Mereo BioPharma Group plc: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2023, included in our Annual Report on Form 10-K that was filed with the SEC on March 27, 2024. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2023, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

Overview

We are a biopharmaceutical company focused on the development of innovative therapeutics for rare diseases. We have developed a portfolio of late-stage clinical product candidates. Our two rare disease product candidates are setrusumab for the treatment of osteogenesis imperfecta (OI) and alvelestat primarily for the treatment of severe alpha-1 antitrypsin deficiency-associated lung disease (AATD-LD). Setrusumab has received orphan designation for OI from the European Medicines Agency (EMA) and the U.S. Food and Drug Administration (FDA), PRIME designation from the EMA and has rare pediatric disease designation from the FDA. Alvelestat has received U.S. Orphan Drug Designation for the treatment of AATD and Fast Track designation for the treatment of AATD-LD.

Our strategy is to selectively acquire and develop product candidates for rare diseases that have already received significant investment from large pharmaceutical and biotechnology companies and that have substantial pre-clinical, clinical and manufacturing data packages. Since our formation in March 2015, we have successfully executed on this strategy by acquiring six clinical-stage product candidates of which four were in rare diseases and oncology. Four of our six clinical-stage product candidates were acquired from large pharmaceutical companies and two were acquired in the Merger. We have successfully completed large, randomized Phase 2 clinical trials for four of our product candidates and the Phase 1b portion of a Phase 1b/2 for a fifth product candidate.

Rare diseases represent an attractive development and, in some cases, commercialization opportunity for us since they typically have high unmet medical need and can utilize regulatory pathways that facilitate acceleration to approval and to the potential market. Development of products for rare diseases involve close collaboration with key opinion leaders and investigators, and close coordination with patient organizations. Rare disease patients are typically treated at a limited number of specialized sites which helps identification of the patient population and enables a small, targeted sales infrastructure to commercialize the products in key markets.

On April 30, 2024, our partner, Ultragenyx announced that all patients have been enrolled across the Phase 3 Orbit and Cosmic studies evaluating setrusumab in pediatric and young adult patients with osteogenesis imperfecta (OI). The pivotal Phase 3 portion of the Orbit study has randomized 158 patients ages 5 to 25 years, and the Cosmic study has completed enrollment of 66 patients ages 2 to <7 years.

On April 15, 2024, we entered into an extension letter, effective as of April 15, 2024 to the cooperation agreement, dated October 28, 2022, between the Company and Rubric Capital Management L.P. (“Rubric Capital”). The extension letter waived the requirement under Section 1(f) of the Cooperation Agreement for Mr. Justin Roberts to offer to resign from the Company’s Board of Directors and all applicable committees thereof upon the termination date of the Cooperation Agreement which was immediately following the conclusion of the Company’s 2024 annual shareholder meeting (the “Termination Date”) and extended the Termination Date of the Cooperation Agreement until immediately following the conclusion of the Company’s 2025 annual shareholder meeting.

Results of Operations

Comparison of Three Months Ended March 31, 2024 and 2023

The following table sets forth Mereo’s results of operations for the three months ended March 31, 2024 and 2023.

* Percentage change not meaningful

Research and development (“R&D”) Expenses

The following table sets forth our R&D expenses by product development program for the three months ended March 31, 2024 and 2023.

Total R&D expenses decreased by $1.3 million, or 25%, from $5.3 million in the three months ended March 31, 2023 to $4.0 million in the three months ended March 31, 2024.

The decrease was primarily due to a $1.8 million reduction in R&D expenses for etigilimab, partially offset by increases of $0.3 million of R&D expenses for both setrusumab and alvelestat.

The reduction in etigilimab expenses was primarily due to the winding down and completion during 2023 of the open label Phase 1b/2 basket study in combination with an anti-PD-1 in a range of tumor types. Program expenses for setrusumab are in relation to increases in ongoing activities in Europe, and input into development, regulatory and manufacturing plans with our partner, Ultragenyx, as the global development program is funded by Ultragenyx pursuant to our license and collaboration agreement. Program expenses for alvelestat primarily include the preparatory work for the Phase 3 study, including manufacturing and drug formulation activities, St. Georges Respiratory Questionnaire (SGRQ) validation activities and regulatory interactions.

General and administrative expenses

General and administrative expenses decreased by $0.5 million, or 8%, from $6.4 million in the three months ended March 31, 2023 to $5.9 million in the three months ended March 31, 2024.

The decrease is primarily related to recognition of a $1.7 million reduction in expenses in the three months ended March 31, 2024 for amounts from our depository to reimburse certain expenses incurred by us in respect of our ADR program, partially offset by an increase in employee-related expenses and professional fees. No similar reimbursements from our depository were recognized in the three months ended March 31, 2023.

Interest income and expense

Total interest expense decreased from $0.8 million in the three months ended March 31, 2023 to $0.3 million in the three months ended March 31, 2024. This decrease was principally due to the lower balance in the quarter of convertible loan notes as the private placement loan notes were fully converted and redeemed in August 2023.

Total interest income increased from $0.3 million in the three months ended March 31, 2023 to $0.6 million in the three months ended March 31, 2024. The increase was principally due to higher interest rates on short-term deposits.

Changes in the fair value of financial instruments

The total change in fair value of financial instruments for the three months ended March 31, 2024 was an unrealized loss of $0.4 million, compared to an unrealized gain of $0.5 million in the three months ended March 31, 2023. The unrealized loss in 2024 is principally due to the increase in the share price of the Company's ADSs while the unrealized gain in 2023 was due to the Private Placement warrants, which reduced in value as they neared expiration in June 2023.

Foreign currency transaction gain/(loss)

The net foreign exchange gain for the three months ended March 31, 2024 was $0.6 million compared to a loss of $1.2 million in for the three months ended March 31, 2023. The net foreign exchange gain is primarily reflecting the impact of the strengthening of the U.S. dollars when translating pound sterling currency balances.

Benefit from research and development tax credit

The benefit from research and development tax credits was $0.5 million for the three months ended March 31, 2023 and 2024, which reflects similar levels of qualifying expenditure in both periods. This tax credit represents eligible cash rebates paid or receivable from the tax authorities in the jurisdictions within which we operate for eligible types of research and development activities and associated expenditure (the “R&D tax credit”).

Other comprehensive loss – Foreign currency translation adjustments

The foreign currency translation adjustment for the three months ended March 31, 2024 was a loss of $0.8 million compared to a gain of $2.3 million for the three months ended March 31, 2023. The $3.1 million change primarily reflects the impact of the strengthening of U.S. dollars when translating from the functional currency of the Company (pound sterling) into the presentational currency (U.S. dollars).

Liquidity and Capital Resources

Overview

Under the current business plan and cash flow forecasts, and in consideration of our ongoing research and development efforts and our general corporate funding requirements, we anticipate that our current on-hand cash resources will extend into 2026. However, we will need additional external funding to complete our development plans and potentially commercialize selected rare disease products. We plan to fund our operations through cash on hand and a combination of non-dilutive funding sources, public or private equity or debt financings or other sources.

We do not currently have any approved product candidates and as a result, have not generated any revenue from product sales. As a result, to date, we have financed our operations primarily through the issuances of our equity securities, convertible debt and warrants. Through these offerings, we raised approximately $209 million, including $12.0 million raised in July 2023 through an “at-the-market” offering pursuant to our Open Market Sale Agreement with Jefferies LLC.

We have also received payments under various license and collaboration agreements, including:

• An upfront payment of $50.0 million under the license and collaboration agreement with Ultragenyx for setrusumab in 2021 and a further milestone payment of $9.0 million in July 2023.
• An upfront payment of $4.0 million under the license and collaboration agreement with Feng Biosciences (formerly OncXerna) for navicixizumab in 2020 and a further milestone payment of $2.0 million in 2022.
• An upfront payment of $1.0 million under the global license agreement with ReproNovo for leflutrozole in December 2023.

Contractual Obligations

As further described in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 27, 2023, under “Item 1. Business—Material Agreements—Novartis Agreements” and “Item 1. Business—Material Agreements—Licensing Agreement with AstraZeneca,” under various agreements with Novartis and AstraZeneca, Mereo has agreed to make milestone payments and pay royalties. The amount, timing, and likelihood of such payments are not known and will remain uncertain for the foreseeable future.

In addition, Mereo enters into contracts in the ordinary course of business with CROs, CMOs, and other vendors to assist in the performance of its research and development activities and other services and products for operating purposes. The contracts with CROs generally provide for termination on notice, and therefore are cancelable contracts. We have manufacturing commitments with CMOs of $3.1 million as of March 31, 2024.

Cash Flows

Comparison of The Three Months Ended March 31, 2024, and 2023

The table below summarizes our cash flows (used in) from operating, investing and financing activities for the three months ended March 31, 2024 and 2023.

22

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2024, was $8.0 million, a decrease of $1.3 million from $9.2 million in the three months ended March 31, 2023. The decrease was primarily driven by the receipt of $1.7 million from our depository to reimburse certain expenses incurred by us in respect of our ADR program and $2.0 million received under a claim on our Directors and Officers insurance policy to reimburse us for certain legal and professional costs incurred in prior years. These inflows were partially offset by approximately $2.0 million higher up-front payments to suppliers, principally for clinical supply manufacturing, as well as payments pursuant to our asset purchase agreements with Novartis.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2024, was $0.7 million, an increase of $0.3 million from $0.4 million in the three months ended March 31, 2023. In both periods, these cash flows relate to payments to acquire intangible assets.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2024 and March 31, 2023 was $ nil.

Operating and Capital Expenditure Requirements

As of March 31, 2024, we had an accumulated deficit of $428.6 million. We expect to continue to report significant operating losses for the foreseeable future as we continue our research and development efforts and seek to obtain regulatory approval of our product candidates and any future product we develop.

We expect to continue to incur expenses in connection with our ongoing development activities related to our product candidates, our outsourced manufacturing activities and other associated costs including the management of our intellectual property portfolio. We also expect to continue to incur costs associated with operating as a U.S. public company listed on Nasdaq and as a domestic registrant.

These costs will increase further if we:

• seek to develop additional product candidates;
• seek regulatory approvals for any of our product candidates that successfully completes clinical trials;
• potentially establish a sales, marketing, and distribution infrastructure and scale-up manufacturing capabilities to commercialize or co-commercialize any product candidates for which we may obtain regulatory approval and chose to commercialize directly;
• expand our intellectual property portfolio;
• add further clinical, scientific, operational, financial, legal and management information systems, and personnel, including personnel to support our development and to support our operations as a U.S. public company listed on Nasdaq; or
• experience any delays or encounter any issues from any of the above, including but not limited to failed studies, complex results, safety issues, or other regulatory challenges.

We expect that our existing cash and cash equivalents will enable us to fund our currently committed clinical trials, operating expenses and capital expenditure requirements into 2026. We have based these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our product candidates and any future product candidates and because the extent to which we may enter into collaborations with third parties for development of any of our product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements will depend on many factors, including:

• The costs for our activities related to our ongoing collaboration with Ultragenyx for setrusumab for the treatment of adults and children with OI; and potential future clinical trials for alvelestat in AATD and other potential indications;
• the costs and timing of manufacturing clinical supplies of our product candidates;
• the costs, timing, and outcome of regulatory review of our product candidates, including post-marketing studies that could be required by regulatory authorities;
• the costs, timing, and outcome of potential future commercialization activities, including manufacturing, marketing, sales, life cycle management and distribution, for our product candidates that we commercialize directly;
• the timing and amount of revenue, if any, received from commercial sales of our product candidates;
• the costs and timing of preparing, filing, and prosecuting patent applications; maintaining and enforcing our intellectual property rights; and defending any intellectual property-related claims, including any claims by third parties that we are infringing, misappropriating or otherwise violating their intellectual property rights;
• the sales price and availability of adequate third-party coverage and reimbursement for our product candidates;
• the effect of competitors and market developments;
• the performance of our collaborators and partners under the existing agreements on setrusumab, navicixizumab and, leflutrozole;
• the extent to which we are able to acquire new product candidates or enter into licensing or collaboration arrangements for our product candidates, although we currently have no commitments or agreements to complete any such transactions;
• milestone and deferred payments under Mereo’s license and option agreement with AstraZeneca;
• whether we need to repay the principal and interest on our Convertible Loan Note due in February 2025. We currently assume it will be converted or otherwise refinanced with new debt or equity; and,
• tax liabilities or other assessments and our ability to claim R&D tax credits or other reliefs.

Our revenues, if any, will be derived from development milestones or sales of any product candidates that we are able to successfully develop, receive regulatory approval for, and commercialize in future years. In the meantime, we will need to obtain substantial additional funds to achieve our business objective.

Adequate additional funds may not be available to us on acceptable terms, or at all. If we raised additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

Any future debt financing or preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute your ownership interests.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, shareholders' ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a shareholder. If we are unable to raise additional funds through partnerships, debt or equity financings when needed, we may be required to delay, limit, reduce, or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our accounting estimates based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The actual impact on our financial performance could differ from these estimates under different assumptions or conditions.

An accounting estimate is considered critical if both (i) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (ii) the impact within a reasonable range of outcomes of the estimates and assumptions is material to our unaudited condensed consolidated financial statements. We believe that there are no estimates and assumptions made in our unaudited condensed consolidated financial statements that rise to this level. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our 2023 Annual Report, which was filed with the SEC on March 27, 2024. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. Other than as disclosed in Note 2 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, there have been no significant changes to our critical accounting estimates from those described in our 2023 Annual Report.

Safe Harbor

See the section titled “Information Regarding Forward-Looking Statements” at the beginning of this Quarterly Report.

There have been no material changes to the Company’s exposure to market risk during the three months ended March 31, 2024. For a discussion of the Company’s exposure to market risk, please refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a 15(e) and 15d 15(e)) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) as of March 31, 2024.

Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at March 31, 2024.

Changes in Internal Control over Financial Reporting.

No changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d – 15(e)) under Exchange Act) occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K as filed with the SEC on March 27, 2024.