TIDMMPH
RNS Number : 0781Q
Mereo BioPharma Group plc
16 June 2020
Mereo BioPharma Group plc
("Mereo" or the "Company" or the "Group")
Financial Results for the Year Ended December 31, 2019
Operational progress, positioned for clinical milestones in
oncology and rare diseases
London and Redwood City, Calif., June 16, 2020 - Mereo BioPharma
Group plc (NASDAQ: MREO, AIM: MPH), "Mereo" or "the Company", a
clinical-stage biopharmaceutical company focused on oncology and
rare diseases, today announces financial results for the 12 months
ended December 31, 2019.
"We are very pleased with the substantial operational progress
we have made throughout 2019 and particularly, over the past
several months," said Dr. Denise Scots-Knight, Chief Executive
Officer of Mereo. "We announced earlier this month that we have
taken the strategic decision to focus on advancing etigilimab, (an
"Anti-TIGIT") for the treatment of solid tumors, alongside our rare
disease portfolio including setrusumab for osteogenesis imperfecta,
which we plan to partner prior to the initiation of a pivotal Phase
3 study, and alvelestat for alpha-1 antitrypsin deficiency which is
in an ongoing Phase 2 proof-of-concept study. Coupled with the
completion of a $70 million financing earlier this month, we
believe we are entering a transformational period for Mereo and are
extremely well positioned to execute on our strategy."
2019 and Recent Financial Highlights
-- Cash resources (1) of GBP16.3 million as at December 31, 2019
(December 31, 2018 GBP27.5 million). Since the year end, Mereo has
raised GBP60.8 million in Private Placements, GBP3.8 million from a
convertible equity financing and GBP3.2 million from licensing
-- Loss after tax for the 12-month period of GBP35.3 million
(2018: GBP32.0 million) or 39 pence per ordinary share (2018:
45pence per ordinary share)
-- Net cash used in operating activities for the year ended
December 31, 2019 of GBP45.9 million (full year 2018: GBP23.1
million).
(1) Cash resources is defined as the aggregate of cash and
short-term deposits and short-term investments
Mereo BioPharma Contacts:
Mereo +44 (0)333 023 7300
Denise Scots-Knight, Chief Executive Officer
Cantor Fitzgerald Europe (Nominated Adviser
and Broker to Mereo ) +44 (0)20 7894 7000
Phil Davies
Will Goode
Burns McClellan (US Public Relations Adviser
to Mereo) +01 (0) 212 213 0006
Lisa Burns
Steve Klass
FTI Consulting (UK Public Relations Adviser
to Mereo ) +44 (0)20 3727 1000
Simon Conway
Ciara Martin
Investors investors@mereobiopharma.com
An electronic copy of Mereo's annual report and accounts will be
made available today on the Company's website
www.mereobiopharma.com . In addition, a copy of the Form 20-F has
been filed with the SEC. This press release does not constitute an
offer to sell or the solicitation of an offer to buy securities,
and shall not constitute an offer, solicitation or sale in any
jurisdiction in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the
securities laws of that jurisdiction.
Forward-Looking Statements
This communication contains "forward-looking statements." All
statements other than statements of historical fact contained in
this communication are forward-looking statements within the
meaning of Section 27A of the United States Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the United
States Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Forward-looking statements usually relate to future events
and anticipated revenues, earnings, cash flows or other aspects of
our operations or operating results. Forward-looking statements are
often identified by the words "believe," "expect," "anticipate,"
"plan," "intend," "foresee," "should," "would," "could," "may,"
"estimate," "outlook" and similar expressions, including the
negative thereof. The absence of these words, however, does not
mean that the statements are not forward-looking. These
forward-looking statements are based on the Company's current
expectations, beliefs and assumptions concerning future
developments and business conditions and their potential effect on
the Company. While management believes that these forward-looking
statements are reasonable as and when made, there can be no
assurance that future developments affecting the Company will be
those that it anticipates.
All of the Company's forward-looking statements involve known
and unknown risks and uncertainties (some of which are significant
or beyond its control) and assumptions that could cause actual
results to differ materially from the Company's historical
experience and its present expectations or projections. The
foregoing factors and the other risks and uncertainties that affect
the Company's business, including those described in its Annual
Report on Form 20-F and other documents filed from time to time by
the Company with the United States Securities and Exchange
Commission and those described in other documents the Company may
publish from time to time should be carefully considered. The
Company wishes to caution you not to place undue reliance on any
forward-looking statements, which speak only as of the date hereof.
The Company undertakes no obligation to publicly update or revise
any of our forward-looking statements after the date they are made,
whether as a result of new information, future events or otherwise,
except to the extent required by law.
About Mereo BioPharma
Mereo BioPharma is a biopharmaceutical company focused on the
development and commercialization of innovative therapeutics that
aim to improve outcomes for patients with oncology and rare
diseases. Mereo's strategy is to selectively acquire product
candidates for oncology and rare diseases that have already
received significant investment from pharmaceutical and large
biotechnology companies and that have substantial preclinical,
clinical and manufacturing data packages. Mereo's lead oncology
product candidate, etigilimab, an anti-TIGIT, has completed a Phase
1a and Phase 1b for a range of solid tumor types and the second
product candidate, navicixizumab, for ovarian cancer has been
licensed to Oncologie Inc. for up to $300M in milestone payments.
Mereo's lead rare disease product candidate, setrusumab, has
completed a Phase 2b dose-ranging study in adults with osteogenesis
imperfecta ("OI") and a pivotal Phase 3 study design in paediatrics
has been agreed with the FDA and EMA. Mereo's second lead product
candidate, alvelestat, is being investigated in a Phase 2
proof-of-concept clinical trial in patients with alpha-1
antitrypsin deficiency ("AATD"). Mereo plans to form a strategic
partnership for setrusumab prior to initiation of the paediatric
pivotal study
Additional Information
The person responsible for arranging the release of this
information on behalf of the Company is Charles Sermon, General
Counsel.
CHAIRMAN AND CEO'S STATEMENT
Introduction
The Group's strategy continues to be to build a portfolio of
oncology and rare disease products acquired from pharmaceutical and
large biotechnology companies and to selectively partner or
potentially develop these through regulatory approval and
subsequent commercialization.
During the year, we completed our acquisition of OncoMed, became
a US listed company and acquired two clinical stage oncology
programs, etigilimab (an "Anti-TIGIT") and navicixizumab (or
"Navi"). Successful integration of OncoMed has allowed us to
broaden our asset base and significantly strengthen our cash
position, enabling us to progress beyond our key clinical
milestones. We have also gained the skills and expertise of an
operational base in the U.S. including highly relevant regulatory
expertise. Our current portfolio consists of six clinical-stage
product candidates. Etigilimab represents an attractive investment
opportunity for the Company given the recent developments with
other Anti-TIGIT programs. In January 2020, we announced that we
had signed a global licensing deal with Oncologie, Inc. on our
second oncology program, navicixizumab, for ovarian cancer. Our
rare disease and orphan drug product candidates, setrusumab for the
treatment of OI and alvelestat for the treatment of severe AATD,
represent attractive development opportunities for us. We plan to
partner setrusumab prior to initiation of the pivotal study and
subsequent commercialization. Prior to our acquisition of OncoMed,
each of our rare disease product candidates had generated positive
clinical data for their respective target indications or for a
related indication.
During the year, we made significant progress across our product
development programs both in terms of clinical development and
regulatory strategy. On November 11, 2019, we reported 12-month
top-line data from our Phase 2b dose-ranging clinical trial for
setrusumab in adults with Type I, III or IV OI. The study enrolled
112 patients in the U.S. and Europe and randomized patients
originally to one of four different blinded monthly dosing regimens
of setrusumab: high, medium, low and placebo. The study was
subsequently revised to convert the placebo arm into an open-label
arm where patients received the high dose regimen of setrusumab.
The data demonstrated setrusumab to have a dose-dependent
bone-building activity measured by well-established bone density
scans ("DXA scans"). In the high dose arm, we also saw fewer
fractures than in the medium or the low dose arms. Setrusumab was
demonstrated to be safe and well-tolerated in the patients
participating in the Phase 2b adult study, as well as by the 83
subjects across the four Phase 1/2 setrusumab studies completed to
date.
After the end of the year, on January 14, 2020, we reported
additional positive data from our Phase 2b dose-ranging clinical
trial. Setrusumab demonstrated a dose dependent increase in bone
strength stiffness and failure load at the radius as measured by
Finite Element Analysis ("FEA"). This was a second prespecified
primary end point and reached statistical significance in the high
dose cohort but not in the medium and low dose cohorts. These FEA
data are consistent with an effect of setrusumab at the high dose
improving radius bone strength as evidenced by a better ability to
resist experimental deformation and improved failure load.
We announced a successful end of Phase Type B meeting on
navicixizumab in July 2019 during which we agreed the outline of a
Phase 2 registrational study for ovarian cancer and an accelerated
approval pathway. Navicixizumab was also granted fast-track
designation in the second half of 2019.
In February 2020, we completed a GBP3.8m million convertible
equity financing with Novartis Pharma AG ("Novartis"). Also in
February we completed two Securities Purchase Agreements with Boxer
Capital of Tavistock Group, and Aspire Capital Fund LLC ("Aspire")
which raised a total of $6 million before expenses. The Agreement
with Aspire included the ability to issue up to an additional $25
million of American Depositary Shares over a three-year period.
On February 28, 2020, we announced the successful completion of
a Type B End-of-Phase 2 meeting with the U.S. FDA to discuss the
development of setrusumab for the treatment of children with OI.
Following the review of the data from the Phase 2b study with
setrusumab in adults with OI, and the design for our proposed Phase
3 study in children with OI, the U.S. FDA agreed on the design of a
Phase 3 pediatric study in OI to be completed prior to the
submission of a potential BLA in the U.S. This is in line with our
proposed pivotal pediatric study design, which has already been
agreed to in principle with the EMA in August 2018.
On June 4, 2020, we announced the completion of a private
placement of $70 million (GBP56 million) (the "Fundraising") before
commission and expenses with a number of new and existing
principally U.S based institutional and accredited investors.
OrbiMed led the Fundraising with participants including Vivo
Capital, Surveyor Capital (a Citadel company), Pontifax Venture
Capital, Samsara BioCapital, Commodore Capital, and funds managed
by Janus Henderson Investors alongside existing investors Boxer
Capital of Tavistock Group and Aspire.
Update on impact of COVID-19
Coronavirus disease 2019 ("COVID-19") is an infectious
respiratory disease that was first identified in 2019 in Wuhan,
China and has since spread globally. The impact COVID-19 is
evolving rapidly and its future effects are uncertain.
We are actively monitoring how the effects and risks of COVID-19
impact our day-to-day operations, including our ongoing clinical
trial activities:
-- Our current activities on setrusumab for potential treatment
of OI are focussed on completion of the ASTEROID Phase 2b extension
study in adults with OI and preparations for the Phase 3 pediatric
trial, which subject to partnering, we intend to start in the
second half of 2020. We currently expect no change to this
timeline. Our Phase 2b ASTEROID study in OI is fully recruited with
topline results, as discussed above, previously announced in
November 2019. Patients who enrolled in this study are in a
one-year follow up post treatment extension phase.
-- Our Phase 2 alvelestat trial recruits individuals with
alpha-1 antitrypsin deficiency-related lung disease, who are
potentially at greater risk from COVID-19 exposure. As a result,
and as we announced in March 2020, recruitment into our Phase 2
alpta-1 antitrypsin study will be delayed, with topline data now
expected in the second half of 2021.
As a business, we have taken necessary measures across our sites
in the U.K. and U.S. to ensure that our employees and other key
stakeholders best adhere to the advice set out by the relevant
authorities. Such measures have included the introduction of remote
working arrangements, reduced face to face contact by encouraging
the use of teleconferencing, a ban on domestic and international
travel as well as other measures considered necessary by our
recently formed COVID-19 committee which is responsible for
business continuity planning during this challenging time.
Organizational change
On March 27, 2020, we announced that Michael Wyzga who currently
serves as a Non-Executive Director, will become the Interim Chief
Financial Officer following the announced departure of Richard
Jones, the Company's current Chief Financial Officer ("CFO").
Richard Jones will remain in his position as CFO for a
transitionary period of up to five months from March 2020.
Michael Wyzga previously served as President and Chief Executive
Officer and a member of the Board of Directors of Radius Health,
Inc. Prior to that he served in various senior management positions
at Genzyme Corporation, including as CFO from July 1999 until
November 2011. Following completion of the Fundraising, we now
intend to commence a search for a permanent CFO.
Business overview
Oncology Disease Product Candidates
-- Etigilimab (OMP-313M32): Etigilimab is an antibody against
TIGIT (T-cell immunoreceptor with Ig and ITIM domains). TIGIT is a
next generation checkpoint receptor shown to block T-cell
activation and the body's natural anti-cancer immune response.
Etigilimab is an IgG1 monoclonal antibody which binds to the human
TIGIT receptor on immune cells with a goal of improving the
activation and effectiveness of T-cell and NK cell anti-tumor
activity. Mereo completed a Phase 1a dose escalation clinical trial
with etigilimab in patients with advanced solid tumors and enrolled
patients in a Phase 1b study in combination with nivolumab in
selected tumor types.
23 patients were treated in the Phase 1a dose escalation study
with doses up to 20mg/kg Q2W. Tumor types included colorectal
cancer, endometrial cancer, pancreatic cancer and other tumor
types. No dose limiting toxicities were observed. In the Phase 1b
combination study, a total of ten patients, nine of whom had
progressed on prior anti-PD1/PD-L1 therapies were enrolled at doses
of 3, 10, and 20 mg/kg. Tumor types included gastric cancer and six
other tumor types. Eight patients were evaluable for tumor growth
assessment, and all of these patients had progressed on PD1/PD-L1
therapies with best responses including two patients with a partial
response and stable disease. Patients remained on study for up to
224 days. No dose limiting toxicities (DLTs) were observed.
The only treatment-related adverse event in the Phase 1a portion
of the study with an incidence rate greater than 20 per cent. was
rash (35 per cent.), and the most common treatment-related adverse
events in the Phase 1b portion of the study were rash (40 per
cent.), fatigue (30 per cent.) and pruritus (20 per cent.) There
was only one treatment-related serious adverse event in the Phase
1a portion (autoimmune hepatitis) and there were no
treatment-related serious adverse events in the Phase 1b portion of
the study. The Phase 1b study has now completed.
The etigilimab program was previously subject to an exclusive
license option with Celgene Corporation ("Celgene") as part of a
collaboration agreement from 2013 with OncoMed ("the Collaboration
Agreement"). In June 2019, we announced that Celgene had notified
OncoMed that Celgene had decided, in light of strategic product
portfolio considerations, not to exercise its option to license
etigilimab. The Collaboration Agreement was terminated with respect
to etigilimab effective on October 11, 2019. As a result, we have
worldwide rights to the etigilimab program.
-- Navicixizumab (OMP-305B83): Navi is a bispecific antibody
that inhibits delta-like ligand 4 (DLL4) and vascular endothelial
growth factor VEGF). We acquired this therapeutic product in the
merger with OncoMed. This antibody is intended to have
anti-angiogenic and anticancer stem cell activity. In a Phase 1a
clinical trial, Navi demonstrated single agent activity. Following
this we conducted a Phase 1b clinical trial in ovarian cancer, in
combination with paclitaxel, in platinum-resistant ovarian cancer.
A successful FDA Type B meeting was held in July 2019 and the
potential for accelerated approval was discussed. Navicixizumab has
also been granted Fast Track Approval by the FDA. In January 2020
we completed a global license agreement with Oncologie, Inc.
("Oncologie") for the further development and commercialization of
Navi.
Rare Disease Product Candidates
-- Setrusumab (BPS-804): Setrusumab is a novel antibody we are
developing as a treatment for OI, a rare genetic disease that
results in bones that can break easily and is commonly known as
brittle bone disease. OI is a debilitating orphan disease for which
there are no treatments approved by the FDA or EMA. It is estimated
that OI affects a minimum of 25,000 people in the United States and
approximately 32,000 people in Germany, Spain, France, Italy, and
the United Kingdom. Setrusumab is designed to inhibit sclerostin, a
protein that inhibits the activity of bone-forming cells. We
believe setrusumab's mechanism of action is well suited for the
treatment of OI and has the potential to become a novel treatment
option for patients that could reduce fractures and improve patient
quality of life.
In 2016, we obtained orphan drug designation in OI for
setrusumab in the United States and the EU and, in November 2017,
it was accepted into the Priority Medicines scheme ("PRIME") of the
EMA. Prior to our acquisition of setrusumab, Novartis conducted
four clinical trials in 106 patients and healthy volunteers. A
Phase 2 clinical trial of setrusumab in OI showed statistically
significant improvements in bone formation biomarkers and bone
mineral density. In April 2017, we initiated a Phase 2b clinical
trial for setrusumab in adults in the United States, Europe and
Canada. The trial is randomized with three blinded arms at high,
medium and low doses to establish the dose response curve and an
open label arm at the top dose. We reported top-line data on the
three blinded dose ranging arms in November 2019 with the results
supporting progression of setrusumab into a pediatric pivotal study
in OI.
Following the completion of the dosing part of the study,
patients are continuing to be followed for a further twelve months
to examine the off-effects of setrusumab. We have also agreed on a
PIP for setrusumab with the EMA and in February 2020, we announced
the successful completion of a Type B End-of-Phase 2 meeting with
the FDA to discuss the development of setrusumab for the treatment
of children with OI in the United States. We intend to partner
setrusumab prior to conducting a pivotal trial of setrusumab in
children with severe OI to begin in late 2020, with fracture rate
as the primary endpoint. We believe that the results from this
trial, if favorable, will be sufficient to support the submission
of an MAA to the EMA for setrusumab for the treatment of children
with severe OI and a CMA for the treatment of OI in adults in the
EU.
-- Alvelestat (MPH-966): Alvelestat is a novel, oral small
molecule we are developing for the treatment of severe AATD, a
potentially life-threatening, rare, genetic condition caused by a
lack of effective alpha-1 antitrypsin ("AAT"), a protein that
protects the lungs from enzymatic degradation. This degradation
leads to severe debilitating diseases, including early-onset
pulmonary emphysema, a disease that irreversibly destroys the
tissues that support lung function. There are an estimated 50,000
patients in North America and 60,000 patients in Europe with severe
AATD. Alvelestat is designed to inhibit NE, a neutrophil protease,
which is a key enzyme involved in the destruction of lung tissue.
We believe the inhibition of NE has the potential to protect AATD
patients from further lung damage.
Prior to our license of alvelestat, AstraZeneca conducted 12
clinical trials involving 1,776 subjects, including trials in
bronchiectasis and CF. Although these trials were conducted in
diseases other than AATD, we believe the data demonstrated
potential clinical benefit and biomarker evidence of treatment
effect for AATD patients. We have initiated a Phase 2
proof-of-concept clinical trial in patients with severe AATD in the
United States and the EU and as previously announced, expect to
report top-line data from this trial in the second half of
2021.
Other Product Candidates for Partnering
Our portfolio of non-oncology/non-rare disease products consists
of the following product candidates:
-- Acumapimod (BCT-197): Acumapimod is a p38 MAP kinase
inhibitor we are developing as an oral first-line acute therapy for
patients with AECOPD. COPD is a non-fully-reversible, progressive
lung disease in which inflammation plays a central role. There are
an estimated 16 million people in the United States diagnosed with
COPD. Of all hospital admissions in the United States related to
COPD, approximately 63 per cent. are for AECOPD patients. We
believe acumapimod offers a potential new treatment for controlling
inflammation by targeting pathways that drive the pathological
mechanism behind AECOPD.
Since there are currently no approved therapies in the United
States or the EU to treat AECOPD, we believe that there is
significant medical need for a drug which is disease-modifying. We
believe acumapimod could potentially prevent AECOPD instead of just
treating the symptoms and has the potential to improve quality of
life, slow the progression of the disease, and significantly reduce
direct healthcare costs.
Prior to our acquisition of acumapimod, Novartis conducted five
clinical trials in 459 patients and healthy volunteers, including a
Phase 2a trial in AECOPD patients that showed a clinically
meaningful improvement in lung function at the highest dose.
We conducted a Phase 2 dose-ranging clinical trial for
acumapimod in 282 patients with AECOPD to explore two different
dosing regimens on top of standard of care, which included
steroids, antibiotics, and bronchodilators. Both dosing regimens
showed a statistically significant change in FEV1 from baseline to
Day 7, meeting the trial's primary endpoint on an intent-to-treat
patient population basis. In addition, dose-dependent,
statistically significant reductions in hsCRP and fibrinogen were
shown with treatment with acumapimod, with hsCRP remaining
suppressed through the 26-week observation period. Treatment with
acumapimod also showed a statistically significant reduction in the
number of COPD exacerbations that required hospitalization.
Consistent with these results, there was a significant reduction in
the use of corticosteroid and antibiotics in the follow-up portion
of the study. In addition, acumapimod was reported to be safe and
well tolerated. Based on these results, we intend to explore
strategic options with third parties for the further development of
acumapimod.
In addition, in April 2019, we announced a successful end of
Phase 2 meeting with the FDA regarding acumapimod. In the meeting,
we and the FDA agreed on a development plan for acumapimod. In
September 2019, we had a positive SAWP meeting with the EMA.
-- Leflutrozole (BGS-649): Leflutrozole is a once-weekly oral
therapy we are developing for the treatment of HH in obese men. HH
is a clinical syndrome that results from inadequate levels of
testosterone. Based on WHO estimates and scientific data, we
estimate there are approximately seven million cases of HH in obese
men in the United States. In these men, a decline in testosterone
is exacerbated by high levels of the aromatase enzyme, which is
present in fat tissue and leads to a reduction in testosterone.
Leflutrozole is designed to inhibit the aromatase enzyme and is
being developed to restore normal levels of testosterone without
causing excessively high testosterone levels or reducing the levels
of LH or FSH. Both LH and FSH play key roles in sperm formation and
LH plays a key role in endogenous testosterone formation. In
contrast to current therapies for HH, which involve the exogenous
administration of testosterone and lead to further down regulation
of LH and FSH, we believe that leflutrozole, by preserving sperm
formation through LH and FSH production, may present a benefit to
patients.
Prior to our acquisition of leflutrozole, Novartis conducted
seven clinical trials exposing 131 patients and healthy volunteers
to leflutrozole, including a Phase 2 proof-of-concept trial for HH
in obese men in which leflutrozole normalized testosterone levels
in all patients and demonstrated an increase in LH and FSH
levels.
In March 2018, we reported top-line data from our completed
Phase 2b dose-ranging clinical trial of leflutrozole for the
treatment of HH in obese men. The trial enrolled 271 patients who
were administered placebo or one of three doses of leflutrozole.
The trial met our primary endpoint of normalizing testosterone
levels in at least 75 per cent. of subjects after 24 weeks of
treatment and all of the secondary endpoints, including normalizing
testosterone in at least 90 per cent. of patients after 24 weeks of
treatment at the two highest doses and improvement in LH and FSH
levels at all three doses. Leflutrozole was reported to be
well-tolerated in the trial. A subset of 143 patients entered into
a six-month safety extension study. Following the positive result
of the safety extension study for leflutrozole, we convened an
advisory board meeting and concluded that the future development of
leflutrozole should focus on male infertility. We intend to explore
strategic options with third parties for the further development of
leflutrozole.
New product opportunities
To support our aim of becoming a leading oncology and rare
disease company, we continue to seek and review new product
opportunities to expand and grow our portfolio in oncology and rare
diseases. There continues to be a good number of opportunities
arising from large pharma and biotechnology companies as they
continue to reappraise development pipelines on an ongoing basis to
allow them to focus on a smaller number of strategically targeted
therapeutic areas.
Future outlook
With the closing of the Fundraising with a very high-quality
group of institutional and accredited investors in June 2020 and
the evolution of our strategy to focus on oncology and rare
diseases, 2020 is set to be an important year for the Company. We
expect to initiate our phase 1b for etigilimab in a number of solid
tumors, to continue to enrol the Phase 2 study for alvelestat in
AATD patients and to report on the Phase 2b adult extension study
for setrusumab in adults with OI.
TIGIT blockade in combination with anti-PD1/PD-L1 antibodies has
recently been highlighted as a potential next generation immunology
target for the treatment of patients with advanced solid
malignancies. We are excited to move our program forward on the
back of our Phase 1a mono therapy and Phase 1b combination
data.
Setrusumab for OI is now Phase 3 ready as a result of the
successful end of Phase 2b meeting with the FDA and the approval of
a Paediatric Investigational Plan ("PIP") by the EMA. We plan to
initiate the Phase 3 study in children with OI once we have secured
a strategic partnership for this program which may include regional
partnerships or a global licensing deal.
Following the partnership with Oncologie for Navi, we continue
to focus on partnering opportunities for our other product
candidates (non-oncology/non-rare disease) acumapimod and
leflutrozole.
Finally, we are now funded into early 2022 providing the Company
sufficient balance sheet strength and runway to deliver on our
clinical and business development milestones.
Dr. Peter Fellner Dr. Denise Scots-Knight
Chairman Chief Executive
Officer
June 15, 2020 June 15,2020
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
for the years ended December 31, 2017, 2018 and 2019
Notes Year ended December 31,
2017 (in 2018 2019 (in
GBP '000) GBP '000)
(in GBP '000)
Research and development expenses (34,607) (22,703) (23,608)
Administrative expenses (10,697) (11,775) (15,909)
Operating loss (45,304) (34,478) (39,517)
Net income recognized on acquisition
of subsidiary 5 - - 1,035
Finance income 827 307 377
Finance charge (1,090) (3,091) (3,496)
Net foreign exchange (loss)/gain (1,384) (44) 483
Loss before tax 7 (46,951) (37,306) (41,118)
Taxation 8 8,152 5,277 6,274
Loss attributable to equity holders
of the parent (38,799) (32,029) (34,844)
Other comprehensive income - items
that may be reclassified to profit
or loss
Net fair value gain/(loss) on investments
in debt instruments held at fair
value - - -
Exchange differences on translation
of foreign operations - - (499)
Other comprehensive income, net
of tax - - (499)
Total comprehensive loss attributable
to equity holders of the parent (38,799) (32,029) (35,343)
Basic and diluted loss per share 9 (0.56) (0.45) (0.39)
CONSOLIDATED BALANCE SHEET
as at December 31, 2018 and 2019
Year Ended December
31,
Notes 2018 2019 (in
GBP '000)
(in GBP'000)
Assets
Non-current assets
Property, plant and equipment 149 11,558
Intangible assets 32,632 44,456
32,781 56,014
Current assets
Prepayments 1,067 2,111
R&D tax credits 5,277 10,426
Other taxes recoverable - 979
Other receivables 609 572
Short-term investments 2,500 -
Cash and short-term deposits 25,042 16,347
34,495 30,435
Total assets 67,276 86,449
Equity and liabilities
Equity
Issued capital 10 214 294
Share premium 118,492 121,684
Other capital reserves 18,593 59,147
Employee Benefit Trust shares (307) (1,305)
Other reserves 7,000 7,000
Accumulated loss (111,221) (146,065)
Translation reserve - (499)
Total equity 32,771 40,256
Non-current liabilities
Provisions 2,641 1,449
Interest-bearing loans and borrowings 11 14,647 5,373
Warrant liability 12 1,006 131
Other liabilities 13 34 44
Lease liability 4 - 9,318
18,328 16,315
Current liabilities
Trade and other payables 4,570 6,352
Accruals 4,437 5,138
Provisions 332 309
Interest-bearing loans and borrowings 11 6,838 15,139
Contingent consideration liability - 354
Lease liability 4 - 2,586
16,177 29,878
Total liabilities 34,505 46,193
Total equity and liabilities 67,276 86,449
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 2017, 2018 and 2019
Notes Year ended December 31, 2019 (in
GBP '000)
2017 (in GBP '000) 2018
(in GBP'000)
Operating activities
Loss before tax (46,951) (37,306) (41,118)
Adjustments to reconcile loss before tax
to net cash flows:
Depreciation of property, plant and equipment 36 39 1,577
Share-based payment expense 3,652 2,190 1,636
Net foreign exchange loss/(gain) 1,384 44 (483)
Provision for social security contributions
on employee share options 1,116 (1,446) (738)
Provision for deferred cash consideration - 443 221
Interest earned (827) (307) (377)
Finance charges 1,090 1,916 3,731
Modification gain on bank loan - - (456)
Modification loss on bank loan - 730 -
Gain on bargain purchase 5 - - (3,681)
Fair value remeasurement on contingent consideration - - 354
Working capital adjustments:
(Increase)/decrease in trade and other
receivables (840) 804 (936)
Increase/(decrease) in trade and other payables 3,860 1,602 (6,730)
Tax received 8 5,331 8,152 1,069
Net cash flows (used in) operating activities (32,149) (23,139) (45,931)
Investing activities
Cash acquired from acquisition 5 - - 10,074
Purchase of property, plant and equipment (16) (36) (21)
Disposal of property, plant and equipment - 2 -
Purchase of license (2,280) - -
(Investments)/proceeds from sale of short-term
investments (2,500) - 32,865
Interest earned 1,052 286 377
Net cash flows (used in)/from investing
activities (3,744) 252 43,295
Financing activities
Proceeds from issue of ordinary shares 15,000 273 -
Transaction costs on issue of shares (730) (8) (761)
Proceeds from issue of bank loan 20,000 455 -
Transaction costs on bank loan (200) (921) -
Interest paid on bank loan (327) (1,645) (1,739)
Proceeds from TAP agreement - 78 -
Purchase of treasury shares - (307) (998)
Payment of lease liabilities 4 - - (2,212)
Net cash flows from/ (used in) financing
activities 33,743 (2,075) (5,710)
Net (decrease) in cash and cash equivalents (2,150) (24,962) (8,346)
Cash and cash equivalents at January 1 53,578 50,045 25,042
Effect of exchange rate changes on cash
and cash equivalents (1,383) (41) (349)
Cash and cash equivalents at December 31 50,045 25,042 16,347
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the years ended December 31, 2017, 2018 and 2019
Issued Share Other Employee Other Accum-ulated Translation Total
capital premium capital Benefit reserves losses reserve equity
reserves Trust
At December 31, 2016 (in GBP'000)
79,255
-------
193 99,975 12,666 - 7,000 (40,579) - -------
Loss for the year
to December 31, 2017
Share-based payments - - - - - (38,799) - (38,799)
- share options (Note
26)
Share-based payments - - 3,028 - - - - 3,028
- LTIPs (Note 26)
Share-based payments
- deferred bonus
shares - - 298 - - - - 298
(Note 26)
Share-based payments
- deferred equity -
consideration (Note - 326 - - - - 326
26) Issue of share
capital on - - 1,331 - - - - 1,331
April 4, 2017 (Note
18) Issue of share
capital on conversion
of loan note 15 14,985 - - - - - 15,000
(Note 18)
Issue of share
capital
for
Novartis bonus shares 2 1,397 - - - - - 1,399
(Note 18)
Equity element of
convertible loan
(Note 19) Conversion
of convertible loan 2 1,081 (1,083) - - - - -
(Note 19)
Issue of share - - (207) - - - - (207)
capital
on October 31, 2017 - - - - - 62 - 62
(Note 18) Transaction
costs on issuance
of share capital
(Note 18) ------- 1,519 - - - - - 1,520
1 (730) - - - - - (730)
- ------- ------- ------- ------- ------- ------- -------
62,483
-------
(79,316)
At December 31, 2017 213 118,227 16,359 7,000 ------- ------- -------
Loss for the year ------- ------- -
to -------
December 31, 2018 - - - - - (32,029) - (32,029)
Adoption of IFRS
9 (Note 4) Share-based
payments - - - - - - 124 - 124
- share options (Note
26) Share-based payments
- LTIPs (Note 26) 1,871 - - - - 1,871
Issue of share capital
on - - 319 - - - - 319
June 1, 2018 (Note
18) Issue of share
capital on August
3, 2018 on exercise
of options - 150 - - - - - 150
(Note 18)
Issue of share capital
on October 22, 2018
on exercise of options - 13 - - - - - 13
(Note 18)
Issue of warrants
for 1 110 - - - - - 111
TAP agreement (Note - - 44
18) Transaction costs - 44 - - -
on issuance of share - - (8)
capital (Note 18) (8) - - - -
Purchase of treasury - - (307) (307)
shares (Note 28) - ------- - ------- - - - -------
- (111,221) -
At December 31, 2018 214 118,492 18,593 (307) 7,000 ------- ------- 32,771
Issued Share Other Employee Accum-ulated Translation Total
capital premium capital Benefit Other losses reserve equity
Loss for the year reserves Trust reserves
to (in GBP'000)
December 31, 2019
Currency translation
of foreign operations
Net fair value
gain/(loss) on
investments in
debt instruments
held at fair value
(Note 25) Share-based
payments - - - - - (34,844) - (34,844)
- - - - - - (499) (499)
- - - - - - - -
- share options
(Note 26) Share-based
payments - - 1,543 - - - - 1,543
- LTIPs (Note
26)
Issue of share
capital on - - 93 - - - - 93
April 23, 2019
(Note 18) Transaction
costs related
to issuance of
share capital
on April 23, 2019 74 - 40,818 - - - - 40,892
(Note 18)
Issue of share
capital on
conversion of
loan note - (761) - - - - - (761)
(Note 18)
Issue of share
capital on
Novartis bonus
shares 3 2,366 - - - - - 2,369
(Note 18)
Equity element
of
convertible loan
note 3 1,587 (1,590) - - - - -
(Note 18) ------- - (310) - - - - (310)
Purchase of treasury - - - (998) - - - (998)
shares (Note 28) - ------- ------- ------- ------- ------- ------- -------
------- 40,256
At December 31, 294 121,684 59,147 (1,305) 7,000 (146,065) (499) -------
2019 ------- -------------- -------------- -------------- -------------- -------------- -------------- -------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate information
Mereo BioPharma Group plc (the "Company") is a clinical-stage,
U.K.-based biopharmaceutical company focused on oncology and rare
diseases.
The Company is a public limited company incorporated and
domiciled in the U.K., and registered in England, with our shares
publicly traded on the Alternative Investment Market of the London
Stock Exchange under the ticker symbol MPH. The Company is also
listed on the Nasdaq Global Market via American Depositary Shares
("ADSs") under the ticker symbol MREO. The Company's registered
office is located at Fourth Floor, 1 Cavendish Place, London, W1G
0QF, United Kingdom.
The consolidated financial statements of Mereo BioPharma Group
plc and its subsidiaries (collectively, the "Group") for the year
ended December 31, 2019 were authorized for issue in accordance
with a resolution of the Directors on June 14, 2020. The principal
activities of the Group is the research and development of novel
pharmaceutical products.
On April 23, 2019, the Group completed the acquisition of
OncoMed Pharmaceuticals, Inc. ("OncoMed"), a company which is based
in California and was previously a public company listed on the
Nasdaq Global Market in the U.S.
2. Significant accounting policies
2.1 Basis of preparation
The Group's consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board
(IASB) and adopted by the E.U. and in accordance with the Companies
Act 2006.
The financial statements are presented in pound sterling
("GBP'000"), which is the functional and presentational currency of
the Group. All amounts disclosed in the financial statements and
notes have been rounded off to the nearest thousand currency units,
unless otherwise stated.
2.2 Revision of previously issued financial statements
During 2019, we identified a classification error in our
statement of comprehensive loss for the year ended December 31,
2018 related to loan modification expense. In correcting the error,
administrative expenses reduced by GBP0.7 million and finance
charges increased by an equivalent amount. There was no impact on
net loss. We evaluated the materiality of the error quantitatively
and qualitatively and concluded it was not material to our
previously issued Consolidated Financial Statements as a whole for
the year ended and as of December 31, 2018.
2.3 Basis of consolidation
The consolidated financial information comprises the financial
statements of Mereo BioPharma Group plc and its subsidiaries as at
December 31, 2019. Subsidiaries are all entities over which the
Group has control. The Group controls an entity when the Group is
exposed to, or has rights to, variable returns from its involvement
with the entity and has the ability to affect those returns through
its power over the entity.
Subsidiaries are fully consolidated from the date on which
control is transferred to the Group. They are deconsolidated from
the date that control ceases. Intercompany transactions, balances
and unrealized gains on transactions between Group companies are
eliminated in preparing the consolidated financial statements.
Accounting policies of subsidiaries are consistent with the
policies adopted by the Group.
The Company has an employee share trust to facilitate share
transactions pursuant to employee share schemes. Although the trust
is a separate legal entity from the Group, it is consolidated into
the Group's results in accordance with the IFRS 10 rules on special
purpose vehicles. The Company is deemed to control the trust
principally because the trust cannot operate without the funding
the Group provides.
2.4 Segmental information
Management views the Group as a single portfolio of product
candidates. Only research and development expenses are monitored at
a product candidate level, however the Chief Operating Decision
Maker ("CODM") makes decisions over resource allocation at an
overall portfolio level. The Group's financing is managed and
monitored on a consolidated basis.
Following the acquisition of OncoMed during the year,
non-current assets held by the Group are located in the United
Kingdom and United States. As at December 31, 2019, approximately
GBP22.4 million of non-current assets are located in the United
States.
The Group's CODM is the executive leadership team which is
comprised of several individuals including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"). The executive
leadership team is responsible for managing the operating results
of the business.
The operations of the Group are mostly influenced by the timing
of progression on underlying clinical development programmes across
product candidates which remain under development.
2.5 Going concern
As at May 31, 2020 the group had total cash resources (1)GBP10.1
million. Taken together with the private placement which completed
on June 3, 2020 and which raised net proceeds of approximately
GBP51.7 million, the group has current total cash resources of
GBP61.8 million.
The Directors have prepared detailed cashflow forecasts for the
30-month period to December 31, 2022 based on the delivering the
business plan objectives set out in the strategic report which
include:
-- Completion of the adult Phase 2b extension study for setrusumab
-- Completion of the current Phase 2 study for alvelestat
-- Commencement later in 2020 of a new Phase 1b study for etiligimab
These forecasts indicate that the group has a total cash runway
into 2022 and will have sufficient funds to meet its liabilities as
they fall due for at least the next 12 months.
In preparing these forecasts the directors have considered the
impact of COVID-19 and in particular the unprecedented burden on
health systems in impacted countries around the world. As a result,
clinical centres have diverted resources away from the performance
of clinical trials and because of that and the vulnerability of
patients in the Company's setrusumab clinical development program
for osteogenesis imperfecta (OI) and its Phase 2 alvelestat program
for patients with alpha-1 antitrypsin deficiency (AATD), the
Company's clinical activities will face some delays. AATD patients,
in particular, are at greater risk from COVID-19 given that the
condition is a respiratory and lung condition, for this reason, our
Phase 2 alvelestat trial will be delayed with topline data now
expected in 2021. Subject to a partnership, we are also currently
planning to initiate a Phase 3 study in children with OI in late
2020, however, the initiation of the study may also be delayed.
In addition, the Directors have considered a downside scenario
involving an increase in operating overheads, an increase in the
costs of setting up and running the planned Phase 1b study for
etiligimab when this study is contracted out to third parties and
increased investment in manufacturing development costs for
setrusumab. In addition, In this scenario the forecasts also
indicate that the group will have sufficient funds to meet its
liabilities as they fall due for at least the next 12 months.
In both scenarios the Directors have not taken into account
potential income from partnering one or more of its assets which
would increase the cash resources available to the company.
In conclusion, although the Group continues to make losses, the
directors believe it is appropriate to prepare the financial
information on the going concern basis. This is because the Group's
development into new products continues to progress according to
plan and the funding secured to date, together with the funds that
have come into the Group since the year end (as described more
fully in Note 14) will allow it to meet its liabilities as they
fall due for at least 12 months from the date of authorization for
the issue of these consolidated financial statements.
(1) Total cash resources are a non-GAAP measure being cash and
short-term deposits and short-term investments
2.6 Summary of significant accounting policies
a) Taxes
Tax expense recognized in the statement of comprehensive income
comprises the sum of deferred tax and current tax not recognized in
other comprehensive income or directly in equity.
Current income tax
Current income tax assets and / or liabilities are measured at
the amount expected to be recovered from or paid to the taxation
authorities that are unpaid at the reporting date. Current tax is
payable on taxable profit, which differs from profit or loss in the
financial statements. Calculation of current tax is based on tax
rates and tax laws that have been enacted or substantively enacted
by the end of the reporting period within the jurisdictions that
the Group operates in.
Amounts receivable in respect of research and development tax
credits are recognized in the financial statements provided there
is sufficient evidence that the amounts are recoverable. These
credits are recognized within income tax in the consolidated
statement of comprehensive loss.
Deferred tax
Deferred tax is provided using the liability method on temporary
differences between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes at the
reporting date.
Deferred income tax assets are recognized for all deductible
temporary differences, carry-forward of unused tax credits and
unused tax losses, to the extent that it is probable that taxable
profit will be available against which the deductible temporary
differences and the carry-forward of unused tax credits and unused
tax losses can be utilized. The carrying amount of deferred income
tax assets is reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the
deferred income tax asset to be utilized. Unrecognized deferred
income tax assets are reassessed at the end of each reporting
period and are recognized to the extent that it has become probable
that future taxable profit will allow the deferred tax asset to be
recovered.
Deferred tax assets and liabilities are measured on an
undiscounted basis at the tax rates that are expected to apply to
the year when the asset is realized, based on tax rates (and tax
laws) enacted or substantively enacted at the end of the reporting
period.
IFRIC 23, Uncertainty over Income Tax Treatments
In June 2017, the IASB issued IFRIC Interpretation 23,
Uncertainty over Income Tax Treatments (IFRIC 23), which addresses
how uncertain tax positions should be accounted for under IFRS.
IFRIC 23 requires that, where acceptance of the tax treatment by
the relevant tax authority is considered probable, it should be
assumed as an accounting recognition matter that treatment of the
item will ultimately be accepted. Therefore, no tax provision would
be required in such cases. However, if acceptance of the tax
treatment is not considered probable, the entity is required to
reflect that uncertainty using an expected value (i.e., a
probability-weighted approach) or the single most likely amount.
IFRIC 23 is mandatorily effective for accounting periods beginning
on or after 1 January 2019 and any resulting change to the tax
provisions should be recognized in retained earnings. Mereo has
recognized a net tax expense of nil in retained earnings on 1
January 2019 in respect of the adoption of IFRIC 23.
b) Foreign currencies
Items included in the financial statements are measured using
the currency of the primary economic environment in which the
entity operates ("the functional currency"). The consolidated
financial statements are presented in pound sterling ("GBP"), which
is the functional and presentational currency of the Group.
Transactions in foreign currencies are initially recorded by the
Group's entities at the rate ruling on the date the transaction
first qualifies for recognition. Differences arising on settlement
or translation of monetary items are recognized in the consolidated
statement of comprehensive loss, as well as gains or losses on the
retranslation of foreign currency balances at the year end.
The results and financial position of Group entities that have a
functional currency different from the presentational currency of
the Group are translated into the presentational currency (pound
sterling). The assets and liabilities of such entities are
translated into pound sterling at the rate of exchange ruling at
the balance sheet date. Income and expenses are translated at the
average rate for the period. Fair value adjustments arising on
acquisition of such entities are treated as assets and liabilities
of the relevant entity and translated into pound sterling at the
closing rate. The exchange differences arising on translation for
consolidation are recognized in other comprehensive income.
c) Property, plant and equipment
Property, plant and equipment is stated at cost, net of
accumulated depreciation and accumulated impairment losses, if any.
Such cost includes the cost of replacing part of the plant and
equipment if the recognition criteria are met. All other repair and
maintenance costs are recognized in profit or loss as incurred.
Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets, as follows:
-- Leasehold improvements ten years
-- Office equipment five years
-- IT equipment three years
The right-of-use assets are presented within the same line item
as that within which the corresponding underlying assets would be
presented if they were owned - for the Group this is property,
plant and equipment. Right-of-use assets are depreciated over the
shorter period of lease term and useful life of the underlying
asset:
-- Right-of-use asset (building) six to nine years
-- Right-of-use asset (equipment) one to two years
An item of property, plant and equipment and any significant
part initially recognized is derecognized upon disposal or when no
future economic benefits are expected from its use or disposal. Any
gain or loss arising on derecognition of the asset (calculated as
the difference between the net disposal proceeds and the carrying
amount of the asset) is included in the statement of comprehensive
loss when the asset is derecognized.
The residual values, useful lives and methods of depreciation of
property, plant and equipment are reviewed at each financial year
end and adjusted prospectively, if appropriate.
d) Business combinations
Business combinations are accounted for using the acquisition
method of accounting. At the date of the acquisition, the Group
initially recognizes the fair value of the identifiable assets
acquired, the liabilities assumed and any non-controlling interest
in the acquired business.
The consideration transferred is measured at fair value at the
date acquisition. The excess of the consideration transferred over
the fair value of net identifiable assets of the business acquired
is recorded as goodwill, unless the amount of consideration
transferred is less than the fair value of net identifiable assets
of the business acquired in which case the difference is recognized
directly in the consolidated statement of comprehensive loss as a
bargain purchase. A valuation is performed of assets and
liabilities assumed on each acquisition accounted for as a business
combination based on our best estimate of fair value.
Where the settlement of any part of cash consideration is
deferred, the amounts payable in the future are discounted to their
present value. Contingent consideration is classified either as
equity or a financial liability and is recognized at fair value on
the acquisition date. Amounts classified as a financial liability
are subsequently remeasured to fair value in accordance with IFRS 9
(Financial Instruments), with changes in fair value recognized in
the consolidated statement of comprehensive loss as an
administrative expense.
Directly attributable acquisition-related costs are expensed as
incurred within the consolidated statement of comprehensive
loss.
d) Leases (IFRS 16)
Effective January 1, 2019, the Group implemented IFRS 16
(Leases). IFRS 16 (Leases) replaces existing guidance, including
IAS 17 (Leases), and sets out the principles for recognition and
measurement of leases. The new standard results in an increased
volume of disclosure information in these consolidated financial
statements.
For further information, refer to Note 4.
e) Intangible assets
Intangible assets are initially recorded at cost which has been
determined as the fair value of the consideration paid and payable.
Assets that have been acquired through a business combination are
initially recorded at fair value. The fair value of consideration
is regularly reviewed based on the probability of achieving
contractual milestones.
Intangible assets are reviewed for impairment at each reporting
date by allocating the assets to the cash-generating units to which
they relate. The estimated useful life is the lower of the legal
duration and economic useful life. The estimated useful lives of
intangible assets are reviewed on an at least annual basis.
Where the consideration paid or payable is in shares, the cost
is measured in accordance with IFRS 2 (Share Based Payments).
Amortization would commence when product candidates underpinned
by the intangible asset become available for commercial use. No
amortization has been charged to date, as the product candidates
underpinned by the intellectual property rights are not yet
available for commercial use.
f) Financial instruments
Financial assets and liabilities are recognized in the
consolidated balance sheet only when the Group becomes party to the
contractual provisions of the instrument.
Financial assets
On initial recognition, a financial asset is classified into one
of three primary measurement categories:
-- Amortized cost;
-- Fair value through OCI ("FVOCI"); or
-- Fair value through profit or loss ("FVTPL").
The initial classification into a primary measurement category
depends on the nature and purpose of the financial asset.
For each reporting period covered herein, the Group's financial
assets were restricted to financial assets held at FVOCI. This
relates to short-term investments which are not classified as cash
and short-term deposits and are held in a business model whose
objective is achieved by both collecting contractual cash flows and
selling the short-term investment on maturity.
For short-term investments, interest income and impairment gains
or losses are recognized directly in the consolidated statement of
comprehensive loss. The difference between cumulative fair value
gains or losses and the cumulative amounts recognized in the
consolidated statement of comprehensive loss is recognized in other
comprehensive income until derecognition, when the amounts in other
comprehensive income are reclassified to the consolidated statement
of comprehensive loss.
g) Fair value measurement
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either:
-- In the principal market for the asset or liability; or
-- In the absence of a principal market, in the most
advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible
by the Group.
The fair value of an asset or a liability is measured using the
assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
The Group uses valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to
measure fair value, maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorized within the
fair value hierarchy, described as follows, based on the lowest
level input that is significant to the fair value measurement as a
whole:
-- Level 1 - quoted (unadjusted) market prices in active markets
for identical assets or liabilities.
-- Level 2 - valuation techniques for which the lowest level
input that is significant to the fair value measurement is directly
or indirectly observable.
-- Level 3 - valuation techniques for which the lowest level
input that is significant to the fair value measurement is
unobservable.
For assets and liabilities that are recognized in the financial
statements on a recurring basis, the Group determines whether
transfers have occurred between levels in the hierarchy by
reassessing categorization (based on the lowest level input that is
significant to the fair value measurement as a whole) at the end of
each reporting period.
h) Impairment of non-financial assets
Further disclosures relating to impairment of non-financial
assets are also provided in the following notes:
-- Disclosures for significant Note 3
assumptions
-- Property, plant and equipment
-- Intangible assets not yet available
for use
The Group assesses, at each reporting date, whether there is an
indication that an asset may be impaired. If any indication exists,
or when annual impairment testing for an asset is required, the
Group estimates the asset's recoverable amount. An asset's
recoverable amount is the higher of an asset's or cash-generating
unit's fair value less costs of disposal and its value in use. The
recoverable amount is determined for an individual asset, unless
the asset does not generate cash inflows that are largely
independent of those from other assets or groups of assets. When
the carrying amount of an asset or cash-generating unit exceeds its
recoverable amount, the asset is considered impaired and is written
down to its recoverable amount.
In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to the asset. In determining fair value less
costs of disposal, recent market transactions are taken into
account. If no such transactions can be identified, an appropriate
valuation model is used. These calculations are corroborated by
valuation multiples, quoted share prices for publicly traded
companies or other available fair value indicators.
Impairment losses are recognized in the statement of
comprehensive loss in expense categories consistent with the
function of the impaired asset.
An assessment is made at each reporting date to determine
whether there is an indication that previously recognized
impairment losses no longer exist or have decreased. If such
indication exists, the Group estimates the asset's or
cash-generating unit's recoverable amount. A previously recognized
impairment loss is reversed only if there has been a change in the
assumptions used to determine the asset's recoverable amount since
the last impairment loss was recognized. The reversal is limited so
that the carrying amount of the asset does not exceed its
recoverable amount, nor exceed the carrying amount that would have
been determined, net of depreciation, had no impairment loss been
recognized for the asset in prior years. Such reversal is
recognized in the statement of comprehensive loss unless the asset
is carried at a revalued amount, in which case the reversal is
treated as a revaluation increase.
i) Cash and short-term deposits
Cash and short-term deposits in the balance sheet comprise cash
at banks and on hand and short-term deposits with a maturity of
three months or less, which are subject to an insignificant risk of
changes in value.
j) Short-term investments
Cash held on deposit for terms greater than three months are
recognized at fair value in the balance sheet with fair value
changes recognized in other comprehensive income. Interest revenue,
impairment gains and losses, and a portion of foreign exchange
gains and losses, are recognized in profit and loss.
When the short-term investment is derecognized or reclassified,
changes in fair value previously recognized in other comprehensive
income and accumulated in equity are reclassified to profit and
loss.
k) Provisions
Provisions are recognized when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation. When the
Group expects some or all of a provision to be reimbursed, for
example, under an insurance contract, the reimbursement is
recognized as a separate asset, but only when the reimbursement is
virtually certain. The expense relating to a provision is presented
in the statement of comprehensive loss net of any
reimbursement.
If the effect of the time value of money is material, provisions
are discounted using a current pre-tax rate that reflects, when
appropriate, the risks specific to the liability. When discounting
is used, the increase in the provision due to the passage of time
is recognized as a finance cost.
l) Share-based payments
Employees (including executives) of the Group receive
remuneration in the form of share-based payments, whereby employees
render services as consideration for equity instruments (equity
settled transactions).
Incentives in the form of shares are provided to employees under
various plans Executive officer have outstanding shares under a
deferred bonus share plan ("DBSP Plan") and a long-term incentive
plan ("LTIP Plan").
In accordance with IFRS 2 Share-based Payment ("IFRS 2"),
charges for these incentives are expensed through the consolidated
statement of comprehensive loss on a straight-line basis over their
vesting period, based on the Group's estimate of shares that will
eventually vest. The total amount to be expensed is determined by
reference to the fair value of the options or awards at the date
they were granted. For LTIP shares, the fair value on grant date
excludes the impact of any non-market vesting conditions - these
are instead taken into account by adjusting the number of equity
instruments included in the measurement of the share-based payment
transaction and are adjusted each period until such time as the
equity instruments vest.
Share options awarded to non-employees are accounted for as
options awarded to employees as the value of non-employee services
could be readily determined.
In accordance with IFRS 2, the cancellation of share options is
accounted for as an acceleration of the vesting period and
therefore any amount unrecognized that would otherwise have been
charged in future accounting periods is recognized immediately.
When options are forfeited, the accounting expense for any unvested
awards is reversed.
Purchases, where consideration is satisfied by issuing equity
shares, is accounted for as equity settled share-based payment
transactions in accordance with IFRS 2. Fair value is determined by
the share price at the date of purchase.
m) Costs of issuing capital
Incremental costs incurred and directly attributable to the
offering of equity securities are deducted from the related
proceeds of the offering. The net amount is recorded as share
premium in the period when such shares are issued. Where such
expenses are incurred prior to the offering they are recorded in
prepayments until the offering completes. Other costs incurred in
such offerings are expensed as incurred and included in general and
administrative expenses.
n) Convertible loan instrument
Convertible loan notes are regarded as compound instruments
consisting of a liability component and an equity component. At the
date of issue, the fair value of the liability component is
estimated using a discount rate for an equivalent liability without
the conversion feature. The difference between the proceeds of
issue of the convertible loan note and the fair value assigned to
the liability component is included in equity.
o) Employee Benefit Trust
The Group operates an Employee Benefit Trust ("EBT"), the Mereo
BioPharma Group plc Employee Benefit Trust.
The EBT has been established to fulfil awards made under the
DBSP Plan and the LTIP Plan. The EBT is a Jersey-based trust which
is funded by a loan from the Company, which it will utilize to buy
shares at nominal value from the Company in sufficient quantity to
fulfil the envisaged awards. The EBT will acquire shares in the
Company and these will be deducted from the shareholders' funds on
the consolidated balance sheet at the cost of acquisition less
proceeds on disposal.
Shares held by the EBT are included in the consolidated balance
sheet as a reduction in equity.
The Group treats the EBT as an extension of the Group and the
Company as it is ultimately controlled by the Company and therefore
consolidated.
p) R&D costs
Expenditure on product development is capitalized as an
intangible asset and amortized over the expected useful economic
life of the product candidate concerned. Capitalization commences
from the point at which technical feasibility and commercial
viability of the product candidate can be demonstrated and the
Group is satisfied that it is probable that future economic
benefits will result from the product candidate once completed.
Capitalization ceases when the product candidate receives
regulatory approval for launch. No such costs have been capitalized
to date.
Expenditure on R&D activities that do not meet the above
criteria, including ongoing costs associated with acquired
intellectual property rights and intellectual property rights
generated internally by the Group, is charged to the statement of
comprehensive loss as incurred. Intellectual property and
in-process R&D from asset acquisitions are recognized as
intangible assets at cost.
q) Provision for deferred cash consideration
Provision for deferred cash consideration consists of future
payments which are contractually committed but not yet certain. In
respect of products which are not yet approved, such deferred cash
consideration excludes potential milestones, royalties or other
payments that are deemed to be so uncertain as to be
unquantifiable. Deferred cash consideration is recognized as a
liability with the amounts calculated as the risk adjusted net
present value of anticipated deferred payments.
The provision is reviewed at each balance sheet date and
adjusted based on the likelihood of contractual milestones being
achieved and therefore the deferred payment being settled.
Increases in the provision relating to changes in the probability
are recognized as an intangible asset. Increases in the provision
relating to the unwinding of the time value of money are recognized
as a finance expense.
r) Bank loan
Borrowings (including interest-bearing loans) are initially
recognized at fair value, net of transaction costs incurred.
Borrowings are subsequently measured at amortized cost. Any
difference between the proceeds (net of transaction costs) and the
redemption amount is recognized in profit or loss over the period
of the borrowings using the effective interest method. Under the
effective interest method, amortization is included as a finance
charge in the consolidated statement of comprehensive loss.
The Group's policy is to account for non-substantial
modifications to financial liabilities measured at amortized cost
through a gain or loss which is recorded in the consolidated
statement of comprehensive loss. The gain or loss is calculated as
the difference between the original contractual cash flows and the
modified cash flows, discounted at the original effective interest
rate.
For substantial modifications, the Group's policy is to
derecognize the existing financial liability and in turn recognize
a new financial liability.
Borrowings are removed from the balance sheet when the
obligation specified in the contract is discharged, cancelled or
expired.
s) Associated warrants
The Group has issued certain warrant instruments to its
lenders
As the terms of the warrant instruments allow for a cashless
exercise, the Group's policy is to account for the associated
warrant instruments at fair value with changes in the fair value
recognized in the consolidated statement of comprehensive loss (see
Note 21 in the Annual Report).
t) The Alpha-1 Project (TAP) funding agreement and associated
warrants
The agreement is accounted for as a compound instrument which
includes both debt and equity components. The liability is measured
first at fair value and the residual value allocated to the equity
component. The difference between the funding payment amount
received and the measurement of the liability will be allocated to
the warrants and recognized in equity. The value of warrants in
equity will not be subsequently remeasured as the warrants will be
settled by providing a fixed number of shares for a fixed amount of
cash.
3. Significant judgments, estimates and assumptions
The preparation of these financial statements requires the
management of the Group to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
The Group bases its estimates and judgments on historical
experience and on various other assumptions that it considers to be
reasonable. Actual results may differ from these estimates under
different assumptions or conditions.
3.1 Judgments
a) Share-based compensation
Incentives in the form of shares are provided to employees under
certain equity award plans (which consist of both share awards and
option grants). The fair value of the employee services received in
exchange for equity award plans is recognized as an expense. The
expense is based upon a number of assumptions disclosed in Note 26.
The selection of different assumptions in the measurement of fair
value of the equity award plans could affect the results of the
Group.
b) Business combination
On April 23, 2019, the Group obtained a 100% controlling
interest in OncoMed, a Company based in the U.S. which was
previously listed on the Nasdaq Global Market.
Judgement is applied under IFRS 3 (Business Combinations) in
determining whether a transaction meets the definition of a
business combination, and so accounted for in accordance with its
requirements. In applying this judgement, management has considered
the underlying economic substance of the transaction in addition to
the contractual terms. Our assessment is that OncoMed meets the
definition of a 'business' and the transaction has therefore been
accounted for as a business combination.
c) Impairment of intangible assets and property, plant and
equipment
An assessment was made in respect of indicators of impairment in
the carrying value of the Group's intangible assets (see Note 14 in
the Annual Report), right-of-use assets, leasehold improvements,
office equipment and IT equipment as at December 31, 2019.
If such an indication exists, the recoverable amount of the
asset, being the higher of the asset's fair value less costs to
sell and value in use, is compared to the asset's carrying value.
Any excess of the asset's carrying value over its recoverable
amount is expensed to the income statement. The assessment of
intangible assets involves a number of significant judgments
regarding the likelihood of successful product approval, the costs
of reaching approval, the estimated useful life of intangible
assets following commercialization and the subsequent commercial
profitability of the product once approved.
d) IFRS 16 (Leases)
Following the adoption of IFRS 16 (Leases) on January 1, 2019,
the Group is required discount future lease payments using the
interest rate implicit in the lease, or, if that rate cannot be
readily determined, the incremental borrowing rate. IFRS 16
(Leases) defines the incremental borrowing rate as the rate of
interest a lessee would have to pay to borrow over a similar term,
and with a similar security, the funds necessary to obtain an asset
of similar value to the right-of-use assets in a similar economic
environment.
For the year ended December 31, 2019, the determination of an
appropriate discount rate has a significant effect on the lease
liabilities recognized (see Note 4 in the Annual Report). For the
current lease portfolio, the Group has determined an incremental
borrowing rate based on relevant and available information as the
interest rate implicit in the lease arrangements cannot be readily
determined.
In addition to the determination of an appropriate discount
rate, the Group was also required to assess the lease term for
qualifying leases. The determination of the lease term is
judgmental as for certain qualifying leases held by the Group, the
contract includes an extension option beyond the non-cancellable
period for which the Group has the right to use the underlying
asset. In applying this judgment, the Group considered the period
over which it was reasonably certain to make use of the extension
option.
3.2 Estimates
a) Fair value of intangible assets acquired in business
combination
The Group performed a full valuation of the fair value of assets
acquired and liabilities assumed following the acquisition of
OncoMed.
Based on the assets acquired and liabilities assumed, specific
consideration was applied to the valuation of the intangible asset
acquired which required an estimation of the expected useful life
and future cash flows of the intangible asset alongside the
determination of an appropriate discount rate. The intangible asset
acquired was valued using a risk adjusted net present value
model.
b) Contingent consideration
The Group makes provision for the estimated fair value of
amounts payable to the former shareholders of OncoMed under the
Contingent Value Rights Agreement ("CVR"), which is accounted for
as a contingent consideration liability.
At December 31, 2019, the Group estimates the fair value of the
contingent consideration liability to be GBP0.4 million ($0.5
million), which is an increase from GBPnil on the date of
acquisition (see Note 5 in the Annual Report). The increase in the
fair value of the contingent consideration liability reflects the
terms subsequently agreed with Oncologie, Inc. ("Oncologie") with
respect to the global licensing agreement of navicixizumab ("Navi")
(see Note 30 in the Annual Report). Total potential payments under
the CVR on a gross, undiscounted basis, are approximately $80.0
million (see Note 5 in the Annual Report).
The estimated contingent consideration payable is based on a
risk-adjusted, probability-based scenario. Under this approach the
likelihood of future payments being made to the former shareholders
of OncoMed under the CVR is considered. The estimate could
materially change over time in line with the development plan and
subsequent commercialization of the Navi product.
c) Deferred license consideration
Deferred consideration in the form of cash is recognized as a
provision at each balance sheet date, to the extent its amount is
quantifiable at the inception of the arrangement (see Note 20 in
the Annual Report). The amount provided is based on a number of
estimates regarding the timing and progress of the related
research.
Deferred consideration in the form of shares is recognized as a
share-based payment when it is probable that shares will be
transferred.
4. Changes in accounting policies
4. 7 Changes in accounting policies 2019
Effective January 1, 2019, the Group has adopted IFRS 16
(Leases). IFRS 16 (Leases) replaces existing guidance, including
IAS 17 (Leases), and sets out the principles for the recognition
and measurement of leases. The new standard has resulted in an
increased volume of disclosure information within these
consolidated financial statements.
The Group has also implemented other minor amendments to
existing standards and interpretations, which have no material
impact on the Group's overall results and financial position.
a) General impact of application of IFRS 16 (Leases)
The date of initial application of IFRS 16 for the Group is
January 1, 2019.
The Group has applied IFRS 16 using the modified retrospective
approach, without restatement of the comparative information.
IFRS 16 introduces new or amended requirements with respect to
lease accounting. It introduces significant changes to the lessee
accounting by removing the distinction between operating and
finance lease, requiring the recognition of a right-of-use asset
and a lease liability at commencement for all leases, except for
short-term leases and leases of low value assets. In contrast to
lessee accounting, the requirements for lessor accounting have
remained largely unchanged.
b) Definition of a lease
Previously, the Group determined at contract inception whether
an arrangement was or contained a lease under IFRIC 4 (Determining
Whether an Arrangement contains a Lease). The Group now assesses
whether a contract is or contains a lease based on the new
definition of a lease under IFRS 16 (Leases). Under IFRS 16
(Leases), a contract is or contains a lease, if the contract
conveys a right to control the use of an identified asset in
exchange for consideration.
On transition to IFRS 16 (Leases), the Group elected to apply
the practical expedient to grandfather the assessment of which
transactions are leases. It applied IFRS 16 (Leases) only to
contracts that were previously not identified as leases. Contracts
that were not identified as leases under IAS 17 and IFRIC 4 were
not reassessed. In preparation for the first-time application of
IFRS 16, the Group has carried out an implementation project.
The new definition in IFRS 16 will not significantly change the
scope of contracts that meet the definition of a lease for the
Group. At inception or on reassessment of a contract that contains
a lease component, the Group allocates the consideration in the
contract to each lease and non-lease component based on their
relative stand-alone prices.
c) Practical expedients adopted on transition
Certain practical expedients permitted by IFRS 16 are used by
the Group, notably:
1) To not reassess, upon transition, whether an existing
contract contains a lease (grandfather the previous assessment of
whether a transaction was a lease under IAS 17 or IFRIC 4). The
definition of a lease under IFRS 16 has been applied only to
contracts entered into or changed on or after January 1, 2019;
2) The recognition exemptions for short-term leases (less than
12 months of lease term) and the leases of low-value assets;
and
3) Used hindsight when determining the lease term, if the
contract contains options to extend or terminate the lease.
d) Financial impact
The application of IFRS 16 to leases previously classified as
operating leases under IAS 17 resulted in the recognition of
right-of-use assets and lease liabilities.
The Group has chosen to use the table below to set out the
adjustments recognized at the date of initial application of IFRS
16.
Restated
as at
As at January
December 31, Impact 1,
2018 of IFRS 16 2019
Non-current assets
Property, plant and equipment 149 2,552 2,701
Prepayments and other 1,067 (50) 1,017
------------- ---------- --------
Total impact on assets 2,502
------------- ---------- --------
Current liabilities
Trade and other payables 4,570 - 4,570
Lease liabilities - 607 607
Non-current liabilities
Lease liabilities - 1,927 1,927
Accruals 4,437 (32) 4,405
------------- ---------- --------
Total impact on liabilities (2,502)
------------- ---------- --------
Total impact on retained earnings -
------------- ---------- --------
As at January 1, 2019, right-of-use assets related to a leased
property (GBP1.2 million) and a lease of medical equipment used in
ongoing clinical trials (GBP1.3 million).
Following the acquisition of OncoMed on April 23, 2019, the
Group acquired an additional right-of-use asset related to a leased
property in Redwood City, U.S. (GBP10.8 million).
The table below presents a reconciliation from operating lease
commitments disclosed as at December 31, 2018 to lease liabilities
recognized as at January 1, 2019.
Operating lease commitments disclosed under IAS 17 (at December
31, 2018) 536
Effect of discounting (944)
Reassessment of lease term under IFRS 16 2,942
Lease liabilities recognised under IFRS 16 (at January 1,
2019) 2,534
Certain lease agreements include an option which allows the
Group to extend the lease. The Group is reasonably certain that it
will invoke the extension option on the lease of medical equipment
used in ongoing clinical trials, as the Group expects that the
studies will extend beyond the initial lease term. Where the Group
is reasonably certain that the lease will be extended, the cash
flows are included in the calculation of the lease liability.
The adoption of IFRS 16 (Leases) results in a decrease in other
operating expenses in the consolidated statement of comprehensive
loss where lease payments were previously recorded. IFRS 16
(Leases) results in an increase in depreciation and interest
expense going forwards following the recognition of a right-of-use
asset and lease liability.
The weighted average incremental borrowing rate applied to lease
liabilities recognized on transition was 15.0%.
As at December 31, 2019, in relation to leases under IFRS 16
(Leases) the Group has recognized the following
amounts in the consolidated statement of comprehensive
loss:
Depreciation 1,505
Interest expense 1,314
Foreign exchange gain 29
Income from sub-leasing right-of-use assets 855
For the year ended December 31, 2019, within the consolidated
statement of cash flows under IFRS 16 (Leases) the Group has opted
to disclose both the cash paid for the interest portion and cash
payments for the principal portion of the lease liability as part
of financing activities. The adoption of IFRS 16 (Leases) did not
have an impact on net cash flows.
The total cash outflow for leases amounted to GBP2.2 million
during the year (2018: GBP0.3 million).
e) Subsequent updates
As at December 31, 2019, the lease term remaining on the medical
equipment has been reassessed in line with the contractual
agreement. The reassessment of lease term has been accounted for as
a change in accounting estimate and the lease liability has been
remeasured accordingly to reflect the change in estimated future
lease payments. The carrying amount of the right-of-use asset has
been adjusted for the remeasurement of the lease liability, both
reduced by GBP0.3 million respectively.
4.2 Changes in accounting policies 2018
Effective January 1, 2018, the Group has adopted IFRS 9
(Financial Instruments) which introduces new requirements for:
1. The classification and measurement of financial assets and
financial liabilities;
2. Impairment for financial assets;
3. General hedge accounting; and
4. New accounting for certain modifications and exchanges of
financial liabilities measured at amortized cost.
The only impact on the Group is in relation to the
non-substantial modification of the convertible loan notes, as
detailed below. The Group has applied IFRS 9 (Financial
Instruments) in full without restating comparatives with an initial
date of application of January 1, 2018.
In relation to the non-substantial modification of financial
liabilities, IFRS 9 (Financial Instruments) requires the
recognition of a modification gain or loss for exchanges or
modifications of financial liabilities that do not result in the of
a financial liability. As a result, under IFRS 9 (Financial
Instruments) the carrying value of the convertible loan note as at
the date of modification was adjusted to recognize the modification
gain in retained earnings as of the date of initial application of
January 1, 2018.
At January 1, 2018 (as calculated under IAS 39) 1,977
Amounts restated through retained earnings (124)
-----
At January 1, 2018 (as calculated under IFRS 9) 1,853
-----
The Group has considered the adoption of IFRS 9 on receivables
and determined the expected credit loss to be immaterial, and
therefore no adjustment has been made for this.
5. Acquisition of subsidiary
On April 23, 2019, the Group obtained control of OncoMed, a
Company based in the U.S., which was previously listed on the
Nasdaq Global Market, by acquiring 100 per cent of its issued share
capital.
OncoMed is a clinical-stage biopharmaceutical company focused on
discovering and developing novel therapeutics that address the
fundamental biology driving cancer's growth, resistance, recurrence
and metastasis. OncoMed was acquired in order to broaden the
Group's asset base, strengthen its cash position and obtain a US
listing to diversify international shareholder base of the combined
group.
The final acquisition accounting is set out below:
OncoMed
Cash and short-term deposits 10,074
Short-term investments 29,019
Other receivables 155
Prepayments 1,699
Property, plant and equipment 82
Right-of-use assets 10,755
Identifiable intangible assets 12,693
Other liabilities (9,215)
Lease liabilities (10,689)
--------
Net identifiable assets 44,573
--------
Bargain purchase (3,681)
--------
Total consideration 40,892
--------
Equity instruments (24.8 million ordinary shares) 40,892
--------
Contingent consideration arrangement -
--------
Total consideration 40,892
--------
The Group acquired net cash of GBP10.1 million with the
acquisition of OncoMed, being the value of the cash and short-term
deposits on April 23, 2019.
The fair value of the 24.8 million ordinary shares issued as
part of the consideration paid for OncoMed was measured based on
the Group's quoted share price on April 23, 2019.
As the Group acquired OncoMed for an amount less than the fair
market value of the net assets acquired, a gain on bargain purchase
of GBP3.7 million was realized. The was attributable to the
following factors:
-- Subject to working capital adjustments, the immediately
pre-closing proportion of shares in the Company due to be issued to
OncoMed's shareholders was agreed in December 2018, based on the
Group's g0-day volume-weighted average share price ending on
December 4, 2018. Following a movement downward in the Group's
quoted share price on the completion date in comparison with the
reference share price, this reduced the overall fair value of the
consideration paid. The impact in the reduction in the fair value
of consideration paid was partly offset by;
-- In the period from announcement of the deal and the date of
acquisition (April 23, 2019), a period of approximately five
months, OncoMed continued to generate losses, reflecting continue
research and development activity, together with recurring
expenditure on its overheads. This had the effect of reducing net
assets acquired on the acquisition date compared with net assets at
the time the acquisition was agreed.
Additional cash consideration, accounted for as contingent
consideration, becomes payable under a Contingent Value Rights
Agreement ("CVR") relating to OncoMed's etigilimab ("TIGIT") and
navicixizumab ("Navi") products. The contingent consideration would
become payable upon the achievement of certain milestones in the
future specific to TIGIT ("the TIGIT milestone") and Navi ("the
Navi milestone").
As at the date of acquisition the fair value of the contingent
consideration was estimated to be close to GBPnil. In making that
assessment, the following information and factors were
considered:
1) The uncertain outcomes of current clinical studies;
2) The level of uncertainty regarding the availability of future funding partners;
3) The level of uncertainty relating to the success of future development of such products;
4) The dependency of the CVR milestones on the occurrence of
events that are outside of the control of the Group; and
5) The likelihood of Celgene exercising the exclusive option
granted by OncoMed to Celgene in relation to OncoMed's TIGIT
product, particularly given Bristol-Myers Squibb's proposed
acquisition of Celgene.
In June 2019 it was announced that Celgene had decided, in light
of strategic product portfolio considerations, not to exercise its
option to license TIGIT. Accordingly, the TIGIT milestone can no
longer be achieved.
As at December 31, 2019, the Group estimates the fair value of
the Navi milestone to be GBP0.4 million ($0.5 million) which is
accounted for as a contingent consideration liability (see Note 25
and Note 30 in the Annual Report). The maximum undiscounted amount
of the Navi milestone is subject to an aggregate cap of $80
million.
The fair value of the financial assets includes receivables from
the landlord under OncoMed's office lease arrangement in relation
to tenant improvements with a fair value and a gross contractual
value of GBP0.2 million. It is estimated at acquisition date that
all contractual cash flows are collectable in full. Short-term
investments acquired with OncoMed were treasury bills (recognized
at fair value through other comprehensive income), in line with the
Group's accounting policy (see Note 25 in the Annual Report).
Acquisition related costs (presented net against the gain on
bargain purchase in the consolidated statement of comprehensive
loss) amounted to GBP2.6 million (rounded). Transaction costs
incremental and directly attributable to the issuance of new share
capital associated with the acquisition of OncoMed amounted to
GBP0.8 million, which is accounted for within equity. The net gain
on bargain purchase in the consolidated statement of comprehensive
loss is therefore GBP1.0 million (rounded).
OncoMed contributed GBPnil revenue and GBP5.7 million to the
Group's loss for the period between the date of acquisition and the
balance sheet date. If the acquisition of OncoMed had been
completed on the first day of the financial year, group revenues
for the period would have been GBP3.3 million and the Group's loss
would have been GBP42.9 million. This information is provided for
illustrative purposes only and is not necessarily indicative of the
results that the Group would have occurred had OncoMed been
acquired at the beginning of the year, or indicative of future
results of the Group.
6. Group information
Information about subsidiaries
The consolidated financial statements of the Group include:
% equity % equity
interest interest
December December
Country of 31, 31,
Name Principal activities incorporation 2019 2018
Mereo BioPharma 1 Limited Pharmaceutical R&D U.K. 100 100
Mereo BioPharma 2 Limited Pharmaceutical R&D U.K. 100 100
Mereo BioPharma 3 Limited Pharmaceutical R&D U.K. 100 100
Mereo BioPharma 4 Limited Pharmaceutical R&D U.K. 100 100
Mereo BioPharma Ireland
Limited Pharmaceutical R&D Ireland 100 100
OncoMed Pharmaceuticals,
Inc. Pharmaceutical R&D U.S. 100 -
Navi Subsidiary, Inc. Pharmaceutical R&D U.S. 100 -
Mereo US Holdings Inc. Holding company U.S. 100 100
Mereo MergerCo One Inc. Holding company U.S. - 100
Mereo BioPharma Group
plc
Employee Benefit Trust Employee share scheme Jersey - -
The registered office of Mereo BioPharma 1 Limited, Mereo
BioPharma 2 Limited, Mereo BioPharma 3 Limited and Mereo BioPharma
4 Limited is located at Fourth Floor, 1 Cavendish Place, London W1G
0QF. The registered office of Mereo BioPharma Ireland Limited is
25/28 North Wall Quay, Dublin 1 D01H104, Ireland.
Mereo US Holdings Inc. and Mereo MergerCo One Inc. were
incorporated on December 3, 2018 for the sole purpose of effecting
the business combination with OncoMed (see Note 5 in the Annual
Report). Following the business combination with OncoMed, Mereo
MergerCo One Inc. ceased to exist. The registered office of Mereo
US Holdings Inc. is 251 Little Falls Drive, City of Wilmington,
County of New Castle, Delaware 19808, U.S. Mereo MergerCo One Inc.
was a 100% owned subsidiary of Mereo US Holdings Inc.
OncoMed became a wholly owned subsidiary of Mereo US Holdings
Inc. on April 23, 2019 and is therefore an indirect, wholly owned
subsidiary of Mereo BioPharma Group plc. The registered office of
OncoMed Pharmaceuticals, Inc. is 251 Little Falls Drive, City of
Wilmington, Country of New Castle, Delaware 19808, U.S. Navi
Subsidiary, Inc, incorporated on April 15, 2019, is a wholly owned
subsidiary of OncoMed.
Under IFRS, the Employee Benefit Trust is treated as an
extension of the Group and the Company as it is controlled and
therefore consolidated.
Following the adoption of IFRS 16 (Leases) on January 1, 2019,
the Group has recognized GBP1.5 million of expense relating to
depreciation of right-of-use assets and GBP1.3 million of interest
expense relating to finance lease liabilities in the consolidated
statement of comprehensive loss. No prior year comparative is
disclosed, however under IAS 17 (Leases) the Group previously
recognized GBP0.3 million relating to operating lease expense in
the consolidated statement of comprehensive loss.
7. Loss before taxation Year ended December
Loss before tax is stated after charging: 31,
2018 2019
Fees payable to the Company's Auditor for the audit
of Group accounts 323 514
Fees payable to the Company's Auditor for other
services:
Audit of subsidiary accounts 30 45
Audit-related assurance services 171 311
Accounting advisory services 10 -
Legal and professional fees including patent costs 936 2,413
Operating lease expense (IAS 17) 293 -
Depreciation of right-of-use assets (IFRS 16) - 1,505
Depreciation (excluding right-of-use assets) 40 52
8.Income tax Year ended December
31,
2017 2018 2019
U.K. corporation tax R&D credit 8,152 5,277 5,149
Other tax income / (expense) - - 1,125
----- ---------- ---------
Income tax credit 8,152 5,277 6,274
----- ---------- ---------
U.K. income tax
The Group is entitled to claim tax credits in the U.K. under the
U.K. R&D small or medium-sized enterprise (SME) scheme, which
provides additional taxation relief for qualifying expenditure on
R&D activities and includes an option to surrender a portion of
tax losses arising from qualifying activities in return for a cash
payment from HM Revenue & Customs (HMRC). The amount included
in the financial statements represents the credit for the year
ended December 31, 2018 which was received in early 2020 together
with the estimated recoverable credit for the year ended December
31, 2019.
U.S. income tax
On December 22, 2017, the Tax Cuts and Jobs Act were entered
into law. Following the acquisition of OncoMed during the year, the
Group has analyzed the effects of the tax reform for the financial
year ended December 31, 2019 The new tax law permanently repeals
the corporate Alternative Minimum Tax ("AMT") and provides a
transition period where existing AMT credits are refundable. Other
tax income of GBP1.1 million reflects amounts received or
receivable by the Group as AMT credits. As at December 31, 2019,
GBP1.0 million is receivable, recognized as other taxes recoverable
within the consolidated balance sheet. At December 31, 2019, the
Group had an Uncertain Tax Position of GBP2.5 million being held
off the Balance Sheet, in respect of the R&D tax credits in the
US. The Uncertain Tax Position is calculated based upon historic US
R&D claims and equates to around 20% of the outstanding US
R&D claims.
Reconciliation of effective tax rate
2017 Year-ended December
31,
2018 2019
Loss on ordinary activities before income
tax (46,951) (37,306) (41,118)
Loss on ordinary activities before tax
at the U.K.'s statutory income tax rate
of 19% (2018: 19%) 9,038 7,088 7,812
Expenses not deductible for income tax
purposes (permanent differences) (13) (1,070) (317)
Temporary timing differences (712) (277) (343)
R&D relief uplift 3,447 2,271 2,540
Losses (unrecognized) (3,785) (2,804) (4,380)
Deferred income from MBG loan guarantee
costs 177 69 (54)
Differences in overseas tax rates - - 340
Gain on bargain purchase - - 699
Other - - (23)
---------------- -------------- -----------
Tax credit for the year 8,152 5,277 6,274
---------------- -------------- -----------
Deferred tax
The analysis of unrecognized deferred
tax is set out below:
December 31,
2017 2018 2019
Losses 6,121 8,604 19,443
US tax credits - - 10,032
Accruals - - 947
Fixed assets - - 400
Other - 6 202
Temporary differences trading 2,267 495 4
---------------- -------------- -----------
Net deferred tax asset (unrecognized) 8,388 9,105 31,028
---------------- -------------- -----------
The analysis of recognized deferred tax
is set out below:
Acquisition
of
At January 1, subsidiary Recognized At December
(Note 5)
2019 in income 31, 2019
Deferred tax liabilities
Intangible asset - (2,686) - (2,686)
Deferred tax asset
Net operating losses - - 2,686 2,686
---------------------------------------------- ---------------- -------------- -----------
Net deferred tax asset / (liability)
- (2,686) 2,686 -
---------------------------------------------- ---------------- -------------- -----------
The deferred tax liability has arisen from the recognition of
separately identifiable intangible assets on the acquisition of
OncoMed (see Note 5 in the Annual Report). A deferred tax asset on
losses has been recognized up to the level of the deferred tax
liability, resulting in a net deferred tax liability of GBPnil.
The remaining deferred tax assets, as set out in the table
above, have not been recognized as there is uncertainty regarding
when suitable future profits against which to offset the
accumulated tax losses will arise.
U.K. deferred tax
A reduction in the rate of U.K. corporation tax to 19% from
April 1, 2017 and to 17% from April 1, 2020 has been substantively
enacted. The standard rate of U.K. corporation tax applied to
reported loss is 19% (2018: 19%). Unrecognized U.K. deferred tax
assets and liabilities are calculated at a rate of 17%.
There is no expiration date for accumulated tax losses in the
U.K. entities.
At December 31, 2019, the Group had U.K. tax losses to be
carried forward of approximately GBP70.2 million (2018: GBP50.0
million).
U.S. deferred tax
In the U.S., the Tax Cuts and Jobs Act reduced the corporation
tax rate to 21% from January 1, 2018. The effect of the new U.S.
corporation tax rate has been considered in these financial
statements. U.S. deferred tax assets and liabilities are calculated
at a blended rate of approximately 21%.
For OncoMed, with respect to accumulated tax losses carried
forward prior to the acquisition of the Company, there is a change
of control restriction which will limit the amount available in any
one year.
At December 31, 2019, the Group had U.S. federal tax losses to
be carried forward of approximately GBP47.5 million, of which
GBP40.9 million can be carried forward indefinitely and GBP6.6
million which will begin to expire in 2023. At December 31, 2019,
the Group had U.S. state tax losses to be carried forward of
approximately GBP3.2 million which begin to expire in 2028. At
December 31, 2019, the Group had an Uncertain Tax Position of
GBP2.5m being held off the Balance Sheet, in respect of the
unrecognized DTA on R&D tax credits in the US. The Uncertain
Tax Position is calculated based upon historic US R&D claims
and equates to around 20% of the outstanding US R&D claims.
9. Loss per share
Basic loss per share is calculated by dividing the loss
attributable for the year to ordinary equity holders of the parent
by the weighted average number of ordinary shares outstanding
during the year.
As the net amount attributable for the year to ordinary equity
holders of the parent was a loss in the year (2018: loss), the
dilutive potential shares are anti-dilutive for the earnings per
share calculation.
December
31,
Loss 2017 Loss Loss 2018 Loss Loss 2019 Loss
GBP'000 weighted per GBP'000 weighted per GBP'000 weighted per share
shares share shares share shares GBP
number GBP number GBP number
Basic
and diluted (38,799) 69,012,348 (0.56) (32,029) 71,144,786 (0.45) (34,844) 89,424,476 (0.39)
The Company operates share option schemes (see Note 26 in the
Annual Report) which could potentially dilute basic earnings per
share in the future. In addition, there exist within equity nil
(2018: 864,988) shares to be issued which also have the potential
to dilute basic earnings per share in the future (see Note 18 in
the Annual Report).
As part of a license and option agreement with AstraZeneca (see
Note 26 in the Annual Report) additional future payments of a
maximum of 1,349,692 new ordinary shares would be payable on
reaching certain clinical milestones.
Warrants totaling 321,444 were issued in 2019 (2018: 41,286)
that could potentially dilute basic earnings per share if
converted.
The equity-settled transactions were considered to be
anti-dilutive as they would have decreased the loss per share and
were therefore excluded from the calculation of diluted loss per
share.
For transactions involving ordinary shares or potential ordinary
shares between the reporting date and the date of authorization of
these financial statements, see Note 30 in the Annual Report.
10. Issued capital and reserves
Ordinary share capital 2017
Balance at beginning of year 193
Issuances in the year 20
----------
Nominal share capital as at December 31 213
----------
Ordinary shares issued and fully paid
Issued on April 3, 2017 for private placement
financing round 5,042,017
Issued on April 26, 2017 for conversion of loan
note 1,221,361
Issued on October 28, 2017 for acquisition of
license 490,798
----------
At December 31, 2017 71,094,974
----------
Nominal value at December 31, 2017 (GBP) 0.003
Issued capital at December 31, 2017 (GBP) 213,285
----------
Ordinary share capital 2018
Balance at beginning of year 213
Issuances in the year 1
----------
Nominal share capital as at December 31 214
----------
Ordinary shares issued and fully paid
At January 1, 2018 71,094,974
Issued on June 1, 2018 for public offering 50,076
Issued on August 3, 2018 for exercise of share
options 10,000
Issued on October 22, 2018 for exercise of share
options 85,222
----------
At December 31, 2018 71,240,272
----------
Nominal value at December 31, 2018 (GBP) 0.003
Issued capital at December 31, 2018 (GBP) 213,721
----------
Ordinary share capital 2019
Balance at beginning of year 214
Issuances in the year 80
----------
Nominal share capital as at December 31 294
----------
Ordinary shares issued and fully paid
At January 1, 2019 71,240,272
Issued on April 23, 2019 for OncoMed acquisition 24,783,320
Issued on June 21, 2019 for conversion of loan
note 1,936,030
----------
At December 31, 2019 97,959,622
----------
Nominal value at December 31, 2019 (GBP) 0.003
Issued capital at December 31, 2019 (GBP) 293,879
----------
Since January 1, 2017, the following alterations to the
Company's share capital have been made:
-- Under the private placement dated April 3, 2017, the Company
issued and allotted 5,042,017 ordinary shares of GBP0.003 in
nominal value in the capital of the Company on April 3, 2017 at a
price of GBP2.975 per share to institutional investors. Gross cash
received was GBP15,000,000;
-- On April 26, 2017 Novartis converted GBP1,398,552 of loan
notes dated June 3, 2016 into 632,829 ordinary shares of GBP0.003
in nominal value in the capital of the Company at the fixed
conversion price of GBP2.21 per share. Under the terms of the
notes, Novartis also received 588,532 bonus shares;
-- On October 31, 2017, Mereo BioPharma Group plc issued 490,798
ordinary shares of GBP0.003 in nominal value in the capital of the
Company to AstraZeneca AB as part payment for the acquisition by
Mereo BioPharma 4 Limited of an exclusive license and option to
acquire certain assets;
-- Under the public offering dated June 1, 2018, the Company
issued and allotted 50,076 ordinary shares of GBP0.003 in nominal
value in the capital of the Company on June 1, 2018 at a price of
GBP3.00 per share to investors. Gross cash received was
GBP150,228;
-- On August 3, 2018 the Company issued and allotted 10,000
ordinary shares of GBP0.003 in nominal value in the capital of the
Company pursuant to an exercise of employee share options;
-- On October 22, 2018 the Company issued and allotted 85,222
ordinary shares of GBP0.003 in nominal value in the capital of the
Company pursuant to an exercise of employee share options;
-- On April 23, 2019, the Company issued and allotted 24,783,320
ordinary shares of GBP0.003 in nominal value in the capital of the
Company as consideration for the acquisition of OncoMed. The fair
value of the ordinary shares, measured on the date of acquisition,
was GBP1.65; and
-- On June 21, 2019, Novartis converted GBP2.4 million of loan
notes dated June 3, 2016 into 1,071,042 ordinary shares of GBP0.003
in nominal value in the capital of the Company at a fixed
conversion price of GBP2.21 per share. Under the terms of the
notes, Novartis also received 864,988 bonus shares.
Share premium December 31,2017
At January 1, 2017 99,975
Issued on April 3, 2017 for private placement financing
round 14,985
Issued on April 26, 2017 for conversion of loan
note 2,478
Issued on October 28, 2017 for acquisition of license 1,519
Transaction costs for issued share capital (730)
At December 31, 2017 118,227
December 31,
Share premium 2018
At January 1, 2018 118,227
Issued on June 1, 2018 for public offering 150
Issued on August 3, 2018 for exercise of share options 13
Issued on October 22, 2018 for exercise of share
options 110
Transaction costs for issued share capital (8)
At December 31, 2018 118,492
December 31,
Share premium 2019
At January 1, 2019 118,492
Issued on June 21, 2019 for conversion of loan note 3,953
Transaction costs for issued share capital (761)
At December 31, 2019 121,684
Other capital reserves
Shares to Share-based Equity component Total
be issued payments of convertible
loan
At January 1, 2017 2,673 9,476 517 12,666
Share-based payments expense
during the year - 4,983 - 4,983
Shares issued (1,083) - - (1,083)
Equity component of convertible
loan instrument - - (207) (207)
At December 31, 2017 1,590 14,459 310 16,359
Shares to be issued Share-based Equity component Warrants Total
payments of convertible issued for
loan TAP funding
At January 1, 2018 1,590 14,459 310 - 16,359
Share-based payments 2,302 - - 2,302
expense during the year - (112) - - (112)
Share-based payments release
for exercise of options -
Warrants issued for TAP funding
- - - 44 44
At December 31, 2018 1,590 16,649 310 44 18,593
Equity component Warrants
Share-based of convertible issued for
Shares to be issued payments loan TAP funding Merger reserve Total
At January 1, 2019 1,590 16,649 310 44 - 18,593
Acquisition of OncoMed
(Note 5) - - - - 40,818 40,818
Shares issued during
the year (1,590) - - - - (1,590)
Convertible loan
conversion - - (310) - - (310)
Share-based payments
expense during the
year - 1,636 - - - 1,636
Share-based payments
release for exercise
of options - - - - - -
At December 31, 2019 - 18,285 - 44 40,818 59,147
Share-based payments
The Group has various share option schemes under which options
to subscribe for the Group's shares have been granted to certain
executives, NEDs and employees.
The share-based payment reserve is used to recognize a) the
value of equity settled share-based payments provided to employees,
including key management personnel, as part of their remuneration
and b) deferred equity consideration. Refer to Note 26 for further
details.
Shares issued or to be issued
At January 1, 2019, a maximum of 864,988 shares were remaining
to be issued to Novartis pro rata to their percentage shareholding
as and when the Company issued further ordinary shares. The fair
value of these shares was GBP1.84 per share.
On June 21, 2019, the remaining 864,988 shares were issued to
Novartis as fully paid up bonus shares for GBPnil
consideration.
Equity component of convertible loan instrument
The convertible loan notes issued to Novartis were a compound
instrument consisting of a liability and an equity component.
On June 21, 2019, Novartis exercised the right to convert the
instrument therefore the value of the equity component as at
December 31, 2019 is GBPnil.
Merger reserve
The consideration paid to acquire OncoMed was 24,783,320
ordinary shares with an acquisition date fair value of GBP40.9
million, based on the Group's quoted share price. The nominal value
of the issued capital was GBP0.1 million with the excess, GBP40.8
million, classified within other capital reserves as a 'Merger
reserve'.
Warrants issued for TAP funding
The funding arrangements with The Alpha-1 Project are a compound
instrument consisting of a liability and an equity component (see
Note 21 in the Annual Report ). The value of the equity component
(consideration received for the warrants) as at December 31, 2019
is GBP44,156 (2018: GBP44,156).
Accumulated loss Year ended December
31,
2017 2018 2019
Other reserves 7,000 7,000 7,000
Accumulated losses (79,316) (111,221) (146,065)
Accumulated deficit (72,316) (104,221) (139,065)
On March 21, 2016, the Directors of the Company signed a
solvency statement with the agreement of all shareholders and
undertook a capital reduction, reducing the share premium account
by GBP7.0 million and crediting a new other reserve by the same
amount.
11. Interest-bearing loans and borrowings Year ended December 31,
2018 2019
Convertible loan notes ("Novartis Notes") 2,039 -
Bank loan 19,446 20,512
At December 31 21,485 20,512
Current 6,838 15,139
Non-current 14,647 5,373
11.1 Convertible loan notes ("Novartis Notes")
On June 21, 2019, Novartis converted the remaining balance of
principal and interest of GBP2.4 million of convertible loan notes
into 1,071,042 ordinary shares at a fixed conversion price of
GBP2.21 per share.
This has been recorded as a reduction in interest bearing loans
and borrowings of GBP2.0 million and a reduction in other capital
reserves of GBP0.3 million. Under the terms of the arrangement,
Novartis also received 864,988 bonus shares (for GBPnil
consideration). There are no convertible loan notes outstanding as
at December 31, 2019.
As at December 31, 2018, the carrying value of the convertible
loan notes was GBP2.0 million. The value of the debt component of
the convertible loan notes on the date of issuance of the
instrument was GBP2.9 million. Cash flows attached to the
convertible loan note up to the date of maturity were calculated
and discounted at an appropriate venture debt rate of 10%. The
value of the equity component of the instrument as at December 31,
2018 was GBP0.3 million.
11.2 Bank loan
The bank loan has a principal amount of GBP20.5 million and will
mature on March 1, 2021, unless extended on reaching certain
milestones. The terms of the bank loan required interest-only
payments up until April 30, 2019, and thereafter payments of
interest and principle in 23 equal monthly instalments through
maturity. The bank loan bears interest at an annual fixed rate of
8.5% and is secured by substantially all of the Group's assets,
including intellectual property rights owned or controlled by the
Group.
On April 23, 2019, the Group agreed an amendment to the terms of
its bank loan with its lenders. The new terms extended the
interest-only period through to December 31, 2019 followed by a
15-month capital and interest repayment period. The Group has
undertaken an assessment believes that the change in terms should
not be accounted for as a modification, but instead as a change in
expected cash flows. The cash flows under the bank loan were
revised from May 1, 2019.
Management estimated the revised carrying value of the loan on
May 1, 2019 to be GBP19.9 million by discounting the revised cash
flows at the original discount rate of 18%. The difference between
the previous and revised carrying value of the loan on May 1, 2019
was GBP0.5 million. The gain as a result of the changes in
estimated cash flows is recognized as a true-up in total finance
cost (i.e. together with interest expense). Following the
re-estimation, the financial liability continues to be accounted
for at amortized cost using the original effective interest
rate.
On May 3, 2019, under the terms of the loan agreement, the
Company issued 321,444 additional warrants (Note 21) to its lenders
giving them the right to subscribe for ordinary shares at an
exercise price of GBP2.95. The fair value of the additional
warrants on their grant date was GBP0.1 million.
A total of GBP1.5 million (2018: GBP0.8 million) of non-cash
interest has been charged to the consolidated statement of
comprehensive loss in the year.
The fair value of the bank loan is not materially different from
the carrying amount, since the interest payable on the borrowings
is reflective of market rates following the most recent amendment
to the bank loan on May 1, 2019. In the prior year, the bank loan
was modified and a modification loss of GBP0.7 million was
recognized on the consolidated statement of comprehensive loss on
the date of modification. This balance has been reclassified from
administrative expenses to finance charges within the statement of
comprehensive loss.
12. Warrant liability Year ended December
31,
2017 2018 2019
At beginning of year - 1,346 1,006
Issued during the year 1,292 376 131
Movement during the year 54 (716) (1,006)
At December 31 1,346 1,006 131
At December 31, 2018, as part of the bank loan facility, the
Company had issued 922,464 warrants (Note 19) to its lenders giving
them the right to subscribe for ordinary shares at a range of
exercise price between GBP2.31 and GBP3.30.
On May 3, 2019, the Company issued a further 321,444 warrants to
its lenders giving them the right to subscribe for ordinary shares
at an exercise price of GBP2.95. The fair value of the additional
warrants on their grant date was GBP0.1 million.
At December 31, 2019, a total of 1,243,908 warrants are
outstanding which are held by lenders of the bank loan facility.
The warrants outstanding are equivalent to 1.27% of the ordinary
share capital of the Company. The movement during the year ended
December 31, 2019 of GBP1.0 million was mostly due to the decrease
in the market price of ordinary shares (refer to table below).
The warrant instrument is classified as a financial liability as
the terms of the instrument allow for a cashless exercise. At each
balance sheet date, the fair value of the warrants will be assessed
using the Black Scholes model considering appropriate amendments to
inputs in respect of volatility and remaining expected life of the
warrants.
The following table lists the weighted average inputs to the
models used for the fair value of warrants granted during the year
ended December 31:
Year ended December
31,
2018 2019
Expected volatility (%) 65 67
Risk-free interest rate (%) 1.56 1.26
Expected life of share options (years) 10 10.0
Market price of ordinary shares (GBP) 2.31 0.83
Model used Black Scholes Black Scholes
Since there is no historical data in relation to the expected
life of the warrants, the contractual life of the options was used
in calculating the expense for the year.
Volatility was estimated by reference to the share price
volatility of a group of comparable companies over a retrospective
year equal to the expected life of the warrants.
13. Other liability Year ended December 31,
2018 2019
At beginning of year - 34
Interest accretion - 10
Arising during the year 34 -
At December 31 34 44
On October 8, 2018, the Group entered into a funding agreement
with The Alpha-1 Project ("TAP"), which provides for total
potential payments to Mereo of $400,000 as contributions towards
the development of MPH-966 upon completion of certain milestones by
the Group. In exchange, on receipt of such funding, the Group will
issue warrants allowing TAP to subscribe for shares in the company
(see Note 18 in the Annual Report). Under the agreement, TAP is
potentially entitled to receive a payment equivalent to amounts
received by Mereo (up to a maximum of $400,000) conditional on and
within thirty days of the first regulatory approval received by the
Group for MPH-966.
The first payment ("Payment 1") of $100,000 (GBP78,445) was made
to Mereo on November 16, 2018. The fair value of the liability of
Payment 1 on November 16, 2018 was GBP34,289. Application of the
effective interest method is required to accrete the initial
liability value up to the face value of the liability over a period
of five years, being the estimate of the earliest date that the
liability could be repaid and assuming that the agreement is not
terminated earlier. This non-cash interest charge will be made in
each statutory reporting period. The annual value of this interest
charge is 25.8%.
The fair value of warrants issued as part of Payment 1 on
November 16, 2018 was GBP44,156.
14. Events after the reporting period
14.1 Global licensing agreement
On January 13, 2020, the Company and Oncologie, Inc.
("Oncologie") announced a global licensing agreement for the
development and commercialization of navicixizumab ("Navi").
Under the terms of the global licensing agreement, Oncologie
will receive an exclusive worldwide license to develop and
commercialize Navi. The Company received an upfront payment of $4
million on January 17, 2020. The Company is also eligible for an
additional payment of $2 million conditional on a Chemistry,
Manufacturing and Controls ("CMC") milestone. Oncologie will be
responsible for all future research, development and
commercialization of Navi. Additionally, the Company will be
eligible to receive up to $300 million in future clinical,
regulatory and commercial milestones, tiered royalties ranging from
the mid-single digit to sub-teen percentages on global annual net
sales of Navi, as well as a negotiated percentage of sublicensing
revenues from certain sublicenses.
As a consequence of the global licensing agreement with
Oncologie, and in accordance with the terms and conditions of the
Contingent Value Rights Agreement for former stockholders of
OncoMed, dated April 23, 2019, by and among the Company and
Computershare Inc., as rights agent, (the "Mereo CVR Agreement"),
holders of contingent value rights ("CVRs") pursuant to the Mereo
CVR Agreement will be entitled to receive certain eligible cash
milestone payments made to the Company under the global licensing
agreement relating to Navi.
Those eligible cash milestone payments are equal to 70% of the
aggregate principal amount received by the Company after deduction
of costs, charged and expenditures within a period of five years
following completion of the OncoMed acquisition on April 23, 2019.
Such eligible milestone payments are subject to a cash
consideration cap of approximately $79.7 million.
As at December 31, 2019, the Company was reasonably certain
payment of approximately $0.5 million (GBP0.4 million) would be
made under the Mereo CVR Agreement. The full amount is recorded as
a contingent consideration payable on the consolidated balance
sheet as at December 31, 2019 and was subsequently paid out in the
Q1 2020.
14.2 Novartis convertible equity financing
On February 10, 2020, the Company entered into a GBP3.8 million
convertible equity financing with Novartis Pharma (AG)
("Novartis"). Under the terms of the convertible equity financing,
Novartis will purchase GBP3.8 million in a convertible loan note
("Loan Note").
The Loan Note is convertible at any time at the option of the
holder, at a fixed price of GBP0.265 per ordinary share. The
maturity of the Loan Note is three years from issuance, and it
bears an interest rate of 6% per annum.
In connection with the Loan Note issuance, the Company also
issued a warrant instrument to Novartis to purchase up to 1,449,614
of the Company's ordinary shares, which are exercisable at an
exercise price of GBP0.265 per ordinary share at any time before
the close of business on February 10, 2025.
14.3 Aspire Capital Securities Purchase Agreement
On February 10, 2020, the Company entered into a Securities
Purchase Agreement (the "Agreement") to issue up to $28 million of
the Company's ordinary shares exchangeable for American Depositary
Shares ("ADSs"), including a $3 million initial purchase, with
Aspire Capital Fund, LLC ("Aspire Capital"), a Chicago-based
institutional investor.
Under the terms of the Agreement, Aspire Capital has made an
initial investment of $3 million to purchase 11,423,925 of the
Company's ordinary shares (equivalent to 2,286,585 ADSs) at a price
equivalent to $1.31 per ADS, which represents a 16% discount over
Mereo's ADS closing stock price of $1.56 on February 8, 2020.
Under the terms of the Agreement, Aspire Capital has also
committed to subscribe at Mereo's request from time to time during
a 30-month period for up to an additional $25 million of Mereo's
ordinary shares exchangeable for ADSs at prices based on the ADS
market price at the time of each sale.
In consideration for Aspire Capital's initial investment and its
commitment to purchase up to an additional $25 million ADSs, Mereo
has agreed to pay Aspire Capital a commission to be satisfied
wholly by the issue to Aspire Capital of a further 2,862,595 of the
Company's ordinary shares (equivalent to 572,519 ADSs).
14.4 Equity investment from Boxer Capital, LLC
On February 19, 2020, the Company entered into a Securities
Purchase Agreement with Boxer Capital, LLC to make an investment of
$3 million to purchase 12,252,715 of the Company's ordinary shares
(equivalent to 2,450,543 ADSs) at a price equivalent to 18.8 pence
per share, which represents a 20% discount over the Company's
closing share price of 23.5 pence on AIM on February 18, 2020.
14.5 Share-based payments
On February 20, 2020, the Company granted 962,836 market value
options over ADSs under the Mereo 2019 EIP (Note 26.1) to certain
Executive Directors and other employees at an exercise price of
$1.84 per ADS.
On the same date, the Company granted 77,000 market value
options over ADSs under the Mereo 2019 NED EIP (Note 26.2) to
certain Non-Executive Directors at an exercise price of $1.84 per
ADS.
14.6 Issuance of additional warrants to lenders
Following the transactions noted above, it is anticipated that a
further 362,534 additional warrants will be issued to the lenders
of the bank loan facility giving them the right to subscribe for
ordinary shares at an exercise price of GBP2.95 (see Note 21 in the
Annual Report).
14.7 Resignation of Chief Financial Officer ("CFO")
On March 27, 2020, we announced the resignation of Richard
Jones. Michael Wyzga, a Non-Executive Director, will assume the
role of Interim Chief Financial Officer following the departure of
Richard Jones. Richard Jones will remain in his position as CFO for
a transitionary period of up to five months.
14.8 Coronavirus ("COVID-19")
The outbreak of COVID-19 has developed into a global pandemic,
spreading to most regions of the world including the United States
and the United Kingdom and to locations where we have facilities or
ongoing clinical trials. The pandemic has resulted in impacts both
direct and indirect to businesses including disruptions to
resources, inability of workers to carry out their jobs
effectively, disruptions to supply chains, inability to travel and
increased pressure on health systems required to treat
COVID-19.
As a result of government and local regulation we have been
required to introduce a work from home policy for the large
majority of our work force and our facilities remain open only for
business critical activities. The requirement by governments to
stay at home or to "social distance" limits normal communications
and may also increase cyber security risk or create data
accessibility concerns. It also significantly curtails the numbers
of individuals who can work in our offices.
COVID-19 has created an unprecedented burden on health systems
in impacted countries around the world. As a result, clinical
centers have diverted resources away from the performance of
clinical trials and because of that and the vulnerability of
patients in the Company's setrusumab clinical development program
for osteogenesis imperfecta (OI) and its Phase 2 alvelestat program
for patients with alpha-1 antitrypsin deficiency (AATD), the
Company's clinical activities will face some delays. AATD patients,
in particular, are at greater risk from COVID-19 given that the
condition is a respiratory and lung condition, for this reason, our
Phase 2 alvelestat trial will be delayed with topline data now
expected in 2021. We are also currently planning to initiate a
Phase 3 study in children with OI in late 2020, however, the
initiation of the study may also be delayed.
14.9 Equity fund raise
On June 4, 2020, Mereo BioPharma Group plc announced completion
of a private placement offering (the "Fundraising") of $70 million
(GBP56 million) before commission and expenses with a number of new
and existing principally U.S based institutional and accredited
investors (the "Purchasers"). The net proceeds from the Fundraising
will be used primarily to fund clinical development activities of
the Company's lead product candidates and for general corporate
purposes. The Company will utilize $13 million (GBP10.4 million) to
reduce current indebtedness (including interest) of $17.6 million
(GBP14.1 million). In the absence of the receipt of any other
income, the Board expects that the resulting net proceeds of the
Fundraising will fund the Company into early 2022.
The Fundraising comprised proceeds of a total of $19.4 million
(GBP15.5 million) through the issue of 89.1 million new Ordinary
Shares of GBP0.003 each in the Company at a price of 17.4 pence per
share and proceeds of a total of $50.6 million (GBP40.5 million)
through the issue by the Company of convertible notes (the "Tranche
1 Notes"). The Purchasers also received conditional warrants to
subscribe for further Ordinary Shares (the "Warrants").
The ability for the Tranche 1 Notes to be converted into
Ordinary Shares and for the Warrants to be exercised is conditional
on the passing of certain resolutions (the "Resolutions") at a
general meeting of shareholders scheduled for June 30, 2020 (the
"General Meeting").
If the Resolutions are passed, the Tranche 1 Notes will
automatically convert into Ordinary Shares at 17.4p, subject to
limitations that apply to the percentage of voting shares that may
be held by Purchasers. Any Tranche 1 Notes not so converted will
remain outstanding. The Tranche 1 Notes will not be separately
admitted to trading on AIM, but the Ordinary Shares which will
arise following any valid conversion of the Tranche 1 Notes will be
admitted to trading as part of the Company's single class of shares
admitted to trading on AIM or the relevant exchange on which the
Company's shares are traded at the time the Tranche 1 Notes are
converted. The Board estimates that 21,674,143 Tranche 1 Notes will
convert automatically if the Resolutions are passed on June 30,
2020, resulting in 124,564,033 Ordinary Shares (excluding Ordinary
Shares resulting in respect of interest on the converted Tranche 1
Notes) being issued, leaving 18,859,528 Tranche 1 Notes in
issue.
The Tranche 1 Notes are constituted by the Note Instrument,
details of which are set out below. The Warrants are constituted by
the Warrant Instrument, details of which are also set out
below.
If the Resolutions are not passed on or before August 7, 2020
the convertible notes will not convert into ordinary shares, the
warrants will not become capable of exercise and the holders of the
convertible notes
and warrants will become entitled to certain amounts (up to
GBP137 million) that will represent material liabilities for the
Company. The Purchasers, representing in aggregate approximately 40
per cent. of the Company's total number of shares and votes have
undertaken to vote in favour of the Resolutions relating to the
warrants and the convertible notes.
Note Instrument
The Note Instrument constitutes three potential tranches of Loan
Note:
-- an initial tranche of 40,533,671 Tranche 1 Notes representing
$50.6 million (GBP40.5 million) issued to all
Purchasers;
-- a second tranche of up to GBP40.0 million Tranche 2 Notes
representing approximately 115,034,554 ordinary shares which may be
issued following the third anniversary of the date on which the
Resolutions are passed to certain holders of Tranche 1 Notes in
lieu of the holder exercising its subscription rights under the
Warrants and in return for payment by that holder of the aggregate
exercise price of the relevant Warrants; and
-- a third tranche of up to GBP56.0 million Tranche 3 Notes,
which may be issued, if the Resolutions are not passed at the
General Meeting (or at any subsequent general meeting) held on or
before August 7, 2020.
The Tranche 1 Notes have a maturity date of June 2023 unless
otherwise extended, converted or accelerated. The Tranche 2 Notes
have a maturity date of three years from their date of issue (i.e.
such that they would be anticipated as becoming due in 2026) unless
otherwise extended, converted or accelerated. The Tranche 3 Notes
have a maturity date of August 2025 unless otherwise extended,
converted or accelerated. The Tranche 1 Notes and Tranche 2 Notes
may be extended by certain holders beyond the initial maturity date
to have a longstop maturity date of 10 years from the date of the
Note Instrument. Tranche 3 Notes may also be extended by certain
holders beyond the initial maturity date up to the same longstop
maturity date of 10 years from the date of the Loan Note
Instrument, however, such extension is subject to the consent of
the Company.
Tranche 1 Notes will initially bear interest at a fixed rate of
10 per cent. per annum, which will be retroactively reduced to a
rate of 6 per cent. per annum to the date of issue if the
Resolutions are passed on or before August 7, 2020. If the Tranche
1 Notes are extended, they cease to bear interest from that
extension. Tranche 2 Notes and Tranche 3 Notes do not accrue
interest (unless default interest applies). Following an event of
default by the Company, default interest will accrue on all Loan
Notes at 2 per cent. above the applicable interest rate in force at
that time for the relevant Loan Notes.
All the Loan Notes are unsecured and have been contractually
subordinated to the Company's existing senior debt facility with
Silicon Valley Bank and Kreos Capital pursuant to the terms of a
Subordination Agreement to which all Purchasers have acceded as
part of the Fundraising.
If the Resolutions are not passed on or before August 7, 2020,
the holders of Tranche 1 Notes are entitled to an additional fee
(the "Uplift Payment"). The Uplift Payment is designed to
compensate the Tranche 1 Noteholders for being unable to
participate in the equity of the Company through the conversion of
the Tranche 1 Notes and the exercise of Warrants. The value of the
Uplift Payment for each Purchaser shall be equal to the aggregate
principal amount of the Loan Notes held by such Purchaser on August
7, 2020. Any Purchaser who fails to attend the General Meeting (in
person or by proxy) and vote in favour of the Resolutions relating
to the Warrants and the Tranche 1 Notes shall not be entitled to
the Uplift Payment. Any Uplift Payment if due, is payable on the
redemption date of the relevant Loan Notes.
If the Resolutions are not passed on or before August 7, 2020,
an original holder of the Warrants may elect without payment to
convert its Warrants into fully paid Tranche 3 Notes with a
principal amount equal to the aggregate exercise price (being 34.8
pence per Warrant Share) of those Warrants, in compensation for the
right to exercise those Warrants not having arisen.
If the Resolutions have not been passed at a time when the
Company undergoes a change of control, each Noteholder on the date
of such change of control, shall (to the exclusion of the Uplift
Payment) be entitled to a payment equal to the amount of
consideration they would have received on such change of control
had the Resolutions been passed and they had received their full
entitlement of Ordinary Shares and all Warrants they held had
become exercisable, less the aggregate principal and interest
outstanding on the Tranche 1 Notes and certain residual interests
in the Warrants (if any) they held on the date of the change of
control (the "Change of Control Payment").
Until the Resolutions have been passed, no Tranche 1 Notes are
capable of conversion. If the Resolutions are passed on or before
August 7, 2020, the Tranche 1 Notes will automatically convert into
Ordinary Shares, except that no new Ordinary Shares will be issued
which would result in any person holding in excess of 9.99 per
cent. of the aggregate voting rights in the Company as a result of
the relevant conversion. Any Tranche 1 Notes not converted will
remain outstanding.
After the Resolutions have been passed, those Tranche 1 Notes
not automatically converted and any Tranche 2 Notes that may be
issued, will be convertible into Ordinary Shares at the election of
the Noteholders at any time prior to their maturity date, and
subject to the 9.99 per cent. beneficial ownership limit. The
Tranche 3 Notes are not capable of conversion.
The Loan Notes are required to be repaid on the earlier of (i)
the applicable maturity date; and (ii) a change of control taking
place in respect of the Company, and are otherwise not able to be
prepaid other than with the consent of a noteholder majority, or if
accelerated following an event of default.
The Loan Notes are subject to customary events of default (for
example, insolvency events in respect of the Company and default
under the Company's material contracts, amongst others) and any
principal amount and interest outstanding is capable of being
accelerated following the occurrence of such an event of default
and the expiry of any cure periods applicable thereto.
Warrants
All the participants in the Fundraising have received
conditional warrants to subscribe for further Ordinary Shares in an
aggregate number equal to 50 per cent. of both the Ordinary Shares
purchased in the Fundraising and the Ordinary Shares initially
issuable upon conversion of the Tranche 1 Notes. A total of
161,048,366 Warrants have been issued.
The Warrants have an exercise price of 34.8 pence per Ordinary
Share, which is equal to 200 per cent. of the Fundraising issue
price, and will be capable of being exercised at any time from and
after the date the Resolutions are passed at the General Meeting
(or at any subsequent general meeting) until the third anniversary
of the date the Resolutions are passed. The Warrants can be
exercised for cash or on a cashless basis.
If the Resolutions are not passed at the General Meeting (or at
any subsequent general meeting), the Warrants remain
non-exercisable but will, until August 8, 2025, continue to benefit
from rights to participate in certain transactions. These include
if the Company is acquired, following which the Company is required
to use its best efforts to ensure that Warrant holders receive
alternate warrants in the acquirer. In certain circumstances,
Warrant holders may require the Company (or the acquirer) pay them
(to the extent lawful) the value of the Warrants, determined in
accordance with a BlackScholes valuation provision.
The Warrant exercise price and the number of shares issuable
upon exercise of the Warrants will be adjusted in certain
circumstances, including if the Company effects a subdivision or
consolidation of its Ordinary Shares, declares a dividend or
distribution, or there is a reorganisation of its Ordinary
Shares.
Arrangements with OrbiMed
In recognition of OrbiMed's participation in, and assistance
with, the Fundraising, the Company has agreed to grant OrbiMed
certain rights. OrbiMed will have the right to nominate two persons
to be appointed to the Board of Directors (out of a maximum number
of 9 directors), within a period of 180 days of the Fundraising
subject to the appropriateness of the nominees. OrbiMed has also
been granted the right to participate in future financings of the
Company, subject, amongst other things, to the existing pre-emption
rights of the Shareholders under the Companies Act 2006 and certain
existing agreements to which the Company is a party. OrbiMed has
been paid a subscription fee of $325,000 by the Company by way of a
commission in consideration of its participation in the
Fundraising.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EADKKFDAEEEA
(END) Dow Jones Newswires
June 16, 2020 02:00 ET (06:00 GMT)
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