Shield Therapeutics — Tangible progress in US Accrufer launch

Shield’s H122 results demonstrated that its US commercial initiatives for Accrufer, its novel FDA-approved iron therapy, are bearing fruit, as US total prescriptions soared fourfold to 11,223 compared to H221 (versus 2,516). Momentum continued to be strong in the latter part of the period, with prescriptions growing 87% q-o-q in Q222, following a sequential doubling in Q122 (versus Q421). The total number of prescriptions reported in H122 compares well with our existing forecast for 26,700 prescriptions for FY22 as a whole. The company also reported that its average net selling price for Accrufer in H122 was $152 (versus $34 in H221), reducing the gross-to-net sales price adjustment from 93% to 70%, which it attributes to increased commercial payer and state-run Medicaid coverage. We believe that Shield’s longer-term goal, as it strengthens its PBM, insurer and distributor relationships, is for this discount to level off at c 50% over the coming years.

The strong growth level in H121 is impressive but not surprising, given we stated in our last note that Accrufer’s July 2021 US launch had been preceded by limited pre-marketing activities, resulting in relatively low market awareness at the time of launch and curtailing H221 uptake. Shield has made significant strides in raising product awareness and securing reimbursement, as Accrufer now has coverage of more than 100 million insured lives.

Shield reported £2.0m (+322% y-o-y) in H122 sales, of which £1.2m was attributable to US Accrufer sales (H121: zero) and £0.66m (+42% y-o-y) from sales royalties for Feraccru sales in Europe from licensing partner Norgine. Shield also recognised £0.1m as an upfront licence payment from its commercial partner in Canada, KYE Pharmaceuticals. Shield reported gross profit of £1.15m in H122, reflecting a 56.4% margin, with cost of sales comprising manufacturing costs for prescriptions sold in the US and Europe, plus a 5% royalty on net sales payable to Vitra Pharmaceuticals (the original owner of the intellectual property associated with Accrufer/Feraccru).

SG&A costs of £10.8m in H122 (excluding intangible amortisation of £1.1m) were up from £4.8m in H121, with the increase primarily attributable to US commercialisation activities. This is essentially in line, when considered on an annualised basis, with our existing FY22 estimate of £22.3m. H122 R&D costs of £1.0m (down 36% y-o-y, but above our prior FY22 estimate of £0.67m) were largely attributable to Shield’s ongoing paediatric study assessing Feraccru/Accrufer in infants, children and adolescents. The company reported that enrolment is progressing as planned, with more than 75% of study sites now active.

We calculate an H122 EBITDA loss of £10.6m, which suggests that further Accrufer sales and market penetration will be required to cover Shield’s overhead costs, as we expected. We are encouraged that Accrufer’s sales growth trajectory is robust and consistent with our expectations. The net loss was £11.8m (up from a £7.3m loss in H121) and the net H122 operating cash burn was £8.8m. Shield had also capitalised development expenditures of £1.3m in relation to the paediatric study, and we calculate H122 free cash outflow at £10.1m.

In its outlook, Shield commented that it expects continued Accrufer sales growth in H222, driven by increased demand and payer coverage, and higher royalties from increased European sales. Its objective in H222 will be to drive US Accrufer sales growth momentum by raising product awareness, generating clinical experience data and further expanding payer coverage. It is also looking to increase its sales and marketing resources by potentially expanding its salesforce and engaging in targeted marketing initiatives. Shield currently has a 30-person US sales team, and we estimate the need for a 160–175-person sales team in the long term to target the 65,000 high prescribing physicians (out of a total of c 550,000) who, according to market research prepared for Shield, write 60% of oral iron prescriptions in the United States. Given the current cash burn rate and the need to further expand resources to optimise the Accrufer sales opportunity, the company commented that it is engaging with various parties to secure additional financing opportunities or strategic partnerships to extend its cash runway.

Shield finished H122 with £2.4m in gross cash with no debt. In August 2022, it completed its loan transaction with shareholder AOP, enabling it to borrow $10m (£8.7m) from AOP in the form of a single-tranche convertible loan maturing at year-end 2023 and bearing interest at 9.1% above the secured overnight financing rate (SOFR). Following finalisation of the loan agreement, AOP converted £2.275m of the loan into 41.2m shares at a conversion price of 5.5215p per share. Shield expects the loan to provide funding to the end of 2022.

As trends for SG&A and prescription growth in H122 are largely in line with our existing estimates, we have made only relatively minor changes to our forecasts. We have lowered our average net FY22 US revenue per Accrufer prescription from $192.9 to $170, and mildly reduced our gross margin estimates for FY22 and FY23. These effects are offset by the appreciation of the US dollar (as we now use a £0.87/US$ assumption versus £0.84/US$ previously). We now expect FY22 and FY23 revenue of £5.8m and £15.9m, respectively (versus our previous forecasts of £6.2m and £16.2m, respectively) and for gross profit margin of 67.4% and 73.2% (versus 71.6% and 75.1%, previously). We have raised our FY22 and FY23 R&D cost expectations by c £1.3m in both years due to the higher-than-expected study costs shown in the H122 results.

We now forecast an EBITDA loss of £20.2m in FY22 and £16.3m in FY23 versus our prior estimates of £18.0m and £14.0m, respectively. We also model and free cash outflow of £20.1m in FY22 and £20.4m in FY23 versus our prior estimates of £20.2m and £16.2m, respectively.

We continue to expect Shield to achieve positive operating profit by FY25 and, consistent with company guidance, assume that following the $10m (£8.4m) convertible debt financing arrangement with AOP, its cash on hand will fund operations into FY23. We estimate the need to raise a further £28m (up from £25m previously) before the end of FY24 (modelled as illustrative debt) before Shield reaches the point of generating sustained profitability from Accrufer/Feraccru-related revenue. We note that if future financing needs are met through equity issues rather than debt, there could be material dilution to current shareholders (depending on the prevailing share price).

We continue to evaluate the company based on a risk-adjusted net present value (rNPV) model of Feraccru/Accrufer for the treatment of iron deficiency anaemia (IDA) in Europe (as covered by Norgine), the United States (Shield-led commercialisation) and China (as covered by ASK Pharm). For the United States and Europe, where the drug is already launched and approved, we have used a probability of success of 100% and a 10% discount rate, while for China (where the product has not been launched yet) we assume a 75% probability of success and a 12.5% discount rate.

We have not made any material changes to our long-term Accrufer sales and gross margin forecasts, but have adjusted our FY22 and FY23 estimates, as mentioned previously, and our FX assumptions (we now use a £0.87/US$ assumption versus £0.84/US$ previously). Our valuation also assumes a 30 June 2022 pro forma net cash position of £4.7m to reflect the August 2022 conversion of a portion of the AOP convertible debt, as described above.

As a result of these changes, we increase our valuation to £377.0m (from £371.0m previously). However, given the increased share count following the conversion of a portion of the AOP convertible debt to equity, our per-share valuation is now 146p/share, down from 172p/share previously.

We highlight that the US opportunity remains a key value driver and represents more than 80% of our valuation for the company (excluding corporate costs). Given that Shield is self-commercialising in the United States, successful execution remains a key sensitivity.

We also note that the debt-to-equity conversion feature of the remaining c £6.43m shareholder loan, if actioned and converted at the current trading price of c 13p, would result in the issue of c 49.4m shares and the added dilution would result in the valuation being adjusted to 125p/share. We highlight that the current share price is at a substantial discount to our revised valuation, which we believe is largely due to investors pricing in risks associated with the uncertainty as it relates to how future financing needs will be met. That said, we believe that if Shield can manage its financing needs with minimal dilution and can execute on its US commercialisation strategy for Accrufer, there could be material upside in the shares, as suggested by our valuation analysis.