Mereo BioPharma Group plc — FY2021 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2021. The filing is an annual Form 20-F and does not provide a separate fourth-quarter income statement. Financial statements are prepared under IFRS in pound sterling.
Business Context
Mereo is a U.K.-based clinical-stage biopharmaceutical company focused on oncology and rare diseases. It had six clinical-stage product candidates, no approved products, and no commercial product sales. Its principal programs were etigilimab in oncology, alvelestat for alpha-1 antitrypsin deficiency and bronchiolitis obliterans syndrome, and setrusumab for osteogenesis imperfecta. Acumapimod and leflutrozole were designated for potential partnering or sale, while navicixizumab was out-licensed to OncXerna.
The company had 584.9 million ordinary shares outstanding at December 31, 2021. Its ADSs trade on Nasdaq under MREO, with each ADS representing five ordinary shares.
Financial Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | £36.5 million | £nil | New revenue |
| Cost of revenue | £17.9 million | £nil | New cost |
| Gross profit | £18.6 million | £nil | New gross profit |
| Gross margin | 50.9% | Not meaningful | Revenue was licensing-related |
| Research and development | £23.6 million | £16.3 million | Up 44% |
| Administrative expenses | £15.9 million | £21.2 million | Down 25% |
| Operating loss | £20.9 million | £37.6 million | Improved £16.6 million |
| Profit/(loss) before tax | £14.2 million | £166.5 million loss | Material improvement |
| Net profit/(loss) | £12.7 million | £163.6 million loss | Material improvement |
| Net cash used in operating activities | £5.2 million | £28.3 million | Improved £23.1 million |
| Cash and short-term deposits | £94.3 million | £23.5 million | Up £70.8 million |
The reported net profit included a £40.0 million gain from changes in the fair value of financial instruments, principally a £39.5 million unrealized gain on private-placement warrants. Accordingly, the net profit did not reflect recurring operating profitability. The operating margin was approximately negative 57.4% and the net margin approximately 34.9%.
FY2021 revenue consisted of a £36.5 million upfront payment from Ultragenyx under the setrusumab license and collaboration agreement. The company continued to generate no revenue from product sales.
Liquidity, Debt and Capital Resources
- Cash and short-term deposits increased to £94.3 million from £23.5 million, primarily reflecting the February 2021 public offering and the Ultragenyx upfront payment.
- Net cash from financing activities was £77.7 million, including £78.4 million of net proceeds from the February 2021 ADS offering.
- The company stated that existing cash resources were expected to fund operating expenses and capital requirements into 2024, but that additional external funding would be required to complete development plans and commercialize selected products.
- Convertible loan notes had a carrying value of £14.4 million at year-end, including £10.6 million related to the June 2020 private placement and £3.8 million related to the Novartis note. Private-placement loan notes had £12.4 million of principal outstanding.
- The former bank credit facility was repaid in full in December 2020. Lease liabilities totaled £2.4 million on an undiscounted maturity basis at December 31, 2021, and CMO manufacturing commitments totaled £1.4 million.
- Outstanding warrants totaled 147.4 million ordinary-share equivalents, or approximately 25% of issued ordinary share capital, creating potential dilution. The warrant liability was £8.3 million at year-end.
Material Changes Versus FY2020
- Revenue emerged for the first time through the Ultragenyx setrusumab transaction; the associated £17.9 million cost of revenue included the derecognized carrying value of licensed setrusumab rights and payments due to Novartis.
- R&D spending increased primarily because of the etigilimab Phase 1b/2 basket study. Etigilimab R&D expense increased to £13.5 million from £1.0 million, while setrusumab and navicixizumab spending declined following partnering activities.
- Administrative expense declined because FY2020 included higher legal, professional and transaction costs.
- The company moved from a £163.6 million net loss to a £12.7 million net profit, primarily due to the reversal of the prior-year warrant fair-value loss and the 2021 warrant fair-value gain.
- Operating cash use decreased substantially because of the Ultragenyx upfront payment, although R&D tax-credit receipts fell to £2.8 million from £10.4 million.
- During 2021, the company issued 245.96 million ordinary shares, including 198.38 million shares underlying the February ADS offering and 40.40 million shares issued on conversion of private-placement notes.
Pipeline, Outlook and Management Commentary
- Etigilimab: The Phase 1b/2 basket study reported interim data in November 2021. Among the reported efficacy population, there was one complete response, one partial response and four instances of stable disease. Management expected to provide an update in mid-2022.
- Alvelestat: The Phase 2 AATD study closed enrollment at 99 patients, below the original protocol target, because of COVID-19-related enrollment challenges. Top-line data were expected in early Q2 2022. A BOS study was expected to expand into Phase 2 in the second half of 2022.
- Setrusumab: Ultragenyx planned to begin a pediatric and young-adult Phase 2/3 study in the first half of 2022 and a separate study in children under age five in the second half of 2022. Mereo retained commercial rights in Europe and the U.K.
- Non-core assets: Mereo intended to pursue out-licensing or sale opportunities for acumapimod and leflutrozole. Navicixizumab remained partnered with OncXerna, with potential future milestones and royalties.
- Management expected continued significant operating losses as clinical development, manufacturing, regulatory and potential commercialization activities advanced. No product candidate had reached regulatory approval.
Key Risks, Contingencies and Unusual Items
- The business has never generated product-sales revenue and depends on successful clinical development, regulatory approval and commercialization of a limited number of candidates.
- Additional financing will be required; future equity or convertible-debt financing could dilute shareholders, while licensing transactions could require relinquishing valuable rights.
- Clinical development remains exposed to failed or inconclusive trials, adverse events, patient-enrollment delays, changing regulatory requirements and COVID-19 disruptions.
- The company relies on CROs and CMOs, with risks relating to manufacturing capacity, raw-material supply, quality, regulatory compliance and clinical-trial execution.
- Setrusumab manufacturing testing had identified a potential opalescence issue in the liquid formulation, although the company reported no observed impact on potency or effectiveness in completed manufacturing runs.
- Mereo recorded a £4.1 million provision for deferred cash consideration linked to AstraZeneca milestones. Potential milestone, royalty and other contractual payments under the Novartis and AstraZeneca agreements remain uncertain.
- The company disclosed a third-party European patent family that may cover use of etigilimab in cancer; opposition proceedings were ongoing and the outcome was uncertain.
- COVID-19 and Brexit-related regulatory, supply-chain and clinical-trial disruptions remained material risks. The filing also discussed potential effects from the Russia-Ukraine conflict and broader geopolitical disruption.
- The company reported no governmental, legal or arbitration proceedings expected to have a significant effect on financial position or profitability.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021. BDO LLP replaced Ernst & Young LLP as auditor in July 2021.
Investor Verification Checklist
- Verify the composition and sustainability of the £36.5 million Ultragenyx-related revenue and the associated £17.9 million cost of revenue.
- Reconcile the £12.7 million net profit to the £20.9 million operating loss and confirm the non-cash nature and valuation assumptions of the £40.0 million fair-value gain.
- Confirm cash runway assumptions through 2024, expected cash burn, and the timing and terms of required future financing.
- Review the £12.4 million private-placement note principal, Novartis note, warrant exercise terms and potential dilution from 147.4 million outstanding warrants.
- Track the 2022 and later clinical milestones for etigilimab, alvelestat and setrusumab, including the impact of the reduced AATD enrollment population.
- Assess partner performance and economics under the Ultragenyx and OncXerna agreements, including milestones, royalties, retained territories and CVR obligations.
- Review the AstraZeneca and Novartis milestone, royalty and intellectual-property obligations, including the £4.1 million deferred consideration provision.
- Confirm regulatory, patent and manufacturing developments that could affect commercialization timelines or the carrying value of acquired development programs.