Sirtex Deal Elevated With Liver Cancer Therapy: Real M&A

A radiation treatment that attacks cancer in the liver from the inside is putting Sirtex Medical Ltd. (SRX) back into the takeover spotlight.

Even after Sydney-based Sirtex’s earnings outpaced 99 percent of specialty pharmaceuticals companies in developed Asia in the past four years, according to data compiled by Bloomberg, profit may double by 2015 as more patients get Sirtex’s therapy, UBS AG estimates. The $494 million company is tripling manufacturing capacity in the U.S., its largest market, as it forecasts a “significant increase” in demand.

Since an attempted takeover by Cephalon Inc. was thwarted in 2003, Sirtex has invested in trials aimed at winning over oncologists and transforming its treatment from a last-resort for dying patients to a first-choice therapy. Germany’s Bayer AG, whose drug Nexavar is being tested in combination with Sirtex’s radiation, would be a logical buyer, while large medical-device companies may also be interested, Morningstar Inc. (MORN) said. Success in ongoing trials may quadruple the number of patients eligible to use Sirtex’s treatment, said Thomas Duthy, an analyst at Taylor Collison Ltd.

“Coupled with good data, it will become a ‘must have’ for a lot of potential acquirers,” Adelaide, South Australia-based Duthy said in a telephone interview. “The end game is moving up that treatment ladder where the available population of patients increases.”

Sirtex rose 4.1 percent to A$8.40 today, the biggest gain in more than a month. Trading volume was more than four times the daily average over the past six months.

Tiny Beads

Sirtex isn’t “necessarily” a target because the company is a device maker with one product, Chief Executive Officer Gilman Wong said in an interview last week in Sydney. While he didn’t rule out a sale, Wong said Sirtex’s single-treatment focus may not make it a good fit for a large pharmaceutical company.

Backed by private-equity investors, Sirtex was founded in 1997 to acquire technology developed by Bruce Gray, a doctor with the Perth-based Cancer Research Institute Inc. By the time of its initial public offering three years later, the company’s SIR-Spheres -- radioactive beads that are injected into the liver’s blood supply -- had been used on more than 400 patients, according to its sale document. Each bead is about one third of the diameter of a human hair.

Sirtex sold 6,141 doses of the treatment in the year ended June 30, generating A$17.1 million ($18 million) in net income, a 49 percent increase from the year earlier, according to a company presentation last week.

Fringe Profile

The treatment is used on only 1 percent of eligible patients -- those whose primary or secondary liver cancer can’t be treated with surgery, chemotherapy or other conventional methods, Sirtex said in the presentation. That’s, in part, because of concern that the spheres, which carry a dose 40 times more powerful than typical radiation, will damage healthy organs, said James Cooper, a Sydney-based Morningstar analyst.

Clinical trials, costing Sirtex A$60 million over five years, will assure doctors of the treatment’s safety and open the door to suitors, Cooper said in a phone interview. Six smaller studies, involving 230 patients, have been completed.

“It’s always suffered from a fringe profile in the medical community,” he said. “To some big pharmaceutical or device company, once one of these big trials comes through and the data look fine, then it does become potentially very attractive.”

Sirtex’s largest trial assesses liver cancer sufferers’ response to a combination of chemotherapy and its radioactive beads, and results will be published as soon as 2014, Sirtex said last week. The assessment of 518 patients is large enough to satisfy oncologists who prefer data from trials involving at least 300 people, David Cade, Sirtex’s global medical director, said in the presentation.

‘Revolutionize Things’

The trials may show SIR-Spheres offer benefit when given to patients in combination with so-called first-line chemotherapy drugs, Peter Gibbs, a medical oncologist at the Royal Melbourne Hospital, said in an interview.

“If that study is positive, it would revolutionize things,” said Gibbs, who has patients in the trials. “It would take it from a marginal treatment that’s used occasionally to a mainstream treatment.”

The radiation beads may potentially be used to treat as many as 40 percent of patients with advanced bowel cancer that’s spread to the liver, “which is a huge market -- hundreds of thousands of patients per year,” Gibbs said. Some of these patients have been cured of their cancer with the treatment, he said.

Sirtex’s sales may vault to 25,500 units by 2020, while sales of 90,000 units are “well within the realms of possibility” when the treatment becomes a first-stage option, according to Morningstar’s Cooper.

Profit Doubling

Even without that scale of expansion, Sirtex is the second- fastest growing specialty pharmaceuticals company with a market value higher than $100 million in developed Asia, with net income rising more than 14-fold in the past four years, according to data compiled by Bloomberg. Sales jumped 117 percent.

UBS expects profit to double and revenue to climb 47 percent in the next three years.

“The company has one arm tied behind its back in terms of being able to market the product effectively, due to limited clinical data until trials are complete,” Dan Hurren, a health- care analyst with UBS in Sydney, said in a phone interview. “Despite that, they’re still achieving higher than 20 percent compound annual growth in dose sales.”

Treatment Risks

There are still risks associated with SIR-Spheres, with about 1 in 200 patients developing potentially fatal liver failure, Gibbs said.

The side effects and effectiveness of the radioactive beads need to be weighed against other treatment options, including surgery, tumor-shrinking medications and ablation therapy, said Benjamin Thomson, a surgeon at the Royal Melbourne Hospital and Peter MacCallum Cancer Centre, who treats mostly tumors of the liver, bile duct and pancreas.

An attempted takeover in 2003 by Frazer, Pennsylvania-based Cephalon failed after Sirtex investors holding 88 percent of the stock agreed to sell, shy of the 90 percent that would have triggered a compulsory buyout. Cephalon was acquired by Teva Pharmaceutical Industries Ltd. last year.

Shareholders backing the A$4.85-a-share offer included Hunter Hall Investment Management Ltd., currently Sirtex’s largest shareholder with a 27 percent stake, data compiled by Bloomberg show. Sirtex’s record closing price of A$8.07 last week is 66 percent higher than Cephalon’s offer.

‘Very Attractive’

Another suitor wouldn’t have to wait until the 2014 trial results to make an approach, Peter Hall, Hunter Hall’s chairman said in a phone interview from London.

“There are early indications that the trials will be successful,” Hall said. “It’s a very attractive company and a very attractive business.”

Any buyer may also have to win over Gray, who still owns 18 percent of the company and has been tangled in legal disputes with Sirtex and the University of Western Australia, his previous employer. Legal proceedings by the university, and against Sirtex and Gray ended after the former director paid the company an additional A$500,000 in costs, Sirtex said Feb. 22.

Gray didn’t reply to a message left at his Sydney office seeking comment on the company’s potential as a takeover target.

Among potential acquirers of Sirtex is Bayer, said James Greenhalgh, an analyst at Sydney-based Intelligent Investor. Bayer’s own liver cancer treatment, Nexavar (BAYN), is being tested in combination with Sirtex’s radioactive beads in a European study of 375 patients that started in 2010.

Bayer Bid

“Bayer might want to use that technology in conjunction with its own medication,” Greenhalgh said in a phone interview. “It’s certainly possible that another cancer company might want to acquire Sirtex.”

Bayer, with about $2.5 billion in cash and short-term investments at the end of June, is looking for “bolt-on” acquisitions in specialty pharmaceuticals, consumer health or animal health, CEO Marijn Dekkers said in July. The Leverkusen, Germany-based company said last week that it would pay as much as $145 million for Teva’s U.S. animal-health business.

Guenter Forneck, a spokesman for Bayer, declined to comment last week on any potential deal with Sirtex.

Companies connected to cancer-fighting devices may also be interested, according to Duthy at Taylor Collison.

“One shouldn’t necessarily just focus on Bayer,” he said. “If the trial results are really good and sufficient to change medical practice, as a pharmaceutical or device company, that’s possibly the inflection point to really have a serious look.”

To contact the reporters on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net; Jason Gale in Singapore at j.gale@bloomberg.net.

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net.

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