Telix Pharmaceuticals Limited (TLX-AU): Novartis Endocyte move highlights opportunity

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Published to the market and investors on 18^th October 2018 @ 11.51am (London time).

Telix Pharmaceuticals Limited (TLX-AU): Novartis Endocyte move highlights opportunity
Recommendation: OUTPERFORM
Target Price: AUD $ 2.50
Current Price: AUD $ 0.860 (COB on 18^th October 2018)

KEY TAKEAWAY

The proposed $2.1bn acquisition of Endocyte Inc. by Novartis AG highlights the substantial opportunity for Telix in radiopharmaceuticals and prostate cancer in particular. Just one of a portfolio of clinical stage radiotherapy and radiotherapy programmes, Telix's TLX-591 promises a superior second-generation product. With potentially better efficacy and tolerability compared to the Endocyte's lead product 177Lu-PSMA-617 currently in Phase III, the antibody-based TLX-591 has the potential for earlier and broader use in combination with existing androgen-depletion therapy ("ADT"), as well as the basis for more potent alpha-emitting radiopharmaceuticals. With the likes of Novartis / Endocyte blazing the trail, Telix looks well placed to take a substantial share of the growing radiopharmaceutical market. Given the $2.1bn offer for Endocyte, Telix looks dramatically undervalued. We maintain and reiterate both our OUTPERFORM recommendation and target price of AUD 2.5 per share.

Improved efficacy - With optimised fractionated dosing shown to reduce previous dose-limiting blood toxicities, unpublished cross-trial comparison data indicates that the Telix 591 177Lu-PSMA-antibody may provide a forty month mean overall survival compared to the 13.5 months reported for Endocyte's 177Lu-PSMA-617.

Reduced long-term side effects - Heavily expressed on the prostate cancer cells the therapeutic target PSMA is also present in salivary and lacrimal glands, which can suffer long-term damage from radiation exposure. In contrast, to smaller peptides like Endocyte's 177Lu-PSMA-617, larger antibody-based radiopharmaceuticals are excluded from these glands. This largely restricts radioactive exposure to cancer cells reducing the substantial impact of dry mouth and eyes, as well as making the antibody format more suitable for next more potent next generation alpha-particle-based radiopharmaceuticals.

Opportunity for earlier combination therapies - With 177Lu-PSMA-617 currently targeted at end-stage salvage therapy, reduction in debilitating damage to saliva and tear production with TLX-591 should facilitate earlier use. ADT has already been shown to boost cancer PSMA levels, indicating potential synergy for TlX-591 with drugs such as Johnson and Johnson's abiraterone, potentially limiting the duration of chemical castration.

Therapeutic supported imaging diagnostic - With the Telix prostate cancer radio-imaging diagnostic illumet (68Ga PSMA-11) already used as a companion diagnostic in the Endocyte Phase III trial, Telix has recently secured distribution deal with the major healthcare service provider Cardinal Health that should provide the basis for broader use of the diagnostic in prostate cancer diagnosis and monitoring, as well as a significant driver for the use of its radiotherapy.

Just one part of the portfolio - With ongoing late stage clinical programmes progressing in renal cancer imaging and therapy as well as glioblastoma, Telix's prostate cancer programme forms just one part of a diversified and significantly de-risked product pipeline.

Substantially undervalued - Telix looks substantially undervalued on the basis of the $2.1bn Endocyte offer. Our DCF analysis indicates that the current market valuation is largely justified on the basis of the imaging programmes alone and ascribes modest value to therapeutics; despite the quality of data in all three programmes. Our risk adjusted analysis indicates a fair value of AUD 2.5 per share with upside of AUD 4.5 per share should the products achieve their full therapeutic potential.

Kind regards,

Chris Redhead | Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

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