Prospects transformed with US partnership and debt/equity fundraising
Shield Therapeutics has signed a marketing partnership for Accrufer in the US and has simultaneously secured its funding position via a combined up to $33.5mln equity and debt fundraising. The twin move transforms Shield's prospects and, in our view, should allow it to capture significantly more value from Accrufer in the US than a hypothetical continuation of the current situation.
The US co-promotion/co-marketing agreement is with Viatris (NASDAQ: VTRS), a $13.5bn market cap US-based company. Viatris is the world's leading speciality pharmaceutical company that was formed by the 2020 merger of Mylan, a leading generics company, with Upjohn, a legacy division of Pfizer. Under the terms, Shield will receive US$5mln upfront and share Accrufer revenues 55:45 going forward. Both companies will contribute equally to a 100-person sales force. This will more than treble the size of sales force promoting Accrufer, given Shield currently has a 30-person team under contract. An important observation that validates the market opportunity is the fact that Viatris is prepared to fund a 50-person sales force in return for a 45% share of Accrufer's US revenues.
In addition, Shield is to raise US$10mln via an increase in the convertible bond provided by its existing shareholder/bondholder, AOP Health, and up to c$23.5mln in equity, via a US$18.5mln share placing with a further £3.9m available from an open offer. Both the placing and open offer are to be conducted at 6p/share, an 11.1% discount. Shield estimates that under the proposed new arrangement, it will become cash flow positive in Q4 2024, with Accrufer generating net product revenues in excess of US$150mln/year by 2025.
Viatris co-marketing/ deal for Accrufer
Shield's heroic go-it-alone US commercial strategy with Accrufer has proven to be challenging despite a seemingly professional execution of the marketing plan. This has meant the product's sales have lagged the trajectory envisaged at the time of launch and the earlier February 2021 fundraising, causing an ongoing funding issue that has in turn weighed heavily on the share price this year.
Shield would now seem to have resolved both of these problems together with the Viatris deal and the associated equity/debt fundraising. Although the Accrufer US launch will undoubtedly have disappointed shareholders, we note that in launching the product itself, Shield has now obtained a much better quality partner/deal than was ever in prospect in 2019-2020 (it had been negotiating then with a much smaller company). The key question for investors now is whether prospects at the current valuation are attractive given that Shield will have to bear increased costs in the short term and give up 45% of the economics of Accrufer in the US market and there is also potential for further dilution in connection with the now larger convertible bond. Ostensibly, that answer would still seem to be in the positive and the new projection of becoming cash flow neutral by late 2024 looks a lot more realistic than the prior ones. This would seem to be based on US net sales reaching $150m/year by 2025.
Great partner and funding now in place
Year end Dec 31 · 2020 · 2021
Revenue (£mln) · 10.4 · 1.5
Gross Profit £ mln · (2.6) · (19.3)
Shield has made a major strategy change with the plan to co-promote and co-market Acrufer with Viatris, one of the world's leading speciality pharmaceutical companies. Shield will receive US$5mln upfront and milestones of US$7.5mln on when annual net sales reach thresholds of US$100mln, US$150mln, US$200mln and US$250mln, the first being possible in 2025. Accrufer revenues will be shared 55:45, with both companies contributing to a joint 100-person sales force. Currently, Shield has a 30-person sales force under contract, which it will have to bring in house and expand to 50.
The new joint arrangement should increase the currently limited geographic coverage of healthcare professionals in the US (with a focus remaining on primary care and women’s health) and the addition of a larger partner should increase market access with the payors (Pharmacy Benefit Managers and integrated Healthcare Managed Organisations).
The Viatris co-promotion agreement should allow Accrufer to reach its peak sales sooner and thus allow Shield to reach a cash flow positive position earlier (and probably at a lower cost) than a continuation of the current stand-alone basis, even after giving up 45% of the economics (this is however a hypothetical scenario as Shield would not be in a position to continue the current strategy without funding).
We consider the Viatris arrangement to validate Shield's view of the ~$300m/year peak sales opportunity for Accrufer, as its partner is prepared to fund the sales force required to market a product in return for a 45% share of the US sales. Indeed, given the upfront, milestones payable and the magnitude of its planned investment in sales and marketing (relative to Shield's market capitalisation), an interesting question must arise around whether Viatris considered - or may do so in future - acquiring its partner to obtain full ownership of the product.
Major strategy change, great partner secured
Shield’s largest shareholder AOP Health has agreed to provide an additional US$10m by extending its existing convertible loan. AOP provided a US$10mln convertible in September, of which US$2.8mln has been converted into equity, leaving $7.2mln outstanding. The note is interest-free for the first 12 months and thereafter pays SOFR (currently 3.8%) plus 9.1%. The loan can be converted at any time at a 10% discount to the 20-day average closing price.
The use of the convertible loan note is presumably being done to prevent AOP's shareholding rising above the 29.9% threshold at which it would have to make a formal offer for the company under UK takeover rules. AOP's effective economic interest in Shield (if the existing bond were fully converted) would be in the region of 38%.
Convertible loan increased
Shield has raised US$18.5mln via a conditional share placing of 251.5m shares at 6p/share, an 11.1% discount to the 12 December share price. This would increase Shield's share count from 257m to 509m. AOP Health has committed to subscribe for its pro rata share of the placing. In addition, Shield will conduct an open offer, which depending on take-up, could raise up to a further £3.9m on the same terms.
This would if fully taken up issue 63.33mln shares and thus increases the share count (including those issued in the placing) to a maximum of 572m shares. Thus, if the open offer is fully subscribed, Shield would have a pro forma market capitalisation of c£40mln (at 7p/share) and cash of c£31m. It would also have c£14m of convertible bonds outstanding.
Placing and open offer
Shield plans to use the proceeds from the upfront payment, placing and open offer as follows:
- US$13.0mln on the expansion of the US sales force and taking the current contract sales force in-house;
- US$8.0mln to digital marketing and other marketing initiatives
- US$3.0mln to expand market access and distribution
- US$8.0mln for working capital and infrastructure needs
Use of funds
Shield's revenues in the first half of 2022 were £2mln of which £1.2mln were from the US, with a further £0.7mln from Norgine, the European licensee, and £0.1mln from the Canadian licence fee. Market expectations for the whole of 2022 are for revenues in the region of £6mln.
Revenue forecasts for 2023 are in the region of £35mln, although this will presumably be scaled back to reflect the 45% share allocated to Viatris, but, with an adjustment to reflect the larger co-promotion sales effort, so may settle in the region of £25mln as a result.
Cash at the end of June was £2.4mln and cash use in the first half was £10mln; the initial AOP US$10mln loan extending the cash runway to the end of 2022. We estimate Shield will enter 2023 with pro forma cash of £27mln-£30mln depending on the take up of the open offer.
Revenue forecasts, cash
Accrufer is typically prescribed for three months, although many users will need chronic therapy. It has a list price is currently $515 for one month's supply and Shield receives a net price after patient and wholesaler discounts and other costs. However, as most prescriptions to date have not been reimbursed, Shield has had to make Accrufer available at a much lower price (so that the deductible would not be prohibitive). However, the net price is expected to rise (to about $250/vial) as reimbursement is obtained and the market matures.
Based on data in its half-year report, we noted a linear extrapolation (with reimbursement assumed at 80%+ and a wholesale net price rising to $225/pack) would indicate sales of c£5mln in the US were possible in 2022 based on 30,000 prescriptions. However, to break even then on its low sales/marketing spend approach, Shield would have needed revenues of about £22.5mln, equivalent to about 105,000 packs/year (or 0.8% of the market).
At the half year, Shield had around 1,500 prescribers and appeared to be increasing this by around 175 per month. There could, however, be 65,000 potential high-prescribers in the US — plus another 485,000 lower prescribers. Women’s health practitioners write about half of all prescriptions. This group seems particularly keen on the benefits of Accrufer for their patients: it works with very few side effects compared to cheap ferrous generic salts which usually don't work with frequent side effects. General practitioners wrote about 45% of the prescriptions, with their use also growing. These two groups write 90% of all US oral iron prescriptions.
In its last report, Shield has insurer reimbursement covering 100mln people in the US (40% of eligible Americans in the targeted population) and coverage from Medicaid in several large US states.
Accrufer: Gross to net, market dynamics