Inaugural profit overlooked as R&D spending soars at Telix Pharmaceuticals

Telix Pharmaceuticals' (ASX: TLX) share price has sunk more than 4% in the first two hours of trade today, on the back of its FY23 announcement. 

This may come as a shock to some investors, given the company has just announced its inaugural profit - with revenues soaring 214% and EBITDA recording a positive result for the first time ever over the 12 months to 31 December.

So, what has compelled today's sell-off? According to Wilsons Advisory's Dr Shane Storey, it's likely the company's indication of a 40-50% increase in research and development expenditure over the coming year. 

For context, Telix spent $128.8 million on R&D in 2023 – far higher than analyst expectations of $93 million. This could see R&D spending increase anywhere between $180.32 and $193.2 million over the coming 12 months. 

That said, Storey believes there is a major catalyst mid-year that could see Telix's share price soar north of $20 – which could mean around 87% in upside from here. 

In this wire, he digests Telix's latest full-year result and outlines why Wilsons Advisory remains bullish on the outlook for the company. 

FY23 Key Results 

• Revenues of $502.5 million, up 214%, versus analyst expectations of $501.8 million
• Gross margins of 63%, versus 59% in 2022
• NPAT of $5.2 million
• Adjusted EBITDA of $58.4 million, versus a year ago -$67.8 million
• Cash and cash equivalents of $123.2 million, versus a year ago $116.3 million 
• R&D expense of $128.8 million versus analyst expectations of $93 million 
• Guidance: Revenues of $675-705 million (analyst expectations of $660.8 million 
• R&D additional investment up 40-50% compared with 2023
• For more financial data on Telix, head to Market Index

1. In one sentence, what was the key takeaway from this result?

Telix is investing in itself and really believes in itself as a therapeutics developer. It's going to invest the majority of the profits it makes from its imaging business to develop its therapeutic assets. 

2. Were there any major surprises in this result that you think investors should be aware of?

I think the R&D increase did surprise the market. I think there is still an element of "trust us, we're the clever guys" in terms of being able to assume that level of capital investment, ploughing shareholder funds back into the assets.

3. Would you buy, hold or sell this stock on the back of this result?

Rating: BUY

We have an "Overweight" on Telix. We've seen how popular the radiotherapeutics area is globally. We share the vision - but sometimes the broader market can take its time to come around to a similar opinion. 

4. What’s your outlook on this stock and the sector over the year ahead?

We have a price target today of about $12.50 and I think there is upside to that over the next 12 months as their therapies continue to develop. There's a major catalyst there mid-year, which could see Telix's share price close in on our analyst's price target which is north of $20 a share - but that depends on approvals.  

In terms of the sector, I think overall it will still face its challenges and it will come down to fundamental stock picking and being in companies that have clear catalysts that will lift their share prices. 

5. Are there any risks to this company and its sector that investors should be aware of?

The major one for the whole sector is being able to fund programs and fund their R&D. Telix is in a great spot there, of course. Their operating business is profitable so they have that luxury. Their peers in biotech and med-device are probably a bit more challenged in accessing capital this year, should they need it. 

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 3

We are probably sitting at 3. The healthcare sector is never cheap. However, we are always hopeful as sell-side analysts - it's engrained within us to be optimistic at some level. It's been a very tough two years in healthcare, but there does seem to be some normalcy returning to how people are looking at and valuing companies - so it does feel better than it was maybe a year ago. It's not dirt cheap - it never is, but 3/5 on your valuation scale would suggest that there is still decent value on offer.