Shield Therapeutics — Viatris strategic partnership to expedite scale-up

Nasdaq-listed Viatris is well-recognised in the generics/branded generics space, with a market capitalisation of $13.7bn and reported sales of $17.8m in 2021. It was formed in November 2020 with the merger of leading generics player Mylan and Pfizer’s off-patent branded and generics division Upjohn. Given Viatris’s broad market footprint, established relationships with healthcare-focused shareholders and resources at hand, we see this co-marketing agreement as a positive development for Shield and its growth plans for the US market. In our last note, we highlighted the need for broader on-ground salesforce coverage, market share expansion and access to capital to optimise the potential for Accrufer in the iron deficiency (with or without anaemia) space. We believe this collaboration will allow Shield to accelerate its scale-up plans for Accrufer and achieve break-even more quickly, a key consideration given the challenges associated with accessing incremental external capital to fund growth.

As part of the co-marketing and commercialisation deal, Shield and Viatris will each employ a dedicated team of 50 sales personnel to market Accrufer to relevant health care professionals (HCPs), which in this case include primary care physicians and OB-GYNs, who together account for more than 80% of oral iron prescriptions in the US, according to Shield. The revenue and costs split will be 55%/45% in favour of Shield, with each company funding its own selling and marketing expenses. Shield will receive an upfront payment of $5m (expected to be received before end December 2022) and is eligible to receive up to $30m in milestone payments based on achieving certain revenue targets ($7.5m each for every incremental $50m increase in revenue between $100 and $250m). Shield will book 100% of the combined collaboration revenues with Viatris’s share reflected as COGS.

Notwithstanding the reduced gross margins because of the aforementioned financial treatment, we see the collaboration bringing several benefits for Shield. Firstly, the expanded salesforce (100 vs the current 30) should allow for broader market coverage and an increased number of touch points with relevant stakeholders, which we believe will have an incremental flowthrough impact on prescription figures. With its current salesforce, Shield is targeting c 3,500 HCPs and expects this number to ramp up to 12,000 with the additional hires. Viatris also has a well-developed digital marketing infrastructure and established relationships with US payors/pharmacy benefit managers and distributors, which it can leverage to improve market awareness of and access for Accrufer. Increased prescriptions should, in turn, translate into accelerated revenues which, combined with the benefits of the shared costs, should allow the company to reach break-even faster than anticipated previously. While management estimates that the company will become cash flow positive by Q424, our projections suggest a slightly more conservative timeline of Q125. Exhibit 1 shows the potential benefits from the Viatris deal.

Shield reported c £3m in sales in the first nine months of FY22 (9M22) versus c £1m in Q322, of which c £2m was attributable to US Accrufer sales (Q322: c £1m), a £0.2m upfront licence payment from commercial partner KYE Pharma in Canada and £0.8m (Q322: c £0.14m) from sales royalties for Feraccru sales in Europe from licensing partner Norgine. US total prescriptions continue to track up, growing to 15,872 at the end of Q322 vs 8,477 in H122 (Q322: 7,395) (Exhibit 2). Management expects Q422 prescriptions to be around 9,700, which adds up to around 25,600 prescriptions for the full year, broadly in line with our previous estimate of 26,700. Based on Q322 US sales and prescriptions, we calculate the average net selling price for Accrufer of $151 in Q322, similar to the H122 average price of $152. This translates to a gross-to-net sales price discount of 70%, which management plans to bring down to the eventual target of 50% by FY25, driven by growing prescription volumes and increased commercial payor and state-run Medicaid coverage. Accrufer now has coverage of more than 100 million insured lives (40% of all covered lives in the US) and is on the formulary list of three of the top four pharmacy benefit managers (PBMs) in the US.

Following the deal with Viatris, Shield also provided its internal targets for prescription growth volumes across FY23–25 (Exhibit 3). Based on the expected Q422 average salesforce number of 22 and prescription figure of 9,700 (as communicated by management during the investor webinar on 14 December), we calculate the number of prescriptions, per salesperson, per quarter at c 440. Applying these data to a 100-member salesforce translates to 176,000 prescriptions per year (440 x 4 x 100). This is ahead of management’s FY23 target and appears achievable, in our view. The FY24 and FY25 targets are more aggressive in comparison (assuming 2x and 3x growth in prescriptions per salesperson), although not implausible provided the employed salesforce can achieve the required market coverage and Shield gains more traction with payors, with support from Viatris.

In parallel with the announcement of the partnership with Viatris, Shield also announced that it would raise up to £27m in additional capital through a combination of convertible debt and equity issues (placement, subscription and open offer):

Management aims to utilise the total funds received – c $38m including an upfront payment of $5m from Viatris, $18.5m raised for the share subscription and placement, an additional $10m received from AOP and a potential $4.8m (£3.9m) from the open offer – to support the committed salesforce expansion ($13m), amplify its digital marketing efforts ($8m), expand payor access and distribution channels ($3m) and for ongoing working capital needs ($8m).

We see these fund raises as a well-planned move by Shield in tandem with the partnership with Viatris, as it removes the funding overhang (gross cash at end-November 2022 was only £0.7m) and allows the company to accelerate and focus on its expansion efforts. Based on our cash burn projections, we believe this additional capital is sufficient to take Shield to profitability in Q125.

We have updated our forecasts to reflect the Viatris deal and our updated outlook for the Accrufer sales trajectory in the US.

For FY22, we have adjusted our FX assumptions (£0.81/US$ versus £0.87/US$ previously) and incorporated the $5m upfront payment received from Viatris while keeping our previous assumptions on prescriptions unchanged. We also reduce our estimated revenue realised per prescription from $170 to $160 based on the nine-month trend. For Europe, we have cut our FY22 estimates from £1.7m to £1.1m to reflect the softer Q3. Overall, our FY22 revenue estimate changes from £5.8m to £8.8m. Our costs and margin assumptions remain unchanged for this year.

For FY23 and beyond, while our ex-US estimates are unchanged, we update our revenue model for US Accrufer sales to reflect the new deal terms with Viatris. We increase our sales projections for Accrufer US to $25.7m in FY23 (previously $14.1m) and $88.9m in FY24 ($40.4m previously) to reflect expected faster prescription growth driven by the enhanced salesforce (management anticipates achieving full strength by April 2023). We also now include Viatris’s 45% revenue share as part of COGS, which has resulted in the long-term gross margin figure coming down from 90% to c 50%. We also capture management guidance of c $45m SG&A costs in FY23–25 but factor in a more gradual ramp-up ($36m in FY23 to $44.5m in FY25) in our model. We also update our EPS estimates as we now factor in the additional 251.5m shares issued from the $18.5m placement. Note that we are not including potential additional shares issued under the £3.9 open offer as these figures are yet to be finalised. Overall, we now expect Shield to become EBITDA positive in early 2025 (versus Q225 earlier). Changes to group-level estimates are presented in Exhibit 4.

We value Shield 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- and Viatris-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. For the US, we have updated our top-line and margin estimates following the partnership agreement with Viatris, as detailed in the previous section. Our valuation also assumes a pro forma estimated net cash position of £9.9m to reflect the contribution from the recent equity and convertible debt raises.

As a result of these changes, we increase our valuation to £403.4m (from £377.0m previously). However, given the increased share count following the recent equity raise, our per-share valuation is now 79p/share, down from 146p/share previously.

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