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.

Article source: http://www.businessweek.com/news/2012-09-17/sirtex-deal-elevated-with-liver-cancer-therapy-real-m-and-a