Business Context and Reporting Period
Company: Mereo BioPharma Group Plc (Mereo)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Year ended December 31, 2019
Filing Date: June 16, 2020
Business Overview: Mereo is a clinical-stage biopharmaceutical company focused on oncology and rare diseases. The company's strategy involves acquiring product candidates with substantial preclinical and clinical data. Key assets include etigilimab (oncology), setrusumab (osteogenesis imperfecta), and alvelestat (alpha-1 antitrypsin deficiency). In April 2019, Mereo acquired OncoMed Pharmaceuticals, Inc., broadening its asset base and securing a U.S. listing.
Key Financial Metrics
| Metric | 2019 (£'000) | 2018 (£'000) |
|---|---|---|
| Revenue | 0 | 0 |
| Operating Loss | (39,517) | (34,478) |
| Loss Before Tax | (41,118) | (37,306) |
| Loss After Tax | (34,844) | (32,029) |
| Loss Per Share (Basic & Diluted) | (0.39) | (0.45) |
| Net Cash Used in Operating Activities | (45,931) | (23,139) |
| Cash and Short-Term Deposits (Year End) | 16,347 | 25,042 |
| Total Debt (Interest-bearing loans) | 20,512 | 21,485 |
Note: All figures in GBP unless otherwise noted. Mereo has no revenue as it is a clinical-stage company.
Material Changes vs. Prior Period
- Acquisition of OncoMed: Completed on April 23, 2019. The transaction was accounted for as a bargain purchase, resulting in a gain of approximately £3.7 million (net gain of £1.0 million after transaction costs). This acquisition added significant intangible assets (£12.7 million) and cash resources (£10.1 million) to the balance sheet.
- Increased Operating Loss: The loss before tax increased by approximately 10% to £41.1 million, driven by higher administrative expenses (£15.9 million vs. £11.8 million) and finance charges, partially offset by the bargain purchase gain.
- Cash Burn: Net cash used in operating activities more than doubled to £45.9 million from £23.1 million, reflecting increased R&D and administrative costs associated with the expanded portfolio and integration of OncoMed.
- Debt Structure: Convertible loan notes with Novartis were fully converted into equity in June 2019. The remaining debt consists of a bank loan facility of approximately £20.5 million.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management states the company is entering a "transformational period" following a £70 million ($70 million) private placement completed in June 2020. The company plans to focus on advancing etigilimab for solid tumors and its rare disease portfolio. Key milestones include initiating a Phase 1b study for etigilimab, continuing enrollment for the alvelestat Phase 2 study, and reporting on the setrusumab Phase 2b extension. The company expects the new funding to provide a cash runway into early 2022.
Recent Financing (Post-Year End)
- June 2020 Fundraising: Raised $70 million (£56 million) via private placement. Proceeds include $19.4 million in equity and $50.6 million in convertible notes (Tranche 1 Notes). The company intends to use $13 million to reduce existing indebtedness.
- February 2020: Completed a £3.8 million convertible equity financing with Novartis and raised $6 million from Boxer Capital and Aspire Capital.
- January 2020: Licensed navicixizumab to Oncologie, Inc. for an upfront payment of $4 million and potential milestones up to $300 million.
Risks and Contingencies
- COVID-19 Impact: The pandemic has caused delays in clinical trials. Recruitment for the alvelestat Phase 2 trial (AATD patients are at higher risk) is delayed, with topline data now expected in the second half of 2021. The initiation of the setrusumab Phase 3 pediatric study may also be delayed.
- Convertible Note Contingency: The Tranche 1 Notes from the June 2020 fundraising are convertible into shares only if shareholder resolutions are passed by August 7, 2020. If not passed, the notes do not convert, and the company faces a potential material liability (Uplift Payment) of up to £137 million.
- Liquidity: As of December 31, 2019, cash resources were £16.3 million. Post-year-end fundraising has significantly improved liquidity to approximately £61.8 million as of June 2020.
Investor Verification Checklist
- Shareholder Approval: Verify the outcome of the shareholder meeting scheduled for June 30, 2020, regarding the conversion of Tranche 1 Notes and exercise of warrants. Failure to pass these resolutions triggers significant debt liabilities.
- Cash Runway: Confirm the net proceeds from the June 2020 fundraising and the specific allocation used to repay the existing £17.6 million bank loan to validate the "early 2022" runway claim.
- Clinical Timelines: Monitor updates on the alvelestat Phase 2 trial and setrusumab Phase 3 pediatric study initiation, as COVID-19 has already caused delays.
- Partnership Progress: Track the status of the strategic partnership for setrusumab, which management intends to secure prior to the pivotal Phase 3 study.
- Debt Covenants: Review the terms of the remaining bank loan and the new convertible notes for any covenants that could be triggered by operational delays or further dilution.