Mereo BioPharma Group plc: 2019 Form 20-F Summary
Business context and reporting period
This filing is an audited annual report for the fiscal year ended December 31, 2019, prepared under IFRS as issued by the IASB and presented in pounds sterling. It is not a quarterly filing, although the requested period is identified as 2019 Q4. Mereo is a U.K.-based, clinical-stage biopharmaceutical company focused on oncology and rare diseases. Its six clinical-stage candidates were etigilimab, navicixizumab, setrusumab, alvelestat, acumapimod and leflutrozole. The company had no approved products and no product sales revenue.
Mereo completed its acquisition of OncoMed Pharmaceuticals on April 23, 2019. The transaction added oncology assets, including etigilimab and navicixizumab, and materially affects comparability with 2018.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Research and development expense | £23.6 million | £22.7 million | Up 4% |
| Administrative expense | £15.9 million | £11.8 million | Up 35% |
| Operating loss | £39.5 million | £34.5 million | Worsened £5.0 million |
| Loss before tax | £41.1 million | £37.3 million | Worsened £3.8 million |
| Loss attributable to shareholders | £34.8 million | £32.0 million | Worsened £2.8 million |
| Basic and diluted loss per share | £0.39 | £0.45 | Improved due primarily to share count growth |
| Net cash used in operating activities | £45.9 million | £23.1 million | Outflow increased £22.8 million |
| Cash and short-term deposits | £16.3 million | £25.0 million | Down £8.7 million |
| Total assets | £86.4 million | £67.3 million | Up £19.2 million |
| Total equity | £40.3 million | £32.8 million | Up £7.5 million |
| Total liabilities | £46.2 million | £34.5 million | Up £11.7 million |
Revenue from product sales was zero. The filing does not provide a meaningful revenue-based gross or operating margin; profitability metrics are therefore not meaningful for this pre-commercial company. The 2019 tax credit was £6.3 million, including U.K. R&D credits and U.S. alternative minimum tax refunds or receivables.
R&D spending increased primarily for setrusumab, which rose to £13.7 million, and alvelestat, which rose to £5.0 million. Spending on leflutrozole and acumapimod declined as major clinical studies were completed or activity shifted toward partnering. OncoMed programs contributed £2.9 million of 2019 R&D expense after the acquisition.
Operating cash use increased because of higher losses, lower tax receipts, working-capital movements and the inclusion of OncoMed operations. Investing cash inflow of £43.3 million primarily reflected cash and short-term investments acquired with OncoMed and the sale of short-term investments. Financing cash use was £5.7 million, including £2.2 million of lease payments and £1.0 million of treasury-share purchases.
The company had a £20.5 million secured bank loan outstanding at year-end, bearing fixed interest of 8.5% and maturing in 2021 unless extended. The facility is secured by substantially all assets, including intellectual property, and includes restrictive covenants. Novartis convertible notes were fully converted in June 2019. Contractual undiscounted obligations included approximately £22.7 million for the bank loan and £20.3 million for leases.
Material changes versus the prior comparable period
- The OncoMed acquisition added approximately £12.7 million of identifiable intangible assets, £39.1 million of cash and short-term investments at acquisition, £10.8 million of acquired right-of-use assets and £9.2 million of assumed liabilities. It produced a net £1.0 million gain recognized on acquisition after transaction costs.
- Administrative expense increased because of the larger combined business, Nasdaq listing costs, higher professional fees, insurance costs and the adoption of IFRS 16. The new lease standard resulted in £1.5 million of depreciation and £1.3 million of lease interest expense in 2019.
- Cash resources declined from £27.5 million at December 31, 2018, including short-term investments, to £16.3 million at December 31, 2019.
- Shares outstanding increased from 71.2 million to 98.0 million, primarily from the OncoMed acquisition and the conversion of Novartis notes. The weighted-average share count rose to 89.4 million from 71.1 million.
- Setrusumab Phase 2b top-line data did not meet the primary wrist trabecular bone-density endpoint because of substantial baseline heterogeneity, although secondary bone-density and bone-strength measures were positive in medium- and high-dose groups. The study was not powered to establish fracture-rate efficacy.
- Celgene declined to exercise its option for etigilimab, leaving Mereo with worldwide rights to the program.
Guidance, outlook, commentary and risks
- Management expected continued significant operating losses and higher R&D spending as it advanced etigilimab, setrusumab and alvelestat, and pursued regulatory and partnering activities.
- The company expected cash resources at the time of filing, including subsequent financing, to fund operations into early 2022, but stated that additional capital would be required to complete development plans and support commercialization.
- Mereo planned to partner setrusumab before a prospective pediatric pivotal study and intended to seek strategic partners or buyers for acumapimod and leflutrozole.
- After year-end, Mereo licensed navicixizumab to Oncologie for an upfront payment of $4.0 million, a possible additional $2.0 million CMC payment, up to $300 million of milestones and tiered royalties. The upfront payment was received in January 2020 and approximately $0.5 million was payable to CVR holders.
- COVID-19 disrupted operations and clinical activities. The filing stated that alvelestat top-line data were delayed to the second half of 2021 and that a planned pediatric setrusumab study could also be delayed.
- On June 3, 2020, the company completed a financing with approximately $64.2 million of net proceeds, consisting of equity, convertible notes and conditional warrants. If related shareholder resolutions were not approved by August 7, 2020, the filing warned that holders could become entitled to amounts of up to $137.1 million, creating a material liability.
- Key risks include clinical-trial failure or delay, regulatory rejection, manufacturing and supply-chain dependence, limited patient enrollment, intellectual-property challenges, reliance on third-party CROs and CMOs, competition, foreign-exchange exposure, Brexit-related uncertainty, COVID-19 disruption and the need for additional financing.
- The company stated that it believed it was a PFIC for U.S. tax purposes in 2019, which may create adverse tax consequences for U.S. investors.
Most important facts for investors to verify
- Whether subsequent financings and shareholder approvals were completed as described and how the convertible notes and warrants affected dilution and liabilities.
- Actual cash runway after debt repayment, clinical spending, COVID-19 delays and any additional financing.
- Setrusumab’s ability to progress from Phase 2b results to a pediatric pivotal trial and the significance of the missed primary endpoint.
- Alvelestat enrollment, the revised timing of top-line data and the probability of success in severe AATD.
- Etigilimab clinical progress after Celgene’s decision not to exercise its option.
- Economic terms, CVR payments and development responsibility under the navicixizumab license with Oncologie.
- Debt maturity, security interests, covenant compliance and potential milestone or royalty obligations to Novartis and AstraZeneca.
- Potential impairment of the £44.5 million carrying value of acquired development programs if clinical or regulatory assumptions deteriorate.