Shield Therapeutics — Ramped up and heading into a stronger H223

Shield reported c $4.3m in sales in H123, of which over 85% was attributable to US Accrufer sales, indicating the early proliferation of accelerated commercialisation efforts in the US market. During Q223, total US prescriptions grew to 15,808, a 51% (q-o-q) growth over 10,476 prescriptions in Q123. Notably, the company witnessed a strong 157% (q-o-q) growth in first-time writers/prescribers and new prescriptions were up by 63% (q-o-q), along with 73% repeat writers/prescribers from Q123, suggesting favourable clinical responses by the prescribers. In H123, total prescriptions rose to 26,284, which is higher than the total prescription volume of 25,200 in FY22. Based on early indications, the company expects the growth momentum to intensify further, leading management to guide a more profound sequential growth rate of ~80% in Q323 and anticipate US prescriptions in the range of 100,000–130,000 prescriptions in FY23 (details in Exhibit 3).

In line with the co-commercialisation deal with Viatris, Shield implemented several initiatives during the second quarter to access the larger US market potential. Both companies recruited the target sales team of 100 employees by May 2023 (50 each by Viatris and Shield), which are now ready to target over 12,000 of the highest prescribers. We believe that this larger salesforce (vs 16 in January 2023) will allow broader market coverage and an increased number of touch points with relevant stakeholders, resulting in an incremental flowthrough impact on prescriptions in the near to medium term. Based on current visibility on prescription volumes for H223 and near-to-medium-term preparedness to target the market potential, management has provided revised targets for prescription volumes during FY23–25 (Exhibit 3). We note that the new targets are somewhat lower than previous estimates and we have incorporated these into our model (explained below in the Financials section).

Management earlier indicated that a good proportion of prescriptions sales are still subsidised through patient assistant programmes, resulting in the lower average net selling price per prescription. In H123, the average net selling price of Accrufer declined to $119 per prescription from $124 and $144 per prescription in H222 and FY22, respectively. This translates into a gross-to-net sales price discount of c 75%, which management aims to bring down to its target of 60% by FY25, which is expected to help in improving the average net sales price to US$220–240 per prescription. We note that this target can be achieved through growing prescription volumes and increased commercial payor and state-run Medicaid coverage and Shield plans to target both:

Norgine, Shield’s European sales partner for Feraccru, has been recording stable revenues from the region. In H123, the total sales volume of Feraccru packs increased 19% over H222 and 11% over H122. Germany, the UK and the Nordics remain key sales contributors for Norgine in the region, with the UK and Germany collectively accounting for 88% of total sales packs in Europe. The company continues to seek reimbursement in several European countries, such as Spain and Italy. As a reminder, Norgine has been undergoing internal restructuring (after Goldman Sachs Asset Management acquired a majority stake in the company in December 2022) and is working towards shifting its sales strategy to target the primary/women’s health market, compared to its earlier focus on the gastro-intestinal market. While this may yield an enhanced sales uplift in the medium term, we estimate a similar growth trend (as seen in H123) for this geography unless approvals in new EU countries are obtained.

Though Shield currently generates revenue from US and Europe markets, it has several partnership agreements in other regions as well, which if successfully executed could provide material upside in revenue potential for the company. One of the key partnership deals is with ASK Pharma in China, which is currently enrolling patients for its Phase III study in China, as required for National Medical Products Administration approval. We note that enrolment for the Phase III programme was affected by the prevalence of COVID-19; however, these challenges have been resolved now with eased restrictions and we continue to estimate a launch in 2025 and ascribe a 75% probability of approval.

KYE Pharmaceuticals (Canada) filed a New Drug Submission for Accrufer with Health Canada in Q122 and anticipates approval by the end of FY23. Korea Pharma (Republic of Korea) is enrolling patients in a pharmacokinetic study, which is required to get approval in the region.

In an important development, AOP Health International Management (AOP), Shield’s largest shareholder, made a mandatory takeover offer in May 2023. However, the offer lapsed as the company received valid acceptances from only 42.26% of existing shareholders (including 40.75% share capital owned by AOP), which was lower than the threshold limit of 50% for takeover approval. To provide more context to the development, Shield entered into a convertible shareholder loan agreement, worth $10m, with AOP in July 2022 and drew it fully in August 2022. Further in December 2022, the shareholder loan was extended to provide an additional $10m convertible loan facility to Shield, which was drawn in January 2023.

Post the initial conversion of the loan into shares (31.3m) in January 2023, AOP held 26.99% of Shield’s total outstanding share capital. Another conversion request from AOP in May 2023 was also approved by the company’s board and led to the issue of another 127.3m shares, resulting in AOP holding 41.9% of Shield’s share capital post conversion. As per Rule 9 of the City Code on Takeovers and Mergers, AOP made a mandatory takeover offer for the company at 6.2p per Shield share, at a 13.3% discount to the last trading price before the date of the announcement, valuing the company at £46.1m on a fully diluted basis. While Shield advised its shareholders not to subscribe to the offer, AOP also acknowledged that the mandatory offer was at a discount to the traded price and may not be accepted. We note that AOP is a long-term shareholder of Shield and has been supportive its growth strategy. Later, AOP expressed its willingness to let Shield operate as an independent company. Hence, both companies signed a relationship agreement that permitted Shield to continue to work independently despite the takeover offer. On 15 June, the takeover offer lapsed due to an insufficient number of shareholders agreeing to the takeover terms. At end H123, the total outstanding AOP loan was $5.7m, which Shield plans to repay from the recently secured term loan of $20m from SWK Holdings in September 2023 (discussed below).

In H123, Shield reported total revenue of $4.3m (65.8% growth over H122 revenue of $2.6m), which mainly comprised $3.7m from Accrufer sales in the US and the remaining $0.6m from royalties from Norgine related to Feraccru sales in Europe. Additionally, the company recognised $4.3m in other operating income in H123, which is primarily the deferred portion of total $5m upfront payment received as part of the Viatris deal at end FY22. Gross profit stood at $2.2m (vs $1.5m in H122), translating into a gross margin of 51.9% for H123, lower than 56.4% in the prior period. The decline in gross margin could be due to a lower average selling price of $119 in H123 compared to $152 in H122. We note that the cost of sales includes the manufacturing cost of prescriptions sold in Europe and the US, along with a 45% share of US net sales as part of the Viatris deal and a 5% royalty to Vitra Pharmaceuticals as per the 2010 asset purchase agreement.

SG&A expenses (excluding $0.5m in amortisation of intangible assets) increased 23.7% y-o-y to $17.2m due to accelerated commercialisation efforts in the US as per the co-commercialisation deal with Viatris (headcount growth to 50 at Shield vs 28 at end FY22). The expensed R&D costs of $0.4m were lower than $1.3m in H122 and were fully attributable to the company’s ongoing paediatric study assessing Feraccru/Accrufer in infants, children and adolescents. The company reported that enrolment is progressing although completion timelines have not been disclosed. We note that $1.5m of R&D related costs were capitalised during first half of 2023, similar to H122. As a result, the operating loss for the period stood at $11.5m versus $15.0m in H122. The operating cash burn rate was reported at $19.9m in H123, up from $14.3m in H122.

Based on H123 performance and near-term operational visibility from management, we have made adjustments to our forecasts and updated our FX assumptions (to £0.82/$ versus £0.80/$ previously). Additionally, we have converted our estimates into US dollars (vs sterling previously) because Shield has changed its reported currency from sterling to US dollars due to the increased focus on US operations. In line with revised management guidance for US annual prescriptions (lower than previously) during FY23–25 (see Exhibit 3), we have slightly trimmed our forecasts for US prescriptions, resulting in Accrufer sales estimates of $20.9m ($22.9m previously) in FY23 and $71.8m ($79.0m previously) in FY24. Factoring in a lower pace of sales growth in Europe and low visibility on new market launches, we have also reduced European sales forecasts, to $2.0m in FY23 and $3.0m in FY24, versus $4.6m and $6.8m previously in the respective periods. Based on directional guidance from management regarding operating expenses ($42–50m during FY23–25), we have slightly increased our selling expense estimates, hence, our total operating expense estimates are now $42.2m in FY23 and $45.6m in FY24. Our revised operating loss estimates stand at $29.1m in FY23 and $13.2m in FY24, compared to $25.3m and $9.2m, respectively, previously. We note that our longer-term growth assumptions remain unchanged.

We anticipate an increase in interest expenses during FY24–25 as the company raised $20m via a new term loan of $20m from SWK Holdings in September 2023 (details below in the valuation section). As a result, we have revised our net loss estimates for FY23 and FY24 to $29.7m ($26.1m previously) and $15.2m ($10.9m previously), respectively. Though management expects to achieve cash flow break-even by end FY24, we continue to project the company turning EBITDA positive in 2025. Changes to our group-level estimates are presented in Exhibit 4.

The company closed H123 with a gross cash balance of $13.6m, supported by $20.2m (net proceeds) from equity financing and an additional $10m convertible shareholder loan from AOP, both in January 2023. Shield recently announced it raised $6.1m through the subscription and placement of new shares (62.4m shares) to institutional investors (existing as well as new) and proposed a retail offer to raise another $1.4m. The issue price for both the share placement for institutional investors and retail investors is set at 8p per new share. Additionally, the company secured a $20m term loan from SWK Holdings, which has a five-year term and interest payable at 9.25% plus the greater of three-month CMR term SOFR (secured overnight financing rate) or 5%. Interest needs to be paid for the first eight quarters, following which the loan will be amortised at a fixed $1m per quarter. The loan agreement comes with financial covenants in respect to minimal liquidity (not less than the greater of either trailing one quarter of cash burn or $2.5m) and minimum revenue targets (Exhibit 5). We believe these revenue targets are achievable based on our current revenue estimates.

The company plans to utilise the proceeds in repaying the outstanding AOP loan, accelerating commercialisation and growth initiatives, along with managing working capital requirements. We note that management estimates that the company will become cash flow positive by Q424; however, our projections suggest a more conservative timeline of FY25.

As we incorporate the above-mentioned changes in our estimates, roll forward our model and update FX and net cash, our valuation slightly adjusts to £390.4m, from £388.9m previously. However, our per share valuation has reduced to 50p, versus 66p, due to the increased base of shares outstanding of 775.4m, versus 587.5m previously. For valuation purposes, we have considered pro-forma net cash of £11.5m ($14.0m), which includes the recently announced equity raise of $6.1m. The increase in net cash has made a positive contribution to our valuation, while the revised estimates brought down the rNPV of valued assets to £378.9m, from £382.1m previously.