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Telix Pharmaceuticals (ASX: TLX)

FY23 Earnings Analysis – 23rd February 2024

Telix Pharmaceuticals Ltd (ASX: TLX) released its full-year 2023 results to a disappointed market reaction. They’ve also continued their acquisition spree with two additions to their portfolio in February alone.

The takeovers are both interesting, and we’ll get to them further on, but first, let’s look at their full-year results and why the market was initially disappointed.

They made it into our high conviction list recently. We like their strong demonstrated growth trajectory and their life-changing products. Our last full report on TLX can be found here.

In our previous coverage of TLX, we discussed the repeated sell-offs occurring after their earnings releases. We included charts highlighting the pattern, which repeated after their latest announcement.

Check out the previous write-up or a more detailed explanation, but as a brief summary, it appears that short-term traders are positioning in TLX before earnings releases in case of a positive earnings surprise. Doing this four times per year in one stock might lose 10% if the surprise doesn’t play out, but they could make 30-50% if they catch a big move. Repeated across many stocks with this upside earnings surprise potential, it may become a lucrative trade.

For our purposes as long-term investors, all we need to know from this is that a lower spike from TLX on earnings doesn’t necessarily mean much. They are heavily loaded with growth expectations, and as long as we are happy with their underlying progress, that’s all we need to worry about.

Let the traders scrap over the cents while we collect the dollars.

FULL-YEAR Results

Revenue increased 214% to $502.5 million, driven by strong Illucix growth in the US. Gross margin improved from 59% to 63%. Adjusted EBITDA went from a loss of $67.8 million in 2022 to a profit of $58.4 million. They also posted their first, albeit modest, profit of $5.2 million, up from a loss of $104.1 million.

On the cash front, we saw a positive operating cash flow of $23.9 million, up from an outflow of $64 million. The cash on hand increased to $123.2 million, a solid war chest for further acquisitions.

These don’t look like bad results, so why the market disappointment?

This is a high-growth stock with high market expectations. This latest result has delivered a slowing in the pace of growth. Not just in percentage terms but also in magnitude. We can see why some could be calling it a day on TLX.

The following chart shows Telix’s impressive revenue growth over two years. Notice that the latest half grew by $60.9 million to $281.7 million. A 27.6% growth in revenue. 1H23 grew a more impressive $84.7 million or 62.2%. The half before that increased by $112.1 or 467%. So, the pace of growth, while still impressive, has slowed.

Source: Telix Pharmaceuticals 2023 Full Year Results Presentation

Now, pay attention to the light blue bar, which is the Adjusted EBITDAR. In the last half, when revenue increased by $60.9 million, Adjusted EBITDAR grew by just $16.1 million despite stable gross margins between halves.

Gross profit for the half increased by $36.1 million to $175.2 million.

To quote Darth Vader, “I find your lack of faith disturbing”.

Companies don’t grow in a straight line. This is one of the strangest aspects of investor expectations. Most things grow in a non-linear fashion. People grow in spurts. Tree growth rate varies from year to year and season to season.

Most products, even the ones that turn into massive phenomenal hits, have flat spots or even periods of negative growth. So why do we expect growth companies never to slow down?

There are two other reasons that the markets might have been disappointed.

Basic EPS came in at 1.63 cents. The analyst consensus was for 16 cents. So that $5.2 million NPAT was expected to come in closer to $50 million. Fair enough, but this is a high-growth stage company. So we aren’t disappointed to see them pump up R&D and marketing expenses in line with revenue growth to ensure a strong future growth pipeline. This is exactly what we want to see.

The one genuinely disappointing thing is the forward guidance for 2024. We’ll get into that in the outlook section, but the company has indicated a forward revenue growth of 35-40%. So, given the high valuation attached to TLX, which is trading at ~7X 2023 revenue, a moderation in expectation is healthy.

In our last update on TLX, we noted that the Q3 operating cash flow was strong at $21.4 million and showed a strong growth trend. The full year of $10.6 million means that 4Q23 had a negative operating cash flow of $10.8 million.

So, should we be alarmed?

With so many imminent growth catalysts, we don’t think so.

Source: Telix Pharmaceuticals 2023 Results Presentation

Illucix – the company’s flagship product – continued to grow in dose volumes. Sales in the US were $130.6 million in Q3. The 2H result of $275.6 million means that H4 was $145 million, growing 11%, down from 13% in Q3.

Overall, 2H23 sales grew by 29% on 1H.

Source: Telix Pharmaceuticals 2023 Results Presentation

There are two recent acquisitions to talk about, which nicely complement the company’s existing portfolio of assets.

QSAM Biosciences

QSAM Biosciences is focused on radiopharmaceutical solutions, just like TLX. Their lead drug candidate is called Samarium-153-DOTMP and is aimed at bone cancer. Two uses that show strong promise are being investigated.

The first is palliative care pain relief. The specific use case is for osteoblastic metastases, which is the growth of bony lesions. A single low dose can offer 3-4 months of pain relief and improved quality of life.

The second use is as a treatment for Osteosarcoma. This is a rare type of bone cancer found mostly in children and young adults. Testing has demonstrated effectiveness at combating tumours and a relatively good safety profile. Repeat dosing is still possible, even at a higher dosage than when used for pain relief.

TLX has a clear positioning strategy as a prostate cancer detection and treatment leader. Osteoblastic metastases occur in the majority of prostate cancer patients. So, it fits well with their current portfolio and is a logical extension of their strategy. And this approach makes a lot of sense. Essentially, they could achieve big marketing synergies, as they will target the same doctors and clinics by having a complete suite of products in the same field.

Source: Telix ‘QSAM Biosciences Acquisition’

Telix is paying $50.8 million upfront in the form of TLX shares. A further $138 million in contingent payments are also included, subject to hitting clinical and commercial milestones.

IsoTherapeutics

IsoTherapeutics is a specialty radiopharmaceutical development company based in Texas. Their core expertise is developing and using radio-active elements and creating stable molecule bonds. They provide contract manufacturing services to companies like TLX.

The acquisition makes a lot of sense. It’s a vertical integration play that should give TLX more control and efficiency in the supply of their products. IsoTherapeutic’s expertise in radiochemistry and molecular bonding could also greatly boost Telix’s product development.

The acquisition costs $12.2 million upfront in cash and TLX shares. Further fees of $7.6 million are contingent on the first year of performance after acquisition. There’s also a revenue share for the first two years based on existing IsoTherapeutics customers with an estimated cash cost of $0.9 million.

Growth Pipeline

While the headline news at TLX has been Illucix and its phenomenal sales growth in the US, there are plenty more exciting opportunities in the works. For Illucix itself, we are keen to see if the same rapid growth can be replicated in other geographies.

Source: Telix Pharmaceuticals 2023 Annual Report

Looking past Illucix, the growth potential is big, with no shortage of upcoming catalysts. There’s a big pipeline of R&D, with several clinical trials underway.

One of the biggest potential catalysts is Zircaix, a kidney cancer imaging agent. The regulatory filing has been initiated with the FDA in the US under a BLA (Biologics License Application) rolling submission. The phase 3 ‘ZIRCON’ trial results were very pleasing, with a 93% positive predictive value for ccRCC (clear cell Renal Cell Carcinoma) – a type of kidney cancer.

The FDA has given the compound ‘Breakthrough Designation’, which makes it eligible for fast-tracking. Subject to final FDA approval, TLX aims to launch Zircaix in 2H24. It would be the first radiopharmaceutical imaging agent targeting kidney cancer in the US. It’s an exciting product for TLX investors.

The company also plans to file an NDA(New Drug Application) for Pixclara soon. That’s their brain cancer imaging compound. ODD (Orphan Drug Designation) has been granted in the US and Europe.

Both of these two new products have strong potential. They are supported by strong clinical trial results and aim to address unmet needs in the market.

Source: Telix Pharmaceuticals 2023 Full Year Results Presentation

Outlook

TLX has provided guidance for 2024. Revenue is expected to grow by 35-40% to $675-705 million. Excluding any potential initial sales of Zircaix and Pixclara. We expect any sales to be modest for 2024 if they do occur.

Research and development costs will continue increasing, with an additional 40-50% spend expected.

The company is still investing heavily in R&D. It seems the plan is to pump all spare cash flow into acquisitions, R&D, and manufacturing ramp-up for new products. This is still a very high-growth stage company, and although the short-term dips and bumps in growth are evident, the long-term trajectory is still intact.

So, we’re happy to see a continued focus on growth and no temptation towards dividends.

The big gift to investors in 2023 was the positive NPAT. For 2024, we expect to see continued positive operating cash flow and revenue growth. On the NPAT front, we expect it to stay positive, but as R&D spending ramps up with cash, it will likely undershoot revenue growth.

This is exactly why the company emphasises Adjusted EBITDAR(Earnings Before Interest Tax, Depreciation and Amortisation and Research and Development). Because research and development costs are quite significant, this measure gives a good view of the underlying profitability on an ongoing basis.

Analyst consensus is for 2024 EBITDA of $100.7m, up from $58.4 million, and EPS of 19 cents, up from a loss of 1.6 cents.

We won’t be surprised or disappointed to see these numbers come in much lower. TLX is still in rapid growth mode, and they have signalled that they will push growth as hard as they can, which means higher costs as far as cash flow will allow.

This is the best strategy for their life stage.

We emphasise revenue as the best growth metric and clinical trial outcomes of their drug pipeline, particularly on the therapeutic side. Analyst consensus revenue for 2024 is $694 million, a growth of 38%, which is reasonable. Revenue for 2025 is forecast at $876 million.

The analyst consensus price target is $12.40

Recommendation

Telix is an exciting company changing people’s lives for the better and experiencing strong revenue growth.

The strong growth looks set to continue with the global roll-out of Illucix and an organic pipeline of products, including two that could see FDA approvals and potential launches this year. Both are exciting with big potential.

On top of that, we continue to see complementary acquisitions with strong synergistic appeal. We expect to see continued smart takeover activity.

We recommend Telix Pharmaceuticals (ASX: TLX) as a buy for growth. This is one of our high conviction plays, and we are lifting our current buy up to price to $14, which equates to a market cap of 9X their 2023 revenue. We are also raising our sell above price to $25.

Technical Update

The TLX stock price is threatening a break out to new all time highs.

The stock could run on a sustained break above the level at ~$12. There are no technicals above there to slow the trend.

If a big sustained breakout does occur, we could expect the share to come back and test the previous highs at $12 at some point or the rising blue support. Whichever comes first.

However, this could take some time, and the price may be substantially higher the next time we get a chance to test that rising blue support.

Source: TradingView / Shares in Value

 

Telix Pharmaceuticals (ASX: TLX) – Initiation – High Conviction Buys – 21st January 2024

Who is Telix Pharmaceuticals?

Telix Pharmaceuticals (ASX: TLX) is a biopharmaceutical company focused on diagnostic and therapeutic products that utilise targeted radiation. Their products are innovative radioactive materials that are used for imaging and treatment.

The company’s flagship product – Illucix – is a radioactive imaging agent. It binds to the proteins expressed by prostate cancer cells. Used in conjunction with a PET scan, it allows doctors to diagnose and map the spread of prostate cancer more accurately. Importantly, it may allow for earlier detection, and it’s non-invasive.

Illucix has seen rapid growth, led by the US market. Revenue increased 214% to $502.5 million in 2023. Revenue growth in the US and geographical diversification and growth will remain the focus of investors in the short term. Illucix sales have demonstrated attractive, stable gross margins above 60%.

Beyond Illucix

While the Illucix ramp-up is a great story, it’s just the beginning. There’s a large pipeline of research and development covering imaging and treatments for various types of cancer, including the prostate, kidney and brain. There are over 20 clinical studies in progress.

Phase 3 trials are underway for TLX591, a radio-antibody specifically targeting prostate cancer cells. Phase 1 and 2 trials have so far demonstrated an acceptable safety profile and meaningful evidence of a survival benefit. Interim results from the phase 3 trial are expected in early 2025, with final phase 1 results should be released in the first half of 2024.

TLX has been solidifying its position as an emerging urologic oncology leader with recent Lightpoint Medical and Dedicaid acquisitions.

Lightpoint Medical has a miniature gamma probe called Sensei, which can be used in surgery in real-time to detect and map Illucix bound to cancerous cells. So, it’s highly synergistic with their flagship product.

The Dedicaid acquisition adds to the Telix AI program with AI powered cancer identification automation for more accurate and faster diagnosis.

The company has also entered a conditional agreement to acquire QSAM Biosciences, who have a similar product to Illucix but with an initial target application of bone cancer. The deal would strengthen TLX’s product suite and bring a potential competitor in-house. TLX’s strong ability to commercialise products will add immediate value to the acquisition.

On top of all their other 2024 catalysts, TLX is eyeing a dual listing in the US, which will bring increased investor scrutiny.

How to play Telix’s stock?

The Telix share price is in a long-term uptrend. We expect the share price to continue to grind higher as revenues in Illucix continue to grow. Further updates regarding new products in the pipeline will create opportunities for price breakouts.

The stock looks set to keep breaking prior highs. While volatility will likely remain high, we can’t predict a pullback to any particular price. One great announcement could send TLX to $20 per share or more quickly.

Between mid-2022 to mid-2023, the share price more than tripled. Similar moves are possible. So, we want to position early and be happy to ride out any pullbacks. A break of previous highs is likely to run. Buy up to $12.50 and take profit at $18, which equates to 10X the current Illucix revenue run rate.

Source: TradingView / Shares in Value

 

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