Mereo BioPharma Group plc — FY2020 Form 20-F Summary
Business context and reporting period
Mereo is a UK-based, clinical-stage biopharmaceutical company focused on oncology and rare diseases. This Form 20-F reports audited IFRS results for the year ended December 31, 2020, with comparisons for 2019 and 2018. The company had six clinical-stage candidates, no approved products, and no product-sales revenue. Its ADSs trade on Nasdaq under MREO; each ADS represents five ordinary shares. Ordinary shares outstanding at December 31, 2020 totaled 338.95 million.
Financial performance and liquidity
| Metric (£ millions, except per-share data) | 2020 | 2019 | Change |
|---|---|---|---|
| Product revenue | None | None | No product revenue |
| Research and development expense | 16.3 | 23.6 | Down 31% |
| Administrative expense | 21.2 | 15.9 | Up 33% |
| Operating loss | 37.6 | 39.5 | Improved 5% |
| Net loss attributable to shareholders | 163.6 | 34.8 | Materially higher |
| Basic and diluted loss per share | £0.48 | £0.39 | Higher loss per share |
| Net cash used in operating activities | 28.3 | 45.9 | Improved 38% |
| Cash and short-term deposits | 23.5 | 16.3 | Up 43% |
The 2020 net loss included a £109.8 million fair-value loss on financial instruments, principally a £63.2 million loss on the embedded derivative in the June 2020 convertible loan notes and a £46.0 million unrealized loss on warrants. It also included a £10.9 million loss on disposal of the navicixizumab intangible asset. These items were largely non-cash valuation or accounting effects rather than ordinary operating expenses.
Total assets were £62.9 million and total liabilities were £77.9 million at year-end, resulting in negative total equity of £15.0 million. The company had £16.1 million of non-current interest-bearing borrowings, primarily the remaining private-placement loan notes and Novartis convertible notes. Its prior bank loan was repaid in full in December 2020.
Operating cash use declined primarily because the company received £10.4 million of R&D tax credits in 2020. Financing activities generated £34.7 million, including equity and convertible-debt proceeds, partially offset by £22.7 million of bank-loan principal and interest repayment.
Material changes versus the prior comparable period
- R&D spending fell by £7.3 million, primarily because the adult Phase 2b setrusumab study was completed and activity in leflutrozole and acumapimod declined.
- Administrative costs rose by £5.3 million, driven by transaction, legal, professional, Nasdaq-listing, personnel and dual-jurisdiction costs.
- Etigilimab R&D spending increased 34% as the company prepared and initiated a Phase 1b/2 basket study.
- The company completed a £56.0 million June 2020 private placement, comprising ordinary shares and convertible loan notes. £21.8 million of notes converted into 125.1 million ordinary shares; £18.9 million remained outstanding at year-end.
- Private-placement and other financing activity materially increased potential dilution. Approximately 162.8 million warrants were outstanding at year-end, equivalent to about 48% of ordinary share capital.
- Navicixizumab was out-licensed globally to OncXerna in January 2020 for a $4.0 million upfront payment, with potential additional milestones and royalties. The transaction generated a £10.9 million accounting loss on disposal of the related intangible asset.
- The company entered into the Ultragenyx setrusumab collaboration in December 2020. The agreement became effective in January 2021, so no related revenue was recognized in 2020.
- The ordinary shares ceased trading on London Stock Exchange’s AIM market in December 2020; Nasdaq became the company’s principal listed market.
Guidance, outlook, commentary and unusual items
- Management expects significant operating losses and R&D spending to continue as etigilimab, alvelestat and setrusumab advance. No product revenue is expected unless candidates receive regulatory approval or partnering income is recognized.
- Management stated that, including the $50 million Ultragenyx upfront payment received in January 2021 and approximately $108.2 million of net proceeds from the February 2021 ADS offering, available cash was expected to fund current operations and capital requirements into 2024. Additional funding will nevertheless be required to complete development plans and commercialize products.
- Etigilimab entered a Phase 1b/2 basket study in combination with an anti-PD-1, with initial data expected in the second half of 2021.
- COVID-19 delayed enrollment and the expected topline or interim analysis for the Phase 2 alvelestat AATD study to late 2021. The company also initiated an investigator-sponsored COVID-19 study.
- Ultragenyx is expected to lead global setrusumab development, initially prioritizing a pediatric Phase 2/3 study planned for late 2021. Mereo retained commercial rights in Europe and the UK and is eligible for up to $254 million of development, regulatory and commercial milestones plus royalties outside those territories.
- The company reported positive biomarker, bone-mineral-density and bone-strength findings for setrusumab in adults, but the study’s primary trabecular volumetric BMD endpoint was not met at any dose level. The study was not powered to demonstrate fracture reduction.
- Key unusual or contingent items include the £50.8 million warrant liability, £1.5 million of deferred cash consideration to AstraZeneca, potential AstraZeneca milestone payments of up to $115.5 million, Novartis royalties and transaction proceeds obligations, and contingent value rights tied to future navicixizumab milestones.
- A material weakness in interim financial reporting controls identified during 2020 was reported as remediated by December 31, 2020. Management concluded year-end internal control over financial reporting was effective; the auditor was not engaged to attest to that conclusion.
Principal risks
- The company has never generated product revenue, has a limited operating history, accumulated losses of £309.7 million, negative equity at year-end, and will require additional capital.
- All principal candidates remain subject to clinical, regulatory, manufacturing, safety, reimbursement and commercial risks; none was approved for sale at year-end.
- COVID-19, patient-enrollment limitations, reliance on CROs and third-party manufacturers, supply-chain disruptions and limited biologics manufacturing capacity may delay development.
- Brexit may complicate UK/EU clinical-trial, import, manufacturing, orphan-designation and marketing-authorization processes.
- Competition is substantial, particularly in anti-TIGIT oncology, AATD, osteogenesis imperfecta and testosterone-related therapies.
- Intellectual-property rights may be challenged or insufficient. The filing identifies a third-party European patent family potentially covering setrusumab use in OI, with opposition proceedings ongoing.
- Future financings, convertible notes, warrants and equity awards may cause significant dilution. The company also faces foreign-exchange risk and does not hedge currency exposure.
Most important facts for investors to verify
- Cash runway assumptions, including the effect of the January 2021 Ultragenyx payment, February 2021 ADS offering, operating burn and future clinical milestones.
- The terms, maturity, conversion mechanics and dilution potential of the £18.9 million remaining private-placement notes, Novartis notes and approximately 162.8 million outstanding warrants.
- Enrollment status and interim or topline results for the alvelestat AATD study and the etigilimab Phase 1b/2 study.
- Ultragenyx’s execution of the setrusumab pediatric and adult development plans, Mereo’s retained European economics and its payment obligations to Novartis.
- The clinical significance and durability of setrusumab’s bone-density and bone-strength results, given that the primary endpoint was not met and fracture efficacy remains unproven.
- Potential milestone, royalty, CVR and intellectual-property liabilities, including the third-party OI patent opposition.
- Whether the reported remediation of the 2020 internal-control weakness remains effective as the company expands its operations and financing activities.