Shield Therapeutics — Tangible progress in US Accrufer launch

Shield Therapeutics (AIM: STX)

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Research: Healthcare

Shield Therapeutics — Tangible progress in US Accrufer launch

Shield Therapeutics reported H122 results reflecting the fact that its commercial activities for Accrufer are bearing fruit. US total prescriptions soared fourfold to 11,223 compared to H221, including an 87% q-o-q increase in Q222. This compares well with our existing and unchanged forecast for 26,700 prescriptions for 2022. We maintain our long-term Accrufer growth assumptions, and continued successful execution could lead to material upside in the shares, in our view, but we reiterate that Shield will need additional capital to execute its growth plans.

Soo Romanoff

Written by

Soo Romanoff

Managing Director - Head of Content, Healthcare

Healthcare

Shield Therapeutics

Tangible progress in US Accrufer launch

H122 update

Pharma and biotech

8 September 2022

Price

13.1p

Market cap

£34m

£0.87/US$; £0.86/€

Net cash (£m) at 30 June 2022

2.4

Shares in issue

257.4m

Free float

55%

Code

STX

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

82.6

(9.9)

(69.6)

Rel (local)

88.8

(4.9)

(68.5)

52-week high/low

48.0p

5.8p

Business description

Shield Therapeutics is a commercial-stage pharmaceutical company. Its proprietary product, Feraccru/Accrufer, is approved by the EMA and FDA for iron deficiency. Outside the United States, Feraccru is marketed internationally through Shield and its commercial partners.

Next events

Launches in additional EU states as covered by Norgine

H222

Further acceptance of Accrufer into key US PBM formularies

H222

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Pooya Hemami CFA

+44 (0)20 3077 5700

Shield Therapeutics is a research client of Edison Investment Research Limited

Shield Therapeutics reported H122 results reflecting the fact that its commercial activities for Accrufer are bearing fruit. US total prescriptions soared fourfold to 11,223 compared to H221, including an 87% q-o-q increase in Q222. This compares well with our existing and unchanged forecast for 26,700 prescriptions for 2022. We maintain our long-term Accrufer growth assumptions, and continued successful execution could lead to material upside in the shares, in our view, but we reiterate that Shield will need additional capital to execute its growth plans.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

10.4

0.8

0.1

0.0

112.0

N/A

12/21

1.5

(17.5)

(8.4)

0.0

N/A

N/A

12/22e

5.8

(20.0)

(8.3)

0.0

N/A

N/A

12/23e

15.9

(17.9)

(6.5)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

US market gains drive sales growth

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. The company reported gross profit of £1.15m in H122, reflecting a 56.4% margin, and an H122 EBITDA loss of £10.6m. We expect further market share gains will be needed to cover Shield’s overhead costs and continue to forecast profitability in FY25.

Further funding needed to optimise sales opportunity

Shield finished H122 with £2.4m in gross cash with no debt, and in August borrowed $10m (£8.7m) from shareholder AOP in the form of a convertible loan maturing at year-end 2023. The company expects this shareholder loan to provide funding to the end of 2022, and we expect it will need an additional £28m by end FY24 to reach operating profitability. Shield indicates that it is engaging with various parties to secure additional financing opportunities or strategic partnerships to extend its cash runway.

Valuation: Higher rNPV offset by increased S/O

Our longer-term growth and margin expectations are unchanged, but we have revised our FX assumptions (£0.87/US$ versus £0.84/US$ previously). We now obtain a valuation of £377.0m, up from £371.0m previously. However, given the increased share count following the August conversion of £2.275m of the AOP loan into 41.2m new shares, our per-share equity valuation is now 146p/share, down from 172p/share previously.

Accrufer sales momentum evident in H1 results

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.

Financials

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).

Valuation

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.

Exhibit 1: Shield Therapeutics rNPV valuation

Product

Market

Launch

Sales* (£m)
in 2030

NPV
(£m)

Probability of success

rNPV
(£m)

rNPV/basic
share (£)

Accrufer in IDA

US

2021

221

403.7

100%

403.7

1.57

Feraccru in IDA

Europe

2019

37

41.6

100%

41.6

0.16

Feraccru in IDA

China

2024

66

60.7

75%

45.5

0.18

Corporate costs

(118.6)

(118.6)

(0.46)

Net cash at 30 June 2022 (adjusted for post-period end debt-to-equity conversion)

4.7

4.7

0.02

Total equity value

377.0

1.46

Source: Edison Investment Research. Note: *Reflects end-market net sales. Shield is expected to receive a percentage of net sales as royalty revenue in Europe and China, and recognise product sales in the US.

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.

Exhibit 2: Financial summary

£’000s

2020

2021

2022e

2023e

2024e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

10,387

1,519

5,810

15,879

40,988

Cost of Sales

(1,354)

(980)

(1,896)

(4,254)

(8,437)

Gross Profit

9,033

539

3,915

11,625

32,551

Sales, General & Administrative

(5,903)

(17,816)

(22,287)

(26,294)

(35,112)

Net Research & Development

(2,579)

(579)

(1,827)

(1,653)

(696)

EBITDA

 

 

551

(17,856)

(20,199)

(16,322)

(3,258)

Depreciation & amortisation of intangible assets

(2,705)

(2,207)

(2,166)

(2,254)

(2,250)

Normalised Operating Profit (ex. amort, SBC, except.)

551

(17,856)

(20,199)

(16,322)

(3,258)

Operating profit before exceptionals

(2,154)

(20,063)

(22,365)

(18,577)

(5,507)

Exceptionals including asset impairment

0

111

0

0

0

Other

0

0

0

0

0

Reported Operating Profit

(2,154)

(19,952)

(22,365)

(18,577)

(5,507)

Net Finance income (costs)

268

387

218

(1,597)

(2,229)

Profit Before Tax (norm)

 

 

819

(17,469)

(19,981)

(17,920)

(5,486)

Profit Before Tax (FRS 3)

 

 

(1,886)

(19,565)

(22,147)

(20,174)

(7,736)

Tax

(744)

229

(354)

0

0

Profit After Tax and minority interests (norm)

75

(17,240)

(20,335)

(17,920)

(5,486)

Profit After Tax and minority interests (FRS 3)

(2,630)

(19,336)

(22,501)

(20,174)

(7,736)

Average Basic Number of Shares Outstanding (m)

117.2

204.0

243.8

276.3

276.3

EPS - normalised (p)

 

 

0.1

(8.4)

(8.3)

(6.5)

(2.0)

EPS - normalised and fully diluted (p)

 

0.1

(8.4)

(8.3)

(6.5)

(2.0)

EPS - (IFRS) (p)

 

 

(2.2)

(9.5)

(9.2)

(7.3)

(2.8)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

27,298

27,155

28,575

28,121

27,221

Intangible Assets

27,266

26,851

27,868

26,914

25,464

Tangible Assets

32

304

707

1,207

1,757

Investments in long-term financial assets

0

0

0

0

0

Current Assets

 

 

5,230

17,258

6,685

5,322

6,486

Short-term investments

0

0

0

0

0

Cash

2,940

12,117

1,115

700

1,864

Other

2,290

5,141

5,570

4,622

4,622

Current Liabilities

 

 

(2,252)

(3,380)

(3,252)

(3,252)

(3,252)

Creditors

(2,252)

(3,380)

(3,252)

(3,252)

(3,252)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

0

0

(6,425)

(26,425)

(34,425)

Long term borrowings

0

0

(6,425)

(26,425)

(34,425)

Other long-term liabilities

0

0

0

0

0

Net Assets

 

 

30,276

41,033

25,583

3,766

(3,970)

CASH FLOW STATEMENT

 

 

 

 

 

 

 

Operating Income

(2,154)

(19,952)

(22,365)

(18,577)

(5,507)

Movements in working capital

(2,711)

(1,415)

(557)

948

0

Net interest and financing income (expense)

268

387

218

(1,597)

(2,229)

Depreciation & other

0

0

0

0

0

Taxes and other adjustments

3,197

4,242

5,152

611

2,250

Net Cash Flows from Operations

 

(1,400)

(16,738)

(17,552)

(18,615)

(5,486)

Capex and capitalised expenditures

(23)

(2,064)

(2,503)

(1,800)

(1,350)

Acquisitions/disposals

0

0

0

0

0

Interest received & other investing activities

3

13

235

0

0

Net Cash flows from Investing activities

 

(20)

(2,051)

(2,268)

(1,800)

(1,350)

Net proceeds from share issuances

6

27,705

2,332

0

0

Net movements in long-term debt

0

0

6,425

20,000

8,000

Dividends

0

0

0

0

0

Other financing activities

(53)

(121)

0

0

0

Net Cash flows from financing activities

(47)

27,584

8,757

20,000

8,000

Effects of FX on Cash & equivalents

266

382

61

0

0

Net Increase (decrease) in cash & equivalents

(1,201)

9,177

(11,002)

(415)

1,164

Cash & equivalents at beginning of period

4,141

2,940

12,117

1,115

700

Cash & equivalents at end of period

2,940

12,117

1,115

700

1,864

Closing net debt/(cash)

 

 

(2,940)

(12,117)

5,310

25,725

32,561

Lease debt

28

156

0

0

0

Closing net debt/(cash) inclusive of IFRS 16 lease debt

(2,912)

(11,961)

5,310

25,725

32,561

Free cash flow

(1,423)

(18,802)

(20,055)

(20,415)

(6,836)

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Shield Therapeutics and prepared and issued by Edison, in consideration of a fee payable by Shield Therapeutics. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by Shield Therapeutics and prepared and issued by Edison, in consideration of a fee payable by Shield Therapeutics. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Melrose has started the GKN businesses realisation process by announcing the demerger of the automotive businesses. This will permit automotive to prosper as a standalone listed entity, developing growth, including in electric vehicles, and corporate opportunities within the automotive arena. Melrose will continue its ‘buy, improve, sell’ strategy, including completing the restructuring of the aerospace business with the flexibility to undertake the next deal. This should release value while also providing optionality for shareholders.

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