Missing the first double on this biotech star

Even the world's greatest investors have their fair share of misses, but what's important is what you learn as a result.

But it takes a brave investor to share those stories, and an even braver one to let it be published for a wider audience and help other investors improve their own decision-making.

In this series, we speak to some of Australia's leading fund managers on the investment opportunity that slipped through their fingers and the lessons they took from it.

In her own words, Rachel Folder, investment analyst at Pendal Group, reflects on identifying a biopharmaceutical company early, but explains how uncertainty around valuation, rapid growth, and entering a brand new sector held her back.

What was the investment idea?

Telix Pharmaceuticals (ASX: TLX) was a stock that came onto our radar in mid 2022. TLX is a biopharmaceutical company focused on diagnostic and therapeutic radiopharmaceuticals.

At the time the stock had a market cap of around $2bn and made revenue of $22.5m in the June 2022 quarter – it was the first commercial quarter of sales for the company. The transition from development stage to commercial stage was a key turning point that sparked our interest in the stock.

Their first product, Illuccix, is a diagnostic imaging agent that allows PET scanners to light up the prostate cancer cells in the body, helping to diagnose and determine treatment pathways for patients. The product was approved by the FDA in December 2021.

What was your reasoning at the time?

We saw a number of key positives supporting an investment in the stock at the time. The company was growing sales of Illuccix rapidly into a large total addressable market in the US.

The product addressed a significant unmet need due to superior accuracy, sensitivity and clinical utility, effectively replacing former scanning technologies. The product has attractive unit economics and high gross margins with very reasonable capital investments needed.

While Illuccix was the second product to market in the prostate imaging space, the market was growing so strongly there was room for more than one player. At the same time we could see TLX’s competitive advantage through the nuances in their supply chain and logistics, and the high barriers to entry in the market that made it difficult for new competitors to enter into the space and take share.

Why didn’t you pull the trigger?

The stock traded pretty volatile during the time we started following the company – which caused us caution in itself. It was around $8 after the release of the June 2022 quarterly and faded to below $5 by September on the back of withdrawing their marketing authorisation application in Europe.

In hindsight this would have been an opportune time to start buying the stock, but we just didn’t have the conviction at the time.

It was a few things that held us back. Firstly, we hadn’t seen anything like this before and we were doing the work getting up to speed on a company and sector that was brand new. So there was a lot of knowledge building that had to be done, and at the time we were early on in that journey. We look to invest in businesses that we have a good handle on and understand well – and this can take time.

Secondly, we underappreciated just how fast the Illuccix product could grow and we were cautious of what the opex profile would look like in the early stages of launch. It was difficult to forecast earnings when the company was growing so fast, and because it was hard to forecast, it was also hard to value the stock at the time. So we were overly conservative with our estimates and couldn’t get there on valuation.

And lastly, we were naturally cautious of what we didn’t know (the ‘unknown unknowns’) relating to the clinical stage assets in their pipeline. If there was a negative outcome in one of their clinical trials, that would impact the stock and likely cause permanent capital damage.

What happened next? How did it perform?

We sat on the sidelines and watched the stock move from below $5 to over $11 per share in less than 12 months. We were certainly feeling the pain of missing out at the time, it is not everyday that we see such rapid sales growth and a stock more than double on the back of it. There were opportunities to buy into the stock along the way but we didn’t.

During that period we continued to do our research – we did calls with clinicians and industry contacts, multiple meetings with management and continued to build the knowledge base on the company and further understand the scale of the opportunity.

We continued to watch the revenue trajectory grow, and in the March quarter of 2023 the company reached over $100m in quarterly sales. It had grown much faster than we thought it would before.

Luckily, that wasn’t the end of the story.

At this point we recognised that the company was further de-risked than during its early days of commercialisation, reaching a milestone of sales that enabled the company to self-fund growth. A track record had been established.

Through the work we had done we knew more about the company and the industry, and came to the conclusion that the market was underestimating the growth potential of Illuccix. At the time we thought the market was only really attributing value for Illuccix and not their pipeline assets, which meant we were almost getting a free option on the future products. We were able to re-assess our estimates and start buying a position in the fund at the time.

While we missed out on the first 100%+ capital return, and that didn’t feel great, the opportunity was still there. Since then we have seen the stock more than double again, and also graduate into the ASX100.

The key lesson was that if you have identified an investment idea you shouldn’t be put off solely by the feeling of ‘I’ve missed it’. It is easy to look at a stock price chart that has travelled from bottom left to top right and feel the pain of regret, and think the wins are over. Humans are naturally risk averse, after all (especially the investing kind!)

It is important to do the work and not let the pain of being wrong initially prevent you from re-assessing a potential investment. We shouldn’t let the past influence our view of the future.

Sometimes the wins are genuinely over, but we have to do the work to form that view (and we don’t always get that right, either!)

In this case in particular, it was important to invest the time in understanding the opportunity, especially as it was a brand new sector emerging in the space. It also highlighted that we need to pay attention to companies in the earlier stages of their growth journey, and while it might be too uncertain at first, the work we do to understand the business and the space has the potential to pay off down the track.