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Strong upside for this stock despite medical study stumble

Glenn Freeman  |  01 May 2017Text size  Decrease  Increase  |  

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Despite the slightly disappointing results of a European medical treatment trial, Morningstar maintains its positive outlook for this oncology-focused medical device company.

 

Overall survival rates of patients treated with the small particle technology developed by Sirtex (ASX: SRX) weren't noticeably different to those achieved using existing treatments, according to the recently-released results of the SARAH medical study.

Conducted in France, the SorAfenib vs Radioembolization in Advanced Hepatocellular carcinoma (SARAH) clinical trial of 459 liver cancer patients--the first of this magnitude--compared the outcomes of patients treated with the SIR-Spheres versus sorafenib, the current standard-of-care systemic therapy.

While the therapy was not shown to extend the lives of patients, neither the treatment nor the company itself should be underestimated in their value, according to Chris Kallos, Morningstar's senior equity analyst covering healthcare.

"In contrast, we were encouraged by safety and tolerability outcomes suggesting Sir-Spheres offered less treatment-related adverse events and a better quality of life over time than sorafenib," he says.

"We remain positive on the outlook for SIR-Spheres, given analysis of secondary endpoints in the Sirflox trial, and maintain our fair value estimate of $28 per share on the stock."

The principal investigator of the SARAH study, Professor Valérie Vilgrain, said that: "In terms of what matters for patients, the findings from this first large head-to-head comparison ... show clearly that liver-directed procedures with SIR-Spheres result in a significantly better tolerance of treatment and quality of life."

"I believe this consideration should be a critical factor in selecting first-line treatment for this patient population in the future."

Sirtex is a Sydney-based company with a novel embolic radiation therapy device based on proprietary small particle technology. It was formed in 1997 to acquire and commercialise three technologies for the treatment of liver cancer, developed by the Cancer Research Institute in Perth.

At current levels, shares in Sirtex are trading 41 per cent below Morningstar's intrinsic value, "reflecting an overly pessimistic market view on clinical prospects and the threat of competition from both peer product TheraSphere and new biologics," Kallos says.

With SIR-Spheres treatment currently limited primarily to the final stages, after traditional approaches have failed, Kallos believes positive data from this latest study and others "increases the potential for the treatment to be deployed in second- or first-line settings".

This would considerably increase the potential marketability of the treatment, thereby further boosting Sirtex's commercial prospects.

"In our view, Sirtex could see a step change in the uptake of SIR-Spheres, which is growing fast despite being deployed as a last-line salvage therapy in hepatocellular carcinoma, if results from the current series of six clinical trials over the next three years support earlier usage in treatment protocols," Kallos says.

He believes SIR-Spheres' further progress towards a first-line treatment setting could lead to 23 per cent market penetration of the US$2-billion addressable market by 2026--up from 8 per cent currently.

However, given Sirtex remains focused on a single-product with an evolving value proposition to oncologists and clinicians, it is not assigned an economic moat by Morningstar.

While Kallos forecasts a five-year compound annual growth rate of 22 per cent, he also emphasises Sirtex is "subject to the same risks typically associated with emerging technologies such as clinical or regulatory failure and commercialisation risk related to uptake, pricing and competition."

With several patents pending, relating to the specifics of the manufacturing process, Sirtex currently has no patent protection in the US. It is one of two producers of selective internal radiation therapy products, alongside BTG's TheraSphere.

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Glenn Freeman is a Morningstar senior editor.

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