Shield Therapeutics plc (LON:STX) is the topic of conversation when Hardman and Co’s Head of Life Sciences Dr Martin Hall caught up with DirectorsTalk for an exclusive interview.
Q1: Shield Therapeutics has made a number of announcements recently, could you summarise what has been happening?
A1: With its interim announcement in September last year, the company was transparent about the need for more capital to accelerate its commercial strategy for Accrufer in the US and also took out a short-term shareholder loan to extend its cash runway. Knowing the pressing need for more capital, probably through an equity raise, the market marked the shares down.
We always thought that STX would wait as long as possible before approaching the market so that it could accumulate as much, hopefully positive, prescription data on Accrufer, especially with markets being difficult and risk averse. This is exactly what the company did, but, additionally, it surprised the market with a co-promotion deal with a major pharma player, Viatris.
Q2: OK, so how has Accrufer performed in the US?
A2: The small sales team, initially 30, has greatly increased awareness of Accrufer and its advantageous characteristics as an oral iron replacement therapy, as evidenced by good rises in the number of prescriptions filled on a quarter-by-quarter basis since launch.
The question for investors has been whether the good momentum reported at the interim stage would continue into the third and fourth quarters of 2022, especially given that the contract sales force had been reduced to about 22. But any concerns appear unfounded.
In its circular to shareholders, they confirmed 29% prescription growth for the third quarter over Q2 and that growth in the fourth quarter was tracking the same rate. This provided the positive momentum and confidence to approach the market for more capital.
Q3: You mention a co-promotion deal with Viatris, can you explain more about this deal?
A3: Internally, STX could see the positive momentum that was building with Accrufer and really wanted to accelerate that rate of growth. To do this it had ambitions to almost treble its sales team in 2023 to 60, but this would take time and money.
Externally, the achievements of the company with its limited resources had not gone unnoticed by the pharma industry, and several companies had approached them about a commercial deal, one of which was Viatris. After completing its own due diligence, which supported its own thoughts about the opportunity for Accrufer, the co-promotion deal with Viatris was announced alongside the capital increase in December.
In our opinion, Viatris is the ideal partner for Shield. First, it is a big pharma player, ranked 22nd by sales in the US market in 2021, this being achieved with largely legacy branded and generic drugs. It also has a good position in female health, a field in which many Accrufer prescriptions are being written, so Accrufer works well with its existing portfolio.
The Viatris deal will increase the sales team from the originally planned 60 to 100, each company providing 50 members. The recruitment and training will be faster than originally planned, targeted by the end of April 2023. Also, Viatris will bring a number of established relationships with wholesalers and payors which should reduce the discounts that STX was having to give. The sales and costs will be split 55/45% in Shield’s favour. So the deal has the potential to accelerate sales at a much faster rate, for lower costs compared with what they could achieve on its own, thereby reaching profitability and cashflow breakeven faster. Additionally, Viatris paid $5m upfront on signing the deal, reducing the quantum of capital that STX needed from the market. Viatris will also be paying up to $30m milestones against net sales targets.
Q4: Have you changed your forecasts?
A4: While 2022 is not particularly relevant, we believe that many of the 2H’22 prescription use has been through state-funded payors, which demand bigger discounts. So, even though prescriptions look set to be higher than we were forecasting back in September, the higher discounts would translate into lower net sales of $4m, about $1m lower.
But this story is really about the future. They provided very strong prescription data and sales expectations for the enlarged sales team with Viatris, equating to sales in excess of $150m in 2025. Even though these will be shared with Viatris, the lower costs over the next three years offset this split. Our own forecasts are slightly lower than the company is predicting, but they should still reach profitability and become cashflow positive in 2024.
Q5: Despite that the shares still languish, what do you expect to happen from here?
A5: In terms of valuation, the stock has a market capitalisation of ca.£40m, and an EV of ca.£25m, albeit the cash in that calculation is needed for Shield Therapeutics’ share of the co-promotion deal. So, on our 2024 forecasts, they are trading on an EV/sales of just 0.3x and an EV/EBITDA of only 1.1x.
Everything is now in place to accelerate Accrufer momentum, with both STX and Viatris training the first wave of new recruits, all full time employees now rather than contract, with the full teams complete by the end of April. The benefits of the larger sales force should start to be seen during Q3 2023, with the full benefits in Q4.
The Viatris deal and third quarter 2022 Rx data gave the market confidence to support the capital increase, which was lower than expected because of the upfront payment from Viatris and an extension to the shareholder loan, but the shares are yet to respond. In our opinion, as soon as we see the first signs of the Viatris deal benefiting prescription growth and sales, the shares should be re-rated.
Also, we have been considering the position of Viatris. On the one hand, if the rise in prescriptions and sales do not come through as expected, the shares will continue to languish. On the other hand, if Accrufer sales do appear to be trending towards $150m in 2024, Viatris may consider STX a suitable route to boosting its own sales and cashflows. Either way, if the shares have not re-rated, Viatris might see them as a cheap opportunity to add to its portfolio so the presence of Viatris limits the downside.
