In our new 'Christmas Cracker' series, each morning through to Christmas we will bring you a top insight from one of our contributors. These will be diverse and could be a macro call, sector view, stock idea, or even some useful tech. Today’s insight is from Simon Shields, Monash Investors Limited.

A micro-cap biotech we like for 2018

One of the advantages of investing Pre-IPO is the access to company information which allows a level of due diligence simply not possible in a listed market environment.  This was critical for a Pre-IPO investment we made into a company that has now listed on the ASX, Telix Pharmaceuticals (TLX-ASX).  Investing in the Biotech space is a high risk / high return prospect, and therefore an investment space where we are highly selective.  The level of due diligence we were able to undertake Pre-IPO was critical to informing our decision to invest. 

Telix is looking to establish itself as a leading player in the molecular targeted radiation (MTR) market.  So what is MTR?  In simple terms, this is direct radiation of cancer at a molecular level.  A number of cancers have specific molecular “targets” unique to that type of cancer therefore the idea is to develop a targeting agent (i.e. small molecule or antibody) that will specifically bind itself to the “target” on the cancer cell and nothing else.  Then a radioactive isotope is linked to the targeting agent and delivers the radiation directly to the cancer cell.  Depending on the isotope use, this can either image the cancer or provide a therapy. 

Source: Telix Pharmaceuticals

The approach offers numerous advantages.  It has the systemic reach of chemotherapy but without the indiscriminate toxic chemistry; the killing power of radiation but brought into the closest possible contact with the cancer; and the selectivity of targeted therapy without the reliance on complex biological interactions.  In short, it is a promising area of medical science, overcoming the drawbacks of other forms of treatment. 

Telix has four clinical programs that it is bringing to market, a clear point of difference to most Biotechs.  One program will be undergoing a confirmatory phase 3 trial, two programs are moving into larger scale phase 2 trials and the fourth is in Phase 1.  All of these programs have shown very encouraging results to date, and as a result, we would expect to see numerous news events and valuation inflection points over the next 1-2 years

Source: Telix Pharmaceuticals

The most advanced of these programs is TLX-250 - Renal cancer imaging.  The targeting agent in this program was used in a previous phase 3 trial with excellent diagnostic performance.  However, imaging was not the end point of this trial and therefore the FDA has required a confirmatory trial as a standalone imaging treatment.  Given that it has already demonstrated this in a previous trial, the prospect that TLX-250 will be approved is high in our view.

While Telix is currently pre-revenue, given the advanced stage of TLX-250, it is expected that Telix will start to generate revenue within 2 years.  This is also a somewhat unique investment attribute versus other Biotechs where revenues are not likely in the foreseeable future. 

Telix has a strong management team with the right blend of medical/industry experience as well as commercial expertise.  In any company management is key, arguably more so in a Biotech.

While Biotech share prices tend to be volatile the combination of this many programs at relatively advanced stages of development, the associated newsflow, with the prospect of revenues within 2 years, with such a modest market capitalisation ticks many boxes.

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