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

If you would like to submit a question about an ASX company covered by Morningstar, please email it to me at [email protected]. I will ask selected questions of the analyst covering the stock and publish their response in a future edition.

Question of the day

Mark’s question on Telix was something like this:

“Unlike many other pharmaceutical start-ups that offer a single product, it appears that Telix has a real portfolio of products which, if all were approved by each country’s equivalent of the Australian TGA or the 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 taken into account?

First, some background on Telix

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

Imaging agents are used in medical imaging procedures (such as X-rays or PET) to make certain body parts or molecules or proteins contrast more strongly with surrounding tissues and become easier to analyze.

Illuccix is ​​primarily used to stage suspected metastatic prostate cancer and determine the extent to which the cancer has spread beyond the prostate. Adoption of Illuccix is ​​also growing for suspected recurrence, monitoring and patient selection for radioligand treatment.

Illuccix has gained significant market share through changes in clinical practice and strong execution on the distribution front. Telix has several distribution partners, including Cardinal Health, which operates the largest radiopharmaceutical network in the United States and efficiently distributes Illuccix to PET imaging sites.

The success of Illuccix has helped Telix grow from less than $5 million in revenue in fiscal 2021 to more than $600 million in revenue in the last twelve months. In doing so, it has grown into a $6 billion-plus market cap company and has rewarded its shareholders handsomely since its 2017 IPO.

What future for Telix?

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

Telix is ​​in the process of obtaining marketing authorization for Europe and Brazil. However, Ponraj expects Illucix sales in the United States to continue to be the cornerstone of Telix’s profits for several key reasons:

1. The price of Illuccix in Europe is expected to be around 1,000 EUR, much lower than the current commercial price of around 4,500 USD.
2. Telix’s geographic expansion may be limited by the supply chain and infrastructure required for the production, storage and transportation of Illuccix. After all, it is based on the radioactive isotope Gallium-68.

Three great hopes in sight

As Mark mentioned in his question, Telix is ​​trying to go beyond just being a single-product company.

The 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).

None of these agents have yet been approved by the United States Federal Drug Agency, but it appears that they most likely are. Ponraj’s assessment of Telix assumes that both products gain US approval and that sales begin for Zircaix in 2025 and Pixclara in 2026.

At the same time, Telix is ​​also testing TLX591, a potential treatment for prostate cancer. TLX591 is currently in a phase 3 clinical trial and therefore still has a way to go before being approved for sale.

Ponraj assigns a 25% probability that the TLX591 will reach the market and expects a quick readout of the Phase 3 trial in the first half of 2025. If all goes well, a 2029 launch could be possible. Ponraj places no significant value on the rest of Telix’s product portfolio, all of which are at a very early stage.

Patents but no gap

As I wrote in a previous article, many large pharmaceutical companies have formidable moats – something we define as a structural advantage that protects a company’s return on capital over an extended period of time.

Ponraj doesn’t think Telix currently has an economic moat.

Gaps in the pharmaceutical sector often arise from patents, which prevent competitors from offering the same treatment (using the same molecules) for a specific period of time. Telix holds patents for its Illuccix product until at least 2035, but the patents relate to Telix’s method of manufacturing the imaging agent, not the underlying biotechnology.

Telix does not own the rights to the molecules or radioisotopes used in radiopharmaceuticals, and Illucix is ​​not the only gallium-68-based imaging agent on the market. The company also faces competition from imaging agents derived from other molecules and radioisotopes.

Most notable here is the fluorine-based agent Pylarify, which was released earlier (in 2021) and Ponraj estimates that it has about 60% of the US market, compared to 30% for Illuccix.

Other moat sources are also not up to the task

Patients initially tested with a single imaging agent typically use the same agent in follow-up scans to ensure consistency. This ensures an element of business retention but, in Ponraj’s view, does not underpin a moat based on switching costs.

Physicians – that is, those who actually select and purchase Illuccix for use in their practice – do not face switching costs as they do with products and treatments that require a lot of training. As a result, they could move to another product quite easily over time.

Another important source of moat in the pharmaceutical sector is distribution advantages. These could include deep business relationships through a broad portfolio of must-have products for a certain niche, or the branding and marketing power that comes with scale. Compared to much larger players in the pharmaceutical industry, Telix does not appear to have a big advantage in this area.

Overall, Telix does not yet seem to have a moat capable of keeping its competitors at bay and protecting the profitability of its capital for a minimum period of ten years.

An influx of new competitors for key products could lead to pricing pressure that would have a significant impact on profits, especially since Telix is ​​currently very dependent on Illuccix. However, to be fair, Telix has invested heavily in an attempt to expand and diversify its portfolio.

Encouraging outlook, but valuations don’t look cheap

While he hasn’t yet seen enough to award Telix a moat, Ponraj still believes Telix can generate high returns on capital thanks to its capital-light business model, high margins and high levels of return on capital. investment.

Ponraj’s fair value estimate of $17 per share calls for annual revenue growth of 21% and earnings growth of 30% over the next five years. These are healthy numbers, but the market seems to expect even more from the company. Its shares currently sit at just over $20.

Telix Pharmaceuticals

• Moat Rating: None
• Stock price on October 9: $20.70
• Fair value estimate: $17 per share
• Number of stars: ★★

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Submit your own question to our analysts

If you would like to submit a question about an ASX company covered by Morningstar, please email it to me at [email protected]. I will ask selected questions of the analyst covering the stock and publish their response in a future edition.

Previously on Ask the Analyst: