Telix Pharmaceuticals Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A biopharmaceutical company focused on developing and commercializing innovative products for medical imaging and therapy, particularly in the field of oncology.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Telix Pharmaceuticals is a global biopharmaceutical company focused on developing and commercializing products that utilize molecularly-targeted radiation. The company’s core focus is in onco-urology and onco-hematology, with current commercial offerings focused primarily on prostate cancer.

  • Revenue Streams: TLX’s revenue comes primarily from the sales of its imaging products, notably Illuccix. Future revenue streams will be driven by expanding into new markets and product approvals.

  • Note: revenue is currently largely from its imaging product, though they expect to expand to more diverse revenue generation from their therapeutic products as they get approvals.

  • Industry Trends: The diagnostic and therapeutic radiopharmaceutical market is growing rapidly, with increased focus on targeted treatments and personalized medicine in oncology. The industry is also seeing an increase in the use of theranostics, combining diagnostic and therapeutic elements in a single agent, which fits well within the core focus of Telix. Competition in radiopharmaceuticals is intensifying, with other big pharma and biotech players.

  • Note: Recent years have also seen increased competition from generic alternatives for older drugs, potentially reducing long-term revenues.
  • Competitive Landscape: While Telix’s focus area is not entirely unique with plenty of biotech and pharmaceutical companies working on different versions of similar products, the uniqueness of the technology as well as strong intellectual property does give the company an advantage over newer or generic players. Many players, especially in the emerging bio-tech and imaging space are mostly small or non-profitable companies.
  • What Makes Telix Different? Telix has been focused in a niche area (radiopharmaceutical for prostate cancer) with very high potential, they also develop and manufacture their drugs. While other companies depend on third-party manufacturers, TLX has taken ownership and has created facilities to produce all their drugs. This is highly important for long term sustainability of the business. They also have a strong pipeline of drugs in trials for many other types of cancers.
  • Note: Strong IP and their own specialized supply chain.

Financial Analysis:

TLX’s financials show a company in growth phase with improving sales and operating metrics, while also showing increasing losses as they invest in R&D.

  • Revenues:
    • In FY2022, TLX reported total revenue of A$123.1 million compared with A$17.6 million for FY2021.
    • The company’s revenue growth is primarily driven by increased sales of its imaging product, Illuccix.
    • For the first quarter of 2023, they reported a profit of ~ 31m AUD, whereas they reported a loss of 13 million last year for the same quarter.
  • Margins:
    • In 2022, gross margin was 68.7% compared to 31.2% in 2021 due to ramp-up in manufacturing and sales of Illuccix
    • As they begin selling more therapeutic products, it will be important to see if they maintain gross margins as there might be some discounts to make it more competitive in the therapeutics sector
  • Operating Expenses:
    • Operating expenses have been decreasing as a percentage of revenue (from 125.6% in 2021 to 109.3% in 2022) but still high in the short term as they continue to push their R&D.
  • Profitability:
    • TLX remains unprofitable as they continue investment in R&D, but they have reduced their losses in FY2022 to a net loss of A$83.8 million versus A$144 million loss in 2021.
      • 2023 Q1 earnings show the profitablity is increasing, they posted a profit of ~31 million AUD, after reporting a loss of 13 million AUD last year in the same quarter.
  • Balance Sheet:
    • The company’s balance sheet is fairly healthy, with around A$172m in cash and cash equivalents as of March 31, 2023, which provides a good liquidity runway.
    • Total debt at A$166 million is slightly less than the cash.
    • They have around 222 million AUD in intangible assets, including goodwill.
    • Total equity is at A$461 million.

Moat Analysis:

  • Moat Rating: 2/5. Telix possesses some narrow moats, but the risks are high. Here’s a breakdown:
 *   **Intangible Assets (Brand, Patents, Regulatory Licenses):** Telix benefits from patents and regulatory approvals surrounding its key products, particularly Illuccix, which creates some entry barrier. However, these protections are time-limited and can be subject to legal challenge, also, they do not have as many patents or licenses as most biopharma companies. So this doesn't create an exceptionally strong moat, but does provide some level of protection.

      *   **Switching Costs:** The cost of switching for the end user is not that high, but the process of changing over a product like the one produced by TLX would be costly for the healthcare provider. So, while this does provide a narrow moat, this is not their strong suit.

      *  **Network Effects**: There are currently very limited network effects as their products do not benefit much from more users. The main benefit comes from word-of-mouth and from the products being available and used in a particular area.

    *  **Cost Advantages**: Telix has a unique manufacturing method, along with in house manufacturing facilities for all their products, resulting in cost advantages and lower dependence on other suppliers or manufacturers, and is a narrow moat.

*  **Overall:** The company does not yet possess a wide, durable moat and they face competition from both new and old market participants.

Risks to the Moat:

  • Clinical Trial Failures: Future revenue projections are highly dependent on products in clinical trials succeeding, which represents substantial risk. Many things can go wrong in clinical trials, and as a small company, losing a phase 3 approval might mean financial ruin to them.
  • Important: Note they are not very diversified at this point, having a limited number of products which are also in specific areas of the cancer therapeutic spectrum. A lot more success is based on phase 3 approvals and expansion into other new product lines.
  • Regulatory Changes: The regulatory environment in the pharmaceuticals and healthcare industry is very tough, and a change in that could mean they could take a serious hit.
  • Competition: As stated above, competition is strong and is expected to increase further.
  • Technological Disruption: New and innovative medicines or diagnosis and treatment methods may come that could make their current line of products irrelevant.
  • Pricing Pressure: As more generics and competitive products come to market, Telix may have difficulty raising prices as well as keeping current prices.
  • Macroeconomic Pressures: Current global economic and inflationary environment is likely to decrease revenue or profitability as they try to pass extra cost onto consumers. In addition, more capital requirements will put additional pressure on existing cash flows.
  • Intellectual Property Challenges: While some of their products have patent protection, it’s still possible a patent claim can be attacked legally, and thus remove an important advantage of TLX.

Business Resilience:

  • Diversified Pipeline: While current revenues are mainly from Illuccix, the pipeline and current research initiatives will mean more products in their portfolio in the coming years, giving the company more opportunity to increase earnings, revenue and ultimately, to build a solid moat.
  • Global Reach: The company has operations all around the world (USA, Australia, Netherlands etc.) which will help cushion it from economic downturns in specific areas.
  • Positive Cashflow From Operations: Company is expected to be cashflow positive after the commercialization of their latest therapies is complete and fully functional.
  • They have recently made significant leaps in creating cash flow from operations, by reducing costs related to R&D and other expenses.

Understandability Rating: 3 / 5

  • While the concept of their products and their functions are easy enough to understand, figuring out which products will succeed, whether or not they can develop the right drugs at the right time and at low cost requires a bit of deep industry knowledge. The company financials are also not that simple because of various complicated treatments in accounting practices for R&D and other things. Furthermore, the dependence on regulatory approvals to drive the business also adds additional complexities.

Balance Sheet Health: 4 / 5

  • The company has enough cash and cash equivalents to cover short-term and long-term debt, while they are still a pre-profit company, they still have sufficient amount of capital to keep its operation up for several more years. In summary, a fairly healthy balance sheet.
  • The debt-to-equity ratio remains low, which is a positive sign. * The company’s liquidity is also very strong, as shown by the current ratio.

Recent Concerns:

In the company’s Q1-2023 call, the company’s CFO specifically mentioned the importance of managing expenses and increasing cashflows, and it seems that management’s current priorities for long term growth is to have sustainable profitability. This was a direct response to the economic downturn and the company’s need to focus more on profitability and less on the promise of revenue.

They are also very focused in clinical results, and they need to continue to demonstrate good clinical and real world results with their product lines.