This is the latest installment in our new Ask the analyst feature. Today’s question concerns Telix Pharmaceuticals (ASX: TLX) and comes from Morningstar reader Mark R.

If you would like to submit a question about an ASX company in Morningstar’s coverage, please email it to me at [email protected]. I will put selected questions to the analyst covering the stock and publish their answer in a future edition.

Today’s question

Mark’s question on Telix was roughly as follows:

“Unlike a lot of other pharma start-ups that have a single product, it appears that Telix has a veritable product pipeline that, if all approved by every country’s equivalent of the Australian TGA or US FDA, would create a significant global entity.

How much can we expect Telix's business to grow given its pipeline and potential for geographic expansion. And how much of this is already priced in?”

First, a bit of background on Telix

Telix’s success is down to Illuccix, which launched in April 2022 as the second commercially available PSMA imaging agent for prostate cancer.

Imaging agents are used in medical imaging procedures (like X-rays or PET scans) to make parts of the body or certain molecules or protein contrast more with surrounding tissue and become easier to analyse.

Illuccix is primarily used for staging suspected metastatic prostate cancer and determining how far the cancer has spread beyond the prostate. The adoption of Illuccix is also growing for suspected recurrence, monitoring, and patient selection for radioligand therapy.

Illuccix has gained significant market share due to changes in clinical practice and strong execution on the distribution front. Telix has several distribution partners, including Cardinal Health, who operate the largest radiopharmaceutical network in the US and effectively distribute Illuccix to PET imaging sites.

The success of Illuccix has helped Telix go from under $5m in revenue in fiscal 2021 to over $600m in revenue over the past twelve months. In the process, it has become a $6bn+ market cap company and rewarded shareholders handsomely since its IPO in 2017.

What next for Telix?

Our analyst Shane Ponraj says that Telix’s current strategy is two-pronged: it will continue to expand distribution for Illucix while developing other imaging agents. Let’s start with the growth potential of the existing Illucix product.

Telix are in the process of obtaining marketing authorisation for Europe and Brazil, however, Ponraj expects that US sales of Illucix will continue to be the cornerstone of Telix’s earnings for a couple of key reasons:

  1. Illuccix’s pricing in Europe is expected to be roughly EUR 1000, much lower than the current commercial list price of roughly USD 4,500.

  2. Telix’s geographical expansion could be limited by the supply chain and infrastructure needed to produce, store and transport Illuccix. After all, it is based on the radioactive isotope Gallium-68.

Three big hopes in the pipeline

As Mark referred to in his question, Telix is attempting to move beyond being a single-product company.

It's two biggest near-term hopes in this regard are Zircaix (an agent used in the detection of kidney cancer) and Pixclara (used in the detection of brain cancer).

Neither of these agents have been approved by the US’s Federal Drug Agency yet, but they appear very likely to be. Ponraj’s valuation of Telix assumes that both products gain US approval, and that sales commence for Zircaix in 2025 and Pixclara in 2026. 

 

Meanwhile, Telix is also trialling TLX591, a potential treatment for prostate cancer. TLX591 is currently in a phase 3 clinical trial and therefore still has some way to go before being approved for sale.

Ponraj assigns a 25% probability that TLX591 will make it to market and expects an early readout of the phase 3 trial in the first half of 2025. If all goes well, a 2029 launch could be possible. Ponraj does not place any significant value on the rest of Telix’s product pipeline, all of which are at a very early stage.

Patents but no moat

As I wrote in an earlier article, several major pharmaceutical companies boast formidable moats – something we define as a structural advantage that protects a company’s returns on capital over a long period of time.

Ponraj does not think that Telix currently has an economic moat.

Moats in the pharmaceutical space often stem from patents, which block competitors from offering the same treatment (using the same molecules) for a set period of time. Telix has patents for its Illuccix product until at least 2035, but the patents are related to Telix’s method of making the imaging agent, not on the underlying biotechnology.

Telix does not own the rights to molecules or radioisotopes used in radiopharmaceuticals, and Illucix isn’t the only Gallium-68 based imaging agent on the market. The firm also faces competition from imaging agents derived from other molecules and radioisotopes.

Most notable here is Fluorine based agent Pylarify, which was earlier to market (in 2021) and Ponraj estimates has about 60% of the US market, compared to Illuccix’s 30%.

Other moat sources also fall short

Patients initially tested with one imaging agent generally use the same agent in follow up scans to ensure consistency. This ensures an element of repeat business but, in Ponraj's view, does not underpin a switching cost based moat.

Medical practitioners – i.e. those who actually select and buy Illuccix for use in their practice – do not face switching costs in the way they do with products and treatments that require a lot of training. As a result, they could move quite easily to another product over time.

Another key moat source in pharmaceuticals are distribution advantages. These could include deep sales relationships from having a broad portfolio of must-have products for a certain niche, or the brand and marketing power that come with scale. Relative to much bigger players in the pharma industry, Telix does not seem to have a big edge here.

All in all, Telix does not yet appear to have a moat capable of keeping competitors at bay and protecting its returns on capital for the minimum period of ten years.

An influx of new competition for key products could result in pricing pressure that significantly impacts earnings, especially as Telix is currently so reliant on Illuccix. Although, to be fair, Telix has invested heavily in an attempt to broaden and diversify its portfolio.

Bright outlook but valuation doesn’t scream cheap

Despite not yet seeing enough to award Telix a moat, Ponraj still thinks that Telix can generate high returns on capital thanks to its capital-light business model, high margins and high levels of return business.

Ponraj’s Fair Value estimate of $17 per share bakes in a forecast of 21% annual revenue growth and 30% profit growth over the next five years. Those are healthy numbers, however, the market appears to be expecting even more from the company. Its shares currently sit at just over $20.

Telix Pharmaceuticals

  • Moat rating: None
  • Share price October 9: $20.70
  • Fair Value estimate: $17 per share
  • Star Rating: ★★

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If you would like to submit a question about an ASX company in Morningstar’s coverage, please email it to me at [email protected]. I will put selected questions to the analyst covering the stock and publish their answer in a future edition.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.