Shield Therapeutics : First signs of hoped-for Accrufer Rx inflection
Shield Therapeutics' recent Q2 trading update showed some early signs of the hoped for upward inflection in the US Accrufer (ferrric maltol) trajectory, as the joint marketing operation with Viatris became operational over the period. Key performance indicators reported included US prescription volume growth (+50% vs Q1), growth in new prescribers in (+175%) and a high proportion (73%) of the Q1 first prescribers repeat prescribing in Q2.
These KPIs are obviously highly positive and, moreover, they only part reflect the large expansion of the US sales force, which was still being recruited and trained over most of Q2. Indeed, the full 100-person team only went out on the road from the start of June. Industry experience suggests an increase in promotional activity does not usually translate into new prescriptions for three to five months, so the full impact of the larger sales force and the concurrent geographical expansion is only likely to be seen in late Q3 or Q4.
Our analysis of these KPIs suggest Accrufer's sales trajectory is trending towards the mid-point of Shield's 2023 target for US prescriptions (125-160k in 2023). This bodes well for the company's ability to meet analyst consensus for sales revenue this year. We expect US Accrufer revenues to be around $20-22mln in 2023, with $90mln possible in 2024 and a tentative $150mln in 2025, although the later figures are also highly dependent on pricing. Shield's first-half financial results are due to be reported in September.
Shield also confirmed its cash/debt position, which was altered by the recent partial conversion of debt held by its largest shareholder, AOP. Cash at the half year stood at $13.6mln (£10.7mln) (excluding any adjustment for marketing spends by Viatris) with debt of $5.5mln/£4.3mln. Thus net cash can be considered to be in the range of $8mln/£6mln at the half-year point. Shield believes this will be sufficient to fund operations until it reaches projected cash flow break even at the end of 2024.
Viatris co-marketing deal now fully running
We continue view Shield's investment case extremely positively. The US is the key market for Accrufer and Shield is now operating with an appropriately-sized sales force given the market opportunity. Other development/marketing partnerships for Accrufer cover Europe, Canada, South Korea and China. The partnership with Norgine for Europe has, however, rather underperformed expectations.
Based on the estimated £6mln net cash, Shield's enterprise value (market cap less net cash) would be c£77mln, up from c£34mln at the end of April. Valuations based on EV/sales should in our view be adjusted for Viatris' 45% interest in US Accrufer sales. On this basis, the EV/sales would be 4.5x this year and 1.8x based on possible 2024 sales. These are low for a high-growth company and highlight the attractive investment case.
We are looking to see further acceleration in US prescription growth later this year (possibly in a Q3 trading update in November) and speculate that if this is evident, it could represent a catalyst for a further re-rating of the stock.
Investment proposition
Year end Dec 31 · 2021 · 2022
Revenue (£mln) · 2 · 5
Gross Profit £ mln · 0.5 · 2.0
Shield's investment proposition is now entirely based around Accrufer and moreover is almost entirely driven by its co-promotion/co-marketing partnership with Viatris for the US market. Viatris (NASDAQ: VTRS) is a $12bn market cap/$16.2bn sales US-based speciality pharma group and represents a strong partner for Shield. This is important given the difficulties with its previous go-it-alone launch strategy.
The product is also licensed outside the US, notably to Norgine for Europe where sales have under-performed expectations most likely because of that company's relatively slow roll-out (for various internal reasons) and sub-optimal marketing effort. Norgine is a family-controlled, privately held company (in which a private equity firm has recently acquired a majority stake). Accrufer is also licensed to other parties (notably in China, Canada and South Korea), where it is generally progressing towards registration, potentially triggering milestones. Approval in Canada is possible in H2.
The US is, however, central to the economic case. Thus key focus for investors is thus when and the extent to which the recent expansion in sales reps translates into material upward change in the trajectory of prescription growth. Hiring and training of the new sales force recruits was completed in mid-May and the enlarged 100 person field force (supported by 12 regional sales managers) first went out to present to doctors in June. Industry experience suggests an increase in promotional activity for products of this type would not translate into new prescriptions for three to five months, so the full impact is likely to be seen in late Q3 or Q4.
Investment summary
The sales force expansion coincided with the launch an innovative promotional campaign with ads based around the concept that Accrufer removes the “irony” associated with generic ferrous iron supplements whose GI side effects often make patients feel worse than the anaemia for which they are prescribed. Accrufer is differentiated from these products by its very tolerable side effect profile.
Ironic promotional campaign
Shield also reported several other KPIs including a 63% quarter-on-quarter rise in new prescriptions (ie for new patient starts), which compares with 11% for the sequential q-on-q comparison in Q1. There was also a 157% rise in first time writers (compared with +24% in Q1) and a high percentage of repeat writers with 73% of the first time doctors in Q1 writing another prescription in Q2 (likely for a different patient).
Other positive KPIs
The recent trading update reported that over 15,800 prescriptions were filled in Q2, up by some 50% on the 10,360 in Q1 (although this is still from a relatively low base). On a sequential month-on-month basis, prescriptions were up 30% in June (ie over May) and by 28% in May. The April figure was not disclosed, we suspect because it was relatively flat for one-off reasons, including the lower number of working days in that month relative to March. While the June m-on-m growth rate is higher than in May, we are hoping to see further acceleration over the next few months.
Almost 16k prescriptions in Q2
Table 1 - Accrufer Prescriptions
Source: ProActive based on Shield
Currently trending towards mid-point
Shield's target for US prescription volume is 125-160k this year. Our analysis of current prescription numbers suggests Accrufer is trending towards the mid-point of the 2023 target. We note that in order to meet this (c140k), Shield would need to see prescription volumes to c34k in Q3 and 79K in Q4. If it is able to achieve this, the sequential quarterly growth rate would have risen to 115% in Q3 and 132% in Q4. Shield's longer-term projections envisage 270-420,000 prescriptions in 2024 and 550-600,000 in 2025.
We have updated our estimates of quarterly prescription volumes, which are based on Shield's low and high scenarios. This is shown in Chart 1. Notable is the large increase in Q3 and Q4 this year (under both low and high scenarios) as the effect of the larger sales force becomes apparent.
Proactive Investors' Quarterly Accrufer projections (actuals Q1-Q2 23)
Net pricing expected to improve over time
Sales revenue is of course a function of both prescription volume and pricing and the latter has effectively been set at an artificially low "launch" level through discounts etc. As is typical industry practice, Shield had to reimburse what would otherwise be unattractive patient co-pays to encourage adoption, and it will gradually reduce these as well as seek to re-negotiate contracts with payers to move them to more realistic prices. Shield hopes this will ultimately achieve a better gross-to-net adjustment (and thus a higher average realised sales per prescription). To illustrate the price impact on sales, our estimates at the mid-point of prescription volumes suggest US Accrufer revenues of around $20mln in 2023, rising to $90mln in 2024 and a possible $150mln in 2025 (the latter two being above current market consensus sales). The timing of Shield achieving higher effective pricing is however difficult to project.
Financial Outlook
We do not publish detailed financial forecasts for Shield. However, we do expect to see a large rise in US sales this year and in 2024, together with a rise in operational costs and cost of goods (notably to reflect co-promotion payments to Viatris). We anticipate a rise in the royalty from Norgine, potentially up to a doubling, but from a low base. European sales (as Ferracru) are likely to remain a fraction on the US figure for Accrufer, despite the markets being of a broadly similar size. The development of Accrufer in China has been slow, primarily for logistical reasons connected with the pandemic. However, there are potentially important milestones from ASK Pharm due on regulatory approval and launch in China.
Cash position
Cash stood at $13.6mln (£10.8mln) at 30 June 2023 (excluding any adjustment for marketing spending by Viatris) with debt of $5.5mln, the latter reduced by a partial conversion of a convertible held by its largest shareholder, AOP, earlier in the year. Net cash can thus be considered to be c$8mln (£6mln) at the half year point. As of 31 March, cash stood at $19.2mln, thus we can estimate the net cash outflow in Q2 at $5.6mln. Management estimates that Shield has cash to last to the end of 2024 when they expect it to have become cash flow positive.
Shares
There are currently 711mln shares outstanding. Shield’s largest shareholder AOP Health holds 40% of the equity and $5.5mln of convertible debt. A hypothetical conversion of the remainder of this debt at the current share price would increase the total number of shares to 746m, of which AOP would hold then c42%.
Valuation observations
Shield's market cap is now £83mln and based on the estimated £6mln net cash, the enterprise value (market cap less net cash) would be c£77m. This has grown from c£34mln at the end of April.
Valuations based on EV/sales should in our view be adjusted for Viatris' 45% interest in US Accrufer sales. Hence, based on our tentative £25mln sales estimate for 2023, less a £8mln adjustment to reflect the Viatris interest, the EV/sales figure would be 4.5x. For 2024, with potential sales in the region of £75mln and a larger £32mln adjustment for Viatris, the EV/sales would fall to 1.8x. We consider these valuations metrics to be low for a high growth company and to illustrate the attractive investment case.