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Failed clinical trials and class action lawsuits: buy, hold or sell?

sirtex asx srx medical shares hot stock

Key statistics: ASX: SRX
Closing share price: $17.980
52-week high: $18.680
52-week low: $10.450
Most recent dividend: 30c
Annual dividend yield: 1.92%
Franking: 0%

 

Is Sirtex a takeover target?

Big pharma companies love buying tiddlers. Sirtex could be just what they’re after.

Sirtex Medical is not a normal company. It has enough skeletons to fill a graveyard: failed clinical trials, slowing growth, insurer abandonment, and the company’s own shareholders suing it in two class action lawsuits.

Trying to put a precise figure on what a company like that is worth would be an empty exercise. However, just because we can’t value Sirtex precisely, doesn’t mean value is absent.

Pharmaceutical companies love to merge. Giants rarely conduct early scientific research.

They leave that to visionary professors and tiny start-ups, then later acquire or license the drugs once the regulatory outlook is clearer.

We have no idea whether any of the big healthcare companies are currently running the rule over Sirtex.

There’s no guarantee that Sirtex’s board would be receptive, but it’s noteworthy that new chief executive Andrew McLean’s history with mergers was mentioned as a factor in his appointment.

The new chief appears to be shaping Sirtex into a more digestible meal. Between the research cuts, clinical trial wind-up, and staff reduction, Sirtex’s high-spending days are over. The company now has no major capital expenditure requirements, so almost all of profits convert quickly into cash.

Still, it would take an impressive show of corporate courage for a larger pharmaceutical company to make a bid. Dose sales increased 5% in 2017, compared to growth of 16% in 2016 and 20% in 2015. That’s quite a slowdown.

Sirtex is a spring of free cash flow with a pristine balance sheet. There isn’t quite a “for sale” sign in the window, but our guess is that there may be a few investment bankers tapping on the glass. HOLD.

Written by Graham Witcomb

Graham Witcomb

Graham Witcomb is a senior analyst at Intelligent Investor, owned by InvestSMART Group. This article contains general investment advice only (under AFSL 282288). To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.

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