Sirtex Medical (ASX:SRX): rebuilding confidence
Sirtex Medical (ASX:SRX) is an Australian global life-sciences company that develops and delivers effective oncology treatments by utilising innovative small particle technology.
The company is considered a global leader within the rapidly growing market of Interventional Oncology, a field of interventional radiology dealing with the diagnosis and treatment of cancer using targeted and minimally-invasive procedures. On the back of a particularly challenging 2017, the company has worked hard to restore shareholder value and grow earnings, and announced in late January 2018 a proposed acquisition by Varian Medical Systems (NYSE:VAR) for the company valued at A$1.6 billion or $28 per share in cash, as CEO Andrew McLean explained recently to The Australian Business Executive.
CEO Andrew McLean
“I’ve been in medical devices almost all of my career,” Mr McLean says. “I spent over a decade at Becton Dickinson, starting out in the Australia and New Zealand business, primarily in marketing roles.”
After working his way up to marketing manager in one of Becton Dickinson’s business units, he left to work for Pfizer in a higher level sales and marketing leadership role, in a small business unit for Australia and New Zealand.
“I then did two stints in China with Pfizer, then came back to Australia and actually re-joined Becton Dickinson as director of the medical business. I did that for roughly three and a half years, and then Becton Dickinson asked me to relocate to their US headquarters.”
Mr McLean spent the next three years in the company’s head office in New Jersey, filling a variety of different roles in medical devices. After this he was approached by a small British company called Synergy Health.
“I was with that organisation as CEO of Applied Sterilization Technologies and Laboratories, for around about three years, before we were acquired by STERIS Corporation in the United States.”
The merger turned out to be a particularly difficult one for Synergy Health, going up against the US Federal Trade Commission, which believed the merging of the companies was of an anti-competitive nature.
“We believed otherwise,” Mr McLean explains, “so we challenged the FTC on that. We ended up going to court and prevailed, and as a result the combination went ahead.”
Mr McLean spent almost a year with STERIS, helping it to integrate and leading a major business unit called Hospital Sterilization Services, before being offered the chance to return home to Sydney and lead Sirtex Medical.
SIR-Spheres® Y-90 Resin
“Sirtex Medical is an Australian listed organisation,” Mr McLean says, “and our key product consists of millions of tiny resin microspheres that are coupled with a radioactive isotope called Yttrium-90 (Y-90), and those tiny, radioactive microspheres are used for what’s called Selective Internal Radiation Therapy [SIRT].”
These microspheres, which are regulated as a Class III medical device, are delivered using a doctor administered catheter that is placed within the liver and targets inoperable liver tumours directly where they occur. To date, the device has been used for treatment over 80,000 times in more than 1,090 treatment centres worldwide.
“SIR-Spheres Y-90 resin microspheres comprise tiny radioactive microspheres that become lodged in the capillaries supplying liver tumours, providing high doses of radiation directly to the tumour and minimising damage to normal liver cells.”
Sirtex Medical was started in 2001 by Dr Bruce Gray, a surgeon from Perth who came up with the idea of the SIR-Spheres microspheres. The company is now well into its commercialisation process, gaining US Food and Drug administration (FDA) approval in 2002.
“The mission was to treat liver tumours that had not been successfully treated with other forms of therapy,” Mr McLean says, “such as chemotherapy. The other key point is that liver tumours cannot be effectively treated via external beam radiation.”
Because of the sensitivity of the human liver, the amount of external beam radiation needed to properly treat such a tumour would be extremely harmful to surrounding healthy liver tissues. This is one of the reasons why SIRT is such an important treatment modality.
“The main categories of treatment that are available for cancer include surgery, and that’s possible in around about 15% of cases, where you resect the liver and take out the cancerous part, and leave the healthy tissue there.”
Another key treatment for liver cancer sufferers is a transplant. This particular treatment is subject to the limited availability of organs for transplant, making it a far less reliable route to go down.
There is also the process of ablation, where a probe or probes are put directly into the tumours and some form of energy kills the cancer. This kind of treatment is limited to three or less tumours, no more than three centimetres in size.
“Then you’ve got different forms of chemotherapy, and then you’ve got the new biologics and immunotherapies that are coming onto the market, and then you’ve got SIRT, which is primarily used in what’s called the salvage setting.”
Salvage therapy is used on patients who are not suitable for surgery or transplant, or there is no transplant available, who can’t be treated with ablation or chemotherapy, and for whom all other forms of medication have previously failed.
“Therefore, there’s no other choice available, so you go for SIRT,” Mr McLean explains. “There are some instances where physicians will choose to use SIRT somewhere earlier in the regime, but primarily it is what’s called a salvage therapy. It’s the last line.”
The therapy is therefore seen as a life-extension modality. Some patients have found it to be curative and have added a decade to their life, but Mr McLean explains that based on the more than fifteen years in the market, the scientific literature supports that, on average, a patient may see a benefit of 3-6 months in life extension within the salvage setting using the product.
“The product has a shelf life of roughly 64 hours, after which it loses its potency. Anything that’s radioactive has what’s called a half-life, where essentially the radiation is diminishing over time. Some forms of radiation, say Cobalt-60, will last decades.”
Yttrium-90 has a very rapid depletion-of-energy schedule, meaning the whole treatment needs to be administered over a very short space of time. For SIR-Spheres microspheres, 90% of the radiation is delivered over just 11 days.
“That’s very important, because you don’t want the radiation ongoing for a long time in the body. What you want is to hit that sweet spot between enough time to have a therapeutic effect on the cancer tumours, but not so long as to damage the healthy liver tissue.”
Sirtex’s SIR-Spheres microspheres are agnostic to the particular type of cancer, meaning any cancer that spreads eventually to the liver, even if it has originated in another area of the body, can be treated by the product.
The company now has regulatory approvals in most of the major markets around the world, and has conducted an enormous amount of clinical research in the space, more so than any other Interventional Oncology company.
“Some of our clinical studies have shown good results in terms of quality of life for patients, less toxicity, less side-effects versus other systemic chemotherapeutic agents.”
When these results are analysed further, it is clear for healthcare professionals to recognise substantial differences between Sirtex Medical’s SIRT treatment and the major chemotherapeutic treatments.
With its global business continuing to expand, Sirtex deals with a string of different regulatory conditions across the countries it works in, many of them offering reimbursement approvals, these being national coverage by a healthcare provider.
“We’re in over 40 countries now with regulatory approvals, and also reimbursement approvals across private and public payers. In some markets we have a bit of reimbursement, in others we have full coverage and reimbursement, but that’s country specific.”
In France and Spain, for example, the company receives reimbursement by the government for metastatic colorectal cancer that has spread to the liver. Similarly, in the US, there is coverage available, as is the case in several other countries.
The business is certainly performing well worldwide. Introducing the product onto the market back in 2002, the company has generated $234m in 2017 alone, coming out with an underlying net profit of $42.4m.
Sirtex will look to expand its market in 2018 by growing in the area of Interventional Oncology. This is an area that includes any form where the physician needs to intervene to eradicate a tumour, and can come in different modalities.
“As we branch out and consider mergers and acquisitions, the particular market segments we’re going to focus on are areas where we have core competencies and capabilities, and the resources that have those skills in those market segments.”
This means that, if the company were to look at mergers and acquisitions in the coming year, it is likely that it would be targeting the segments of Interventional Radiology and Interventional Oncology. Now with the proposed acquisition of Sirtex by Varian, there is even greater scope to accomplish these goals under a combined structure.
Sirtex has recently introduced a new mission statement and group corporate strategy, designed to improve the quality and longevity of patients’ lives by providing innovative interventional oncology solutions.
“What we are trying to do is to have a multi-faceted strategy,” Mr McLean explains, “which we’re now implementing, and that strategy has several operational components, and four primary areas of organic expansion.”
These four areas are concerned with geographical expansion, new segments within existing geographies, reimbursement and broadening indications. There is also a marketing element, which looks at improving Sirtex’s differentiation from its competitors.
“Finally, we’ll also look to target new revenue streams through targeted Research & Development and acquisitions. We’re positioning ourselves for the future with a new focus on becoming a more efficient business, with better business processes.”
By lowering staff numbers and opening a new manufacturing facility in Germany, the company has increased efficiency, as well as moving closer to the customer in Europe, the Middle East and Africa, ensuring quicker delivery of the product.
“One part of our organic growth strategy that we’re excited about is developing new business segments within existing geographies, and one example of this is that we’re leveraging the trend of healthcare moving outside of the hospital in the United States.”
This change has seen Sirtex build up several partnerships in what is known as the Office Based Laboratory (OBL) segment. The company has assisted in getting licences for several OBLs where patients have already been treated, and more are scheduled.
“This therapy does have a lot of long term growth potential,” Mr McLean says. “Today we estimate that out of the total available market, the countries which we currently have regulatory approval in, we’re only accessing roughly 5% of the available product.”
This means that, as Sirtex moves closer towards market saturation, the potential for long term growth is significant. The company estimates that the market itself is growing somewhere between 8-12%, presenting a real opportunity for growth.
“So not only do you have an under-penetrated market,” Mr McLean explains, “but you have a growing market, so we find those two factors very advantageous for the outlook of the business.”
The growth of the market also offers further global opportunities. So far the company is present in countries across Europe such as Germany, Italy, Belgium and the UK, as well as in Canada, the United States, Singapore and Australia, amongst others.
“We really are all across the world, and all across those markets there’s still a long way to go to bring the referring medical physicians an increased awareness that this therapy exists and have a higher level of patient referrals to this therapy.”
Part of the company’s success in these countries has come from the reimbursement it has gained from private and government healthcare providers, an arrangement which significantly boosts the uptake of the therapy.
“Like all innovative therapies, SIR-Spheres microspheres is not cheap. So getting reimbursement—whether that be public or private—is essential to our business growth and success.”
Another element of the company’s business strategy relies upon the high margins on the product, which are at about 85%, providing the company with the opportunity to invest in more R&D, along with promotion, education and raising awareness of the product.
“Over the years, many medical products have come under significant pricing pressure,” Mr Mclean adds. “Our pricing has been relatively stable. If we were to look back to 2008, in the United States, reimbursement has increased from $12,600 per dose up to $16,716.”
Year-by-year pricing has remained stable, and even in some cases grown a little. The same trend can be seen across Europe and Asia, meaning the product has fared significantly better than many other medical products and devices, where price pressure still exists.
“Overall, every year the volume’s going up and the pricing is remaining stable. In the vast majority of cases, you compare SIRT and the costs of that, versus being on a programme of chemotherapy, there’s less side-effects and it’s cheaper.”
The business remains a highly profitable one, and is actively seeking to become more so. At the end of the last fiscal year, the company had $118m in cash and no debt, and it continues to generate extremely strong levels of cash.
“We’ve cut back on some non-core R&D initiatives,” Mr McLean explains, “and now that the major clinical studies have reported out over the last twelve months, we are also spending less cash, so that cash generation should actually be enhanced moving forward as well.”
In addition, Sirtex has made two significant moves over the last twelve months to reward its shareholders. The first was a share buyback for $30m, and the second was a significant dividend payment.
“We’ve rewarded shareholders and given back to them. We don’t have a dividend policy or a buyback policy, but we’ll review what we do in the future against the backdrop of our strategy and how we want to use our cash.”
Going forward, acquisitions will form an important part of the company’s overall strategy, but there will also be several other areas of the business that will receive increased focus, giving a rounded approach to the coming year’s activities.
Despite the ongoing success and growth of Sirtex Medical, Mr McLean is the first to admit that the company experienced a tough time in 2017, finding itself up against several significant challenges.
“We’ve had multiple leadership changes in our US market,” he explains. “We’ve had leadership changes across our European and Asia-Pacific markets, and a number of our major clinical studies failed to reach their primary end points.”
In addition to these concerns, the company has recently appointed a new Chief Medical Officer and has had to deal with an investigation by ASIC for alleged breaches in continuous disclosure obligations—an investigation which is now finalised and in the past.
“In addition, we experienced a decline in our growth, missed our guidance and had class action lawsuits against us. So all of that has led to a marked deterioration in the share price and a significant loss of investor confidence.”
Despite these trying events, Mr McLean is happy to say that the company is rebuilding the trust and confidence lost over this period, with staff rallying around Sirtex and its important product to help it out of these difficult times. This turnaround culminated in late January, when the Board of Directors of Sirtex unanimously recommended the company be acquired by a large, US medical device company specialising in oncology called Varian Medical Systems, Inc.
Proposed Acquisition by Varian
The proposed acquisition by Varian via a Scheme of Arrangement values Sirtex at A$1.6b and the all-cash offer of $28 per share represents a 49% premium to the closing share price of Sirtex prior to the announcement. The transaction, if approved, is expected to complete in late May.
Mr McLean was excited by the potential of the combined businesses moving forward. “Varian employs approximately 6,500 staff globally, had 2017 sales of US$2.7b and has a market value of approximately US$12b. It is a leader in developing and delivering cancer solutions. Sirtex has a significant focus on the medical oncology and interventional radiology market, so the ability to leverage those additional relationships means the business synergies are potentially quite significant.”
When asked about the financial markets response to the deal, Mr McLean commented “It’s fair to say the investor and analyst response to the proposed acquisition has been overwhelmingly positive. The price Varian are prepared to pay to acquire Sirtex is greater than 50% above the consensus analyst 12 month price target for the stock, and is very attractive based on commonly used transaction multiples, such as price to earnings, and enterprise value to sales and EBITDA. We remain hopeful that once the Scheme Booklet is available to all our shareholders for review, they will see the merits of the deal proceeding as much as we do.”
Dow Wilson, the Chief Executive Officer of Varian, said “Sirtex is a highly complementary strategic fit with our existing solutions for the treatment of cancer. We are excited by the opportunity to expand Sirtex’s business and continue to provide physicians and patients around the world with smart, efficient, and high-quality care.”
Mr McLean concluded “I really want to thank all the staff of Sirtex for their contributions and for their faith in the business,” he adds, “because we are rebuilding the business, which has been absolutely recognised by Varian and together we are obviously going to do well in the future.”