Can a stock become too successful for its own good?
There can be only one objective measure by which the success of any company can be measured. The share-price.
For Warren Buffet’s corporate world the answer to this question may be no, or at least not yet, but for other companies, shareholders should be wary of unsustainable, meteoric rises in the share-price in combination with excessive hype.
A rising share-price offers security for increased debt levels to fund expansion, but should profit results falter, and asset values fall, this may trigger a dramatic change in fortunes..
There is a psychological imperative as well for shareholders. They are likely to become increasingly nervous of losing their paper gains in a profit-taking correction. .
Prudent institutions usually accumulate stock years before at rock-bottom prices, taking profits along the way. If prices fall subsequently, they may be able to replenish their holding at cheaper prices.
The purpose of this Post
This post considers the possibility that the fall in share-price of Sirtex last month, from an all-time high of $40 to just under $15, wiping off the capital gains of the previous twelve months, might have been not unwelcome, and in the financial interest of leading shareholders. There is no suggestion of any untoward share dealing. It is important for companies to manage their business to the advantage of its share-holders.
This SBS article tells the story.
More than $1 billion has been wiped from the market value of biotech Sirtex Medical after a treatment under development for colorectal cancer produced mixed results.
The company’s share price more than halved, reducing its total value to $991 million, from $2.2 billion at the start of the day’s trade.
Sirtex has been evaluating a new treatment option for patients with colorectal cancer that has spread to the liver.
It considered whether a type of chemotherapy in combination with internal radiation implants, known as SIR-Spheres, was more effective than chemotherapy alone.
“Based on the preliminary analysis just completed, the primary endpoint of the SIRFLOX study was not achieved,” Sirtex said.
Sirtex shares dropped by 62 per cent to $14.80 in early trade, before recovering some ground to close at $17.53, down $21.47, or 55 per cent.
The study did not show a statistically significant improvement in overall progression-free survival in the first line treatment of non-resectable metastatic colorectal cancer (mCRC).
Overall progression-free survival measures progression of existing tumours and/or the development of new tumours in any organ or body.
But the study did show a statistically significant improvement in progression-free survival in the liver.
Sirtex said this was important because liver tumours were commonly the only or dominant site of disease in patients with mCRC and were the major site of disease influencing survival.
Up to 90 per cent of mCRC patients die of liver failure as a result of the effects of liver tumours.
- The Sirflox study is just one of a number of research projects which Sirtex is helping to fund to define the scope of its advanced SIRT technology (Selective Internal Radiation Therapy).
- This is a preliminary assessment of the likely outcome, which probably did not need to be released at this time. The last result will be the subject of an oncology conference paper in Chicago in six weeks time (May 29 to June 2).
- This was a controlled, randomised, multicentre study on 500 odd patients with inoperable colorectal cancer using a combination of chemotherapy and SIR theraoy
- The interim result showed benefit using SIR therapy for treatment of the tumours in the liver, but no benefit for treating the primary colonic cancer and other metastatic deposits. This is not surprising given the difficulty radiologists would have in selecting appropriate arteries to correspond with many diffuse tumours.
- The market has drastically over-reacted to this news release. One cannot be too critical of this given that there have been at least two or three biotech stocks of late whose share-prices have been decimated when disappointing trial results were announced. The fortunes of biotech stocks are inextricably linked to clinical trials, the intricacies of which are difficult for investors to evaluate.
A technical view of the present outlook
- A lower high just below $27 was formed yesterday when the share-price fell nearly $2.
- Today there was an initial fall of nearly $2, but this time buyers have re-entered the market, and taken the share price back above $25, forming a Doji candle indicative of investor uncertainty. This could change before close, and might provide some guidance for tomorrow’s open.
- Resumption of upwards trending would be indicated if the share-price were to lift above $27.
- On the other hand if today’s low of $23.17 was breached, this would favour continuation of the decline.
- In this event, the next support level is at $20.
Sirtex is far from a spent force, destined to wither away. The issue for present holders of the stock is how far it will decline before rallying. This is likely to be determined by institutional investors. They may or may not wish to support the share-price at current levels, but they certainly will when they think value is restored.
The disadvantage of waiting until the May/June oncology conference presentation, is that there could be falls in the share-price in the interim, and cheaper buying. In all likelihood there will be little change in the trial result.
I would expect a more favourable outlook to be presented then however, so those who are now on board may be grateful for retaining their position. .