Telix Pharmaceuticals — Prostate programmes boosted

Telix is a biotechnology company that is developing molecularly targeted pharmaceutical products for imaging (identified by ‘CDx’ suffix) and treating a range of cancers. It is developing TLX250-CDx and TLX250 for imaging and treating the kidney cancer known as clear cell renal cell carcinoma (ccRCC); TLX591-CDx (branded illumet in the US) and TLX591 for imaging and treating prostate cancer; and TLX101-CDx and TLX101 for imaging and treating brain cancer (TLX101-CDx will be used for studying the pharmacology of TLX101 but will not be developed for clinical use). TLX250-CDx, which now uses the 89Zr radionuclide that produces sharper images, is in a confirmatory Phase III trial (ZIRCON). The TLX591-CDx prostate cancer imaging kit is available as an investigational imaging tool for use in clinical trials and a filing for US regulatory approval is expected during 2019. The TLX101 therapeutic agent is in a Phase I/II study.

We value Telix at A$380m or A$1.74 per share, which includes our estimates of the future milestone payments and royalty streams for TLX250 and TLX591, plus profits from commercialisation of TLX250-CDx, TLX591-CDx and TLX101. Our rNPV calculation is based on the assumptions discussed below, such as target population, market uptake, pricing, R&D costs, market exclusivity expiry and calculated peak sales. Telix’s strategy is to self-commercialise TLX250-CDx, TLX591-CDx and TLX101 due to the compact market structure for these products. For TLX591 and TLX250 its strategy is to seek a marketing partner to promote the products into the more dispersed urology market. One option for Telix would be to seek to partner TLX591 before initiating the planned Phase III study. Our scenario analysis suggests that progressing TLX591 to Phase III (subject to funding and regulatory approvals) could add around A$70m to our valuation, even after accounting for an estimated US$60m in development costs.

Telix reported a pre-tax loss of A$15.7m in 2018, its second year of operation. Expenses associated with R&D projects were A$18.7m, personnel expenses were A$4.9m and administration and consulting costs totalled A$4.3m. Our pre-tax loss estimates for 2019 and 2020 grow to A$24.3m and A$23.6m, respectively, mainly due to increased R&D expenditure as Telix progresses its clinical trial programme, partly offset by the Australian government’s R&D rebate scheme. Telix had A$25.8m cash and equivalents at 31 December 2018 and is funded to mid-2020. However, we estimate that it may need additional funding in 2020 (we model A$15m of indicative debt). Additional funds would be needed to proceed with a TLX591 Phase III trial.

Telix is subject to typical biotech company risks, including unpredictable trial outcomes, regulatory decisions, success of competitors, financing and commercial risks. We assume that TLX250 and TLX591 will be out-licensed; therefore, our valuation is sensitive to potential licensing timing and actual deal terms. While Telix is commencing commercialisation of TLX591-CDx, it is still mainly a mid-stage drug developer, therefore in the foreseeable future most value creation will depend on successful R&D progress and any potential partnering activities. If the FDA requires Telix to conduct a prospective clinical study of TLX591-CDx, it could delay filing for full marketing approval by one to two years. We model the use of TLX591-CDx as a second-line test in prostate cancer patients following biochemical relapse when metastases cannot be detected by CT or MRI scans, but if it becomes a first-line test in these patients, the addressable market could be significantly larger.

Telix Pharmaceuticals is based in Melbourne, Australia and focuses on the development of MTR products (also referred to as targeted radiopharmaceuticals) to image and treat cancer. The company was incorporated in January 2017 and listed on the Australian Stock Exchange (ASX) in November 2017 after raising A$50m (before costs) in an IPO. The company’s founders, Christian Behrenbruch (CEO) and Andreas Kluge (CMO), are experienced executives and drug developers in the field of radiopharmaceuticals. The company’s portfolio, which consists of a pipeline of in-licensed and acquired products as well as company-originated intellectual property, was described in detail in our initiation report and is summarised in Exhibit 1.

On 24 December Telix completed the acquisition of its Belgium-based partner ANMI, which developed the TLX591-CDx kit for producing 68Ga-labelled PSMA-11 imaging agent for prostate cancer PET scans. Telix and ANMI had previously formed a JV for commercialising TLX591-CDx in the US, while ANMI retained 100% of the ex-US rights. TLX591-CDx is branded as illumet in the US.

The acquisition gives Telix control of the global rights to the TLX591-CDx kit. This would likely double the market opportunity for Telix in prostate cancer imaging, given that ex-US markets typically account for around 50% of global sales for pharmaceutical products. ANMI generated A$2.6m (~US$2m) revenue from sales of the 68Ga-PSMA-11 cold kit as an investigational (unregistered) product in 2018.

Consideration comprised €3.15m (A$5m) of Telix shares at A$0.83 per share, €2m (A$3.1m) in cash, plus Telix assuming responsibility for €0.8m of debt. The debt comprises non-recourse repayable grants and development loans, mostly owed to the Belgian government and repayable on successful commercialisation. The total upfront consideration was €6.0m (A$9.4m).

Telix will also pay an earn-out equivalent to a low double-digit royalty on product sales for of five years after the first marketing approval of an ANMI product in either the US or EU. The royalty rate payable on US sales will be lower than other territories, in recognition of Telix’s contribution to commercialisation in the US; we model a 10% royalty rate in the US and 12.5% elsewhere.

Telix now carries 100% of the risk and expense of the global development and commercialisation of TLX591-CDx, and will in turn reap 100% of the rewards (after earn-outs to ANMI shareholders) if TLX591-CDx is a commercial success.

The European Association of Urology (EAU) has issued updated guidelines for managing prostate cancer, which foreground the advantages of PSMA-based PET scans (such as those performed using the TLX591-CDx labelling kit) compared to other PET imaging technologies. The updated guidelines list PSMA scans as the only PET imaging technology recommended for identifying metastatic disease in men with persistent prostate specific antigen (PSA) levels after prostate cancer surgery (radical prostatectomy). Significantly, the guidelines do not recommend that the competing technologies such as 18F-fluciclovine (Axumin, Blue Earth Diagnostics) or 18F-fluorocholine be used for this application.

For a related patient population, men whose disease has returned after initial prostate surgery (biochemical recurrence), PSMA PET is recommended as the preferred PET for imaging technology. Fluciclovine PET and choline fluorocholine PET are only recommended to be used in these patients if PSMA PET/CT is not available.

The guidelines describe the strength of both of these ratings as weak, as the current evidence base is limited (we note that this does not necessarily imply that the clinical utility is weak). However, despite this, the recommendation that PSMA PET/CT should be used in preference to competing PET technologies should help make PSMA PET imaging routine clinical practice and therefore drive increased uptake of the TLX591-CDx 68Ga-PSMA kit in Europe. Developing the clinical data to support a marketing approval application and submitting this to regulatory review will strengthen the evidence base.

Telix intends to seek regulatory approval to market TLX591-CDx in the US and Europe. It is in active discussions with the FDA regarding the nature of the evidence that would be required to support regulatory approval in the US. Based on discussions to date, management anticipates an NDA submission in 2019.

The European Medicines Agency considers 68Ga-PSMA-11 to be a drug whereas the FDA considers it to be an active pharmaceutical ingredient (API). Due to this distinction, Telix expects that it will need to do further clinical studies before filing for approval in Europe. As a consequence, we model filing in Europe in 2021, two years later than in the US.

ANMI has several other pipeline products that are synergistic with Telix’s focus on urological diseases.

The availability of a GMP-grade 177Lu radiopharmaceutical precursor means that Telix’s TLX591 could potentially be developed in kit form to be used to produce the final radiolabelled product, rather than relying on centrally-manufactured product. This could potentially be a point of differentiation from Novartis/Endocyte’s PSMA-617, which is currently being investigated in a Phase III trial in 750 prostate cancer patients, and which is expected to be distributed as a centrally manufactured, labelled product ready for use.

Providing the products as a ‘cold kit’ which can be radiolabelled on site would make the therapy as well suited to smaller clinics as it is to large hospital sites, because it does not require access to a cyclotron to generate the radioisotope or a centralised manufacturing facility to generate the therapeutics product.

In September 2018, Telix completed the anticipated acquisition of Atlab Pharma for ~US$10m (in shares and warrants), to strengthen its IP position and gain access to clinical data and know-how related to its TLX591 prostate cancer therapeutic programme.

Atlab had previously conducted a number of clinical trials of 177Lu-huJ591 in prostate cancer, in conjunction with Professor Neil Bander’s lab at Weill Cornell Medical Centre (WCMC), and had licensed the huJ591 anti-PSMA (prostate specific membrane antigen) antibody technology from WCMC. As part of the acquisition of Atlab, Telix brought in a third-party contract research organisation (CRO), ABX, to asses and verify the Atlab clinical study data.

Following the review of the Atlab/WCMC data, Telix concluded that the safety and efficacy data from prior clinical studies of 177Lu-huJ591 were sufficiently promising to justify progressing the original, unmodified huJ591 antibody directly into a Phase III study in chemotherapy-naïve patients with metastatic castration resistant prostate cancer (CRPC).

The analysis of the historical data by ABX confirmed that when the dose of 177Lu-huJ591 was fractionated (ie split into two doses administered two weeks apart), the efficacy and tolerability of the treatment was improved. In particular, the patients who received the highest two doses of fractionated therapy survived much longer than patients who had been treated at lower doses. The difference in survival was most dramatic for patients who had not had prior treatment with chemotherapy drugs (ie were chemotherapy-naïve).

The original huJ591 antibody, which will be radiolabelled with lutetium (177Lu), will now be known as TLX591.

The company’s enhanced version of the huJ591 mAb (which was previously known as TLX591), will now be developed as a follow-on or backup product known as TLX592. TLX592 will be labelled with the alpha-particle emitting radioisotope Actinium-225 (225AC). Telix expects the second-generation TLX592 product to have toxicity and efficacy advantages over TLX591.

Telix had previously planned to investigate TLX592 in a Phase I/II study, before progressing to Phase III.

The proposal to target use of huJ591 in chemotherapy-naïve patients makes sound commercial sense, in our view, because there is currently a potential opportunity to be first to market for this patient population.

On the other hand, if Telix was to follow the more typical approach of seeking an initial approval as a salvage therapy for patients who have already failed prior chemotherapy treatment, it could potentially be competing for market share with an established PSMA-targeted radiotherapeutic in Endocyte/Novartis’s PSMA617. Endocyte is already well-advanced in its VISION Phase III study of PSMA 617 in mCRPC patients who have failed first-line chemotherapy (NCT03511664). The VISION study is expected to report top-line data in H220.

Atlab conducted a number of studies of prostate cancer patients treated with 177Lu-huJ591 (which it called ATL101), in conjunction with WCMC1. This included both “single shot” dosing where the full dose of 177Lu-huJ591 was administered as a single infusion, and fractionated dosing, where the total dose was split into two fractions that were administered two weeks apart.

When 177Lu-huJ591 was administered as a single infusion, the maximum tolerated dose (MTD) was 70 mCi/m2 and 11–12% of subjects treated at 65 or 70 mCi/m2 achieved at least a 50% reduction in PSA count (referred to as a biochemical response). The dose-limiting toxicity was reversible myelosuppression, a condition where bone marrow activity is decreased, resulting in fewer red blood cells, white blood cells and platelets.

The tolerability was improved in a subsequent study by splitting the total dose into two fractions administered two weeks apart. The total dose tolerated as two fractions was higher at 80–90 mCi/m2 (2x40 mCi/m2 or 2x45 mCi/m2 with the option of GCSF white blood cell growth factor). Exhibit 2 shows that the drop in white blood cell counts (neutropenia) and platelet counts (thrombocytopenia) was much less when a total dose of 70 mCi/m2 was fractionated into 2x35 mCi/m2 than when it was administered as a single shot treatment.

Although tolerability was improved by fractionated dosing, manageable reversible bone marrow suppression was still a frequent observation. In the study of dose fractionated 177Lu-huJ591, 36/49 (74%) subjects treated in all six dose cohorts had grade 3/4 haematological toxicity, while 19/33 (58%) subjects treated at the RP2D had the more severe grade 4 haematological toxicity. The bone marrow suppression was of short duration, with platelet counts recovering within 9–12 weeks of the initiation of treatment.

In addition to improved tolerability, the higher total doses that were able to be administered as a result of dose fractionation resulted in improved efficacy; 21% of subjects who received the second-highest dose (2x40 mCi) and 46% of subjects treated at the highest dose of 2x45 mCi/m2 experienced a 50% reduction in PSA (Exhibit 3, right hand side box).2 This compares to response rates of less than 15% for the maximum tolerated single shot doses (65 and 70 mCi/m2).

Exhibit 3 also shows that the overall survival (OS) was higher for patients in the highest two fractionated dose cohorts. Median OS of 42.9 months and 48.4 months for the 2x40 mCi/m2 and 2x45 mCi/m2 cohorts compared to 11.9 months and 19.9 months for the 65 and 70 mCi/m2 single-shot cohorts.

We also note that a 2016 analysis of the available survival data of the fractionated dosing cohorts showed a statistically significantly longer OS for patients treated with the two highest doses compared to the lower doses of fractionated therapy (28 months vs 15 months, p=0.004).3

A retrospective subset analysis suggested that there may have been a greater survival benefit from high-dose fractionated therapy with 177Lu-HuJ591 in chemotherapy-naïve patients than in patients who had failed prior chemotherapy treatment. Exhibit 4 shows that the median survival for chemotherapy-naïve patients who underwent high-dose fractionated therapy was ~48 months, which was approximately twice that for patients who had received single-shot therapy.

While post-chemo patients who received the highest dose of fractionated therapy also survived longer than patients who had received either high or low dose single-shot therapy, the difference in median survival was not as dramatic as for chemotherapy-naïve patients (Exhibit 5).

Telix is well placed to pursue development in chemotherapy-naïve patients because Atlab has already demonstrated that a single cycle of fractionated 177Lu-huJ591 can be safely administered in combination with multiple cycles of docetaxel chemotherapy. Docetaxel is the standard-of-care first-line chemotherapy treatment for mCRPC.

In a study where a single cycle of fractionated 177Lu-huJ591 was administered in combination with a multiple cycles of docetaxel chemotherapy, 11/15 (73%) of subjects achieved at least a 50% reduction in PSA levels4. The MTD in combination with docetaxel was identified as 2x40 mCi/m2.

In the docetaxel combo study, 20% of subjects experienced grade 4 neutropenia without fever, while 13% experienced grade 4 thrombocytopenia. Given that both docetaxel and TLX591 both cause neutropenia when administered as single agents, it is encouraging to see that the combination therapy did not appear to increase the incidence of neutropenia. However, we expect neutropenia and other bone marrow abnormalities to be monitored closely in the Phase III study.

If approved, TLX591 (177Lu-huJ591) may face competition in the prostate cancer space from Endocyte’s small molecule therapeutic 177Lu-PSMA-617, which also binds to the PSMA receptor (Endocyte was acquired by Novartis for~US2.1bn in December 2018). In June 2018 Endocyte enrolled the first patient in a 750-patient global Phase III study of 177Lu-PSMA-617 in patients with PSMA-positive mCRPC who had failed or refused prior chemotherapy. The dose in the Phase III study is 7.4GBq every six weeks for up to six cycles. Endocyte is using Telix’s TLX591-CDx kit to screen patients for enrolment into the trial.

Endocyte reported preliminary data at ASCO in June 2018 from a Phase II study of PSMA617 in patients who had progressed after conventional therapies, including 88% who had progressed after chemotherapy. Interim results from 50 patients after a median of four cycles of PSMA617 included 62% (31/50) with at least a 50% PSA decline, including 40% with a PSA decline of at least 80%. Rates of grade 3–4 haematological toxicities reported included thrombocytopenia (10%), anaemia (10%) and neutropenia (6%). The treatment was well tolerated, with the most common side effect being grade 1–2 dry mouth reported by 68% of subjects (66% grade 1, 2% grade 2).

In an earlier report on the first 30 patients in the study, 14 of 17 (82%) patients with measurable lymph node or soft tissue lesions achieved a measurable response on radiological imaging5.

Despite the high response rates, the median OS rates reported from PSMA617 studies have typically been 15 months or less6,7. This compares to 43–48 months for high-dose fractionated TLX591, including ~28 months in post chemotherapy patients and ~48 months in chemotherapy-naïve patients (see previous pages).

Exhibit 6 illustrates the difference in OS between patients who received high-dose fractionated 177Lu-huJ591 in the Atlab study, and an earlier retrospective German multicentre study of PSMA-617. The median OS in the German study was ~15 months, vs 48 months for 2x45 mCi/m2 huJ591.

Given the absence of randomised control arms in either study and the fact that there have been no direct comparisons between the two therapies, these retrospective, cross-trial comparisons do not allow any firm conclusions to be drawn as to whether the observed differences in survival reflect differences in the patient populations studied or differences in the efficacy of the two treatments.

However, despite these caveats, a randomised, controlled study to investigate whether the longer survival reported for patients treated with high-dose fractionated 177Lu-huJ591 was due to positive effects of the therapy seems to justified, in our view. Telix’s proposed Phase III study aims to address this question.

Telix is currently developing a clinical protocol for the Phase III study of TLX591, in collaboration with its Medical Advisory Board. Initial guidance is for a trial of approximately 550 subjects, targeting chemotherapy-naïve patients who have progressed on androgen deprivation therapy. We anticipate that patients undergoing treatment with standard first-line chemotherapy agent docetaxel would be randomised to either a TLX591 treatment arm or a control arm (the trial could be open label due to the difficulty of masking radioactive therapies). The randomised Phase III could be preceded by a non-randomised safety run-in study to obtain additional safety data about the use of the proposed Phase III dose in combination with docetaxel.

The company’s indicative timeline for preparing for the study includes:

We estimate that a trial of this size would cost in excess of US$50m and we include an indicative trial cost of US$60m in our evaluation of Phase III trial scenarios. Telix does not have sufficient capital to fund the Phase III study, but has indicated that it would not seek additional capital until it has agreement from the FDA to proceed with the study.

We note that one option to fund the study without diluting existing shareholders would be to seek a licensing deal with a pharma partner who would fund part or all of the cost of the Phase III study.

Given that the initiation of the study is contingent on Telix receiving consent from regulators to undertake the study, including the US FDA and Australia’s TGA, we have not included the accelerated development programme Phase III for TLX591 in our base-case valuation model. However, we have explored the potential impact of the accelerated development proposal for TLX591 in a scenario analysis.

Potential advantages of the accelerated development programme for TLX591 include:

Over the past two years Telix has re-engineered the original huJ591 antibody to optimise its attributes. It has been re-humanised, stability/affinity optimised, and re-engineered to have better properties for radioactive drug use. One important change is that Telix has modified the constant region of the huJ591 mAb to stop it binding to the Fc receptor on white blood cells. As a result, TLX592 is cleared from the bloodstream much more rapidly, which is expected to reduce haematologic toxicity; the haematologic toxicity of radiolabelled mAbs has been attributed to their longer circulation time (serum half-life of around one week vs around 48-hour clearance for radiolabelled peptides).

Telix has collaborated with Nihon Medi-Physics Co (NMP), a Japanese manufacturer and supplier of radiopharmaceuticals, to develop an Actinimum-225 (225Ac) labelled version of TLX592 (engineered huJ591), utilising NMP’s novel linker chemistry.

225Ac is an alpha-emitting radionuclide. Alpha particles are relatively large particles that have much higher energy to damage cancer cells, but deposit their energy over a shorter range than other types of radionuclides. The short range (<100µm) reduces the damage to nearby normal cells. This is expected to make alpha emitters superior for treating small, highly disseminated metastases (micro-metastases). The short range also makes alpha-emitters safer for medical staff and for the patient’s friends and family and less radiation shielding is needed.

225Ac-TLX592 is being developed as a second-generation or follow-on product that has the potential to be both better tolerated and more efficacious than 177Lu-TLX591. Telix is undertaking IND-enabling studies as a stepping stone to testing 225Ac-TLX592 in the clinic.

Telix is also developing alpha-labelled versions of two other pipeline molecules. The first of these is TLX202 (211At-labelled IPA), which could potentially enter the clinic in late 2019 in an investigator-initiated study in multiple myeloma. The second is 225Ac-TLX251 (engineered girentuximab), which is in early preclinical development for testicular cancer.

While this report has focused on prostate cancer, Telix is also making good progress with its other key programmes.

Telix expects to complete enrolment in the ZIRCON Phase III study of TLX250-CDx (89Zr-gerintuximab) for imaging ccRCC by the end of 2019. We expect the primary application of TLX250-CDx to be to help distinguish between ccRCC (the most serious form of kidney cancer) and other renal masses, as part of the initial diagnostic workup.

The Phase III study is planned to recruit ~250 patients undergoing surgery to remove suspicious kidney masses in up to 25 sites in Europe, Australia and the US (enrolment in the US is subject to regulatory approval). Additional sites in Canada and Turkey may also be added to drive patient volume.

The Phase III was preceded by the 10-patient ZIR-dose bridging study to compare the dose of radiation absorbed by patients treated with TLX250-CDx to historical dosimetry data from patients treated with the older 125I-labelled version of the imaging agent (125I-girentuximab).

Interim data from the first five patients treated in the bridging study showed that the the change of isotope from 124I to 89Zr has reduced the dose of radiation absorbed by the patient by approximately 25% and that the TLX250-CDx product that contained 10mg of girentuximab targeting antibody was superior to the 5mg product. Recruitment in the ZIR-dose study was completed in December.

The IPAX-1 Phase I/II trial of TLX101 in patients with glioblastoma (GBM) is recruiting from sites which have a significant number of suitable patients. The EU/Australian study at seven centres is expected to report preliminary experience around Q319.

The Phase I/II dose-ranging study is evaluating the safety, tolerability, dosing schedule and preliminary efficacy of single or repeated injections of TLX101 in patients whose GBM has recurred following previous treatment. It is intended to recruit at least 35, and potentially up to 55, subjects in the study.

Subjects will be administered TLX101 in conjunction with external beam radiation therapy, in order to capitalise on the fact that, in addition to delivering the 123I radioisotope directly to GBM tumour cells, TLX101 also acts as a radio-sensitiser, increasing the sensitivity of cells to radiation.

Manufacturing of clinical trial product for the TLX250 therapeutic is currently underway. Further studies of TLX250 (177Lu-girentuximab) in combination with immunotherapy are expected to commence in 2019. TLX250 is being developed as a treatment for metastatic ccRCC. In previous studies TLX250 demonstrated progression-free survival of ~88,9 months in patients with advanced metastatic ccRCC with no other treatment options.

Telix is subject to typical biotech company development risks, including the unpredictable outcome of trials, regulatory decisions, success of competitors, financing and commercial risks. Our model assumes that TLX250 and TLX591 will be out-licensed; therefore, our valuation is sensitive to potential licensing timing and actual deal terms. While Telix is commencing commercialisation of TLX591-CDx, it is still mainly a mid-stage drug developer, therefore in the foreseeable future most value creation will depend on successful R&D progress and any potential partnering activities, although the timing of licensing deals is typically difficult to forecast. Telix’s new strategy to progress TLX591 to a Phase III in chemo-naïve patients is dependent on agreement from regulators and obtaining funding for the study; approval from the FDA to commence the study would be a significant milestone which would likely see us adopt the Phase III strategy into our base-case valuation model. If the FDA requires Telix to conduct a prospective clinical study of TLX591-CDx rather than utilising existing scans, then that could delay filing for full marketing approval by one to two years. Predicting utilisation of PSMA-PET imaging such as TLX591-CDx in prostate cancer is challenging; we model a scenario where it is used as a second-line test when metastases cannot by detected by CT or MRI scans, but if it becomes a first line test in prostate cancer patients with biochemical relapse, or if patients typically undergo repeated PET scans, the market could be significantly larger.

Our risk-adjusted DCF valuation has increased to A$380m from A$303m. Valuation per share has increased to A$1.74 per share (vs A$1.43 per share) as the increase in NPV significantly outweighs the estimated 6.1m shares issued as consideration to ANMI shareholders. After dilution for options and warrants on issue, our fully diluted valuation is A$1.68 per share (vs A$1.40 per share).

We have revised our model to account for the ANMI transaction consideration and the resultant move to 100% of the global rights to TLX591-CDx (vs prior US-only JV). We have added US$5m to R&D expenses up to 2022 to cover our estimate of the cost of clinical studies and regulatory filing for TLX591-CDx in Europe. We have rolled forward our DCF model for the new financial year and have increased our forecast SG&A expenses to reflect the 2018 outcome. Our other valuation assumptions are unchanged.

Prior to the ANMI acquisition Telix’s rights to TLX591-CDx were restricted to the US market where it shared revenue with ANMI. With Telix now holding global rights to TLX591-CDx we have included rest-of-world (RoW) sales of the product, including modest sales as an investigational reagent. We assume that RoW peak sales will be similar to our forecast US peak sales of US$80m, but that marketing approval and peak sales lag the US by two years (European approval in 2022 vs 2020 in the US; peak sales in 2025 and 2027 in the US and Europe respectively). We assume that Telix earns a profit margin equal to 35% of net TLX591-CDx sales in the US (before royalties) and 25% in other territories. We apply an 80% probability of success in the US, and a lower 65% probability in Europe due to the likely requirement for further clinical studies before approval in that region.

Exhibit 7 shows our market assumptions for TLX250, TLX250-CDx, TLX591, TLX591-CDx and TLX101 imaging and therapeutic products, and the rNPV for each product. We have offset the risk-adjusted trial cost against revenue for each indication.

We have investigated the impact that progressing TLX591 into a Phase III study in combination with docetaxel would have on our valuation. We modelled a scenario where Telix obtains FDA agreement for the Phase III study and funds the Phase III study itself, and licences to a partner after completing the Phase III study. Key changes to assumptions under this scenario are a higher royalty rate for a post-Phase III deal (17% net royalty vs 12% for post Phase II) and a 35% probability of success (vs 20% under the base case scenario). We assume that the cost of the TLX591 development programme would be A$83m (US$60m) vs A$20m under the base case.

Based on these assumptions, we estimate that progressing TLX591 directly to a self-funded Phase III could potentially add approximately $A70m (A$0.32/share) to our valuation, after accounting for the trial costs.

Telix reported a pre-tax loss of A$15.7m in 2018, its second year of operation. Expenses associated with R&D projects were A$18.7m, personnel expenses were A$4.9m and administration and consulting costs totalled A$4.3m. Our pre-tax loss estimates for 2019 and 2020 grow to A$24.3m and A$23.6m, respectively, mainly due to increased R&D expenditure as Telix progresses its clinical trial programme, partly offset by the Australian government’s R&D rebate scheme. Telix has received an advance/overseas R&D tax finding totalling A$55.2m regarding the eligibility for the rebate of overseas R&D expenditure that is essential to Telix’s programmes but cannot be executed in Australia by Australian vendors and service providers.

Telix had A$25.8m cash and equivalents at 31 December 2018 and is funded to mid-2020. However, we estimate that it may need additional funding in 2020 (we model A$15m of indicative debt). Additional funds would be needed to proceed with a TLX591 Phase III trial.