Shield Therapeutics: Further positive momentum (LON:STX)

Hardman & Co

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: Despite launching a drug into the US market, Shield Therapeutics has performed really badly over the past 12 months. Can you summarise why this has happened?

A1: As we entered 2021, hopes were high for the company shares, given that its oral iron replacement drug, Accrufer, had US regulatory approval and it had decided to commercialise the drug itself to retain as much profitability for shareholders. The launch formally occurred on the 1st July 2021 after obtaining the necessary capital from the market.

However, when the drug launched, it did not have the benefit of the usual two years of pre-launch activities, whereby physicians become fully aware of a pending launch of a new drug. Consequently, it has taken much longer than anticipated to generate that awareness, get reimbursement from the payors and see sales traction. Given the slower start, the company now needs more capital to accelerate the considerable progress that has been made recently, and the shares have been marked down in anticipation of another equity raise.

Q2: You mention some considerable progress, can you summarise your thoughts on this?

A2: First, the sales team has made considerable inroads in getting key opinion leaders aware of the advantageous characteristics of Accrufer, as evidenced by a more than 100% increase in the number of first time prescribers between January and April of 2022.

Secondly, critical to the success of a drug in the US is getting it onto the formularies whereby the cost of the drug will be reimbursed by the payors, both private insurance and state-backed plans. They had great success with this, with the number of lives covered for reimbursement rising from 40 million at the end of December 2021, to over 100 million by the end of June 2022.

Thirdly, these activities have been reflected in the steady rise in the number of prescriptions being filled quarter-by-quarter. What is more, this has all been achieved from 20 people out of a team of 30 sales reps, with the underperforming third having been let go. By the end of June, they had 10 replacements recruited and trained, which should benefit Q3.

Q3: What are the implications for the full year?

A3: On the one-hand, we cannot get away from the slow start for Accrufer. But on the other hand, based on recent quarterly trends, we can see the company doing 25,000 prescriptions in 2022 and that is the number on which our forecasts are based. However, if the new members of the sales team get into their stride quickly, this could comfortably rise to 30,000. Still way off where we expected them to be, but it would signal further positive momentum.

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The most important impact is on the cash position. To accelerate the positive momentum recently achieved, the company would like to double the sales team to 60, but this takes investment. Short-term, it has taken out a $10m shareholder loan to extend its cash runway into the fourth quarter of 2022 and give management more times to assess the various sources of capital to expand its commercial investment.

Q4: Given your argument, why are the shares still falling?

A4: Market conditions, particularly for biotechs, are very difficult at the current time. Investors are fretting about global economics and the impact of relatively high inflation which might well persist for longer than market commentators and governments are suggesting, so they are adopting a position of risk-aversion. This is not helpful to companies needing capital. Until they can provide more information about the continuing progress that it is making or clarify where the desired investment capital will come from, the shares are likely to hover around current levels.

Q5: You have mentioned investment capital, do you know how much is required?

A5: The company has not provided any guidance. However, we did note that the shareholder loan becomes repayable or convertible in the event that the company raises $30m of new funds, so we believe that this is a good proxy for the quantum required and our forecasts are based on this figure.

Q6: Finally, can you summarise the investment opportunity?

A6: Despite the slow start, the company does appear to have the right people in place to realise the potential of Accrufer in the US. Albeit that it did recruit a number of salespeople that subsequently underperformed.

One thing is clear, there is enormous demand for a safe, effective, oral iron replacement therapy. The current market is very unsatisfied and the characteristics of Accrufer do fit the bill.

At the current share price, the downside risk is 6p, but the upside potential is enormous. This should be realised in the event that Shield Therapeutics gets the desired investment capital to accelerate the positive momentum. Additionally, iron replacement is a hot area and there have been two recent acquisitions of companies at significant premiums to the market valuations, and this should not be ignored by investors and limits the downside risk.

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