Back Ground and Pre-amble explaining Strawman Trades today

I have today used a small portion of my $CSL proceeds to initiate a position in $TLX - an earlier stage pharmceutical company, focused on tthe development and commercialiation of diagnostic and therapuetic radiopharmaceuticals.

I have been sitting on the sidelines, paralysed as I have watched the potential of this firm explode over the last year. And I have been waiting all the while for a pullback, almost acting on the recent FDA setback for their renal imaging product in July. A setback which should be temporary, and which relates more to the control of manufacturing and supply chain, rather than the efficacy or safety of the product.

I want to start by explaining why I have made a number of Strawman trades to facilitate initiating the position. To be clear, I have not sold any of today's SM trades in RL. I had to sell down a little of several positions to make room in SM. That's because it is my policy only to hold higher risk investments on SM, and so I've never held $CSL on SM even though I have held it in RL for several years.

In Australia, we are blessed with biotech/pharmaceutical companies, and I aim to hold several that have the potential to become global platform leaders in their areas. $BOT, $NEU, $PNV, and now $TLX, all hold that promise, with everything that entails that for the long term, should any one of them succeed in the very long term (10-20 years).

As with other Strawman holdings, I am slow to the party here and should have paid more attention when @mmff @edgescape @Varmallama and @Remorhaz put this on the community radar screen. Although in fairness, over the last 6 months I have been my own worst enemy by trying to get a better entry point.

$TLX

On $TLX, ILLUCCIX appears to be off to the races, on track to deliver $A750m sales in CY2024 ($TLX reports FY=CY). This product is taking share so strongly in the prostate cancer diagnostic sphere, that peak sales of A$1.5bn over time are foreseeable.

Next is ZIRCAIX, which had its BLA filing rejected recently by the FDA around sterility assurance questions in the manufacutring and control packages. (As someone who early in their career was a pharmaceutical manufacturing plant manager, I can say that these are serious but fixable issues. In some respects, should $TLX be able to resolve these issues to the satisfaction of the FDA, that would be a positive flag for me, and an early and important test of their supply chain controls, given that they are building an integrated supply chain. While the company's communications sought to downplay the issue, I can say from direct experience that issues in sterility control in manufacturing can be problematic, and sometimes hard to fix to the level of assurance the FDA requires! So this is an important test for $TLX, in a similar way that $BOT was successfully tested by the labelling and patient instruction issues with SOFDRA.)

Anyway, I missed the full opportunity of the minor $TLX puilback to $17, but have decided to act today on a "better late than never" basis. Should the resubmitted ZIRCAIX package be accepted by the FDA we are likely to see the recent pullback quickly reversed, so I want to have at least one seat on the bus, should that occur.

Unlike ILLUCCIX, which faces several competitors, ZIRCAIX for imaging certain renal cancers is in a less competitive space, and should it be approved in 2025, there is the prospect it could grow over time to achieve A$500-1,000 annual sales over 5-7 years.

Importantly, ZIRCAIX and ILLUCIX have the same specialist customers, so would share the same salesforce/distirbutors.

The third of the core imaging daignostic products is PXICLARA, used for imaging certain brain cancers. Again, this also looks promising from clinical studies so far, with potential for approval also in 2025.

These three products represent the core of my investment thesis and valuation. However, the "blue sky" I am looking for, lies in the ongoing clinical studies to use the cancer-targeting technology to actually deliver the radioactive treatments. The slide below shows the overall portfolio. The treatment products will have a higher clinical bar to clear than the diagnostics products. The indications are for advanced metastatic cancers, and so CT endpoints will generally be based on survivability compared with standards of care, as well as side effects/quality of life.

Another factor that is distrinctive in $TLX is its commercial capability in licencing and acquiring both molecules and technologies, as well as the critical elements of the supply chain. The products require a globally distributed supply chain because they need to be deployed to the patient often within hours of manufacture, due to the radioactive decay. So building the integrated supply chain to allow manufacturing and deployment of these high value products will be a common and differentiating capability across the portfolio. With ILLUCCIX, $TLX has shown it can standup the supply chain, and now it is about scaling it and adding products to it.

In this initial, brief writeup, I've not even mentioned the recently acquired bone marrow conditioning product, which includes one development product and one commercial product. In truth, that because I haven't fully got my head around that part of the business - but my investment case doesn't need it, so it will keep.

Valuation

My imple intial valuation is based on the intiial three core diagnostic products achieveing 2029 revenues of $2,000bn.

Other key assumptions:

Operating margin of 35%

2029 PBIT = $700m

No debt and a tax rate of 25%

2029 NPAT of $525m.

Assuming growth in SOI from today's 335m to 360m

2029 EPS = $1.45.

BULL CASE ("Blue Sky")

Method 1

Assuming $TLX maintains a strong development portfolio and a P/E of 50 gives Value/Share (2029) = $72

Discounted back 5 years at 10% gives: $45/share

Method 2

M&A at 7.5 x "peak" sales in 2029 of 2bn = $15bn or $42/share

BASE CASE

Assuming valuation just on the core diagnostic portfolio, with broadening indications/molescules but no breakthrough into radio-therapies, resulting in a more modest 2029 P/E of 25 gives Value/Share (2029) = $36.

Discounted back 5 years at 10% gives: $22/share

Investment Strategy

Today I've taken an initial 2% RL position. Over time, I'll look to scale this up.

Next "buy" triggers will be 1) info coming out of 1H FY24 briefing and 2) Acceptance by FDA of the ZIRCAIX BLA package.

When I'd Sell

1. ILLUCAIX plateaus prematurely (e.g. either due to TAM or competitive issues emerging)
2. ZIRCAIX a) package BLA resubmission isn't accepted in 2024 or b) approval not granted in 2025

Post-Note

Yesterday, in writing about $CSL and why I have exited, I referred to the "tyranny of growth". To recap, with c. $14bn of annual sales today, $CSL must produce multiple blockbusters (a dated term showing my age, which used to mean product with peak sales of $1bn) every few years to justify its multiple. My critical examination of the $CSL portfolio over the last two years, together with their increasing focus on cost out and margin improvement in their blood products supply chain as well as cutting Vifor costs, pushed me over the edge to recycle capital from $CSL back into earlier stage, though hig-growth revenue-generating firms like $BOT, $NEU, $PNV and today $TLX.

$TLX is far and away the largest of these, but it is still 1-2 orders of magnitude smaller than $CSL and 1-2 decades earlier in its growth story. The tyranny of growth is some way off into the future for all my core biotech holdings, and the graphic below shows that for $TLX the story have several chapters to run.

In writing this, I have to highlight that these earlier stage companies have a much higher risk profile than $CSL. But all have - or are in immediate sight of - producing strong positive cash flows to drive them forward.

Disc: Held in RL and SM (trade submitted)