Business Context and Reporting Period
Company: Mereo BioPharma Group Plc (NASDAQ: MREO, AIM: MPH)
Filing Type: Form 6-K (Interim Financial Results)
Reporting Period: Six months ended June 30, 2019
Business Overview: Mereo is a clinical-stage biopharmaceutical company focused on rare diseases. Its strategy involves acquiring product candidates with substantial data packages and developing them through regulatory approval. Key assets include setrusumab for Osteogenesis Imperfecta (OI) and alvelestat for Alpha-1 Antitrypsin Deficiency (AATD). In April 2019, the company completed the acquisition of OncoMed Pharmaceuticals, Inc., adding oncology assets navicixizumab and etigilimab to its portfolio.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Revenue | £0 (Nil) | £0 (Nil) |
| Loss After Tax | £16.2 million | £17.0 million |
| Loss Per Share (Basic & Diluted) | 22 pence | 24 pence |
| Research & Development Expenses | £11.9 million | £10.9 million |
| Administrative Expenses (GAAP) | £6.5 million | £7.1 million |
| Cash Resources (Cash + Short-term Investments) | £36.1 million | £36.9 million |
| Total Debt | £19.7 million | £20.9 million |
| Net Cash Flow from Operating Activities | £27.6 million (Inflow) | £15.0 million (Inflow) |
Note: The significant operating cash inflow in 2019 includes a non-cash gain on bargain purchase of £3.7 million from the OncoMed acquisition and working capital adjustments.
Material Changes vs. Prior Period
- Acquisition of OncoMed: Completed on April 23, 2019. The transaction resulted in a "bargain purchase" gain of £3.7 million, as the fair value of net assets acquired exceeded the consideration paid. This significantly impacted the balance sheet, increasing intangible assets and cash resources.
- Debt Restructuring: The Novartis Loan Notes were converted into ordinary shares in June 2019, reducing debt obligations. The bank loan terms were amended to extend the interest-only period to December 31, 2019.
- Accounting Policy Change: Adoption of IFRS 16 (Leases) on January 1, 2019, resulted in the recognition of right-of-use assets (£13.0 million) and lease liabilities (£13.1 million) on the balance sheet.
- Expense Trends: R&D expenses increased by £1.0 million year-over-year, driven by the setrusumab Phase 2b study and the alvelestat Phase 2 study. Administrative expenses decreased on a GAAP basis but increased on a non-GAAP underlying basis due to the inclusion of OncoMed costs post-acquisition.
Guidance, Outlook, and Risks
Outlook and Milestones
- Setrusumab (OI): 12-month topline data from the Phase 2b ASTEROID study is expected in Q4 2019. A pivotal pediatric study design has been agreed upon with the EMA for the EU and Canada.
- Alvelestat (AATD): Topline data from the Phase 2 proof-of-concept study is now expected in mid-2020 (delayed from late 2019).
- Partnerships: Management is actively discussing partnering opportunities for its broader portfolio (acumapimod, leflutrozole, navicixizumab, etigilimab) to optimize value and fund development.
Liquidity and Going Concern
As of June 30, 2019, cash resources of £36.1 million are projected to extend operations to the end of Q2 2020. The filing explicitly states a material uncertainty regarding the company's ability to continue as a going concern without additional external funding. Management plans to raise further capital through equity financing and/or partnering transactions by mid-2020.
Risks
- Clinical Development: Risks associated with the failure or delay of clinical trials, particularly the upcoming 12-month data readout for setrusumab.
- Funding: Dependence on successful equity raises or partnership deals to fund operations beyond Q2 2020.
- Regulatory: Uncertainty regarding regulatory pathways and approval timelines for rare disease indications.
Investor Verification Checklist
- Cash Runway: Verify the accuracy of the cash burn rate and the timeline for the next funding round (targeted for mid-2020).
- Setrusumab Data: Monitor the Q4 2019 release of 12-month ASTEROID study data, which is critical for valuation and partnership discussions.
- Partnership Progress: Track announcements regarding potential licensing or co-development deals for the non-rare disease assets (acumapimod, navicixizumab, etigilimab).
- Debt Covenants: Review the amended bank loan terms and any potential triggers related to clinical milestones or liquidity ratios.
- OncoMed Integration: Assess the financial and operational integration of OncoMed, including the status of the contingent consideration milestones.