Excellent piece, thanks for the heads-up!
https://www.sharesinvalue.com.au/high_conviction_buys/telix-pharmaceuticals/3Q24 Performance Update – 24th October 2024It has been a fairly quiet quarter by Telix’s own standards. The company has continued to plug away, and importantly, the share price has followed. Telix Pharmaceuticals (ASX: TLX) once again achieved solid revenue growth in the US from sales of Illuccix, driven by the successful execution of its sales and marketing strategy.
As a key provider of PSMA imaging, the aim is now not only to boost adoption but also to increase market share and solidify its leadership in the urology market. All of which Telix is doing at a rapid pace.
Innovation also continues across imaging, surgical interventions, and treatments for urological cancers. There is progress across multiple late-stage assets in its therapeutic pipeline while preparing to commercialise three new imaging agents within the precision medicine portfolio. Telix’s strong cash position and earnings generation means the business is well-positioned to pursue high-value opportunities across the pipeline and invest in the infrastructure that underpins commercial dose delivery and long-term value creation. This is the most exciting phase in the company’s growth – that is, the flagship product is flying, and Telix is now using the proceeds to accelerate growth across additional products. It’s exactly the point on a growth map that every biotechnology company wants to be in.
Telix reported unaudited total revenue of ~US$135 million (AU$201 million), largely driven by sales of its prostate cancer imaging product, Illuccix, within the Precision Medicine (Px) division. This marks a 55% increase compared to the same quarter last year (Q3 2023: US$87 million or AU$133 million) and a 9% increase from the previous quarter (Q2 2024: US$124 million or AU$189 million). Out of this, revenue from US sales of Illuccix reached around US$131 million (AU$195 million), contributing to a year-to-date total revenue of US$374 million (AU$565 million). As for costs and other financial and operational metrics, we would have to wait for FY24, full-year results from Telix.
Telix bolstered its cash position by raising $650 million through convertible bonds, with strong investor backing. The company said that this capital will support the acceleration of critical clinical development programs, facilitate strategic M&A opportunities, and enhance global supply chain and manufacturing infrastructure. The latter two have come into focus as Telix looks to build its business vertically and grow its presence all over the world. In line with this strategy to expand manufacturing capabilities in North America, Telix acquired RLS (USA) Inc for US$230 million. More on this later.
There has also been development on listing the US after Telix pulled the plug on a NASDAQ listing earlier this year. It has now applied to list on the NASDAQ as a Level II American Depositary Receipt (ADR) program. Being listed on the NASDAQ increases Telix’s visibility among US and international investors, analysts, and media, enhancing its profile and credibility. It also grants access to a larger pool of global investors, including institutional investors and high-net-worth individuals who may not invest in stocks listed solely on the ASX. This can increase demand for Telix shares, potentially driving up the stock price. There is also strong evidence that indicates that companies listed on the NASDAQ often trade at higher multiples compared to their peers on smaller exchanges due to the exposure to a larger, more diversified investor base.
During the quarter, Telix announced a business reorganisation aligning operations across four business units to reflect its focus as a therapeutics-led radiopharmaceutical company committed to precision oncology. The updated business model comprises Therapeutics, Precision Medicine (Diagnostics), Lightpoint (MedTech) and Telix Manufacturing Solutions (TMS). FY24 financial results will be reported in line with this structure (with Lightpoint included under Precision Medicine for financial reporting purposes).
Telix Manufacturing Solutions (TMS) – The importance of Vertical Integration
Telix is building a global network of facilities for the production and delivery of patient doses worldwide. It is focused on building manufacturing capacity and improving the technology and processes for producing precision medicines and therapies at scale. TMS works closely with key isotope supply chain and regional distribution partners to achieve this.
The acquisition of RLS (USA) Inc perfectly aligns with this strategy. As the only Joint Commission-accredited radiopharmacy network in the US distributing PET, SPECT, and therapeutic radiopharmaceuticals, RLS will significantly boost Telix’s manufacturing presence in North America. It will also form the foundation for a next-generation radiometal production network, benefiting Telix and its strategic partners. The acquisition involves an upfront payment of US$230 million, with an additional deferred consideration of up to US$20 million, contingent upon achieving specific milestones. The transaction is set to close in early 2025.
RLS’s revenue for FY234 was US$158 million, and the transaction is expected to be cost-neutral to Telix from an operating cash flow perspective. RLS is currently a distributor of Illuccix, and, as such, the acquisition is expected to be accretive to Telix immediately.
We see this strategy from every biotechnology firm that makes it big. The strategic growth in manufacturing capabilities can significantly reduce Telix’s production costs, enhance supply chain efficiency, and strengthen its ability to meet increasing demand, positively impacting future revenues.
While we don’t have enough information from Telix to quantify the efficiency gains, we can look at examples from the past to get an idea. A good example is Novartis (one of the largest pharmaceutical companies in the world), which acquired Advanced Accelerator Applications (AAA) in 2018 for around US$3.9 billion to bolster its radiopharmaceutical capabilities, particularly in the production of Lutathera, a radioligand therapy. This acquisition helped Novartis to reduce costs by controlling more of the supply chain and significantly increased its ability to meet demand for Lutathera, resulting in substantial revenue growth.
Within two years, Lutathera contributed nearly US$500 million in annual sales, but more importantly, the vertical integration of manufacturing operations played a key role in driving profit margins upward due to improved cost efficiencies and economies of scale.
Applying this example to Telix, the acquisition of RLS (USA) Inc could lead to similar benefits. By expanding its in-house radiopharmaceutical production, Telix can expect to reduce dependency on third-party suppliers, lower production costs, and improve margins. With RLS’s network of radiopharmacies, Telix can meet growing demand in North America more efficiently, which could drive significant revenue growth in its Precision Medicine division. If Telix follows a similar trajectory as Novartis, this strategic move could potentially add a few hundred millions in revenue each year while reducing production costs by 10-20%, enhancing profitability.
Product Pipeline
There is a lot of expectation on Telix. The share price has run up and earnings forecasts have been continuously revised upwards. Telix now needs to accelerate growth not just in the US, but also globally, and across different products. Over the past quarter, the company progressed regulatory filings for several products globally.
TLX007-CDx (Prostate Cancer Imaging): The FDA has accepted the NDA for a new PSMA-PET imaging kit for prostate cancer. A decision is expected by March 24, 2025. If approved, it will improve patient access and complement Illuccix.
TLX250-CDx/Zircaix (Kidney Cancer Imaging): The BLA resubmission is planned for November 2024, with a US launch targeted for 2025. Cardinal Health will distribute Zircaix in the US, pending approval. Phase III trial results confirmed high accuracy in detecting clear cell renal carcinoma.
TLX101-CDx/Pixclara (Brain Cancer Imaging): An NDA has been submitted for a PET diagnostic agent for glioma, with a US commercial launch expected in 2025. The product is being used in therapeutic studies, with expanded access now open.
Illuccix (Global Submissions): Regulatory approval in Germany is expected by January 2025, with UK and Brazil decisions anticipated shortly.
Outlook & Valuation
Telix reaffirmed its full-year 2024 revenue guidance of US$490 million to US$510 million (AU$745 million to AU$776 million), representing a ~48%-54% increase on full year 2023. Guidance for full year 2024 R&D expenditure remains at an expected 40%-50% increase compared with full-year 2023, funded by earnings from product sales.
FY24 market expectations are within the guidance range for Telix. However, where things get interesting is the FY25 forecasts. Expectations are moving upward as Illuccix’s geographical expansion, and the possibility of new products hitting the shelves draws closer.
Since our last coverage two months ago, revenue expectations have gone from $950 million to $1.01 billion, a 6% growth. However, Telix is well-positioned to beat the revenue estimate. We also expect these forecasts to be revised continually as more evidence of Telix’s growth trajectory on the revenue and profitability front hits the market.
EV/Revenue is our preferred valuation metric for companies at this stage in their lifecycle. For Telix, revenue growth is a more critical indicator of potential success than current profits. EV/Revenue reflects the market’s valuation of the company’s sales pipeline and growth prospects, which are typically the main drivers for investors at this stage. The enterprise value includes both debt and equity, giving a more complete picture of a company’s valuation by accounting for its capital structure.
Based on FY25 forecasts, Telix trades at an EV/Revenue of 6.87x, similar levels to CSL at 6.83x. However, CSL is growing revenues in the single digits and Telix by ~50%. Therefore, valuations are not outstretched. The median target price based on nine analysts covering Telix is $25 a share, again suggesting that there is a 20% headroom. Our forecast for Telix is higher than the market consensus based on the global commercialisation potential (which we have gone into more detail in earlier coverages of Telix) of Illuccix and two more products that could hit commercialisation in the short and medium term.
Recommendation
Telix is becoming a complex business that aims to become a vertically integrated company. At the base, Illuccix sales continue to grow handsomely. The cash flows from this are being redirected to push growth across multiple products candidates. The vertical integration amidst a growing geographical footprint and product suite will ensure streamlined operations, cost efficiency, and a stronger competitive position.
Telix has maintained its guidance for FY24, and consensus expectations are within reach. Our initial investment thesis continues to play out, and given that there is more evidence of Telix’s growth now than when we initiated coverage, it has strengthened our view of the firm. While we retain our “Hold” recommendation at current prices, we raise our buy up-to price to $18.75 and sell-above price to $30, a level where the EV/Revenue will have spiked up to 10x, and the valuation will begin to look stretched.
Technical AnalysisThe Telix share price has accelerated in 2024 out of it’s previous bullish trajectory, with a rough new channel shown by the orange lines in the below chart.
As the stock is now into all time highs, there’s no telling where the next target to the upside is. However, there are several key technicals which will support price on a pullback.
The strongest being a horizontal support coinciding with a top of the previous channel at $17.45, both shown in blue below. Previous channel highs often act as a support when we have a price acceleration out of a channel like this.
The next obvious support is the rising channel floor, shown in orange below. Note that this channel is fairly undefined and needs further swing highs and lows to flesh it out.
With the current price acceleration, we would expect pullbacks to be limited, barring any substantial negative news flow.
1H24 Earnings Analysis – 23rd August 2024Telix Pharmaceuticals (ASX: TLX) has continued its explosive growth in 1H24, and they have built on the profitability that the company reached 6 months ago. Top-line results came in as expected, and the company reiterated its full-year guidance. However, Telix missed EBIT and EPS expectations. Consequently, shares sold off ~3%.
Revenues hit $364.0 million, an increase of $143.2 million, or 65%, compared to $220.8 million for the prior comparable period. The majority of revenue was from sales of Illuccix in the United States (US) in its second full year of commercial sales.
Gross margin continued to improve to end at 66%, up from 63% in H1 2023, supported by a stable selling price of Illuccix and disciplined cost control.
Adjusted EBITDA was $57.5 million, an improvement of $22.8 million or 66% when compared to $34.7 million in the prior comparable period.
It is not just Illuccix sales that are impressive. Telix is growing sustainably with effective cost control. Gross margins have expanded, and revenue growth is outpacing cost growth. It is everything we want to see, but the markets want more. EPS was estimated to come in at 15 cps, but Telix only managed 9 cps in 1H24.
Revenue growth outpaces cost growthTelix is not just growing at a rapid pace, but it is growing in a very healthy way. Management has been focused on efficient growth by investing in manufacturing facilities closer to the markets they service. They are also focussing on vertical integration – which would enable it to have control across the entire supply chain. These initiatives will increase profitability and cash flow generation in the long term.
Telix reported a half-year profit after tax of $29.7 million, compared to a net loss of $14.3 million in H1 2023. This includes costs associated with the withdrawn US initial public offering (IPO) of $7.6 million. It was a one-off expense, and Telix’s normalised NPAT comes in higher at $37.3 million. The increase in profitability already demonstrates Telix’s ability to build a sustainable business while investing in the growth and advancement of late-stage pipeline assets.
The group generated cash from operating activities of $39.1 million, an improvement of $25.8 million from H1 2023.
Telix’s biggest costs will be sales and marketing, as it’s all about getting the word out in the community about its new and innovative product. Companies usually have their marketing budgets blow out at this stage of the business, that is, when the company steps on the accelerator and pushes for maximum growth. But Telix’s numbers show control and discipline. In the grand scheme of things, this is also why a miss on the EPS is also not a big deal for Telix.
Sales and marketing expenses were $37.2 million for the half-year ended 30 June 2024, an increase of $13.0 million, or 54%, compared to $24.2 million for H1 2023. This increase was primarily driven by increased investment in salesforce operations, effectively deployed to drive higher sales volumes of Illuccix. Selling and marketing expenses continue to reduce as a percentage of revenue, indicative of revenue growth exceeding cost-based growth and expenditure control.
Manufacturing and distribution costs were $5.1 million, an increase of $2.0 million, or 65%, compared to $3.1 million for H1 2023, primarily driven by the increased volume of sales.
General and administration costs were $16.9 million, an increase of $2.9 million, or 21%, compared to $14.0 million for H1 2023. This was primarily driven by an increase in infrastructure to support the expansion of services assisting commercial operations in each region. Operating profit as a percentage of revenue improved by 6%, reflecting the strength of the commercial business and effective cost control.
Continued product development
This is where things get a lot more interesting. The promise of Telix is its entire suite of product candidates, and there has been a greater focus on investing in and developing its therapeutic pipeline. Consequently, investors are now more focussed on Telix’s ability to commercialise its other products.
Research and development (R&D) investment for the half year period was predominantly focused on preparing for the commercial launch of late-stage diagnostic assets (TLX250-CDx or Zircaix, TLX101-CDx or Pixclara and TLX007-CDx), including commercial manufacturing process qualification and validation, US Food and Drug Administration (FDA) filing fees and early access programs. R&D was also directed towards clinical manufacturing for the Phase III ProstACT GLOBAL trial.
Total investment in R&D was $83.9 million for the half-year, an increase of $35.2 million, or 72%, compared to $48.7 million for H1 2023. Approximately 29% of R&D expenses were directed towards progressing Telix’s therapeutic pipeline. Overall investment in therapeutics and other assets totalled $24.3 million (H1 2023: $11.8 million), which included late-stage therapeutic asset investment directed towards clinical manufacturing and progressing the Phase III ProstACT GLOBAL trial.
Investment in late-stage diagnostic assets was $34.0 million (H1 2023: $18.5 million), comprising:
- Commercial manufacturing process qualification and validation
- Filing fees for TLX250-CDx (Zircaix®1) biologics license application (BLA) submission and new drug application (NDA) submission for TLX007-CDx with FDA and
- Commercial launch preparation and early access programs.
Hence, there is a lot happening on the development front. There are several product candidates in different stages of development. The company’s pipeline is expanding, and new programs are being implemented at the clinic. They are all positive signs for the long term.
Outlook & Valuation
Telix’s FY24 GuidanceTelix reaffirmed its full year 2024 revenue guidance of US$490M to US$510M ($745 million to $776 million at current exchange rates), representing a ~48-54% increase on FY 2023. It also confirmed that the guidance previously advised for R&D expenditure remains unchanged at a 40-50% increase compared with 2023. This means R&D investment in FY24 will be around $190 million.
Growth OpportunitiesTelix’s lead imaging product, marketed under the brand name Illuccix, has so far been approved by the US Food and Drug Administration (FDA), the Australian Therapeutic Goods Administration (TGA), and Health Canada. No other Telix product has received a marketing authorisation in any jurisdiction. However, applications have been lodged, and given the success in the USA, the grant seems to be a matter of when and not if.
Since Telix continues to invest in product expansion, investors are growing impatient on the growth front. Market participants want to see Illuccix take global markets by storm (similar to how it did in the USA) and the commercialisation of Zircaix (TLX250-CDx, imaging for kidney cancer) and Pixclara (TLX101-CDx, imaging of glioma).
On the Illuccix front – Brazil, EU, and UK submissions are progressing. Telix has said that no substantive issues have been raised to date, and the decisions are expected in H2 2024.
Regulatory filings for two additional new products, Pixclara and Zircaix, are expected in Q3 2024 and Q4 2024, respectively. At this stage, Zircaix is closer to the commercialisation phase, and Pixclara is at an earlier stage, but it has potential as part of Telix’s expanding oncology portfolio. These will also potentially serve as catalysts for the TLX shares in the short to medium term.
Zircaix – The biologics license application (BLA) resubmission is expected in Q4 2024. Its expanded access program (EAP) is now active in over 30 sites globally. The product candidate has also been included in EAU (European Association of Urology Guidelines on Renal Cell Carcinoma) guidelines as an emerging technology.
Pixclara – It has been granted Fast Track designation, and the EAP has been cleared in the USA. Telix has said that it has had a positive pre-NDA (new drug application) meeting with the FDA, and it is on track to file the NDA in Q3 2024.
Combined, the 3 products have an estimated total market opportunity of US$4.5 billion in the USA alone. However, the bulk of the opportunity comes from Illuccix, and it is also the reason why markets want to see faster growth from Telix.
The current revenue of US$240 million from Illuccix sales in the USA means that Telix has already captured 7.5% of the total addressable market. This has been achieved in about two years. With over comes more widespread adoption, and network effects should drive sales of the product.
USA PenetrationWhat we know so far is that Telix has significant potential and there is a lot of momentum in the company. Markets recognise this potential and are impatient for Telix to realise it. As long term investors, we need to zoom out, look at Telix from a big-picture perspective, and focus less on the short-term milestones. This has the potential to become the next CSL. In the earnings call following the result, management once again showed that they were confident in their strategy.
Despite the financial, clinical and execution focus around its therapeutic pipeline, they remain highly committed on the Precision Medicine business. It is a differentiator, and it is extremely important in the field of radiopharma. This is also the basis on which management seems to be highly confident in driving the business to generate a couple of billion dollars of revenue over the next few years just through what they have already developed. We think patience is key here, and Telix is well-positioned structurally and competitively to deliver the big money to the top and bottom line.
The commercial landscape in the USA is evolving, with a shift from focusing on individual account wins to targeting larger entities like Investigational New Drug (IND) programs and group purchasing organisations (GPOs). This change means that customer acquisition is moving from a granular approach to one where entire segments of the market can be captured or shifted away from competitors in a more mature market environment.
Currently, PSMA imaging remains concentrated in major metropolitan areas and academic centres, but there’s significant potential for expansion into community settings. This is one of Telix’s key advantages. The growth compared to competitors shows that it is successfully capitalising on this opportunity. Patients increasingly prefer local access to PSMA imaging rather than travelling several hours to big cities for scans. This is where the nuclear pharmacy distribution model offers a critical edge, facilitating the delivery of PSMA imaging services closer to where patients live. We anticipate a continued shift towards broader community adoption of PSMA imaging. It isn’t just going to happen overnight.
ValuationThere is a lot riding on the TLX share price. The growth has been staggering, and given the potential, the markets want more, and they want it now. For FY24, the guidance has been priced in.
A trading pattern has been established for TLX. Shares run-up in the days prior to the result and then get sold off on the day of the result. This time, in the 10 days prior to its 1H24 result, TLX shares returned 14%. We can expect the share price to revert back to the $17.50 level over the next few days, just based on history alone. This seems to be the work of short-term traders.
For long term purposes, shares are highly valued and rightly so. This is a business that is growing revenues at 65% from just one product candidate and a couple of more in the short-term pipeline. The company is well-positioned to meet its FY24 revenue guidance. However, the expectations on EPS are lofty, particularly considering that Telix has fallen behind by missing EPS expectations in the 1H24 result. For full-year FY24, 21 cps of EPS has been priced in. But we expect it to be revised over the coming weeks. We think 18 cps is achievable for the full year, and it is highly likely that consensus will land on the same number as it is the 1H24 EPS annualised. This means that Telix still has work to do on the profitability front in FY25. The new products, vertical integration, and increased penetration of Illuccix in the USA should help.
Consensus estimates for FY25 are as follows:
- Revenue of $950 million, a 24% growth over FY24
- EBIT of $207 million, 100% growth over FY24
- EBIT margins are expected to expand to 21%
- EPS of $0.58
We think these numbers are achievable, and in fact, Telix is well-positioned to even beat the revenue estimate. However, over the next 12-18 months, we expect these estimates will likely be revised following more evidence of Telix’s growth trajectory on the revenue and profitability front.Currently, these estimates mean that Telix is trading at an EV/Revenue of 6.8x, EV/EBIT of 31x, and a P/E of 32x for FY25. Zooming out and looking 18 months ahead indicate that the valuations are not outstretched relative to the growth ahead. For reference, CSL trades at a 45x P/E, 6.2x EV/Revenue, and 19x EV/EBIT for the same period, even though it is growing at high single digits.
RecommendationTelix Pharmaceuticals continues to perform well. Revenues are growing at over 65% from just Illuccix alone. The growth has been primarily driven by the USA, and we are now waiting for approval for sale in Europe, the UK, and Brazel, all regions that should see material uptake of the product. Telix’s management has already shown that they think deeply about costs and profitability, and this is reflected in the company’s earnings, just not to the degree that markets expect. With higher community penetration and network effects of Illuccix, the launch of new product candidates, and the expected benefits from the vertical integration, costs will eventually align with consensus expectations.
As for what lies ahead, there are two more products that could hit commercialisation in the short and medium term. With R&D investment continuing to increase, the company is building a robust product pipeline that can enable long term growth.
