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MEREO BIOPHARMA GROUP PLC
1 Cavendish Place
London
W1G 0QF
United Kingdom
UNLOCKING
POTENTIAL
MEREO BIOPHARMA GROUP PLC
ANNUAL REPORT 2016
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016
UNLOCKING HEALTHCARE
POTENTIAL FOR PATIENTS
Mereo is an innovative leader in the biopharma sector
developing an initial portfolio of three medicines designed
to improve outcome in areas of significant unmet medical
need in rare and speciality diseases.
BPS-804
OSTEOGENESIS
IMPERFECTA PIVOTAL
PHASE 2B
READ MORE
ON P10
BGS-649
HYPOGONADOTROPIC
HYPOGONADISM
PHASE 2B
READ MORE
ON P12
ACUMAPIMOD
ACUTE EXACERBATIONS
OF CHRONIC OBSTRUCTIVE
PULMONARY DISEASE
PHASE 2
READ MORE
ON P14
2016 HIGHLIGHTS
» A Phase 2 dose-ranging study initiated with acumapimod for treatment
of the underlying inflammation in patients with acute exacerbations
of COPD in H1 2016
» Initiated a Phase 2b dose confirmation study with BGS-649 for the
treatment of hypogonadotropic hypogonadism in obese men in H1
2016 and a six month safety extension study was initiated in Q4 2016.
On track to report interim analysis in March 2017
» Obtained Orphan Drug Designation in the US and the EU for BPS-804
as a treatment for osteogenesis imperfecta
» Positive Phase 1 drug-drug interactions study with BCT-197
(acumapimod) and azithromycin
» Strengthened intellectual property across the portfolio
» Shares admitted to the AIM market of the London Stock Exchange on
9 June 2016 following a private placement raising a further £14.8 million
of capital, in addition to the £56.5 million drawdown earlier in the year
from the previous financing round bringing the total raised since
July 2015 to £91.3 million
» Balance sheet remains strong, with cash and cash equivalent balance
at 31st December 2016 of £53.6 million
POST PERIOD HIGHLIGHTS
» Three abstracts have been accepted for presentation as posters at the
American Thoracic Society in May 2017
» BPS-804 accepted for EMA Adaptive Pathways programme, potentially
enabling earlier patient access
» Richard Jones appointed as Chief Financial Officer, Jerome Dauvergne
appointed as Head of Pharmaceutical Development
GROSS CASH PROCEEDS
FROM FINANCING
YEAR-END CASH AND
CASH EQUIVALENTS
£71.3m
16
15
£20.0m
£71.3m
£53.6m
16
15
£12.2m
£53.6m
INVESTMENT IN R&D
LOSS PER SHARE
£22.8m
(1) Excludes
share based
payments.
16
15
£5.0m
£22.8m(1)
63p
16
15
63p(2)
(2) Adjusted loss
per share 51p
(see note 10).
101p
1
STRATEGIC REPORT*
2 At a glance
4 Business model
6 Chairman and CEO’s statement
10 Our products – BPS-804
12 Our products – BGS-649
14 Our products – Acumapimod
16 Risk factors
18 Financial review
CORPORATE GOVERNANCE
20 Board of Directors
22 Key management
24 Corporate Governance Report
29 Remuneration Report
33 Directors’ Report
35
Statement of Directors’
Responsibilities
FINANCIAL STATEMENTS
36 Independent auditor’s report
Consolidated statement
37
of comprehensive loss
38 Balance sheets
39
Consolidated and Company
statement of cash flows
Consolidated statement of changes
in equity
Company statement of changes
in equity
40
41
42 Notes to the financial statements
69 Advisors
* The Strategic Report, which has been
prepared in accordance with the CA
2006 has been approved and signed by
order of the Board on 24 February 2017
Charles Sermon
Company Secretary
FOR MORE INFORMATION
VISIT OUR WEBSITE
WWW.MEREOBIOPHARMA.COM
STRATEGIC REPORT AT A GLANCE
Unlocking potential in R&D pipelines
Mereo was established to address the R&D and financial challenges faced
by an increasing number of pharmaceutical companies and thereby deliver
novel medicines to patients that may not otherwise have been developed.
OUR VISION
Mereo’s vision is to become the partner of choice for pharmaceutical companies for
the development of novel, clinically validated pipeline products that have the potential
to address significant unmet medical needs.
OUR STRATEGY
Mereo’s strategy is to leverage its innovative business model
and resources to develop novel medicines for patients that otherwise
may not be developed and become a leader in speciality biopharma.
OUR PRODUCTS
BPS-804
BGS-649
ACUMAPIMOD
BPS-804 is a fully humanised
BGS-649 is a novel once-weekly
Acumapimod (BCT-197) is an
monoclonal antibody targeting
oral aromatase inhibitor being
oral p38 MAP kinase inhibitor
sclerostin, which is being developed
developed as a first-line therapy
being developed as a first-line
to improve bone quality and
for the treatment of obese
therapy for acute exacerbations
thereby reduce fractures in the
men with hypogonadotropic
of chronic obstructive pulmonary
orphan disease osteogenesis
hypogonadism (HH).
disease (AECOPD).
imperfecta (OI).
READ MORE ON P10
READ MORE ON P12
READ MORE ON P14
2
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 OUR STRENGTHS
Strategy
READ MORE ON P4
Leverage our innovative model
to develop novel medicines for
patients and become a leader in
speciality biopharma
Large companies’ pipelines are full of promising new drugs, but P&L pressures
and competition for R&D resources mean it is difficult for all of these drug candidates
to be advanced. Mereo was established to overcome these hurdles, optimise drug
development and ensure that promising drug candidates are made available to
patients and fulfil their potential.
Business model
Acquire innovative products
and deliver to patients in areas
of high unmet medical need
READ MORE ON P5
Mereo combines the efficiency of a small company combined with the financial strength
to conduct comprehensive clinical studies, enabling us to rapidly develop promising drug
candidates into marketable products and to capitalise on this value through partnership,
sale or direct commercialisation. Our substantial internal expertise is complemented by
an agreement with the global Contract Research Organisation (CRO) ICON.
Pipeline
Build a pipeline of novel products
focused on rare and speciality
diseases with unmet needs
READ MORE ON P9
Mereo has developed a clear set of selection criteria for new product candidates
which reflects the expertise and experience of its founders. The Group has acquired
an initial portfolio of three pipeline products from Novartis, each with a comprehensive
and robust package of Phase 2 clinically meaningful data. Longer term, the Group
aims to build a diversified portfolio of five to seven products.
Governance
Highly experienced Board and
management team
Our leadership team is highly experienced in clinical development, identifying new
product opportunities, capital raising and structuring transactions. Our Board
comprises individuals with significant general operating and clinical development
experience in successful biotechnology and pharmaceutical companies.
READ MORE ON P20
Financial
Well financed to support
achievement of key value
inflection points
In 2016 Mereo drew down £56.5 million from the private financing round in 2015
with two leading investors, Woodford and Invesco, and completed a further financing
round of £14.8 million from investors, including Novartis, in June 2016, following
which it joined the London Stock Exchange’s AIM market.
READ MORE ON P18
3
STRATEGIC REPORT BUSINESS MODEL
Acquire innovative products
and deliver to patients in areas
of high unmet need.
HELPING TRANSFORM THE LIVES OF PATIENTS
Current portfolio – Developing our drugs
Strong internal development expertise
ICON relationship to facilitate clinical development
Leverage global thought leaders to optimise development strategies
Well diversified risk profile across multiple drug types and clinical indications
Identifying new products
Leverage relationships with large pharmaceutical companies
Acquisition of new products
Aligned interests with pharmaceutical
companies allow for
alternative transaction
structures
New products
Target rare and speciality indications with unmet medical needs and compelling market potential
Optionality
around
further value
creation
Indication
with unmet
medical need
Sourced
from large
pharma
companies
Favourable
competitive
landscape
Selection
criteria
Scientific
rationale and
robust data
package
Clear clinical
and regulatory
strategy
Clinically
meaningful
data
Manageable
clinical trials
to reach
value-creating
milestone
4
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 A flexible and scalable
business model.
1
DEVELOP EXISTING PORTFOLIO
» We are focused in specialist-treated disease areas where there are often few or no treatment options
for patients and hence a high level of unmet medical need.
» We consult broadly with patient organisations and global thought leaders to shape our clinical
development plans to meet the needs of patients, physicians and payers as well as regulators.
» Our studies are robust and statistically well powered to build on and expand the high quality packages
we acquire from our large pharmaceutical company product providers.
2
OPTIMISE THE VALUE
» We seek to acquire global rights for all products, providing control over the future development
and commercialisation of each programme. Mereo intends to develop, register and commercialise
products in orphan diseases, whereas it will seek a partner for speciality disease products at the most
appropriate stage.
» Mereo has been structured to provide flexibility for value realisation through multiple avenues.
» We are intentionally pursuing a diversified portfolio – in terms of disease areas, mechanisms of action
and types of molecule – to ensure a balanced risk profile.
3
EXPAND THE PORTFOLIO
» Our lean internal infrastructure covers clinical development, manufacturing and IP management. This
is further complemented by key partners, in particular the global CRO, ICON for clinical development
and operators. Furthermore, this structure is readily scalable for future product acquisitions with
only modest increases in headcount for new products.
» Our focus is on product candidates with strong intellectual property, compelling market potential,
comprehensive preclinical, clinical and manufacturing data packages and a clear path to a significant
and timely value inflection point.
» For each additional product candidate we will seek to secure funding to reach the next value inflection
point at the time of acquisition.
READ MORE ON P6
5
STRATEGIC REPORT
CHAIRMAN AND CEO’S STATEMENT
Mereo had a strong year in 2016.
Mereo is a
biopharmaceutical
group developing
innovative medicines
for patients with rare
and/or speciality
diseases that are not
adequately treated by
current drug products.
Introduction
The Group’s strategy is to generate
shareholder value by acquiring clinical
stage products according to our exacting
criteria, as an increasing number of
pharmaceutical and biotechnology
companies face R&D and financial
challenges. We then seek to finance and
develop such products to an optimum
value inflection point. Patients benefit
from this approach by having access
to medicines that otherwise may
remain underdeveloped by larger
pharmaceutical companies.
The Group plans to build a broad
and diverse portfolio of acquired orphan
disease products and develop them
through clinical studies to regulatory
approval and then plans to commercialise
them directly. Orphan disease products
are an attractive opportunity for smaller
companies to commercialise. Due to the
lack of existing treatments, orphan drugs
can be fast-tracked to the market and can
involve smaller clinical trials, with lower
development costs. The development
of these products often involves close
co-ordination with patient organisations
and a limited number of treatment sites
DR DENISE SCOTS-KNIGHT
CHIEF EXECUTIVE OFFICER
DR PETER FELLNER
CHAIRMAN
6
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016
allowing for relatively easy identification
of the patient population and therefore
a small sales infrastructure.
For speciality products the Group
plans to partner or sell the product
upon completion of additional clinical
studies which may be for dose-ranging
optimisation or, in certain cases, the
Phase 3 studies required for product
approval and registration.
By acquiring products with clinical
efficacy and safety data the Group aims
to reduce some of the development risks
involved and to accelerate the availability
of these drugs for patients. Such well
characterised clinical-stage products
will have received significant investment
whilst being developed by major
pharmaceutical companies.
Our product selection process has a
clear set of criteria and typically means
that we acquire products that already
have compelling proof of concept data
or a well-established scientific proof
of mechanism in the disease indication
we plan to pursue.
This is the case for the Group’s
initial portfolio, comprising of three
products acquired from Novartis in
2015; acumapimod (BCT-197) for acute
exacerbations of chronic obstructive
pulmonary disease (AECOPD), BGS-649
for hypogonadotropic hypogonadism
(HH) and BPS-804 for osteogenesis
imperfecta (OI, also known as brittle
bone disease). Each of these products
was acquired with proof of concept
data in the target clinical indication
we intend to pursue.
2016 YEAR IN REVIEW
Mereo had a strong year in 2016,
advancing all of our three clinical
stage products towards the goal
of delivering novel medicines
to patients. In 2016 we:
Acumapimod
In Q2 2016 we initiated a Phase 2
dose-ranging clinical trial for acumapimod
in 270 AECOPD patients in the US and
the EU to explore two different dosing
regimens versus placebo (on top of
standard of care). The study aims
to demonstrate the most biologically
active dose regime of acumapimod
based on a primary end point of forced
expiratory volume in one second (FEV1).
Patients will be followed for 26 weeks
after treatment to explore recurrence
rates of AECOPD and number of
hospitalisations. We also initiated and
successfully completed a drug-drug
interaction study for acumapimod
with the antibiotic azithromycin in
16 healthy volunteers. This will allow
acumapimod to be dosed in patients
already being treated with azithromycin,
an antibiotic routinely employed in
this clinical indication.
BGS-649
In Q1 2016 we initiated a Phase 2b
clinical study for BGS-649 in 260
hypogonadotropic hypogonadism (HH)
patients to determine the lowest
effective dose of the once-weekly pill.
This study is comparing three doses
of BGS-649 with placebo. The primary
objective of this study is to demonstrate
the efficacy of BGS-649 to normalise
total testosterone levels in greater than
75% of subjects after 24 weeks of
treatment. We are also assessing
patient recorded outcomes and
determining the impact of BGS-649
on luteinising hormone (LH), follicle
stimulating hormone (FSH) and semen
parameters. In Q4 2016 we initiated a
six-month Phase 2b extension study
for BGS-649 to confirm the safety of
long-term treatment. This study aims
to enrol up to 50% of the patients (130)
from the first BGS-649 study and will
include monitoring of the testosterone
levels and any changes in bone mineral
density. The Group has announced that
it will release the outcome of a blinded
interim analysis in the Phase 2b study
of BGS-649 by the Independent Data
Monitoring Committee (IDMC) in
March 2017.
BPS-804
During the year we obtained Orphan
Drug Designation for BPS-804 in the
US and the EU, which provides
significant benefits for the product.
Following submissions to and
discussions with the regulators, we
are progressing BPS-804 towards a
potentially pivotal dose-ranging study
in 120 patients with OI using a novel
biomarker (HRpQCT). Post the period
end, earlier this month BPS-804 was
accepted to participate in the European
Medicine Agency’s (EMA) Adaptive
Pathways programme. The adaptive
pathway approach is part of the EMA’s
efforts to improve timely access for
patients to new medicines, primarily in
areas of high medical need. The pivotal
Phase 2b study for BPS-804 in OI is
expected to commence in H1 2017.
7
STRATEGIC REPORT CHAIRMAN AND CEO’S STATEMENT CONTINUED
Introduction continued
Our acquisition structures are
intended to align the interests of the
Group and our shareholders with those
of the pharmaceutical company through
the use of equity and downstream payments
based on success, rather than substantial
upfront cash payments. Another key feature
of our business model is the comprehensive
nature of the clinical studies we undertake.
These are designed to answer the key
questions which are important to both
patients and their physicians, as well
as the regulators and payers.
Our values and our people
The Group has grown significantly over
the past 18 months and we now employ
over 20 full-time staff in our London
headquarters. We seek to attract and
retain highly experienced individuals in
clinical development, clinical operations,
manufacturing, intellectual property and
quality assurance and support them with
strong leadership at the executive and
Board level. This internal expertise is
leveraged with external organisations
such as the clinical research organisation
ICON and external contract manufacturers.
This combination has allowed the Group
to efficiently and effectively transfer the
three programmes from Novartis and to
make significant progress this year with a
lean internal infrastructure. The successful
growth to date is a result of the hard work,
enthusiasm, experience and skills of all our
employees who show a strong affiliation
with Mereo and our mission to deliver
innovative medicines to patients.
Our Board members have significant
operational experience in large and
small pharmaceutical companies
and in clinical research organisations.
They provide valuable strategic input
into our development programmes and
into the overall direction of the Group.
In October 2016 Richard Bungay
notified us of his intention to step down
as CFO/COO and as a Board member
of Mereo. Richard left the company
on 13 January 2017 and we would like
to thank him for his contribution to
the Group during the past 18 months.
In November 2016 we announced the
appointment of Richard Jones as CFO
and a Board member of Mereo. Richard
joined the company on 30 January 2017.
Previously, Richard was the CFO of Shield
Therapeutics plc from April 2011 and a
board member from early 2010. Prior to
that, Richard was an investment banker
in the healthcare sector at Investec and
Brewin Dolphin. We are also pleased to
announce the appointment of Jerome
Dauvergne as Head of Pharmaceutical
Development. Jerome is currently
Head of External Manufacturing at
Ipsen Biopharm Ltd and he will join
the Group on 2 May 2017.
From founding the Group only 18 months
ago we have made outstanding progress,
acquiring and integrating our first three
programmes from Novartis and advancing
them into the clinic. We would like to
thank Board members and our staff for
their important contributions during this
successful period, and also our shareholders
for their continued support.
Recent developments and outlook
The Group is expecting to deliver a number
of key clinical milestones in 2017.
The Group has announced it will release
the outcome of a blinded interim analysis
in the Phase 2b study of BGS-649 by the
Independent Data Monitoring Committee
(IDMC) in March 2017. This follows the
enrolment of 93 patients out of a total of
260 patients expected in the study. They
will have received at least one month’s
treatment at this point. Following this
analysis, any doses either not expected
to normalise testosterone at 24 weeks
or with significant safety concerns will
be dropped and the study will continue
with remaining doses versus placebo
until patients have received six months’
treatment. Any doses that have been
dropped at the interim analysis will also
be dropped from the six month safety
extension study. As per the trial design,
the Group will continue to be completely
blinded to the study, including information
on dosing, until it is complete.
The Phase 2 study for acumapimod
in AECOPD and the Phase 2b study
for BGS-649 in HH are expected to
read out as planned in H2 2017.
Following consultation with the
regulators the BPS-804 programme for
osteogenesis imperfecta was accepted
into the Adaptive Pathways programme
in the EU as announced earlier this month.
We expect to start the pivotal Phase 2b
study for BPS-804 in OI in H1 2017.
These data points are each
important in demonstrating our ability
to successfully transfer programmes
from major pharmaceutical companies,
to rapidly execute comprehensive clinical
studies and also to validate our selection
criteria for the product acquisitions.
The Group continues to seek further
product opportunities to accelerate
growth with the aim of becoming a
leading player in the development and
commercialisation of novel therapies
for rare and speciality diseases with
high unmet medical needs. Our plan is
to use our first mover advantage to add
additional product opportunities such that
in the longer term we have between five
and seven products under development.
Mereo is looking to become the partner
of choice for pharmaceutical and large
biotechnology companies as they look to
unlock the potential in their development
pipelines and deliver promising drug
candidates to patients. During the period,
we have seen strong interest from a
range of pharmaceutical companies to
partner with us in respect of a significant
number of specific product opportunities.
We remain confident of delivering on
our strategy.
Dr Denise Scots-Knight
Chief Executive Officer
Dr Peter Fellner
Non-Executive Chairman
24 February 2017
8
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 STRATEGIC REPORT
STRONG PIPELINE PRODUCTS
Mereo acquired an initial portfolio of
three strong pipeline products from
Novartis, each with a comprehensive
and robust package of Phase 2,
clinically meaningful data.
PHASE 2B/
PIVOTAL
BPS-804
OSTEOGENESIS IMPERFECTA
READ MORE ON P10
PHASE 2B
BGS-649
HYPOGONADOTROPIC HYPOGONADISM
READ MORE ON P12
PHASE 2
ACUMAPIMOD
ACUTE EXACERBATIONS OF CHRONIC OBSTRUCTIVE
PULMONARY DISEASE
READ MORE ON P14
9
OUR PRODUCTS
Unlocking the potential of
BPS-804
CLINICAL STUDIES TO DATE:
» 83 patients have received BPS-804,
including patients with moderate OI
» Statistically significant improvement on bone
mineral density and bone biomarkers in OI
» Safe and well tolerated in target population
TIMELINE
BPS-804 is expected to commence a potential pivotal
Phase 2b study in H1 2017.
Phase 2b/
pivotal
In progress
Phase 2
Completed
Preclinical
Completed
Phase 1
Completed
PREVALENCE
~6.3
OI cases per 100,000
population in the US(1)
~7.5
OI cases per 100,000
population in the EU(2)
85–90%
are linked to a gene mutation
that produces abnormal type 1 collagen(1),(2)
(1) Based on Osteogenesis Imperfecta Foundation estimates.
(2) Based on Orphanet estimates.
(3) Shapiro J (2014) Osteogenesis Imperfecta: A Translational Approach
to Brittle Bone Disease. Academic Press. Chapter 2: pp15–22.
10
OVERVIEW
Osteogenesis imperfecta (OI) is a rare genetic
condition that affects between 20,000 and
50,000 patients in the US alone. OI
is characterised by fragile bones and
reduced bone mass, resulting in bones that
break easily, loose joints and weakened
teeth. In severe cases, patients may
experience hundreds of fractures in a
lifetime. The disease can be extremely
debilitating and even fatal in newborn infants
with a severe form of the disease.
WHY IT IS BEING DEVELOPED
Current treatment of OI patients focuses on
reducing the number of fractures, maintaining
mobility and managing pain. Currently there are
no FDA or EMA licensed treatments that address
the underlying bone weakness. BPS-804 is a fully
human monoclonal antibody that inhibits a protein,
sclerostin, which inhibits the activity of bone-forming
cells. Treatment with BPS-804 will increase bone
formation and reduce bone resorption, thereby
strengthening the bone and potentially reducing
fractures in OI patients.
OI types I, III and IV in
72–77%
of total OI population(3)
Symptoms:
» Frequent bone fractures and loose joints
» Early hearing loss
» Respiratory problems
» Brittle teeth
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 MARKET OPPORTUNITY
CLINICAL DEVELOPMENT
There is a significant unmet need for drugs to treat OI
as there is no pharmacological agent approved for the
reduction in the number of fractures for children
or adults with OI.
Currently available therapies, which are largely surgical, reduce
pain or address the complications associated with this disorder.
BPS-804 represents a novel approach that will strengthen bone
by building bone and reducing the resorption of bone, thereby
reducing the number of fractures.
Novartis’ Phase 2 data in OI patients established proof
of concept by demonstrating a statistically
significant improvement in bone formation
biomarkers and bone mineral density.
In studies to date, BPS-804 has been shown to have the
potential to be safe and well tolerated. Mereo intends to
commence a potential pivotal trial of BPS-804 in H1 2017
that is due to report in 2018. BPS-804 has been granted
Orphan Drug Designation in the US and the EU.
11
STRATEGIC REPORT OUR PRODUCTS
Unlocking the potential of
BGS-649
CLINICAL STUDIES TO DATE:
» 130 patients have received BGS-649
» Statistically significant rise in testosterone
levels, with once-weekly dosing
» Normalisation of testosterone levels was
accompanied by rises in LH and FSH
» Safe and well tolerated in the target population
TIMELINE
BGS-649 is currently undergoing a global, multi-centre
Phase 2b dose confirmation study in HH patients.
Preclinical
Completed
Phase 1
Completed
Phase 2b
In progress
PREVALENCE
32.6%
adult males in the US
are obese(1)
21.5%
adult males in the EU
are obese(1)
~15.8%
HH prevalence in obese men(2)
(1) Based on 2014 WHO estimates.
(2) Hofstra et al (2008) Netherlands J. Med, 66pp103–109.
12
OVERVIEW
Hypogonadotropic hypogonadism (HH)
results from inadequate levels of testosterone.
Symptoms associated with testosterone
deficiency include reduced/loss of libido,
erectile dysfunction, tiredness, fatigue,
impaired physical endurance, loss of vitality,
lack of motivation and mood disturbance.
The mainstay of current therapy for HH
is direct replacement of testosterone
administered by gel formulations applied to
the skin, which risk transference to anyone
in close contact, or intramuscular injections,
which can be painful and inconvenient.
WHY IT IS BEING DEVELOPED
BGS-649 inhibits aromatase, an enzyme that converts
patients’ own testosterone to oestradiol, thereby
increasing testosterone levels. BGS-649 has been
shown in clinical studies to normalise testosterone
and increase the gonadotrophin luteinising hormones
(LH) and follicle stimulating hormone (FSH), implying
maintenance of the normal negative feedback loop
which controls testosterone levels.
~10 MILLION
obese men with HH in the US and the EU
Symptoms:
» Reduced or loss of libido
» Erectile dysfunction
» Fatigue
» Impaired physical endurance and strength
» Loss of vitality or motivation
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 MARKET OPPORTUNITY
CLINICAL DEVELOPMENT
There are approximately six million obese men in the
US and four million in the EU who suffer from HH.
Of men with clinical testosterone deficiency, over 85% are
untreated despite access to care. Due to its mechanism of
action, BGS-649 is expected to be safer and better tolerated
as it normalises testosterone without inhibiting LH and FSH.
Furthermore, as an oral drug taken once weekly, Mereo believes
it is a more convenient option for patients.
Novartis’ Phase 2 data established proof of concept
for BGS-649 in obese men with HH because it showed
that BGS-649 normalised testosterone levels, increased
LH and FSH and was well tolerated.
Overall, BGS-649 has been well tolerated with no BGS-649-related
serious adverse events. The Group has commenced a Phase 2b
trial of BGS-649 and expects results in H2 2017.
13
STRATEGIC REPORT OUR PRODUCTS
Unlocking the potential of
ACUMAPIMOD
CLINICAL STUDIES TO DATE:
» 260 patients have received acumapimod
» Clinically meaningful improvement in FEV1
throughout the exacerbation period
» Safe and well tolerated in the target population
TIMELINE
Acumapimod is undergoing a global, multi-centre Phase 2
dose confirmation study in patients with AECOPD.
Preclinical
Completed
Phase 1
Completed
Phase 2
In progress
PREVALENCE
12 MILLION
COPD cases
diagnosed in the US(1)
13 MILLION
COPD cases
diagnosed in the EU(2)
H
>1.5 MILLION
hospital visits per year due to COPD(3)
(1) National Heart, Lung and Blood Institute (accessed in Feb 2016).
(2) COPD Coalition.
(3) Mannino et al (2002) MMWR Survell Summ 51:pp1–6.
(4) Wier et al (2011) AHRQ, HCUP, Statistical Brief #106pp1–11.
14
OVERVIEW
Chronic obstructive pulmonary disease
(COPD) is a non-reversible, progressive lung
disease that is a leading cause of death.
Smoking and air pollutants are the most
common causes of the disease and lead to a
chronic inflammatory response, narrowing
the airways and resulting in breakdown of
lung tissue. Acute exacerbations of chronic
obstructive pulmonary disease (AECOPDs)
occur when a patient with COPD experiences
a sustained increase in coughing, sputum
production or dyspnoea (shortness of
breath), and may require hospitalisation.
Increased inflammation is a core feature
of an AECOPD.
WHY IT IS BEING DEVELOPED
Acumapimod is an orally dosed inhibitor of p38
MAP kinase, which is activated in COPD and AECOPDs
and is inversely correlated with measures of lung
function. The higher the p38 MAP kinase activation,
the lower lung function is expected to be. COPD
patients are treated with corticosteroids to control
the inflammation. Despite this treatment, AECOPDs
still occur frequently. Acumapimod offers a path
to potentially controlling the inflammation.
62.5%
of all hospital admissions related to COPD are AECOPD patients(4)
Symptoms:
» AECOPDs occur when a patient
with COPD experiences a
sustained increase in coughing,
sputum production or dyspnoea
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 MARKET OPPORTUNITY
CLINICAL DEVELOPMENT
There are currently no therapies approved in the
US or the EU to treat AECOPD.
Novel therapeutics to treat and reduce exacerbations have
the potential to improve quality of life, slow disease progression
and significantly reduce healthcare costs. A drug that can treat
and also have an anti-inflammatory effect is expected to
significantly improve the quality of life of patients due to
improved lung function, fewer infections, shorter hospital
stays and reduced risk of rehospitalisation.
The studies undertaken by Novartis for acumapimod
demonstrated a statistically significant reduction of
the inflammatory marker TNFα and a clinically
meaningful increase in forced expiratory volume
in one second (FEV1), a clinically relevant endpoint
in the treatment of COPD.
In studies to date, acumapimod has been shown to be safe
and well tolerated in the target patient population. Mereo has
commenced a Phase 2 dose-ranging trial in AECOPD patients
to establish the optimal dose, with results expected to be
reported in H2 2017.
15
STRATEGIC REPORT RISK FACTORS
The Group’s principal activity is
the acquisition, development and
commercialisation of biopharmaceutical
products. In common with other businesses
in the biopharmaceutical sector, there are
significant risks and uncertainties relevant
to the Group’s operations. The Board has
adopted a strategy designed to identify,
quantify and manage the risks it faces,
whilst recognising that no risk management
strategy can provide absolute assurance
against loss.
The Audit and Risk Committee reviews
risks at its regular meetings to oversee
the management and mitigation of the
principal risks faced by the Group, as set
out below, and reports its findings to the
Board. The Board reviews risks at its
regular Board meetings, including, but
not limited to, an update on progress with
clinical trials and manufacturing, financial
results and projections, and corporate
development activities. Progress against
objectives is measured by financial and
non-financial key performance indicators
(KPIs). The Directors consider cash
runway and research and development
(R&D) expenditure to be the Group’s
financial KPIs at its current stage of
development. These are detailed in the
Financial Review on pages 18 and 19.
The Directors consider that the most
important non-financial KPIs relate to
progress with clinical studies, manufacturing
and acquisition of new products, which
are discussed in the Chairman and CEO’s
statement and the R&D overview.
Set out below are the key risk factors that
have been identified through the Group’s
risk management review process. Some
of these risk factors are specific to the
Group and others are more generally
applicable to the biopharmaceutical
industry in which the Group operates.
Risk
Description
Mitigation
Mereo has carefully selected and continues to closely manage
a range of experienced external partners. Each programme has
been carefully planned with detailed feasibility work undertaken
prior to programme commencement and regular reviews with
each vendor are conducted on an ongoing basis. Our highly
experienced team have oversight of each study.
Whilst Mereo is not yet close to commercialisation with any
of its product candidates, the management team and the Board
keep in close contact with relevant industry contacts and maintain
a dialogue in respect of future potential licensing and divestment
opportunities, as well as continuing to review the market backdrop
in relevant therapy areas and geographies.
R&D
Commercial
Mereo’s research and development activities are focused on
the progression of its three product candidates, BPS-804 for
OI, BGS-649 for HH, and acumapimod (BCT-197) for AECOPD.
Mereo’s ability to successfully develop these product candidates
could be influenced by a number of factors, including the ability
to demonstrate satisfactory safety and efficacy in clinical trials;
delays in completing clinical trials which may cause the Group
to incur additional costs; delays or difficulties in the enrolment
of patients into clinical trials; unforeseen adverse events in
connection with clinical trials; reliance on the completeness
and accuracy of data packages provided by the product originator;
reliance on third-party contract research organisations (CROs)
for the conduct of clinical trials; and reliance on contract
manufacturing organisations (CMOs) for the manufacturing
of product candidates in sufficient quantity and in compliance
with good manufacturing practice (GMP).
Mereo does not currently have any approved products. Its
future success is dependent on obtaining a commercial return
from its product candidates, either by entering into arrangements
with third parties for commercialisation or commercialising
certain product candidates itself.
Mereo’s ability to obtain a commercial return on product
candidates could be influenced by a number of factors, including
the ability to establish sales and marketing capabilities; the
ability to enter into product divestment or licensing agreements
with third parties; competition that may lead to third parties
developing or commercialising products earlier or more
successfully than Mereo; the ability to achieve commercially
reasonable rates for product reimbursement for product
candidates commercialised by Mereo; and physician and
patient acceptance of product candidates approved for
commercial sale.
Regulatory
Mereo operates in a highly regulated industry, giving rise
to a number of risks that could affect the development and
commercialisation of its product candidates, including the
ability to obtain required regulatory marketing approvals;
the ability to maintain orphan drug status for its product
candidate BPS-804; and the impact of changes to current
legislation and potential future legislation as they relate
to regulatory matters.
Mereo has a well developed in-house quality process and
standard operating procedures (SOPs) managed by a dedicated
Head of Quality and the highly experienced Mereo team receive
regular updates and reviews in respect of regulatory requirements.
In March 2016, BPS-804 was granted Orphan Drug Designation
for the treatment of OI by the Food and Drug Administration (FDA).
In June 2016, the European Commission also granted Orphan
Drug Designation to BPS-804.
16
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 Risk
Description
Mitigation
Intellectual
property (IP)
Financial
Operational
Manufacturing
Mereo’s ability to successfully license, divest or commercialise
its product candidates depends in large part on its ability to
obtain and maintain effective patent protection for its products
in the US, Europe and other territories. If Mereo is unable to
obtain or maintain patent protection for its product candidates,
or if the scope of the patent protection is not sufficiently
broad, competitors could develop and commercialise similar
products which would materially affect Mereo’s potential
commercial return from its products. Mereo is subject to
additional risks, including infringement of IP rights and
inability to protect the confidentiality of its know-how, which
could have an adverse effect on the competitive advantage
of its product candidates.
Mereo has a limited operating history, has incurred
losses since its inception and does not have any approved
or revenue-generating products. Mereo expects to incur
losses for the foreseeable future, and there is no certainty
that it will ever generate a profit. Mereo may not be able
to raise additional funds that will be needed to support
development or commercialisation of its product candidates,
and any additional funds that are raised could cause dilution
to existing investors. Mereo’s financial situation could be
adversely impacted by any future changes in UK taxation
legislation, including the R&D tax credit regime. Mereo has
significant expenditures in US Dollars and Euros; consequently,
its financial results could be adversely impacted by foreign
currency movements.
Mereo’s future success depends upon its ability to retain key
Executives, including the Chief Executive Officer, and to attract,
retain and motivate qualified individuals. Mereo anticipates
expanding its operational capabilities, and there is a risk that
it may encounter difficulties in managing this growth which
could disrupt the business. Mereo’s growth plans are dependent
upon its ability to identify further product candidates and to
integrate such products into its business. Mereo’s operations
may be adversely impacted if it is unable to comply with the
terms of licensing or acquisition agreements and applicable
laws and regulations, including data privacy.
The Group does not have its own manufacturing
infrastructure but relies on third parties for the production
of its product candidates. Mereo’s ability to commence or
continue its development activities could be impacted by a
failure to meet expectations in terms of quality, scheduling
scale-up, reproducibility, yield, purity, cost, potency or quality
or the failure to adhere to regulatory requirements.
Mereo has continued to expand its IP portfolio during the year.
In December 2016, Mereo also announced the expansion of its
IP protection through new patent applications and the grant
of pending patent applications for acumapimod, BPS-804 and
BGS-649 in the US, the EU and other territories. Mereo has a
dedicated Head of IP and utilises expert external counsel in
the prosecution and maintenance of its IP portfolio.
Mereo has a strong balance sheet with net cash and
cash equivalents at 31 December 2016 of £53.6 million
following a private placement and introduction to the AIM
market in June 2016. The Board is confident that Mereo
has sufficient resources to complete its current clinical
development programmes.
The Group continues to attract highly experienced people and
continued to expand its team through 2016 to reflect the growth
in activity. The Group has a range of short, medium and long-term
incentives including share options to attract and retain key staff.
During the year total headcount increased from 15 to 23.
Mereo entered into a supply services agreement with Novartis
in respect of its three product candidates. In addition, the Group
is working with a number of other experienced manufacturers
in respect of its drug manufacturing capabilities and requirements.
17
STRATEGIC REPORT FINANCIAL REVIEW
Mereo is well financed to reach
key value inflection points.
RICHARD JONES
CHIEF FINANCIAL OFFICER
The financial statements are presented
for the year ended 31 December 2016;
comparative data is shown for the
Group’s first accounting period, from
the parent company’s incorporation
on 10 March 2015 to the financial year
end on 31 December 2015.
During June 2016, the Group raised
gross proceeds of £14.8 million in a
private placement with institutional
investors and additionally drew down
the remaining balance of £56.5 million
gross proceeds from the £76.5 million
private financing round that was completed
in July 2015, in total therefore the Group
raised £71.3 million gross proceeds in
2016, £68.3 million net of expenses.
This will enable the Group to continue
to fund its existing programmes for each
of its three current product candidates
to achieve key value inflection points
in 2017 and 2018, as detailed in the
Strategic Report.
On 9 June 2016, following completion
of the private placement, the Company’s
shares were admitted to trading on the
AIM market of the London Stock Exchange
under the ticker symbol “MPH”.
The Group is structured to provide
flexibility for the eventual sale, licensing
or commercialisation of its product
candidates, with each being developed
within a wholly owned subsidiary
company. External research and
development activities are contracted
directly by the Group’s subsidiary
companies, with the parent company
employees providing services on an
“arm’s-length” basis to facilitate efficient
development of product candidates. It is
envisaged that future product acquisitions
can be added to the Group with modest
increases in internal resource.
Revenue
The Group did not generate any revenue
from product sales or licensing activities
during the period.
Research and development expenses
Research and development (R&D) expenses
during the period amounted to £24.6 million
(2015: £5.4 million). Excluding a non-cash
charge relating to share-based payments,
adjusted R&D expenses were £22.8 million
(2015: £5.0 million). This expenditure
18
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016
primarily related to payments to contract
research organisations (CROs) for the
ongoing and planned clinical trials for each
of the Group’s product candidates and
to contract manufacturing organisations
(CMOs) for the provision of drug products
to support the clinical studies. R&D expenses
are expected to increase in 2017, with the
planned initiation of the first pivotal clinical
study and associated manufacturing
activities for the Group’s orphan disease
candidate BPS-804 alongside the ongoing
clinical studies for acumapimod and
BGS-649, both of which are due to read
out as planned in H2 2017.
Administrative expenses
Administrative expenses during the
period amounted to £11.6 million
(2015: £7.7 million). Excluding share-based
payments and one off advisory fees adjusted
Administrative expenses amounted
to £5.7 million (2015: £5.2 million)
This expenditure primarily related to
employee-related expenses, including the
Board and executive management, costs
of the Group’s premises and professional
advisors’ fees. Underlying administrative
expenses are expected to increase in 2017
ahead of inflation reflecting a small planned
increase in headcount and a full year’s
cost relating to being a listed company.
Financial and other income
The Group earns interest on its cash reserves
from short-term deposits. Interest earned
during the period amounted to £0.2 million
(2015: £0.03 million). The Group has
benefited during 2016 from holding
a significant amount of its cash in
US Dollars (see below), where the
available interest rates have been higher
than those available for Sterling deposits,
reflecting the underlying base rates and
future base rate expectations. In addition,
the Group registered a non-cash gain on
these deposits of £2.3 million (2015: £nil)
from the gain on translation of these
deposits at the year-end reflecting a
strengthening of the US Dollar against
Sterling during the year.
Taxation
The Company’s subsidiaries conduct
all research and development activities
and consequently are responsible for
submitting claims under the UK research
and development small or medium-sized
enterprise (“R&D tax credit”) scheme.
The R&D tax credit scheme provides
additional taxation relief for qualifying
expenditure on R&D activities, with 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 Company’s
subsidiaries received the first R&D tax
cash repayment during the year, totalling
£0.9 million, in respect of the claim for the
period ended 31 December 2015. The
R&D tax credit receivable in the balance
sheet of £5.3 million is an estimate of
the cash repayments the Company’s
subsidiaries expect to qualify for in
respect of activities during the year ended
31 December 2016; however, as at the
date of this report these amounts have
not yet been agreed with HMRC.
Loss per share
Basic loss per share for the year was
63 pence (2015: 101 pence). On an adjusted
non-GAAP basis, excluding one-off items
and share-based payments, Loss per share
was 51 pence (a comparative 2015 adjusted
loss per share has not been presented after
taking into account that the Company was
formed in 2015 and therefore the nature of
the operating expenses was not compatible
between 2015 and 2016). Taking account
that Admission and the associated fund
raising occurred part way through the
year, on an adjusted non-GAAP proforma
basis, loss per share was 36 pence.
For definitions of adjusted and proforma
adjusted loss per share please see note 10.
Liquidity, cash, cash equivalents
and money market investments
The Group’s cash, cash equivalents
and money market investments at the
period end totalled £53.6 million
(2015: £12.2 million).
During June 2016, the Group raised gross
proceeds of £14.8 million in a private
placement with institutional investors,
of which £3.4 million was in the form
of a convertible loan, and additionally
drew down the remaining balance of
£56.5 million gross proceeds from the
£76.5 million private financing round that
was completed in July 2015, in total
therefore the Group raised £71.3 million
gross proceeds in 2016, £68.4 million
net of expenses.
The net cash outflow from operating
activities in 2016 was £27.4 million against
a loss before tax of £33.7 million, with the
major reconciling items being the non-cash
charge for share-based payments of
£7.5 million, the R&D credit received
of £0.9 million and other movements
in working capital of £2.0 million.
A significant component of the Group’s
clinical trial expenditure is denominated
in US Dollars. The Group has in place a
conservative hedging strategy in respect
of its USD requirements that ensures
that sufficient Sterling is converted to
US Dollars at any time to cover up to the
next twelve months anticipated operational
requirements. At the time of Brexit, the
Group therefore had significant US Dollar
deposits converted at favourable rates. The
Group continues to purchase US Dollars
on an ongoing basis based on this policy
and utilises a conservative assumption
when considering the cash funding
requirements for its operational activities.
Other balance sheet items
Intangible assets at the year end
were £25.8 million (2015: £25.8 million),
representing the value assigned to the
Group’s product candidates acumapimod,
BGS-649 and BPS-804 upon acquisition
from Novartis. The Group has performed
an annual review of the value in use for
these programmes at 31 December 2016
and has concluded that there is no
impairment at that date.
Future commitments to Novartis (as
described in note 24) will be recognised
as an expense in the same period when
related future cash inflows from product
sales or outlicensing or other monetisation
of the programmes by the Group are earned.
Trade and other receivables (including R&D
tax credit receivable of £5.3 million) at the
year end were £7.2 million (2015: £1.6 million)
and trade and other payables were £3.2 million
(2015: £4.0 million) at the year end.
Outlook
Overall, the Group believes it is well
positioned and well-funded to execute
on its business strategy and to progress
its existing products through the current
clinical trial programmes in 2017 and 2018.
Richard Jones
Chief Financial Officer
24 February 2017
19
STRATEGIC REPORT MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016
BOARD OF DIRECTORS
Mereo’s Board has extensive experience
in successful pharmaceutical and
biotechnology companies.
DR PETER FELLNER
CHAIRMAN
DR DENISE SCOTS-KNIGHT
CEO AND CO‑FOUNDER
RICHARD JONES
CFO
N
In addition to Mereo, Peter
also serves as Chairman of the
biotech and medtech companies
Ablynx NV, Vernalis plc and
Consort Medical plc. He has
previously served on the boards
of a wide range of life science
companies, including as
Vice-Chairman of Astex
Pharmaceuticals Inc. until its
sale to Otsuka in 2013, Chairman
of Optos plc until its acquisition
by Nikon Corporation, Director
of the global biopharmaceutical
company UCB SA from 2005
to 2014 and Chairman of
Acambis plc from 2006 until
its acquisition by Sanofi in 2008.
He was Chairman of Celltech
Group plc until its acquisition
by UCB in 2004, having been
CEO from 1990. Before joining
Celltech he was CEO of Roche UK
from 1986 to 1990. He served as
a member of the Medical Research
Council from 2000 to 2007.
Denise has over 25 years'
experience in the
biopharmaceutical industry
both in R&D management and
as a venture capitalist. She
started her career in R&D
management at Amersham and
Fisons and as a Senior Executive
at Scientific Generics before
joining Rothschild Asset
Management as an Investment
Manager. In 1999 she joined
Nomura and became a Managing
Director after heading the life
science investment team
investing globally in biotechnology
companies. She led the Phase4
Partners MBO from Nomura
in 2010. Denise has served on
many US and European private
and public boards including
Idenix (prior to its acquisition
by Merck for $3.85 billion).
She is currently a board
member of OncoMed (OMED)
and Albireo (ALBO). Denise has
a PhD and a BSc (Hons) from
Birmingham University and
was a Fulbright scholar at
UC Berkeley.
Richard joined the Company
as Chief Financial Officer and an
Executive Director on 30 January
2017. Richard was previously at
Shield Therapeutics plc where
he was Chief Financial Officer
and Company Secretary.
He was initially appointed as a
Non-Executive Director at Shield
in 2010 before moving to CFO in
2011 where he had a leading role
establishing the finance operations
and guiding Shield through its
private funding and recent IPO,
during which time the group
raised over £60 million from both
institutional, private and venture
capital investors to fund both
clinical development and
commercialisation activities.
Prior to this, Richard had a
career in investment banking,
holding senior positions at
Investec and Brewin Dolphin
Securities, where he advised
healthcare clients on a wide
range of transactions and
fundraisings including IPOs,
M&A and fundraisings.
Richard qualified as a Chartered
Accountant with PwC in 1991.
DR FRANK ARMSTRONG
SENIOR INDEPENDENT
NON‑EXECUTIVE DIRECTOR
N
R
+
Frank has served as CEO to
a number of healthcare and
biopharmaceutical companies
including CuraGen and
Fulcrum Pharma. He held
senior management positions
including Executive VP Product
Development at Bayer AG,
Senior VP Medical Research
at Zeneca Pharmaceuticals
(now AstraZeneca) and Senior VP
at Merck Serono. Frank holds an
MBChB from the University
of Edinburgh and became a
member of the Royal College
of Physicians in 1984. He was
elected Fellow of the Royal College
of Physicians, Edinburgh, in 1993
and also Fellow of the Faculty
of Pharmaceutical Physicians
in 1994.
20
CORPORATE GOVERNANCE
A
R
N
Audit and Risk Committee
Remuneration Committee
Nomination Committee
+ Research and Development
Committee
Chairman of Committee
PETER BAINS
NON‑EXECUTIVE DIRECTOR
PAUL BLACKBURN
NON‑EXECUTIVE DIRECTOR
DR ANDERS EKBLOM
NON‑EXECUTIVE DIRECTOR
KUNAL KASHYAP
NON‑EXECUTIVE DIRECTOR
N
R
+
A
N
A
R
N
+
A
N
Peter has nearly three decades of
experience in the pharmaceutical
industry encompassing strategic
and operational leadership
expertise across global
geographies, functions and
business segments. He is currently
Representative Executive Officer
and Chief Executive Officer of
Sosei Group Corporation, a
Tokyo-listed biotech company.
Previously, he was Chief Executive
Officer of Syngene International,
which he successfully took public
on the Mumbai exchange in
2015, where he continues to be
a Non-Executive Director. He also
currently serves as Non-Executive
Director for Phase4 Partners and
MiNA, and is also Non-Executive
Chairman of Fermenta Biotech, a
subsidiary of DIL, a Mumbai-listed
company. Previously, he had a
23-year career at GlaxoSmithKline,
where he held multiple senior roles.
Peter received a BSc Combined
(Honours) in Physiology/Zoology
from Sheffield University.
Paul has over 40 years of
experience in the field of finance.
He has previously held the
positions of Senior Vice
President Strategic Finance
Projects and Financial Controller
at GSK, gaining extensive
emerging markets, corporate
finance and change experience.
He also recently served on the
GSK Audit and Risk Committee.
He is currently a Board member
of Syngene International and
is also a member of Syngene’s
Audit and Risk and Stakeholder
Relationships Committees.
In addition, Paul was appointed
a Board member of the Precision
Medicine Catapult in December
2016. He holds a BSc in
Management Sciences from
Warwick University and also
a professional accounting
qualification from the
Chartered Institute of
Management Accountants.
Anders has extensive experience
as an executive and leader with
broad business knowledge
from senior roles in the
biopharmaceutical industry,
with global experience delivering
products, projects, productivity
and change management. He is
currently Chairman of the Board
at Karolinska University Hospital
and Chairman/Non-Executive
Board member of several biotech
companies. During two decades
at AstraZeneca, he was a member
of global executive teams
including Executive VP Global
Drug Development, EVP Global
Medicines Development, Global
Head Clinical Development, Global
Therapy Area Head, Global Head
Science & Technology Integration,
and CEO AstraZeneca AB Sweden.
Anders is also a board-certified MD
(anaesthesiology and intensive
care), PhD, DDS and Associate
Professor at Karolinska Institute,
Stockholm, Sweden and a fellow
of the Royal Swedish Academy
of Engineering Sciences.
Kunal is a Chartered Accountant
and is currently Chairman and
Managing Director of Allegro
Capital Advisors, a leading
Indian investment bank. Kunal
has a deep understanding of
the life sciences industry, built
over two decades of advising
companies in the industry on
fund raising, IPOs, mergers and
acquisitions, and IP licensing.
He is an Independent Director
of GlaxoSmithKline Consumer
Healthcare Ltd and Phase4
Partners. He was also Founder and
Executive Director of Celstream
Technologies, a leading software
product engineering organisation.
From 1994-2000 he was a global
partner at Arthur Andersen
responsible for building and
developing the firm’s practice
in Southern India.
21
KEY MANAGEMENT
DR ANTHONY HALL
THERAPY AREA HEAD, ORPHAN DISEASES
DR FIONA BOR
HEAD OF INTELLECTUAL
PROPERTY
DR ANTHONY HALL
THERAPY AREA HEAD,
ORPHAN DISEASES
IAN HODGSON
HEAD OF CLINICAL
OPERATIONS
STEWART JONES
HEAD OF CMC
Fiona is the Head of Intellectual
Property for Mereo Biopharma
and is based in London having
previously been Mylan’s Vice
President and Global Head of
Regional IP. Fiona graduated
in Natural Sciences from
Cambridge University before
going on to do a PhD at the
Medical Research Council, UK
and then a post-doc at Harvard
Medical School USA. She started
her career as a patent attorney
at SmithKline Beecham (later
GlaxoSmithKline) qualifying and
working as a UK and European
patent attorney. She spent two
years in private practice before
joining Teva and then Mylan.
Fiona is also qualified as a UK
patent attorney litigator and
has substantial experience of
UK High Court Litigation and
litigation in other jurisdictions.
She is a Principal Examiner for
the Patent Examination Board,
a member of the BIA IP Advisory
Committee and is a regular
speaker at conferences.
Tony graduated from King’s
College London with first class
honours in physiology and
pharmacology before going
on to study medicine at the
Royal Free Hospital School
of Medicine. He joined the
pharmaceutical industry in
1994 and has spent many years
working on the development
of drugs for rare diseases.
Immediately prior to joining
Mereo, Tony worked at
Prosensa/Biomarin on the
development of antisense
oligonucleotides for the
treatment of Duchenne muscular
dystrophy. He was also an
integral part of the DevelopAKUre
consortium, which raised money
from the European Commission
to develop a treatment for the
ultra-rare genetic disease
alkaptonuria. Tony speaks
regularly at rare diseases
conferences and is author
of a number of articles and
book chapters on orphan drugs,
including his most recently
published book entitled
“The Patient Group Handbook:
A Practical Guide for Research
and Drug Development”.
Ian has over 17 years in Clinical
Development positions in Small,
Medium and Large Pharma
and CROs, including Takeda
Oncology, Shire, Sanofi, Alcon
and ICON. Working within
Clinical Science and Operational
roles he has broad therapeutic
and operations experience
leading early and late-phase
development to support
successful registrations
in the US, EU and Japan.
He has been successful
in operationalising several
complex programs in orphan
and speciality indications.
Ian has a PhD in Medical
Microbiology from the
University of Edinburgh/Queen
Margaret, a BSc (Hons) from
Reading University as well as
two years of post-doctorate
vaccine research.
Stewart has over 25 years’
experience in CMC, spanning
the fine chemicals, CMO,
Biotech and BioPharmaceuticals
industries, during which he
has been involved with several
collaborations with big pharma.
At Mereo Stewart is responsible
for all of Mereo’s manufacturing
activities. Prior to joining Mereo
in September 2015, Stewart was
at Chroma Therapeutics for over
nine years and was responsible
for the development of the
clinical portfolio, all of which
have been successfully licensed
on. Previously Stewart worked in
the development department
at Evotec (now known as Aptuit)
for nine years leading teams on
the manufacturing development
of several different types of
entities from small molecules
to large molecules, peptides and
liquid crystals, some of which
have subsequently gone on to
commercial launch. Stewart has
a BSc (hons) in chemistry.
22
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016
DR JACKIE PARKIN
THERAPY AREA HEAD, RESPIRATORY ENDOCRINOLOGY
DR ALASTAIR MACKINNON
CHIEF MEDICAL OFFICER
CO‑FOUNDER
DR JACKIE PARKIN
THERAPY AREA HEAD,
RESPIRATORY ENDOCRINOLOGY
JOHN RICHARD
HEAD OF CORPORATE
DEVELOPMENT, CO‑FOUNDER
CHARLES SERMON
GENERAL COUNSEL, COMPANY
SECRETARY, CO‑FOUNDER
Alastair is our Chief Medical Officer
and a co-founder of Mereo. Prior
to Mereo, he was a Partner at
for Phase4 Partners, a global
life science venture capital firm.
He was also involved in Phase4’s
MBO in 2010 having originally
joined Nomura in 2005. Before
Nomura, he was a practising
physician in the UK for ten years.
Alastair received a BSc and MBBS
from King’s College London, is a
Member of the Royal College of
Surgeons of Edinburgh (MRCS)
and has a Diploma in Corporate
Finance from the London Business
School. Alastair is a board member
of Phase4 Partners.
Jackie is an academically-trained
physician with extensive technical,
clinical, and development
capabilities from over 30 years’
experience in clinical medicine and
pharmaceutical R&D. Following
senior clinical roles in London
teaching hospitals where she led
services for immunodeficiency,
infectious and autoimmune
diseases, she progressed
her career by moving to
GlaxoSmithKline. Rising to
Vice President, she gained a
breadth of experience across
all phases of pharmaceutical
discovery and development,
leading to successful regulatory
approvals with small molecule
and biological medicines. Jackie
joined Mereo in October 2015
as the Therapeutic Area Head for
Endocrinology and Respiratory,
leading the development of
acumapimod for treatment
of acute exacerbations
of COPD and BGS-649 in
hypogonadotropic hypogonadism.
John is our Head of Corporate
Development and a co-founder of
Mereo. Prior to Mereo, he worked
with the co-founders at Nomura
then Phase4 Partners since 2000.
He has significant corporate,
operational and transactional
experience, having served in
various executive, director and
advisory roles throughout his
career. He is a board member
of Aviragen, Phase4 Partners,
QUE Oncology and Catalyst
Biosciences. Previously, he
was Executive VP Business
Development at SEQUUS, where
he was responsible for negotiating
SEQUUS’ acquisition by ALZA.
John also headed business
development for VIVUS and
Genome Therapeutics; where
he established numerous
alliances. John holds a MBA
from Harvard Business School
and BS from Stanford University.
Charles is our General Counsel,
Company Secretary and a
co-founder of Mereo. He has over
20 years’ experience in corporate
law and biopharmaceuticals. He
started his career as a corporate
lawyer at Freshfields before joining
Nomura as an Associate Director
in 1998 where he worked for
Nomura’s life science investment
team investing globally in
biotechnology companies.
Charles was part of Phase4
Partners’ MBO from Nomura in
2010. Charles has an LLB (Hons)
from Hull University.
23
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE REPORT
Audit and Risk Committee prior to the
Company’s Admission to AIM in June
2016. At 31 December 2016 the Board
comprised six Non-Executive Directors
and one Executive Director.
The initial five Non-Executive Directors
(Peter Fellner, Frank Armstrong, Peter Bains,
Anders Ekblom and Kunal Kashyap) were
issued with share options in recognition
of their assistance in establishing the
Company in the period prior to completion
of the private financing round. These share
options have a vesting period of three years.
In light of the limited number of options
and relatively short remaining vesting
period, the Board does not consider that
the share options impact the independence
of the Non-Executive Directors. One Director,
Kunal Kashyap, is not considered to be
independent due to a common shareholding
in Phase4 Partners Limited with Denise
Scots-Knight, CEO of Mereo. At the date
of this report, therefore, there are two
Executive Directors, five independent
Non-Executive Directors and one
non-independent Non-Executive Director.
The biographies of the Directors serving
at the date of this report are shown on
pages 20 and 21.
The Board considers there to be sufficient
independence on the Board and that all
the Non-Executive Directors are of sufficient
competence and calibre to add strength
and objectivity to the Board, and bring
considerable experience in scientific,
clinical, operational and financial development
of biopharmaceutical products and
companies. In line with best corporate
governance practice, the Board has
appointed Frank Armstrong as the
Senior Independent Director, providing
an alternative conduit to the Chairman
and CEO for any concerns of employees
and shareholders.
DR PETER FELLNER
CHAIRMAN
Chairman’s governance overview
I am pleased to present the Corporate
Governance Report for the year ended
31 December 2016.
The Board believes that strong governance
is a central element of the successful
growth and development of the Company.
The Board and its Committees play a key
role in the Company’s governance by
providing an independent perspective
to the senior management team, and
by seeking to ensure that an effective
system of internal controls and risk
management procedures is in place.
This section of the annual report
describes our corporate governance
structures and processes and how they
have been applied throughout the year
ended 31 December 2016.
The Board
Following the closure of its initial
private financing round in July 2015,
the Company appointed an experienced
Board with extensive expertise in clinical
development, commercialisation and
financing and further strengthened
the Board with the appointment of
Paul Blackburn as Chairman of the
24
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 Name
Peter Fellner
Denise Scots-Knight
Frank Armstrong
Peter Bains
Paul Blackburn
Richard Bungay
Anders Ekblom
Richard Jones
Kunal Kashyap
The Board is responsible to the shareholders
for the proper management of the Group
and meets regularly to set the overall
direction and strategy of the Group and to
review scientific, operational and financial
performance. The Board has also convened
on an ad-hoc basis between scheduled
Board meetings to review the strategy
and activities of the business. The key
responsibilities of the Board are as follows:
» setting the Company’s values
and standards;
» approval of long-term objectives
and strategy;
» approval of budgets and plans;
» oversight of operations ensuring
adequate systems of internal controls
and risk management are in place,
maintenance of accounting and other
records and compliance with statutory
and regulatory obligations;
» review of performance in light of strategy
and budgets, ensuring any necessary
corrective actions are taken;
» approval of the annual report and financial
statements and major projects such as
new product acquisitions;
» changes to structure, size and the
composition of the Board;
» determining the remuneration policy
for the Directors and approval of the
remuneration of the Non-Executive
Directors; and
Date of appointment
Date of resignation
29 July 2015
1 July 2015
29 July 2015
29 July 2015
6 October 2015
9 June 2016
31 October 2016
29 July 2015
30 January 2017
29 July 2015
» approval of communications with
shareholders and the market through
a separate disclosure committee.
The Company Secretary, Charles Sermon,
is responsible for ensuring that Board
procedures are followed and applicable
rules and regulations are complied with.
There is a clear separation of the roles
of the Chief Executive Officer and the
Non-Executive Chairman. The Chairman
is responsible for overseeing the running
of the Board, ensuring that no individual
or group dominates the Board’s decision
making and ensuring the Non-Executive
Directors are properly briefed on matters.
The Chief Executive Officer has the
responsibility for implementing the strategy
of the Board and managing the day-to-day
business activities of the Group.
All of the Directors are subject to re-election
by shareholders at the third Annual General
Meeting (AGM) after the AGM at which
they were appointed or reappointed.
Conflicts of interest
Under the Articles of Association the
Directors may authorise any actual or
potential conflict of interest a Director
may have and may impose any conditions
on the Director that are felt to be appropriate.
Directors are not able to vote in respect of
any contract, arrangement or transaction
in which they have a material interest
and they are not counted in the quorum.
A process has been developed to identify
any of the Directors’ potential or actual
conflicts of interest. This includes declaring
any new conflicts before the start of each
Board meeting.
Development, information and support
Updates are given to the Board on
developments in governance and
regulations as appropriate, including
presentations from the Company’s
Nomad and legal advisors. The Company
Secretary supports the Chairman in ensuring
that the Board receives the information
and support it needs in order to carry out
its roles.
Performance evaluation
The Board has a process for evaluation
of its own performance and that of its
Committees and individual Directors,
including the Chairman. The Board
intends that these evaluations are
carried out annually.
Attendance at Board meetings
The Directors' attendance at scheduled
Board meetings during 2016 was
as follows:
Peter Fellner
Denise Scots-Knight
Frank Armstrong
Peter Bains
Paul Blackburn
Richard Bungay
Anders Ekblom
Kunal Kashyap
Attendance
12/12
12/12
9/12
10/12
10/12
3/4
11/12
12/12
25
CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
Board Committees
In order to effectively manage governance of the Group, the Board has delegated certain responsibilities to sub-committees,
as detailed below:
The detailed charters for each of the Committees can be found on the Group’s website at www.mereobiopharma.com. All of the
Board Committees are authorised to obtain, at the Company’s expense, professional advice on any matter within their terms of
reference and to have access to sufficient resources in order to carry out their duties.
THE BOARD
Audit and Risk
Committee
Remuneration
Committee
Nomination
Committee
Research and Development
Committee
Paul Blackburn (Chair)
Anders Ekblom (Chair)
Peter Fellner (Chair)
Frank Armstrong (Chair)
Anders Ekblom
Kunal Kashyap
Frank Armstrong
Peter Bains
Frank Armstrong
Peter Bains
Paul Blackburn
Anders Ekblom
Kunal Kashyap
Peter Bains
Anders Ekblom
Audit and Risk Committee
The Audit and Risk Committee is made
up of three members, Paul Blackburn
(Chairman) and Anders Ekblom, who are
independent Non-Executive Directors,
and Kunal Kashyap. While Kunal Kashyap
is not considered to be independent by
the Board, he has recent and relevant
financial experience.
The Audit and Risk Committee will
normally meet at least four times a year
at the appropriate times in the reporting
and audit cycle. The Committee has
responsibility for, amongst other things:
» monitoring the financial integrity
of the financial statements of the Group,
including its annual and half year reports;
» reviewing and challenging where
necessary any changes to, and
consistency of, accounting policies,
whether the Group has followed
appropriate accounting standards
and made appropriate estimates
and judgements, the going concern
assumption and all material
information presented with the
financial statements;
» involvement of the Group’s auditor
in the above processes;
» reviewing the effectiveness of the
Group’s internal control and risk
management systems and reviewing and
approving the statements to be included
in the financial statements concerning
internal controls and risk management;
» overseeing the process for managing
risks across the Group, including
reviewing the Group’s corporate
risk profile;
» regularly assessing the need for an
internal audit function;
» considering and making
recommendations to the Board,
to be put to shareholders for approval
at the Annual General Meeting in
relation to the appointment,
reappointment and removal of
the Company’s external auditor;
» ensuring that at least every ten years
the audit services contract is put out
to tender, in respect of the tender to
oversee the selection process;
» overseeing the relationship with the
external auditor, including approval
of its remuneration, approval of
its terms of engagement, annual
assessment of its independence
and objectivity, taking into account
relevant professional and regulatory
requirements and the relationship with
the auditor as a whole, including the
provision of any non-audit services;
» meeting regularly with the external auditor
and, at least once a year, without any
Executive Director or other member of
management present to discuss any
issues arising from the audit;
» reviewing and approving the annual
audit plan and reviewing the findings
of the audit;
» reviewing the Group’s arrangements
for its employees and contractors to
raise concerns in confidence about
possible improprieties in financial
reporting or other matters, the Group’s
procedures for detecting fraud and
the Group’s anti-bribery and corruption
procedures; and
26
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 » it focuses in particular on compliance
with legal requirements, accounting
standards and the rules of the FCA and
ensuring that an effective system of
internal financial control is maintained.
The ultimate responsibility for reviewing
and approving the annual report and
accounts and the half yearly reports
remains with the Board.
The Audit and Risk Committee monitors
the relationship with the external auditor,
Ernst & Young LLP, which was appointed
in 2015 and reappointed at the 2016 AGM,
to ensure that auditor independence and
objectivity are maintained. As part of
its review the Audit and Risk Committee
monitors the provision of non-audit services
by the external auditor. The breakdown of
fees between audit and non-audit services
is provided in note 6 to the financial
statements. The Audit and Risk Committee
also assesses the auditor’s performance.
Having reviewed the auditor’s independence
and performance, the Audit and Risk
Committee is recommending that
Ernst & Young LLP be reappointed
as the Company’s auditor at the next
Annual General Meeting.
Remuneration Committee
The Committee consists entirely of
independent Non-Executive Directors.
The Remuneration Committee will
normally meet at least twice a year and
has responsibility for, amongst other things:
» setting the remuneration policy for the
Executive Directors and the Chairman,
taking into account relevant legal and
regulatory requirements, the provisions
of the UK Corporate Governance Code
and other guidance such as that issued
by the Association of British Insurers
and the National Association of
Pension Funds;
» within the agreed policy determining
the total individual remuneration
package of each Executive Director
and the Chairman;
» recommending and monitoring the
level and structure of remuneration
for senior management;
» approving the design of and determining
» responsibility for identifying and
the targets for any schemes of
performance-related remuneration,
including share schemes;
nominating, for the approval of the
Board, candidates to fill Board
vacancies as and when they arise;
» considering whether the Directors
should be eligible for annual bonuses
and, if so, to consider the upper limits
for such bonuses;
» formulating plans for succession for both
Executive and Non-Executive Directors
and in particular for the key roles of
Chairman and Chief Executive Officer;
» considering whether the Directors
» assessing the reappointment of any
Non-Executive Director at the conclusion
of their specified term of office having
given due regard to their performance
and ability to continue to contribute to
the Board in light of the knowledge,
skills and experience required; and
» assessing the re-election by shareholders
of any Director having due regard
to their performance and ability to
continue to contribute to the Board
in light of the knowledge, skills and
experience required and the need for
progressive refreshing of the Board.
During the year, the Nomination
Committee discussed and approved
the appointment of Richard Jones
as Chief Financial Officer, with effect
from 30 January 2017.
Research and
Development Committee
Reflecting the importance of the Group’s
development activities, the Board has
established a Research and Development
Committee to provide oversight and
guidance to the executive management.
The Research and Development Committee
meets at least twice a year and has
responsibility for, amongst other things,
oversight of:
» the research and development
activities of the Group;
» relationships with key research
and development suppliers;
» strategic development plans for
products in the Group’s portfolio; and
» the acquisition of new products.
should be eligible for benefits under
long-term incentive schemes;
» agreeing the policy for authorising
claims for expenses from the Executive
Directors and the Chairman; and
» ensuring that contractual terms on
termination, and any payments made,
are fair to the individual and the Company
and that failure is not rewarded and
that the duty to mitigate loss is
fully recognised.
During 2016 the Remuneration Committee
set the remuneration policy for the Company
to be operated following its Admission to
AIM and set the targets used in assessing
the bonus for the Chief Executive Officer
and the Chief Financial Officer.
The Directors’ Remuneration Report
is presented on pages 29 to 32.
Nomination Committee
The Nomination Committee comprises
a majority of independent Non-Executive
Directors and expects to meet at least
twice a year at appropriate times in the
operating cycle. The main duties of the
Nomination Committee include:
» regularly reviewing the structure, size
and composition (including the skills,
knowledge, experience and diversity)
required of the Board compared to
its current position and making
recommendations to the Board
with regard to any changes;
» giving full consideration to succession
planning for Directors and other senior
Executives in the course of its work,
taking into account the challenges and
opportunities facing the Group, and
what skills and expertise are therefore
needed on the Board in the future;
27
CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
Research and
Development Committee continued
The Committee is also tasked with being
kept informed of strategic issues and
commercial changes affecting the
Group’s research and development
activities, and providing guidance and
making recommendations to the Board
in respect of such activities.
During 2016 the Research and Development
Committee reviewed and provided input
into clinical trial protocols for the Company’s
products and reviewed and provided input
on new product opportunities.
Corporate social responsibility
The Board recognises the importance of
social, environmental and ethical matters
and it endeavours to take into account
the differing interests of the Group’s
stakeholders, including its investors,
employees, suppliers and business
partners, when operating its business.
Risk management and internal control
The Board is responsible for the systems
of internal control and for reviewing their
effectiveness. The internal controls are
designed to manage rather than eliminate
risk and provide reasonable but not absolute
assurance against material misstatement
or loss. The Board reviews the effectiveness
of these systems annually by considering
the risks potentially affecting the Group.
These procedures include the preparation
of management accounts, forecast
variance analysis and other ad-hoc
reports. A Financial Procedures Manual
sets out minimum reporting standards.
Risks throughout the Group are considered
and reviewed on a regular basis, as detailed
under "Audit and Risk Committee" on
page 26. Principal risks identified are
set out in the Strategic Report on
pages 16 and 17.
At present the Group does not have
an internal audit function. Given the
current size of the Group and the control
systems that are in place the Audit and
Risk Committee believes that there is
sufficient management oversight to
highlight any areas of weakness in the
financial reporting systems. The Audit
and Risk Committee will review the
need for an internal audit function
at least annually.
A comprehensive budgeting process is
completed twice a year and is reviewed
and approved by the Board. The Group’s
results, compared with the budget, are
reported to the Board at each Board
meeting and are discussed in detail.
The Group maintains appropriate insurance
cover in respect of actions taken against
the Directors because of their roles, as
well as against material loss or claims
against the Group. The insured values
and type of cover are comprehensively
reviewed on a periodic basis.
Employment
The Board recognises its legal responsibility
to ensure the wellbeing, safety and welfare
of its employees and to maintain a safe
and healthy working environment for
them and for its visitors.
Financial and business reporting
The Board seeks to present a balanced
and understandable assessment of the
Group’s position and prospects in all half
year, final and price-sensitive reports and
other information required to be presented
by statute. The Board receives a number
of reports to enable it to monitor and
clearly understand the Group’s financial
position. Procedures have been put in
place to ensure that price-sensitive
information is identified effectively and
all communications with the market are
released in accordance with expected
time scales.
Relations with shareholders
The Board recognises the importance
of communication with its shareholders
to ensure that its strategy and performance
is understood and that its remains
accountable to shareholders. The Group
maintains a regular dialogue with
institutional investors. The Group’s
website, www.mereobiopharma.com,
has a dedicated investor section and
provides useful information for the
Company’s shareholders including the
latest announcements, press releases,
published financial information, current
development pipeline and other information
about the Company. The Board as a whole
is responsible for ensuring that a satisfactory
dialogue with shareholders takes place,
while the Chairman and the Chief Executive
Officer ensure that the views of the
shareholders are communicated to the
Board as a whole. The Senior Independent
Director acts as an alternative conduit for
stakeholders' concerns.
The Board ensures that the Group’s
strategic plans have been carefully
reviewed in terms of their ability to
deliver long-term shareholder value.
Shareholders are welcome to attend
the Group’s AGM, where they have
the opportunity to meet the Board. All
shareholders will have at least 21 days’
notice of the AGM, at which the Directors
will be available to discuss aspects of the
Group’s performance and question in
more detail.
This year’s Annual General Meeting of
the Company will be held on 27 June 2017.
The Notice of Annual General Meeting
is included with the Annual Report and
financial statements and is available
on the Group’s website.
Dr Peter Fellner
Non-Executive Chairman
24 February 2017
28
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 REMUNERATION REPORT
This report sets out the remuneration policy operated by the Group in respect of the Executive and Non-Executive Directors.
The Remuneration Committee
The Board has delegated certain responsibilities for Executive Director remuneration to the Remuneration Committee. Details of the
Remuneration Committee, its remit and activities are set out in the Corporate Governance Report on pages 24 to 28.
Remuneration policy
The Group’s remuneration strategy is to provide pay packages that will:
» reward delivery of value to shareholders and achievement of the Group’s key strategic objectives;
» motivate and retain business-critical employees; and
» enable the Group to continue to attract high quality recruits.
The remuneration framework for Executive Directors is a combination of base salary, benefits, an annual bonus and awards under
the Long Term Incentive Plan as described below. A similar pay structure is operated for other key members of senior management.
Element
Description
Vesting/performance conditions
Base salary
Base salaries are reviewed annually with effect from 1 January each year. The review
process is managed by the Remuneration Committee with reference to market salary
data and the individual’s performance and contribution to the Group during the year.
n/a
With effect from 1 January 2017 the base salary of Denise Scots-Knight,
Chief Executive Officer, was increased by 7.3% to £365,000. Richard Jones,
Chief Financial Officer, commenced employment with the Group on
30 January 2017 on a base salary of £250,000.
Bonuses
Annual bonuses for Executive Directors and senior management are based on
achievement of Group strategic and financial targets. The annual bonus potential
for the Executive Directors and senior management is a maximum of 100% of salary.
For the year ended 31 December 2016 bonuses were awarded at 70% of the
maximum potential.
70% of the annual bonus is paid in cash.
30% of the annual bonus is deferred into rights
to acquire shares equal in value to the amount
deferred free of charge ("awards"). The awards
are made under the Deferred Share Bonus
Plan (DSBP). The DSBP awards vest three
years after the date of issue and have no
performance conditions.
Long Term
Incentive Plan
(LTIP)
In order to further incentivise the Executive Directors and senior management, and
align their interests with shareholders, the Group has put in place an LTIP scheme,
under which rights to acquire shares at nil-cost may be awarded. The shares to
satisfy LTIP awards are delivered through an employee benefit trust (EBT), as
detailed in note 21 to the financial statements.
The LTIP awards vest over a five-year period
with 75% of the total award based upon the
achievement of share price targets and 25%
of the total award based upon the achievement
of strategic targets.
At the time of the Company’s Admission to the AIM market of the London Stock
Exchange (“Admission”) the CEO received LTIP awards over shares equivalent to
300% of salary (the maximum permitted by the LTIP rules) at the price at Admission
and key senior management received LTIP awards over shares equivalent to 225%
of salary at the price at Admission.
Share option
scheme
Prior to Admission, the Group operated a share option scheme (the "Historic
Scheme"). At the time of Admission the Company established a new market
value share option scheme (the "New Scheme"). Share options may be granted
to all employees on commencement of employment with the Group and may be
granted on a periodic basis thereafter.
Under the Historic Scheme share options for
Executives vest over four-year period; share
options for Non-Executive Directors vest
over a three-year period; and there are no
performance conditions other than continued
service with the Company.
Under the New Scheme share options vest over
a three-year period and NEDs are not eligible to
participate. There are no performance conditions
under the New Scheme.
29
CORPORATE GOVERNANCE REMUNERATION REPORT CONTINUED
Remuneration policy continued
Element
Description
Vesting/performance conditions
Pension
The Group operates a defined contribution pension scheme, which is available to all
employees. The Company makes payments of 10% of basic salary for Executives
(15% for the Chief Executive Officer) into any pension scheme or similar arrangement
as the participating Executive may reasonably request (or a payment in lieu). Such
payments are not counted for the purposes of determining bonuses or awards
under the Mereo LTIP.
n/a
Other benefits Other benefits provided to all employees are life assurance, income protection,
private medical insurance and subsidised gym membership.
n/a
Executive Directors’ service agreements and termination provisions
Details of the Executive Directors’ service agreements are set out below.
Director
Date of initial contract
Notice period by Company
Notice period by Director
Denise Scots-Knight, Chief Executive Officer
Richard Jones, Chief Financial Officer
29/07/2015
30/01/2017
12 months
6 months
12 months
6 months
There are no specific provisions under which Executive Directors are entitled to receive compensation upon early termination, other
than in accordance with the notice period.
At the Company's sole discretion it may make a payment in lieu of notice equivalent to the basic salary which the individual would
have been entitled to receive following notice of termination.
Richard Bungay, CFO/COO, was appointed to the Board on 9 June 2016 and resigned on 31 October 2016, at which date he stepped
down from the Board of Directors. His contract of employment ended on 13 January 2017.
Non-Executive Directors
The remuneration payable to Non-Executive Directors is decided by the Chairman and the Executive Directors. Remuneration
of Non-Executive Directors is currently as follows:
Chairman
Non-Executive Director fee:
Chair of Committee(1)
Member of two or more Committees (but not as chair)(1)
Member of one Committee or fewer(1)
Additional fee for Senior Independent Director
(1) Excludes membership of Nomination Committee.
Terms of appointment
Non-Executive Director
Frank Armstrong
Peter Bains
Paul Blackburn
Anders Ekblom
Kunal Kashyap
£
100,000
48,000
44,000
40,000
8,000
Date of initial contract
Notice period by Company
Notice period by Director
29 July 2015
29 July 2015
6 October 2015
29 July 2015
29 July 2015
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
The appointments for each Non-Executive Director are for an initial term of three years commencing on the date above until the
conclusion of the Company’s Annual General Meeting occurring approximately three years from that date and may be terminated by
either party giving notice as shown above. There are no arrangements under which any Non-Executive Director is entitled to receive
compensation upon the early termination of his appointment.
30
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 Directors’ remuneration
Under the terms of their service agreements, letters of appointment and applicable incentive plans, the remuneration and benefits
of the Directors serving during the year ended 31 December 2016 are set out below. (See also note 7 on pagse 49 and 50.)
Frank Armstrong
Peter Bains
Paul Blackburn
Richard Bungay(4)
Anders Ekblom
Peter Fellner
Kunal Kashyap
Denise Scots-Knight
56,000
44,000
48,000
230,000
48,000
100,000
40,000
357,000
Basic salary
and fees
£
Benefits
in kind
£
Pension
contributions
£
—
—
—
—
—
—
Total(1)
bonus
£
—
—
—
Total(3)
£
56,000
44,000
48,000
5,347
23,000
109,212(2)
367,559
—
—
—
—
—
—
—
—
—
48,000
100,000
40,000
5,863
34,000
238,000(1)
634,863
(1) Bonus is split 70% cash and 30% deferred after the DSBP.
(2) Bonus awarded 100% in cash.
(3) Prior to Admission of the Company's ordinary shares to trading on the AIM market of the London Stock Exchange ("Admission") on 9 June 2016 the Company
operated as a private entity. The Directors believe therefore that the provision of comparative information would be misleading.
(4) As noted above, Richard Bungay resigned as a Director on 31 October 2016. For completeness, details of his remuneration have been included for the
whole year.
Directors’ share interests
As at 31 December 2016 the Directors serving during the year had the following interests in share options and awards made under the LTIP :
Date of grant
At
1 January
2016
Awarded(3)
Cancelled (1)
Lapsed (2)
2016 Exercise price
At
31 December
Latest date
of exercise
Denise Scots-Knight
Share option scheme
25/9/15
1,692,673
—
(147,928)
— 1,544,745
£1.29
24/9/25
LTIP
DSBP
9/6/16
7/2/17
—
—
461,538
25,319
—
—
—
—
461,538
25,319
£nil
£nil
9/6/22
8/3/21
1,692,673
486,857
(147,928)
— 2,031,602
Richard Bungay
Share option scheme
25/9/15
846,336
—
LTIP
9/6/16
—
234,162
846,336
234,162
—
—
—
(581,856)
264,480
£1.29
24/9/25
(234,162)
—
£nil
n/a
(816,018)
264,480
Frank Armstrong
Peter Bains
Paul Blackburn
Anders Ekblom
Peter Fellner
Kunal Kashyap
29/9/15
236,974
29/9/15
778,630
—
—
(20,710)
(68,047)
11/5/16
—
236,974
—
29/9/15
236,974
29/9/15
1,692,673
29/9/15
236,974
—
—
—
(20,710)
—
(20,710)
—
—
—
—
216,264
710,583
236,974
216,264
— 1,692,673
—
216,264
£1.29
£1.29
£1.84
£1.29
£1.29
£1.29
28/9/25
28/9/25
10/5/26
28/9/25
28/9/25
28/9/25
(1) Pursuant to a side letter entered into following Admission of the Company, 500,000 share options held by founders, including Directors and senior
management, were cancelled on 7 July 2016.
(2) Following Richard Bungay’s resignation on 31 October 2016 his unvested share options and LTIP shares lapsed.
(3) Awards to NEDs were made prior to Admission. Under the rules of the new share option scheme, awards to NED’s are not permitted.
31
CORPORATE GOVERNANCE REMUNERATION REPORT CONTINUED
Directors’ share interests continued
The first awards under the DSBP in respect of the annual bonus for the year ended 31 December 2016 were made on 7 February 2017.
Since the expense relating to the DSBP shares has been reflected in the consolidated statement of comprehensive loss for the year
ended 31 December 2016, the awards have been included in the share interests as at 31 December 2016.
Directors’ interests in the share capital of the Company as at the date of this report
Director
Denise Scots-Knight
Peter Fellner
Frank Armstrong
Peter Bains
Paul Blackburn
NxtScience AB (on behalf of Anders Ekblom)
Kunal Kashyap
Number of
ordinary shares
Percentage
of issued
share capital
844,199
10,000
256,444
107,906
22,624
93,002
1,497,735
1.31
0.02
0.40
0.17
0.04
0.14
2.33
The shares trade on the AIM market of the London Stock Exchange under the ticker symbol “MPH”. The shares were admitted to trading
on 9 June 2016 at a price of 221 pence and a market capitalisation of £142 million prior to which the shares were not publicly traded.
At 31 December 2016 the market price of the Company’s shares was 268 pence per share and the market capitalisation was
approximately £172 million.
The Board considers that the FTSE All-Share is an appropriate benchmark for the performance of its shares and a comparison
is set out below rebased to Mereo’s price at Admission on 9 June 2016 up to 31 January 2017. This chart highlights that Mereo’s
share price outperformed the index by 14% in the period.
)
p
1
2
2
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e
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s
i
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e
s
a
b
e
r
(
e
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r
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360p
340p
320p
300p
280p
260p
240p
220p
200p
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Mereo BioPharma Group plc
FTSE All-Share
Anders Ekblom
Chairman of the Remuneration Committee
24 February 2017
32
27.0%
13.0%
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016
DIRECTORS’ REPORT
The Directors present their report and the
audited financial statements for Mereo
BioPharma Group plc and its subsidiaries
(the "Group") for its financial year ended
31 December 2016. Comparative data is
presented for the period from the parent
company’s incorporation on 10 March 2015
to 31 December 2015.
Principal activities
The Group is principally engaged in
the research and development of novel
biopharmaceuticals for the treatment
of rare and speciality diseases.
Review of the business
and future developments
The Strategic Report describes research
and development activity during the year
and outlines future planned developments.
Details of the financial performance,
including comments on the cash position
and research and development expenditure,
are given in the Financial Review. Principal
risks and key performance indicators are
outlined in the Strategic Report.
Going concern
The Directors have reviewed the current
and projected financial position of the
Group, taking into account existing cash
and deposits balances. Though the Group
and Company 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 research into new products
continues to progress according to plan
and the funding secured in June 2016 will
allow it to meet its liabilities as they fall
due for at least twelve months from the
date of authorisation for issue of these
consolidated financial statements.
Results and dividends
The Group recorded a loss for the year
before taxation of £33.7 million (period
ended 31 December 2015: £13.1 million).
Further details are given in the Financial
Review. The Directors do not recommend
payment of a dividend.
Employees
The Directors are committed to continuing
involvement and communication with
employees on matters affecting both
employees and the Group. Management
conducts regular meetings with all
employees on site.
Health, safety and environment
The Directors are committed to ensuring
the highest standards of health and safety,
both for their employees and for the
communities within which the Group
operates. The Directors are also committed
to minimising the impact of the Group’s
operations on the environment.
Political contributions
Neither the Company nor any of its
subsidiaries made any political donations
or incurred any political expenditure
during the year ended 31 December 2016
(period ended 31 December 2015: £nil).
Financial risk management
A description of financial risk
management is set out in note 16
to the financial statements.
Research and development
In the year ended 31 December 2016,
the Group spent £24.6 million (period ended
31 December 2015: £5.4 million) on research
and development. Details of the Group’s
research and development programmes
can be found in the Strategic Report.
Directors
Biographical details of the Directors are
given on pages 20 and 21. All Directors
served throughout the year except as
follows: Richard Bungay resigned as
a Director on 31 October 2016 and his
employment ended on 13 January 2017,
and Richard Jones was appointed on
30 January 2017.
The interests of the Directors in the share
options of the Company are set out in the
Remuneration Report.
Directors’ and officers’
liability insurance
The Company has, as permitted by
the Companies Act 2006, maintained
insurance cover on behalf of the
Directors, indemnifying them against
certain liabilities which may be incurred
by them in relation to the Group.
33
CORPORATE GOVERNANCE DIRECTORS’ REPORT CONTINUED
Disclosure of information to the auditor
Each of the persons who is a Director at the date of approval of this report confirms that:
» so far as the Director is aware, there is no relevant audit information of which the Group’s auditor is unaware; and
» the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant
audit information and to establish that the Group’s auditor is aware of that information.
Substantial interests
At 31 January 2017 the Company had been informed of the following substantial interests of over 3% in the issued share capital
of the Company:
Number issued
Percentage of
share capital
16,105,450
12,546,480
12,546,204
11,130,873
6,401,876
25.03
19.50
19.50
17.30
9.95
Woodford Equity Income Fund
Novartis Pharma AG
Invesco Perpetual High Income Fund
Woodford Patient Capital Trust
Invesco Perpetual UK Strategic Income Fund
Post balance sheet events
There were no subsequent events from the year end to the date of this report.
By order of the Board.
Charles Sermon
Company Secretary
24 February 2017
34
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 STATEMENT OF DIRECTORS’ RESPONSIBILITIES
In preparing each of the Group and parent
company financial statements, the
Directors are required to:
» select suitable accounting policies and
then apply them consistently;
» make judgements and estimates that
are reasonable and prudent;
» state whether they have been prepared
in accordance with IFRS as adopted by
the EU; and
» prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
Group and the parent company will
continue in business.
The Directors are responsible for preparing
the annual report, the Strategic Report,
the Directors’ Report and the financial
statements in accordance with applicable
laws and regulations.
Company law requires the Directors to
prepare financial statements for each
financial year. As required by the AIM
Rules of the London Stock Exchange
they are required to prepare the Group
financial statements in accordance
with International Financial Reporting
Standards (IFRS) as adopted by the
EU (EU IFRS) and applicable law and have
elected to prepare the parent company
financial statements on the same basis.
Under company law the Directors must
not approve the financial statements
unless they are satisfied that they give
a true and fair view of the state of affairs
of the Group and parent company and
of their profit or loss for that period.
The Directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the parent
company’s and Group’s transactions and
disclose with reasonable accuracy at any
time the financial position of the parent
company and Group and enable them to
ensure that its financial statements and
Remuneration Report comply with the
Companies Act 2006. They have general
responsibility for taking such steps as are
reasonably open to them to safeguard the
assets of the Group and to prevent and
detect fraud and other irregularities.
The Directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
Company’s website. Legislation in the UK
governing the preparation and dissemination
of financial statements may differ from
legislation in other jurisdictions.
By order of the Board
Charles Sermon
Company Secretary
24 February 2017
35
CORPORATE GOVERNANCE INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF MEREO BIOPHARMA GROUP PLC
Opinion on other matter prescribed
by the Companies Act 2006
In our opinion:
Based on the work undertaken in the
course of the audit:
» the information given in the Strategic
Report and the Directors’ Report for
the financial year for which the financial
statements are prepared is consistent
with the financial statements;
» the Strategic Report and the Directors’
Report have been prepared in accordance
with applicable legal requirements.
Matters on which we are required
to report by exception
We have nothing to report in respect
of the following matters where the
Companies Act 2006 requires us to
report to you if, in our opinion:
» adequate accounting records have
not been kept by the parent company,
or returns adequate for our audit have
not been received from branches not
visited by us; or
» the parent company financial statements
are not in agreement with the accounting
records and returns; or
» certain disclosures of Directors’
remuneration specified by law
are not made; or
» we have not received all the
information and explanations
we require for our audit.
David Hales (Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
Statutory auditor
Reading
24 February 2017
We have audited the financial statements
of Mereo BioPharma Group plc for the
year ended 31 December 2016 which
comprise the consolidated statement
of comprehensive loss, the consolidated
and parent company balance sheets,
the consolidated and parent company
statements of cash flow, the consolidated
and parent company statements of changes
in equity and the related notes 1 to 26.
The financial reporting framework that
has been applied in their preparation is
applicable law and International Financial
Reporting Standards (IFRSs) as adopted
by the European Union and, as regards the
parent company financial statements, as
applied in accordance with the provisions
of the Companies Act 2006.
This report is made solely to the Company’s
members, as a body, in accordance with
Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken
so that we might state to the Company’s
members those matters we are required
to state to them in an Auditor’s Report and
for no other purpose. To the fullest extent
permitted by law, we do not accept or
assume responsibility to anyone other
than the Company and the Company’s
members as a body, for our audit work,
for this report, or for the opinions we
have formed.
Respective responsibilities of the
Directors and the auditor
As explained more fully in the Directors’
Responsibilities Statement set out on
page 35, the Directors are responsible for
the preparation of the financial statements
and for being satisfied that they give a
true and fair view. Our responsibility is
to audit and express an opinion on the
financial statements in accordance
with applicable law and International
Standards on Auditing (UK and Ireland).
Those standards require us to comply
with the Auditing Practices Board’s
Ethical Standards for Auditors.
Scope of the audit of the
financial statements
An audit involves obtaining evidence
about the amounts and disclosures in
the financial statements sufficient to give
reasonable assurance that the financial
statements are free from material
misstatement, whether caused by fraud
or error. This includes an assessment
of: whether the accounting policies are
appropriate to the Group’s and the parent
company’s circumstances and have been
consistently applied and adequately
disclosed; the reasonableness of significant
accounting estimates made by the Directors;
and the overall presentation of the financial
statements. In addition, we read all the
financial and non-financial information
in the Annual Report and Accounts to
identify material inconsistencies with
the audited financial statements and to
identify any information that is apparently
materially incorrect based on, or materially
inconsistent with, the knowledge acquired
by us in the course of performing the audit.
If we become aware of any apparent
material misstatements or inconsistencies
we consider the implications for our report.
Opinion on financial statements
In our opinion:
» the financial statements give a true and
fair view of the state of the Group’s and
of the parent company’s affairs as at
31 December 2016 and of the Group’s
loss for the period then ended;
» the consolidated financial statements
have been properly prepared in
accordance with IFRSs as adopted
by the European Union;
» the parent company financial
statements have been properly prepared
in accordance with IFRSs as adopted
by the European Union and as applied
in accordance with the provisions of
the Companies Act 2006; and
» the financial statements have
been prepared in accordance with
the requirements of the Companies
Act 2006.
36
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
FOR THE YEAR ENDED 31 DECEMBER 2016
Research and development expenses
Administrative expenses
Operating loss
Net finance income
Net foreign exchange gain
Loss before tax
Taxation
Loss attributable to equity holders of the parent
Other comprehensive income for the period, net of tax
Year ended
31 December
2016
£
10 March 2015
to 31 December
2015
£
Notes
(24,562,502)
(5,445,015)
(11,616,816)
(7,716,344)
(36,179,318)
(13,161,359)
8.1
195,141
25,717
2,262,626
—
(33,721,551)
(13,135,642)
9
5,331,271
946,681
(28,390,280)
(12,188,961)
—
—
Total comprehensive loss for the period, net of tax and attributable to the equity holders of the parent
(28,390,280)
(12,188,961)
Basic and diluted loss per share
Non-GAAP measure
Adjusted loss per share
Proforma adjusted loss per share
10
10
10
(£0.63)
(£1.01)
(0.51)
(0.36)
37
FINANCIAL STATEMENTS BALANCE SHEETS
AS AT 31 DECEMBER 2016
Group
Company
31 December
2016
£
31 December
2015
£
31 December
2016
£
31 December
2015
£
Notes
11
5
13
12
9
14
17
18
18
18
173,869
204,517
173,869
67,754,682
—
—
—
—
25,812,941
25,812,941
—
—
204,517
421,352
— 35,699,919
—
—
—
—
25,986,810
26,017,458
67,928,551
36,325,788
1,102,146
5,331,271
767,009
253,926
946,681
396,022
1,102,146
253,926
—
—
767,009
396,022
53,577,571
12,247,986
53,577,571
12,247,986
60,777,997
13,844,615
55,446,726
12,897,934
86,764,807
39,862,073
123,375,277
49,223,722
193,022
59,221
193,022
59,221
99,975,399
26,212,880
99,975,399
26,212,880
12,667,562
21,660,105
12,667,562
21,660,105
(33,579,241)
(12,188,961)
3,031,229
(2,827,315)
79,256,742
35,743,245
115,867,212
45,104,891
20
19
1,172,424
3,126,526
141,311
—
1,172,424
3,126,526
141,311
—
4,298,950
141,311
4,298,950
141,311
23
3,209,115
3,977,517
3,209,115
3,977,520
7,508,065
4,118,828
7,508,065
4,118,831
86,764,807
39,862,073
123,375,277
49,223,722
Assets
Non-current assets
Property, plant and equipment
Investments
Intercompany receivables
Intangible assets
Other receivables
Current assets
Prepayments
R&D tax credits
Other receivables
Cash and short-term deposits
Total assets
Equity and liabilities
Equity
Issued capital
Share premium
Other capital reserves
Accumulated profit/(loss)
Total equity
Non-current liabilities
Provisions
Convertible loan
Current liabilities
Trade and other payables
Total liabilities
Total equity and liabilities
The Company loss for the year was £1,141,456 (2015: £2,827,315).
Approved by the Board on 24 February 2017 and signed on its behalf by
Dr Denise Scots-Knight
Director
Richard Jones
Director
Company number: 9481161 (England & Wales)
38
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 CONSOLIDATED AND COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2016
Operating activities
Loss before tax
Adjustments to reconcile loss before tax to net
cash flows:
Depreciation of property, plant and equipment
Share-based payment expense
Provision for social security contributions
on employee share options
Interest received
Interest on convertible loan
Capitalisation of Intercompany balances
Working capital adjustments:
Increase in receivables
(Decrease)/increase in payables
Tax received
Group
Company
31 December
2016
£
Notes
Period ended
31 December
2015
£
31 December
2016
£
Period ended
31 December
2015
£
(33,721,551)
(13,135,642)
(1,141,456)
(2,827,315)
11
21
32,940
11,361
32,940
11,361
6,494,018
2,982,265
4,905,559
2,560,916
1,031,109
8.1
(374,906)
141,311
(25,717)
794,960
121,346
(374,906)
(299,759)
179,765
—
—
—
179,765
(29,808,806)
—
—
(1,219,202)
(649,948)
(1,219,202)
(10,565,215)
(768,402)
3,977,517
(768,402)
4,025,774
946,681
—
—
—
Net cash flows from operating activities
(27,399,548)
(6,698,853)
(27,399,548)
(6,972,892)
Investing activities
Purchase of property, plant and equipment
Disposal of property, plant and equipment
Investment in subsidiaries
Interest received
Net cash flows used in investing activities
Financing activities
Proceeds from issue of ordinary shares
Transaction costs on issue of shares
Proceeds from issue of convertible loan
11
11
5
8.1
18
18
19
(3,467)
(215,878)
(3,467)
(215,878)
1,175
—
—
—
1,175
—
—
(3)
374,906
25,717
374,906
299,759
372,614
(190,161)
372,614
83,878
67,888,820
20,005,000
67,888,820
20,005,000
(2,995,864)
(868,000)
(2,995,864)
(868,000)
3,463,563
—
3,463,563
—
Net cash flows from financing activities
68,356,519
19,137,000
68,356,519
19,137,000
Net increase in cash and cash equivalents
41,329,585
12,247,986
41,329,585
12,247,986
Cash and cash equivalents at beginning of the period
12,247,986
—
12,247,986
—
Cash and cash equivalents at 31 December
17
53,577,571
12,247,986
53,577,571
12,247,986
Significant non-cash transaction
During the year 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 £7,000,000 and reducing the accumulated losses by the same amount (see note 18).
During the year, 8,697,480 shares were issued to Novartis Pharma AG (for nil consideration), The fair value of these was £1.84 per share.
During the period ended 31 December 2015 the Company issued two bonus shares of £0.001 in nominal value for each ordinary
held. The post-bonus share capital was consolidated such that each ordinary shareholder received one share for every three held.
The total number of ordinary shares remained at 19,740,296 but the nominal value is now £0.003 (see note 18).
39
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2016
At 10 March 2015
Loss for the period to 31 December 2015
Issue of share capital (note 18)
Issue of bonus share capital (note 18)
Share-based payments – share options (note 21)
Shares to be issued
Profit on transfer of loan notes for equity
Transaction costs on issuance of share capital
Issued capital
£
Share premium
£
Other capital
reserves
£
Accumulated
losses
£
Total equity
£
—
—
—
—
—
—
—
— (12,188,961)
(12,188,961)
19,740
27,067,420
39,481
(39,481)
—
—
—
—
—
—
—
2,982,265
— 18,677,840
52,941
(868,000)
—
—
— 27,087,160
—
—
—
2,982,265
— 18,677,840
—
—
52,941
(868,000)
At 31 December 2015
59,221
26,212,880
21,660,105
(12,188,961)
35,743,245
—
—
—
—
—
6,185,067
133,601
175,350
—
516,802
Loss for the year to 31 December 2016
Issue of share capital (note 18)
Share-based payments – share options (note 21)
Share-based payments – LTIPS (note 21)
Share-based payments – deferred bonus shares (note 21)
—
—
—
—
—
—
6,185,067
133,601
175,350
—
—
— (28,390,280)
(28,390,280)
107,709
67,781,112
—
— 67,888,821
Redemption of shares to be issued (note 18)
26,092
15,977,271
(16,003,363)
Equity element of convertible loan (note 19)
Share capital reduction (note 18)
Transaction costs on issuance of share capital (note 18)
—
—
—
—
516,802
(7,000,000)
(2,995,864)
—
—
7,000,000
—
—
(2,995,864)
At 31 December 2016
193,022
99,975,399
12,667,562 (33,579,241) 79,256,742
40
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016 COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2016
At 10 March 2015
Loss for the period to 31 December 2015
Issue of share capital (note 18)
Issue of bonus share capital (note 18)
Share-based payments – share options (note 21)
Shares to be issued
Profit on transfer of loan notes for equity
Transaction costs on issuance of share capital
Issued capital
£
Share premium
£
Other capital
reserves
£
Accumulated
losses
£
Total equity
£
—
—
—
—
19,740
27,067,420
39,481
(39,481)
—
—
—
—
—
—
—
—
—
2,982,265
— 18,677,840
52,941
(868,000)
—
—
—
—
(2,827,315)
(2,827,315)
— 27,087,160
—
—
—
2,982,265
— 18,677,840
—
—
52,941
(868,000)
At 31 December 2015
59,221
26,212,880
21,660,105
(2,827,315)
45,104,891
—
—
—
—
—
6,185,067
133,601
175,350
—
516,802
Loss for the year to 31 December 2016
Issue of share capital (note 18)
Share-based payments (note 21)
Share-based payments – LTIPS (note 21)
Share-based payments – deferred bonus shares (note 21)
—
—
—
—
—
—
6,185,067
133,601
175,350
—
—
107,709
67,781,112
—
—
(1,141,456)
(1,141,456)
— 67,888,821
Redemption of shares to be issued (note 18)
26,092
15,977,271
(16,003,363)
Equity element of convertible loan (note 19)
Share capital reduction (note 18)
Transaction costs on issuance of share capital (note 18)
—
—
—
—
516,802
(7,000,000)
(2,995,864)
—
—
7,000,000
—
—
(2,995,864)
At 31 December 2016
193,022
99,975,399
12,667,562
3,031,229 115,867,212
41
FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
1. Corporate information
The consolidated financial statements of Mereo BioPharma Group plc and its subsidiaries (collectively, the “Group”) for the
year ended 31 December 2016 were authorised for issue in accordance with a resolution of the Directors on 24 February 2017.
Mereo BioPharma Group plc (the “Company” or the “parent”) is a public limited company incorporated and domiciled in the United Kingdom,
and registered in England, whose shares are publicly traded. The registered office is located at Fourth Floor, 1 Cavendish Place,
London W1G 0QF.
The Group is principally engaged in the research and development of novel pharmaceuticals (see note 4). Information on the
Group’s structure is provided in note 5. Information on other related party relationships of the Group is provided in note 25.
2. Significant accounting policies
2.1 Basis of preparation
The Group and Company’s annual financial statements have been prepared in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union and for the parent company in accordance with the Companies Act 2006.
The financial information is presented in Sterling.
2.2 Going concern
Though the Group and Company continue 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 research into new products continues to progress according to plan and
the funding secured in June 2016 will allow it to meet its liabilities as they fall due for at least twelve months from the date of
authorisation for the issue of these consolidated financial statements.
2.3 Basis of consolidation
The consolidated financial information comprises the financial statements of Mereo BioPharma Group plc and its subsidiaries as
at 31 December 2016. 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 unrealised 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.
All Group subsidiaries prepare yearly financial information to 31 December consistent with the Company.
2.4 Summary of significant accounting policies
a) Current versus non-current classification
The Group presents assets and liabilities in its balance sheet based on current/non-current classification. An asset is current
when it is:
» expected to be realised or intended to be sold or consumed in its normal operating cycle;
» held primarily for the purpose of trading;
» expected to be realised within twelve months after the reporting period; or
» cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the
reporting period.
42
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS 2. Significant accounting policies continued
2.4 Summary of significant accounting policies continued
a) Current versus non-current classification continued
All other assets are classified as non-current.
A liability is current when:
» it is expected to be settled in its normal operating cycle;
» it is held primarily for the purpose of trading;
» it is due to be settled within twelve months after the reporting period; or
» there is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.
The Group classifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.
b) Taxes
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities.
The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in
the countries where the Group operates and generates taxable income.
Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of comprehensive
loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations
are subject to interpretation and establishes provisions where appropriate.
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 recognised 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 utilised. 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 utilised. Unrecognised deferred income tax assets
are reassessed at the end of each reporting period and are recognised 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 realised, based on tax rates (and tax laws) enacted or substantively enacted at the end of the reporting period.
c) Foreign currencies
The functional currency of the Company and its subsidiaries is Sterling. 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 recognised in profit or loss.
Gains or losses on the retranslation of foreign currency balances at the year end are recognised in the consolidated statement
of comprehensive loss under net foreign exchange gains/(losses).
43
FINANCIAL STATEMENTS 2. Significant accounting policies continued
2.4 Summary of significant accounting policies continued
d) 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 recognised 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
» Office equipment
» IT equipment
ten years
five years
three years
An item of property, plant and equipment and any significant part initially recognised is derecognised 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 derecognised.
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.
e) Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of
comprehensive loss on a straight-line basis over the period of the lease.
The Company leases its premises (see note 24). The Company recognises any lease incentives on a straight-line basis over the entire
period of the lease, assuming that any break clauses available to the Company are not exercised. By not exercising any break clauses,
the Company receives a 50% rent discount from the landlord for a fixed period of time as described in note 24, and this also forms
part of the accounting policy.
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception
date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific asset or assets
or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.
f) Intangible assets
Intangible fixed assets, relating to goodwill and intellectual property rights acquired through licensing or assigning patents and
know-how, are carried at historical cost, less accumulated amortisation, where the useful economic life of the asset is finite and the
asset will probably generate economic benefits exceeding costs. Where a finite useful life of the acquired intangible asset cannot be
determined or the intangible asset is not yet available for use, the asset is tested annually for impairment by allocating the assets to
the cash-generating units to which they relate. Amortisation would commence when product candidates underpinned by the intellectual
property rights become available for commercial use. Amortisation would be calculated on a straight-line basis over the shorter of
the remaining useful life of the intellectual property or the estimated sales life of the product candidates. No amortisation has been
charged to date, as the product candidates underpinned by the intellectual property rights are not yet available for commercial use.
Expenditure on product development is capitalised as an intangible asset and amortised over the expected useful economic life
of the product candidate concerned. Capitalisation 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. Capitalisation ceases when the product candidate receives regulatory approval for
launch. No such costs have been capitalised to date.
Expenditure on research and development 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 research and development from asset acquisitions are
recognised as intangible assets at cost.
Future commitments to Novartis (as described in note 24) will be recognised as an expense in the same period when related
future cash inflows from product sales or out-licensing or other monetisation of the programs by the Group are earned.
44
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED
2. Significant accounting policies continued
2.4 Summary of significant accounting policies continued
g) Financial instruments – initial recognition and subsequent measurement
The Group’s financial instruments comprise cash and cash equivalents, short-term bank deposits, and receivables and payables
arising directly from operations. Cash and cash equivalents comprise cash in hand and short-term deposits which have an original
maturity of one month or less and are readily convertible into known amounts of cash. Such assets are classified as current where
management intends to dispose of the asset within twelve months of the end of the reporting period.
With the exception of a convertible loan note (see note 19) the Group does not have any committed borrowing facilities, as its cash,
cash equivalents and short-term deposits are sufficient to finance its current operations. Cash balances are held on short-term deposits
with quality financial institutions, in line with the Group’s policy to minimise the risk of loss. The main risks associated with the
Group’s financial instruments relate to interest rate risk and foreign currency risk (see note 16).
Investments are recognised initially at fair value, being the transaction price. Subsequently, they are measured at cost less impairment.
The carrying value of investments is reviewed annually for impairment to determine whether there is any indication that the carrying
value may not be recoverable.
h) Fair value measurement
The Group does not record any financial instruments at fair value at each balance sheet date, nor disclose fair values in the notes.
The Directors consider that the fair value of all financial instruments is not materially different from the carrying value at the balance
sheet date.
i) Impairment of non-financial assets
Further disclosures relating to impairment of non-financial assets are also provided in the following notes:
» Disclosures for significant assumptions
» Property, plant and equipment
note 3
note 11
» Intangible assets not yet available for use
notes 12 and 15
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 (CGU) 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 CGU 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 of continuing operations are recognised in the statement of comprehensive loss in expense categories consistent
with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously
recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s
recoverable amount. A previously recognised 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 recognised. 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 recognised for the asset in prior years. Such reversal is recognised 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.
Intangible assets not yet available for use are tested for impairment annually as at 31 December at the CGU level, as appropriate,
and when circumstances indicate that the carrying value may be impaired. An impairment test was performed at 31 December 2016.
45
FINANCIAL STATEMENTS
2. Significant accounting policies continued
2.4 Summary of significant accounting policies continued
j) 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 one month or less, which are subject to an insignificant risk of changes in value.
k) Provisions
General
Provisions are recognised 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 recognised 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 recognised as a finance cost.
I) Share-based payments
Employees (including Senior 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 a share option plan. Key management are also provided with shares
under a deferred bonus plan and a long term incentive plan (LTIP). In accordance with IFRS 2 Share-based Payment, 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 excludes the impact of any
non-market vesting conditions. The fair value of LTIP shares, which have market conditions attached, includes an adjustment based
on the probability of the shares vesting at the end of the vesting period.
In accordance with IFRS 2 Share-based Payment, the cancellation of share options is accounted for as an acceleration of the
vesting period and therefore any amount unrecognised that would otherwise have been charged in future accounting periods
is recognised immediately. When options are forfeited, the accounting expense for any unvested awards is reversed.
m) Costs of issuing capital
The Group deducts directly attributable costs of issuing capital from the proceeds in accordance with IAS 39 Financial Instruments:
Recognition and Measurement.
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, representing the embedded option to convert the liability into equity of the Group, is included in equity.
o) Employee Benefit Trust
The Group operates an Employee Benefit Trust (EBT): Mereo BioPharma Group plc Employee Benefit Trust.
The EBT has been established to fulfil awards made under the Deferred Share Bonus Plan and the Long Term Incentive Plan.
The EBT is a Jersey-based trust which is funded by a loan from the Company, which it will utilise 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.
In compliance with IAS 32 Financial Instruments: Presentation Group, shares held by the EBT are included in the consolidated
balance sheet as a reduction in equity. Gains and losses on Group shares are recognised directly in reserves.
The Group consolidated accounts treat the EBT as a wholly owned subsidiary company. Residual cash within the EBT is classified
as a debtor (restricted cash) since it is not readily accessible by the Group.
46
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 3. Significant accounting judgements, estimates and assumptions
The preparation of the consolidated accounts requires the Group to make estimates and judgements that affect the reported
amounts of assets, liabilities, revenues and expenses. The Group bases its estimates and judgements 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.
Share-based compensation
Incentives in the form of shares are provided to employees under a share option plan, long term incentive plan and deferred share
bonus plan. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense.
The expense is based upon a number of assumptions disclosed in note 21: Share-based payments. The selection of different
assumptions could affect the results of the Group.
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 15)
and leasehold improvements, office equipment and IT equipment as at 31 December 2016. The assessment of intangible assets involves
a number of judgements regarding the likelihood of successful product approval, the costs of reaching approval and the subsequent
commercial profitability of the product once approved.
4. Segment information
For management purposes, the Group is organised into business units based on its products and has three reportable segments,
as follows:
» Respiratory Unit, which develops drugs to treat respiratory diseases;
» Endocrinology Disorders Unit, which develops drugs to treat endocrine disorders; and
» Orphan Diseases Unit, which develops drugs to treat various orphan diseases.
The Executive Management monitors the operating results of its business units separately as part of the process for making
decisions about resource allocation and performance assessment. Segment performance is evaluated based on the progress
of each development programme and the related development expenditure. Expenditure is measured consistently with the total
expenditure included in the consolidated financial statements. The Group’s financing (including finance costs and finance income)
is managed on a Group basis and is only partially allocated to operating segments.
Year ended
31 December 2016
Expenses
Respiratory
Unit
£
Endocrinology
Disorders Unit
£
Orphan
Diseases
Unit
£
Total
segments
£
Unallocated
£
Consolidated
£
Research and development
(9,733,421)
(9,431,758)
(4,804,117) (23,969,296)
(593,206) (24,562,502)
Administrative
(2,747,085)
(2,787,307)
(3,076,405)
(8,610,797)
(3,006,019) (11,616,816)
Segment operating loss
(12,480,506) (12,219,065)
(7,880,522) (32,580,093)
(3,599,225) (36,179,318)
Assets
Tax credit
2,102,469
2,094,259
1,134,543
5,331,271
Intangible assets (note 12)
4,310,761
9,886,356
11,615,824
25,812,941
—
5,331,271
— 25,812,941
47
FINANCIAL STATEMENTS 4. Segment information continued
Period ended
31 December 2015
Expenses
Respiratory
Unit
£
Endocrinology
Disorders Unit
£
Orphan
Diseases
Unit
£
Total segments
£
Unallocated
£
Consolidated
£
Research and development
(2,399,367)
(1,393,860)
(1,437,664)
(5,230,891)
(214,124)
(5,445,015)
Administrative
(1,641,880)
(1,695,991)
(1,739,566)
(5,077,437)
(2,638,907)
(7,716,344)
Segment operating loss
(4,041,247)
(3,089,851)
(3,177,230)
(10,308,328)
(2,853,031)
(13,161,359)
Assets
Tax credit
300,024
290,965
355,692
946,681
Intangible assets (note 12)
4,310,761
9,886,356
11,615,824
25,812,941
—
946,681
— 25,812,941
Unallocated
The majority of payroll and related costs, and expenses relating to the Group’s facilities, are not allocated to segments as these are
managed centrally, as are finance income and costs.
All non-current assets held by the Group are located in the United Kingdom.
5. Group information
Investments in subsidiaries
At 10 March 2015
Additions in the period
At 31 December 2015
Additions in the period
At 31 December 2016
Information about subsidiaries
The consolidated financial statements of the Group include:
Name
Principal activities
Mereo BioPharma 1 Limited
Pharmaceutical research and development
Mereo BioPharma 2 Limited
Pharmaceutical research and development
Mereo BioPharma 3 Limited
Pharmaceutical research and development
Mereo BioPharma Group plc
Employee Benefit Trust
Employee share scheme
£
—
421,352
421,352
67,333,330
67,754,682
Country of
incorporation
% equity interest
31 December
2016
United Kingdom
United Kingdom
United Kingdom
Jersey
100
100
100
—
The registered office of Mereo BioPharma 1 Limited, Mereo BioPharma 2 Limited and Mereo BioPharma 3 Limited is located
at Fourth Floor, 1 Cavendish Place, London, W1G 0QF.
Mereo BioPharma 1 Limited, Mereo BioPharma 2 Limited and Mereo BioPharma 3 Limited each have issued share capital
of one ordinary share of £1 fully paid or credited as fully paid, totalling £3.
Under IFRS, the Employee Benefit Trust is treated as a wholly owned subsidiary company.
A capital contribution of £1,588,459 (2015: £421,349) by Mereo BioPharma Group plc to its subsidiaries has been recorded
for the granting of employees’ share options for services rendered by the employees to the subsidiaries.
A capital contribution of £65,744,871 (2015: £nil) by Mereo BioPharma Group plc to its subsidiaries has been recorded
for the conversion of intercompany balances at original cost.
48
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 6. Auditor’s remuneration
During the period the Group obtained the following services from the auditor and its associates:
Audit of Group accounts
Audit of subsidiary accounts
Audit-related assurance services
Corporate finance transaction services
Taxation advisory services
Total
Year ended
31 December
2016
£
Period ended
31 December
2015
£
50,000
20,000
10,000
169,196
—
24,000
12,000
—
430,000
22,925
249,196
488,925
7. Employees and Directors
The average monthly number of persons (including Executive Directors) employed by the Group and Company during the period was:
By activity
Office and management
Research and development
Total
Year ended
31 December
2016
Number
Period ended
31 December
2015
Number
16
7
23
12
3
15
The Group contributes to defined contribution pension schemes for its Executive Directors and employees. Contributions of £13,001
(2015: £17,612 included in other liabilities) were payable to the funds at the period end.
The details of Directors of Mereo BioPharma Group plc who received emoluments from the Group and Company are shown in the
table below:
Salaries and fees
Benefits in kind
Pension contributions
Bonus
Total
Year ended
31 December
2016
£
Period ended
31 December
2015
£
923,000
237,954
11,210
57,000
347,212
2,205
13,750
64,553
1,338,422
318,462
Full details of the Directors’ remuneration and Directors’ options are contained in the Directors’ Remuneration Report.
49
FINANCIAL STATEMENTS 7. Employees and Directors continued
Compensation of key management personnel of the Group
Key management includes Directors (Executive and Non-Executive), the General Counsel and the Chief Medical Officer.
The compensation paid or payable to key management is set out below.
Short-term benefits
Post-employment benefits
IFRS 2 Share-based payment charge
Total compensation paid to key management personnel
Year ended
31 December
2016
£
2,111,712
106,500
Period ended
31 December
2015
£
759,170
47,000
4,631,853
2,521,499
6,850,065
3,327,669
Compensation of key management personnel of the Company
Key management includes Directors (Executive and Non-Executive). The compensation paid or payable to key management is set
out below.
Short-term benefits
Post-employment benefits
IFRS 2 Share-based payment charge
Total compensation paid to key management personnel
8. Other income/expenses and adjustments
8.1. Net finance income
Group
Bank interest
Interest payable on convertible loan
Net finance income
Year ended
31 December
2016
£
1,506,512
99,600
Period ended
31 December
2015
£
537,838
30,750
1,861,920
2,181,523
3,468,032
2,750,111
Year ended
31 December
2016
£
Period ended
31 December
2015
£
374,906
(179,765)
25,717
—
195,141
25,717
50
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 8. Other income/expenses and adjustments continued
8.2. Employee benefits expense
Included in research & development expenses:
Salaries
Social security costs
Pension contributions
Share-based payment expense
Included in administrative expenses:
Salaries
Social security costs
Pension contributions
Share-based payment expense
Group
Company
31 December
2016
£
31 December
2015
£
31 December
2016
£
31 December
2015
£
1,150,222
317,862
344,467
50,864
50,107
16,120
196,440
64,340
12,446
78,036
13,578
5,456
1,550,884
327,559
288,199
113,325
2,132,920
1,040,409
109,187
779,540
188,684
44,163
1,688,801
934,141
84,249
644,754
179,068
35,729
4,943,133
2,654,706
4,617,360
2,477,591
Total employee benefits expense
11,322,086
4,378,741
7,885,976
3,547,537
8.3. Operating loss
Group
Employee benefits expense (note 8.2)
Externally contracted research and development
Legal and professional fees including patent costs
Operating lease expense
Depreciation
Other expenses
Total operating loss
Year ended
31 December
2016
£
Period ended
31 December
2015
£
11,322,086
4,378,741
21,417,083
3,754,788
782,492
293,328
33,397
2,087,343
127,954
11,361
2,330,932
2,801,172
36,179,318
13,161,359
51
FINANCIAL STATEMENTS 9. Income tax
The Group is entitled to claim tax credits in the United Kingdom under the UK research and development (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 receivable by the Group for the year. The 2016
amounts have not yet been agreed with the relevant tax authorities.
Reconciliation of the accounting loss multiplied by the United Kingdom’s domestic tax rate for 2016:
Group
United Kingdom corporation tax R&D credit
Income tax credit
Year ended
31 December
2016
£
Period ended
31 December
2015
£
5,331,271
946,681
5,331,271
946,681
The tax credit for the year is lower than the standard rate of corporation tax in the UK of 20%. The differences are explained below:
Group
Loss on ordinary activities before income tax
Year ended
31 December
2016
£
Period ended
31 December
2015
£
(33,721,551)
(13,135,642)
Loss on ordinary activities before tax at the United Kingdom’s statutory income tax rate of 20%
6,744,310
2,627,129
Expenses not deductible for tax purposes (permanent differences)
Temporary timing differences
Research and development relief uplift
Tax losses carried forward to future periods
Tax credit for the period
(15,116)
(438,196)
(1,300,044)
(599,975)
2,134,107
378,956
(2,231,986)
(1,021,233)
5,331,271
946,681
A reduction in the rate of UK corporation tax to 19% from 1 April 2017 and to 17% from 1 April 2020 has been substantively enacted.
UK deferred tax assets and liabilities are recognised at a rate of 17%.
At 31 December 2016, the Group had tax losses to be carried forward of approximately £16,343,508 (2015: £5,106,165).
Deferred tax
Deferred tax relates to the following:
Losses
Accelerated capital allowances
Other
Net deferred tax asset
31 December
2016
£
31 December
2015
£
2,788,396
919,110
(9,883)
2,210
—
3,170
2,770,723
922,280
The deferred tax asset has not been recognised as there is uncertainty regarding when suitable future profits against which to offset
the accumulated tax losses will arise. There is no expiration date for the accumulated tax losses.
52
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 10. Loss per share
Basic loss per share is calculated by dividing the loss attributable for the period to ordinary equity holders of the parent by the
weighted average number of ordinary shares outstanding during the period.
As net losses from continuing operations were recorded in the period, the dilutive potential shares are anti-dilutive for the earnings
per share calculation.
Year ended 31 December 2016
Period ended 31 December 2015
Group
Loss
£
Weighted
shares
number
IFRS – basic and diluted
(28,390,280) 44,789,893
Adjusted – basic and diluted
(22,956,976) 44,789,893
Proforma adjusted – basic and diluted
(22,956,976) 64,340,798
Loss per
share
£
(0.63)
(0.51)
(0.36)
Loss
£
Weighted
shares
number
Loss per
share
£
(12,188,961)
12,009,419
(1.01)
—
—
—
—
—
—
The Company operates share option schemes (see note 21) which could potentially dilute basic earnings per share in the future.
In addition there exist within equity 1,453,520 shares to be issued which also have the potential to dilute basic earnings per share
in future (see note 18). There have been no other transactions involving ordinary shares or potential ordinary shares between the
reporting date and the date of authorisation of these financial statements.
The adjusted loss is calculated after adding back non-recurring items and share-based payment charges as illustrated in the table
below. A comparative 2015 adjusted loss per share has not been presented after taking into account that the Company was formed
in 2015 and therefore the nature of the operating costs is not comparable between 2015 and 2016. The adjusted loss per share will
be disclosed in future years on a consistent basis.
The adjusted loss per share is calculated using the weighted average number of ordinary shares in issue during the period.
The adjusted proforma loss per share is calculated using the number of ordinary shares in issue following admission to the AIM
market of the London Stock Exchange (that is it assumes the admission took place on 1st January 2016 in respect of the number
of shares in issue to enable better comparison in future years). As the date of admission to the AIM market was on 9 June 2016,
comparatives for the previous period have not been provided.
Group
Loss for the period
Share-based payments
Provision for social security on share options
Non-capitalised IPO costs
Corporate finance costs
Net gain on foreign exchange
Adjusted loss
Year ended
31 December
2016
(28,390,280)
6,494,018
1,031,109
45,000
125,803
(2,262,626)
(22,956,976)
53
FINANCIAL STATEMENTS 11. Property, plant and equipment
Group and Company
Cost or valuation
At 1 January 2016
Additions
Disposals
At 31 December 2016
Depreciation and impairment
At 1 January 2016
Disposals
Depreciation for the period
At 31 December 2016
Net book value
At 1 January 2016
At 31 December 2016
Group and Company
Cost or valuation
At 10 March 2015
Additions
At 31 December 2015
Depreciation and impairment
At 10 March 2015
Depreciation for the period
At 31 December 2015
Net book value
At 10 March 2015
At 31 December 2015
Leasehold
improvements
£
Office
equipment
£
IT
equipment
£
Total
£
155,494
20,024
—
—
—
—
40,360
3,467
(1,175)
215,878
3,467
(1,175)
155,494
20,024
42,652
218,170
(5,625)
(1,335)
(4,401)
(11,361)
—
—
457
457
(15,549)
(4,005)
(13,843)
(33,397)
(21,174)
(5,340)
(17,787)
(44,301)
149,869
18,689
35,959
204,517
134,320
14,684
24,865
173,869
Leasehold
improvements
£
Office
equipment
£
IT
equipment
£
—
155,494
155,494
—
20,024
20,024
—
40,360
215,878
40,360
215,878
Total
£
—
—
—
—
—
(5,625)
(1,335)
(4,401)
(11,361)
(5,625)
(1,335)
(4,401)
(11,361)
—
—
—
—
149,869
18,689
35,959
204,517
54
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 12. Intangible assets
Group
Cost at 1 January 2016 and 31 December 2016
Amortisation and impairment
At 1 January 2016
Impairment (note 15)
At 31 December 2016
Net book value
At 1 January 2016
At 31 December 2016
Group
Cost at 10 March 2015
Acquisition of new programmes
At 31 December 2015
Amortisation and impairment
At 10 March 2015
Amortisation
Impairment (note 15)
At 31 December 2015
Net book value
At 10 March 2015
At 31 December 2015
Acquired
development
programmes
£
25,812,941
—
—
—
25,812,941
25,812,941
Acquired
development
programmes
£
—
25,812,941
25,812,941
—
—
—
—
—
25,812,941
The Group’s strategy is to acquire clinical-stage development programmes for the treatment of specialist and rare diseases from
large pharmaceutical companies.
On 28 July 2015, the Group acquired three development programmes from Novartis AG.
BPS-804 is a human monoclonal antibody which is being developed to reduce fractures in the orphan disease osteogenesis
imperfecta. The net book value of the programme at 31 December 2016 was £11,615,824.
BGS-649 is being developed as a therapy for the treatment of obese men with hypogonadatropic hypogonadism. The net book
value of the programme at 31 December 2016 was £9,886,356.
Acumapimod is being developed as an acute therapy for acute exacerbations of chronic obstructive pulmonary disease. The net
book value of the programme at 31 December 2016 was £4,310,761.
55
FINANCIAL STATEMENTS 13. Intercompany receivables
Intercompany loan notes
Intercompany receivables
Group
Company
31 December
2016
£
31 December
2015
£
31 December
2016
£
31 December
2015
£
—
—
—
—
—
—
— 25,812,941
—
9,886,978
— 35,699,919
On 30 June 2016 Mereo BioPharma Group resolved to capitalise the intercompany loans and all outstanding intercompany
receivables at that date, and any intercompany balances in existence at 31 December were similarly extinguished.
14. Other receivables
Rent deposit
Accrued interest
VAT recoverable
Cash held by Employee Benefit Trust
Group
Company
31 December
2016
£
31 December
2015
£
31 December
2016
£
31 December
2015
£
293,328
228,775
241,306
3,600
293,328
4,010
98,684
—
293,328
228,775
241,306
3,600
293,328
4,010
98,684
—
767,009
396,022
767,009
396,022
15. Impairment testing of acquired development programmes not yet available for use
Acquired development programmes not yet available for use are allocated to the Group’s operating segments and are assessed
annually for impairment.
Carrying amount of acquired development programmes allocated to each of the operating segments:
Acquired development programmes
4,310,761
9,886,356
11,615,824
25,812,941
Respiratory
Unit
31 December
2016
£
Endocrinology
Disorders Unit
31 December
2016
£
Orphan
Diseases Unit
31 December
2016
£
Total
31 December
2016
£
Respiratory
Unit
31 December
2015
£
Endocrinology
Disorders Unit
31 December
2015
£
Orphan
Diseases Unit
31 December
2015
£
Total
31 December
2015
£
Acquired development programmes
4,310,761
9,886,356
11,615,824
25,812,941
The Group considers the future development costs, the probability of successfully progressing each programme to product approval
and likely commercial returns after product approval, among other factors, when reviewing for indicators of impairment. The results
of this testing did not indicate any impairment of the acquired products’ rights in the year to 31 December 2016.
The acquired development programmes are assets which are not used in launched products. These assets have not yet begun to be
amortised but have been tested for impairment by assessing their value in use. Value-in-use calculations for each programme are utilised
to calculate the recoverable amount. The calculations use pre-tax cash flow projections covering the period through product development
to commercial sales up to the later of loss of patent protection or market exclusivity, which extend beyond five years from the balance sheet
date; no cash flows are included after this date. Approved products are assumed to be out-licensed such that the Group receives signature
fees, milestone receipts and royalties on sales; therefore, the Company does not incur any costs of commercialisation after out-licensing.
56
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 15. Impairment testing of acquired development programmes not yet available for use continued
Key assumptions for the value-in-use calculations are described as follows:
» development costs to obtain regulatory approval – costs are estimated net of any contributions expected from collaborative
arrangements with future partners. The Directors have developed cost estimates based on their previous experience and in
conjunction with the expertise of their clinical development partner, ICON;
» launch dates of products – these reflect management’s expected date of launch for products based on the timeline of development
programmes required to obtain regulatory approval. The assumptions are based on the Directors’ and ICON’s prior experience;
» probability of successful development – management estimates probabilities of success for each phase of development based
on industry averages and knowledge of specific programmes;
» out-licensing signature fees, milestones and royalty rates on sales – management estimates these amounts based on prior experience
and access to values from similar transactions in the industry, which are collated and accessible from specialist third-party sources;
» sales projections – these are based on management’s internal projections using external market data and market research
commissioned by the Company;
» profit margins and other operational expenses – these are based on the Company’s internal projections of current product
manufacturing costings, with input from manufacturing partners where applicable, and estimates of operating costs based
on management’s prior industry experience;
» cash flow projections – the periods over which cash flows are forecast (based on the current patent protection periods relevant
to the asset), are as follows:
» acumapimod (respiratory) – 16 years;
» BGS-649 (endocrinology) – 14 years; and
» BPS-804 (orphan diseases) – 16 years: and
» discount rates – the discount rate is estimated on a pre-tax basis reflecting the estimated cost of capital of the Group and
is applied consistently across each of the operating segments. The cost of capital was calculated at 11.2% (2015: 11.2%).
At this stage of product development, the key sensitivity for all three development programmes is the probability of successful
completion of clinical trials in order to obtain regulatory approval for sale. Therefore, full impairment of a development programme
is expected should such related trials be unsuccessful.
16. Financial and capital risk management
16.1. Capital risk management
For the purpose of the Group’s capital management, capital includes issued capital, share premium, the equity component of a
convertible loan note and all other equity reserves attributable to the equity holders of the parent.
The Group’s objectives when managing capital are to safeguard the ability to continue as a going concern and ensure that sufficient
capital is in place to fund the Group’s research and development activities. The Group’s principal method of adjusting the capital available
is through issuing new shares. The Group’s share capital and share premium are disclosed in note 18. The Group monitors the availability
of capital with regard to its forecast future expenditure on an ongoing basis. The Group has extinguished its liability instruments (loan
notes) through the issue of equity instruments during the period.
16.2. Financial risk management objectives and policies
The Group’s simple structure, operating from a single location in the United Kingdom, and the lack of external debt financing reduces
the range of financial risks to which it is exposed. During the year, the Company issued unsecured convertible loan notes to a shareholder,
Novartis Pharma AG (see note 19). Monitoring of financial risk is part of the Board’s ongoing risk management, the effectiveness of
which is reviewed annually. The Group’s agreed policies are implemented by the Chief Financial Officer, who submits periodic
reports to the Board.
Except for the convertible loan notes, the Group’s principal financial instruments comprise trade payables and trade receivables
which arise directly from its operations and are not designed as a means of raising finance for the Group’s operations. The Group has
various financial assets, such as receivables and cash and short-term deposits, which arise directly from its operations. The Group
does not consider that its financial instruments gave rise to any material financial risks during the year to 31 December 2016.
57
FINANCIAL STATEMENTS 16. Financial and capital risk management continued
16.2. Financial risk management objectives and policies continued
Interest rate risk
The Group’s policy in relation to interest rate risk is to monitor short and medium-term interest rates and to place cash on deposit for
periods that optimise the amount of interest earned while maintaining access to sufficient funds to meet day-to-day cash requirements.
The Group does not have any committed external borrowing facilities, as its cash and cash equivalents and short-term deposit
balances are sufficient to finance its current operations. The interest payable on the loan note issued to Novartis AG is fixed at the
effective rate on inception. Consequently, there is no material exposure to interest rate risk in respect of interest payable.
Foreign currency risk
The Group currently has no revenue. The majority of operating costs are denominated in Sterling, Euros and US Dollars. Foreign exchange
risk arises from future commercial transactions and recognised assets and liabilities. In relation to foreign currency risk, the Group’s
policy is to hold the majority of its funds in Sterling, and to use short to medium-term currency purchase options (including foreign
currency deposits and spot purchases) to manage short to medium-term fluctuations in exchange rates.
Credit risks
The Group’s policy is to place funds with financial institutions which have a minimum long-term credit rating with S&P of A.
The Group does not allocate a quota to individual institutions but seeks to diversify its investments where this is consistent
with achieving competitive rates of return. It is the Group’s policy to place not more than £10 million with any one counterparty.
Cash flow and liquidity risk
Credit risk from balances with banks and financial institutions is managed by the Group’s finance department in accordance with
the Group’s policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to
each counterparty. Counterparty credit limits are reviewed by the Group’s Board of Directors on an annual basis, and may be updated
throughout the year subject to approval of the Group’s Audit and Risk Committee. The limits are set to minimise the concentration
of risks and therefore mitigate financial loss through a counterparty’s potential failure to make payments.
The Group’s maximum exposure to credit risk for the components of the balance sheet at 31 December 2016 is the carrying amounts
as illustrated in note 16.
The Group monitors its funding requirements through preparation of short-term, mid-term and long-term forecasts. All short-term
deposits are immediately convertible to liquid funds without penalty and are recorded in the balance sheet at their open market value.
Please refer to note 2.2 “Going Concern” regarding the Directors’ assessment of liquidity for further information.
17. Cash and short-term deposits
Group and Company
Cash at banks and on hand
Short-term deposits
31 December
2016
£
31 December
2015
£
421,292
647,007
53,156,279
11,600,979
53,577,571
12,247,986
Cash at banks earns interest at floating rates based on daily bank deposit rates. Short-term deposits are available immediately
and earn interest at the respective short-term deposit rates.
58
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 18. Issued capital and reserves
Ordinary share capital
Balance at beginning of year/period
Issuances in the period
Nominal share capital as at 31 December
Ordinary shares issued and fully paid (post ordinary share split)
At 1 January 2016
Issued on 9 June 2016 for private financing round
Issued on 9 June 2016 for private placement
At 31 December 2016
Nominal value at 31 December 2016 (£)
Issued capital at 31 December 2016 (£)
Ordinary shares issued and fully paid (post ordinary share split)
At 10 March 2015 – Incorporation capital
Founders’ shares
Issued on 29 July 2015 for private financing round
Bonus shares issued on 27 November 2015
Consolidation of post-bonus share capital
At 31 December 2015
Nominal value at 31 December 2015 (£)
Issued capital at 31 December 2015 (£)
Year ended
31 December
2016
£
10 March to
31 December
2015
£
59,221
133,801
193,022
1
59,220
59,221
19,740,296
39,464,540
5,135,962
64,340,798
0.003
193,022
1,000
4,999,000
14,740,296
39,480,592
(39,480,592)
19,740,296
0.003
59,221
On 29 July 2015, there was a subdivision of 5,000 ordinary shares of £1.00 in nominal value in the capital of the Company
to 5,000,000 ordinary shares of £0.001 in nominal value in the capital of the Company (the “ordinary share split”).
On 27 November 2015 the Company issued two ordinary bonus shares of £0.001 in nominal value for each ordinary share
held and consolidated the post-bonus share capital such that each ordinary shareholder received one share for every three held.
The nominal value of each ordinary share changed to £0.003.
Since 1 January 2016, the following alterations to the Company’s share capital have been made:
» under the subscription agreement dated 28 July 2015, as amended by an agreement dated 1 June 2016, the issue and allotment
of 39,464,540 ordinary shares of £0.003 in nominal value in the capital of the Company on 9 June 2016 at a price of £1.84 per share.
39,699 of these ordinary shares were issued to WG Partners LLP, for no cash consideration, as payment for financial advisory services;
» on 21 March 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 £7,000,000 and reducing the accumulated losses by the same amount;
» under a private placement dated 9 June 2016, the issue and allotment of 5,135,962 ordinary shares of £0.003 in nominal value
in the capital of the Company on 9 June 2016 at a price of £2.21 per share; and
» on 9 June 2016, the Company’s ordinary shares were admitted to trading on the AIM market of the London Stock Exchange.
59
FINANCIAL STATEMENTS 31 December
2016
£
26,212,880
72,423,314
11,335,068
(2,995,863)
(7,000,000)
99,975,399
31 December
2015
£
—
27,067,420
(868,000)
52,941
(39,481)
26,212,880
£
21,660,105
6,494,018
(16,003,363)
516,802
12,667,562
£
—
2,982,265
18,677,840
21,660,105
18. Issued capital and reserves continued
Share premium
At 1 January 2016
Issuance of share capital for private financing round on 9 June 2016
Issuance of share capital for private placement on 9 June 2016
Transaction costs for issued share capital
Share capital reduction on 21 March 2016
At 31 December 2016
Share premium
At 10 March 2015
Issuance of share capital for private financing round on 29 July 2015
Transaction costs for issued share capital
Profit on transfer of loan notes for equity
Consolidation of post-bonus share capital on 27 November 2015
At 31 December 2015
Other capital reserves
At 1 January 2016
Share-based payments expense during the period
Shares issued
Equity component of convertible loan instrument
At 31 December 2016
At 10 March 2015
Share-based payments expense during the period
Shares to be issued
At 31 December 2015
60
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 18. Issued capital and reserves continued
Share-based payments
The Group has a share option scheme under which options to subscribe for the Group’s shares have been granted to certain
Executives, Non-Executive Directors and employees (see note 21 for further details).
The share-based payment reserve is used to recognise the value of equity-settled share-based payments provided to employees,
including key management personnel, as part of their remuneration. Refer to note 21 for further details of these plans. Of the
£6,494,018 share-based payment expense in the year, £298,836 is an accelerated charge relating to 500,000 share options
which were cancelled on 9 June 2016.
Shares issued/to be issued
Of the 14,740,296 ordinary shares issued on 29 July 2015, 3,849,000 shares were issued to Novartis Pharma AG (Novartis). This left
a further 10,151,000 shares to be issued to Novartis pro rata to their percentage shareholding as and when the Company issued further
ordinary shares.
Of the 44,600,502 ordinary shares issued on 9 June 2016, 8,697,480 shares were issued to Novartis as fully paid up bonus shares
(for nil consideration), the number of which was calculated to maintain its shareholding at 19.5%. The fair value of these shares
was £1.84 per share. A further 1,453,520 shares are to be issued to Novartis pro rata to their percentage shareholding as and
when the Company issues further ordinary shares.
19. Convertible loan note
On 3 June 2016, the Company issued 3,463,563 £1 unsecured convertible loan notes (“Notes”) to Novartis Pharma AG, a related
party (see Note 25). The Notes attract an interest rate of 4% per annum payable annually and accruing daily and constitute direct,
unsecured obligations of the Company ranking ahead of any other unsecured obligations of the Company.
The noteholder shall be entitled, at any time within 36 months of the date of the instrument (“Maturity Date”), to serve a conversion
notice on the Company to convert all or some only of the outstanding Notes into fully paid ordinary shares at a conversion price of
£2.21 per share. To the extent the Notes are not converted at the Maturity Date, the outstanding principal amount of the Notes, together
with any accrued interest, is redeemable. Upon conversion of any Notes, in addition to the relevant number of conversion shares,
the noteholder is entitled to receive an additional number of ordinary shares in the Company equal to the number of conversion
shares into which such Notes are to convert, multiplied by 0.93, up to a maximum aggregate number of 1,453,520 such bonus shares.
The value of the debt component of the Notes at the date of issue was calculated as £2,946,761. The cash flows attached to the
Note up to the Maturity Date were calculated and discounted at an appropriate venture debt rate of 10%. The carrying amount
at 31 December 2016 is £3,126,526.
The value of the equity component of the Notes at 31 December 2016 was calculated as £516,802.
20. Provisions
Group and Company
social security contributions on share options
At beginning of year/period
Accretion of discount
Arising during the year/period
Released
At 31 December
Current
Non-current
Year ended
31 December
2016
£
10 March to
31 December
2015
£
141,311
7,293
—
—
1,084,181
141,311
(60,365)
—
1,172,420
141,311
—
—
1,172,420
141,311
The provision for social security contributions on share options is calculated based on the number of options outstanding at the
reporting date that are expected to be exercised. The provision is based on the estimated gain arising on exercise of the share options,
using the best estimate of the market price at the balance sheet date. Since the Directors assume the options will be held for their
full contractual life of ten years (see note 21) the liability has been classified as non-current. The provision has been discounted.
61
FINANCIAL STATEMENTS 21. Share-based payments
The charge for share-based payments under IFRS 2 arises across the following schemes:
Unapproved option plan
Long term incentive plan
Deferred share bonus plan
Option Plan
Historic Scheme
Group
Company
31 December
2016
£
31 December
2015
£
31 December
2016
£
31 December
2015
£
6,185,067
2,982,265
4,667,854
2,560,916
133,601
175,350
—
—
104,040
133,666
—
—
6,494,018
2,982,265
4,905,560
2,560,916
Under the Mereo BioPharma Group plc Share Option Plan (the “Option Plan”), the Group, at its discretion, granted share options
to employees, including executive management, and Non-Executive Directors. Share options vest over four years for executive
management and employees and over three years for Non-Executive Directors. There are no performance conditions attached
to the options issued under the Option Plan. The fair value of share options granted was estimated at the date of grant using
a Black Scholes pricing model, taking into account the terms and conditions upon which the share options were granted. The
fair value calculation does not include any allowance for dividends as the Company has no available profits for distribution.
The exercise price of the share options will be equal to the market price of the underlying shares on the date of grant, less a discount
agreed with the Group’s institutional investors. The contractual term of the share options is ten years.
Of the £6,185,067 expense recognised under the option plan for employee services received during the year, £298,836 is an accelerated
charge relating to 500,000 options which were cancelled on 9 June 2016.
New Scheme
No share options were issued during the year under the Mereo BioPharma Group plc Share Option Scheme that was established
at Admission.
Movements during the period
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during
the period:
Outstanding at beginning of period
Granted during the period
Cancelled during the period
Forfeited during the period
Outstanding at 31 December
Exercisable at 31 December
2016
Number
8,964,394
1,316,117
(500,000)
(581,856)
2016
WAEP
£
1.29
1.49
1.29
1.29
2015
Number
—
8,964,394
—
—
9,198,655
1.32
8,964,394
3,115,337
1.29
—
2015
WAEP
£
—
1.29
—
—
1.29
—
The weighted average remaining contractual life for the share options outstanding as at 31 December 2016 was 8.3 years
(2015: 9.6 years).
The weighted average fair value of options granted during the year was £1.29 (2015: £1.33).
Options outstanding at the end of the period had an exercise price of between £1.29 and £2.21.
62
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 21. Share-based payments continued
Movements during the period continued
The following tables list the weighted average inputs to the models used for the fair value of share options granted during the period
ended 31 December 2016:
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ordinary shares (£)
Model used
Year ended
31 December
2016
Period ended
31 December
2015
56
56
1.48–2.07
1.85-2.07%
10
1.84–2.21
10
1.84
Black Scholes
Black Scholes
Since there is no historical data in relation to the expected life of the share options the contractual life of the options was used in
calculating the expense for the period.
Volatility was estimated by reference to the share price volatility of a group of comparable companies over a retrospective period
equal to the expected life of the share options.
Long Term Incentive Plan
Under the Mereo BioPharma Group plc Long Term Incentive Plan (the “LTIP Plan”), initiated in 2016, the Group, at its discretion, may
grant nil-cost options to acquire shares to employees. Under the LTIP Plan rules, vesting of 75% of the options issued to employees
is subject to a share price performance condition (the “Share Price Element”) and vesting of 25% of the options is subject to achievement
of strategic operational targets (the “Strategic Element”). Share options vest over a maximum of five years, dependent upon
achievement of these targets.
The fair value of the LTIP Share Price Element is estimated at the date of grant using a Monte Carlo pricing model, taking into account
the terms and conditions upon which the share options were granted.
The fair value of the LTIP Strategic Element is estimated at the date of grant using a Black Scholes pricing model, taking into
account the terms and conditions upon which the share options were granted, and the expense recorded is based upon the
expected level of achievement of strategic targets.
The fair value calculations do not include any allowance for dividends as the Company has no available profits for distribution.
The contractual term of the LTIP options is five years.
The expense recognised for employee services received during the year to 31 December 2016 was £133,601 (31 December 2015: £nil).
Movements during the period
The following table illustrates the number of, and movements in, LTIP options during the year:
Granted during the period
Cancelled during the period
Forfeited during the period
Outstanding at 31 December
Exercisable at 31 December
2016
Number
2015
Number
1,199,658
—
(234,162)
965,496
—
—
—
—
—
—
The weighted average remaining contractual life for the LTIP options outstanding as at 31 December 2016 was 3.7 years.
The weighted average fair value of LTIP options granted during the year was £1.21.
63
FINANCIAL STATEMENTS 21. Share-based payments continued
The following tables list the weighted average inputs to the models used for the fair value of LTIP options granted during the period
ended 31 December 2016:
LTIP Share Price Element
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ordinary shares (£)
Model used
LTIP Strategic Element
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ordinary shares (£)
Model used
Year ended
31 December
2016
48.9
0.48–0.74
3–5
2.21
Monte Carlo
Year ended
31 December
2016
48.9
0.74
5
2.21
Black Scholes
Since there is no historical data in relation to the expected life of the LTIP options the contractual life of the options has been used
in calculating the expense for the period.
Volatility is estimated by reference to the share price volatility of a group of comparable companies over a retrospective period
equal to the expected life of the LTIP options.
Deferred Share Bonus Plan
Under the Mereo BioPharma Group plc Deferred Share Bonus Plan (DSBP), 30% of the annual bonus for the senior management team
is payable in deferred shares, which are governed by the DSBP scheme rules. At the date of grant of the awards, the monetary bonus
amount will be divided by the closing share price to give the number of shares issued to the employee under the DSBP. The number
of shares is fixed and not subject to adjustment between the issue date and vesting date. Under the DSBP, awards vest after three years
from the date of the award. There are no further performance conditions attached to the award, nor any service conditions (including
no requirement for continued employment once the awards have been made). The scheme does allow for adjustment of awards in
the event of a material misstatement of Mereo’s accounts or fraud or misconduct on the part of an individual. The scheme also allows
for adjustment of awards in the event there was an error in calculating the vesting of the awards.
Since the awards are issued at nil cost they will be satisfied by the issue of shares from the Employee Benefit Trust.
The following table illustrates the number of, and movements in, DSBP options during the year:
Granted during the period
Outstanding at 31 December
Exercisable at 31 December
2016
Number
62,180
62,180
—
2015
Number
—
—
—
The weighted average remaining contractual life for the DSBP options outstanding as at 31 December 2016 was four years.
The weighted average fair value of deferred share bonus plan options granted during the year was £2.80.
64
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 22. Loss of the parent company
The parent company has taken advantage of the exemption permitted by Section 408 of the Companies Act 2006 not to present an
income statement for the year. The parent company’s loss for the year was £1,141,456 (2015: £2,827,315), which has been included
in the Group’s statement of comprehensive loss.
23. Trade and other payables
Trade payables
Social security and other taxes
Other payables
Accruals
Intercompany payable
Group
Company
31 December
2016
£
31 December
2015
£
31 December
2016
£
31 December
2015
£
994,901
113,205
13,001
1,263,747
107,661
17,612
994,901
113,205
13,001
1,263,747
107,661
17,615
2,088,008
2,588,497
2,088,008
2,588,497
—
—
—
3
3,209,115
3,977,517
3,209,115
3,977,520
Terms and conditions of the above financial liabilities:
» trade payables are non-interest bearing and are normally settled on 30-day terms; and
» other payables are non-interest bearing and have an average term of one month.
24. Commitments and contingencies
Operating lease commitments — Group as lessee
The Company has entered into a lease for its premises at Fourth Floor, 1 Cavendish Place, London W1G 0QF. The term of the lease
agreement is from 17 August 2015 through to 16 August 2025.
The premises comprise approximately 4,000 square feet. The principal rent for the premises is £162,960 per annum through
16 December 2016 and £325,920 per annum thereafter, subject to increase on 17 August 2020 based on the open market value
of the premises (the “Principal Rent”). In addition to the Principal Rent, the Company is responsible for value added tax on the
Principal Rent and certain insurance costs and service charges incurred by the landlord.
The Company may break the lease agreement on 16 August 2020 by providing six months’ prior written notice to the landlord.
If the Company does not exercise its break option, the landlord will decrease by 50% the Principal Rent for the period from
16 August 2020 through to 15 April 2021.
Future minimum rentals payable under non-cancellable operating leases as at 31 December are, as follows:
Land and buildings
Within one year
After one year but not more than five years
More than five years
The Group does not have any other operating leases.
31 December
2016
£
31 December
2015
£
325,920
854,576
—
293,328
1,063,708
—
1,180,496
1,357,036
65
FINANCIAL STATEMENTS 24. Commitments and contingencies continued
Finance leases – Group as lessee
The Group did not have any leasing arrangements classifying as finance leases at 31 December 2016 (2015: nil).
Financial commitments
As described in note 25, each of Mereo BioPharma 1 Ltd, Mereo BioPharma 2 Ltd and Mereo BioPharma 3 Ltd issued to Novartis loan
notes (which were assigned by Novartis to the Company in exchange for ordinary shares pursuant to the Subscription Agreement)
and each of Mereo BioPharma 1 Ltd, Mereo BioPharma 2 Ltd and Mereo BioPharma 3 Ltd agreed to make future payments to Novartis
comprising amounts equal to ascending specified percentages of tiered annual worldwide net sales (beginning at high single digits
and reaching into double digits at higher sales) by such subsidiary of products that include the assets acquired. The levels of ascending
percentages of tiered annual worldwide net sales are the same for each of Mereo BioPharma 1, Mereo BioPharma 2 and Mereo
BioPharma 3 under the respective Purchase Agreements.
Each of Mereo BioPharma 1 Ltd, Mereo BioPharma 2 Ltd and Mereo BioPharma 3 Ltd further agreed that in the event it transfers,
licenses, assigns or leases all or substantially all of its assets, it will pay Novartis a percentage of the proceeds of such transaction.
The Company will retain the majority of the proceeds from such a transaction. Such percentage is the same for each of Mereo
BioPharma 1 Ltd, Mereo BioPharma 2 Ltd and Mereo BioPharma 3 Ltd under the respective Purchase Agreements. The payment
of a percentage of proceeds is not payable with respect to any transaction involving equity interests of Mereo BioPharma plc,
a merger or consolidation of Mereo BioPharma Group plc, or a sale of any assets of Mereo BioPharma Group plc.
25. Related party disclosures
Note 5 provides information about the Group’s structure, including details of the subsidiaries and the holding company. The following
shows the transactions that have been entered into with related parties for the relevant financial period.
On 30 June 2016 Mereo BioPharma Group plc resolved to capitalise the intercompany loans and all outstanding intercompany
receivables at that date, and any intercompany balances in existence at 31 December were similarly extinguished. A capital
contribution of £65,744,871 by Mereo BioPharma Group plc to its subsidiaries was recorded extinguishing all intercompany
balances at 31 December 2016.
Novartis Pharma AG (“Novartis”) holds shares in the Company at 31 December 2016. On 3 June 2016, the Group issued 3,463,563
£1 unsecured convertible loan notes (“Notes”) to Novartis and received £3,463,563 from Novartis in consideration (note 19).
On 28 July 2015, Mereo BioPharma 1 Ltd, Mereo BioPharma 2 Ltd and Mereo BioPharma 3 Ltd each acquired certain assets from
Novartis, each company issuing a loan note to Novartis as consideration. The total amount was £25,812,941. The loan notes were
interest bearing at a fixed rate of 2% above the Bank of England rate.
Of the 14,740,296 ordinary shares issued on 29 July 2015, 3,849,000 shares were issued to Novartis. This left a further 10,151,000
shares are to be issued to Novartis pro rata to their percentage shareholding as and when the Company issued further ordinary
shares. Of the 44,600,502 ordinary shares issued on 9 June 2016, 8,697,480 shares were issued to Novartis at a price of £1.84 per
share. A further 1,453,520 shares are to be issued to Novartis pro rata to their percentage shareholding as and when the Company
issues further ordinary shares.
On 28 July 2015, Mereo BioPharma Group plc entered into a subscription agreement to obtain investor funding. As part of the
subscription agreement (as amended by an agreement dated 1 June 2016), Novartis Pharma AG assigned its loan notes with the
three subsidiaries to Mereo BioPharma Group plc and extinguished the loan notes in return for the receipt of 3,849,000 ordinary
shares in the Company.
As part of the extinguishing of the loan notes as described above, an intercompany loan was established from Mereo BioPharma
Group plc to Mereo BioPharma 1 Ltd. The initial amount was £4,310,761 with interest bearing at a fixed rate of 2% above the
Bank of England rate. As described above, the intercompany loan formed part of the intercompany balances that were capitalised
on 30 June 2016.
66
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED 25. Related party disclosures continued
A total of £11,969,916 (2015: £8,211,558) was charged by Mereo BioPharma Group plc to Mereo BioPharma 1 Ltd in the year
in respect of recharged expenses.
As part of the extinguishing of the loan notes as described above, an intercompany loan was established from Mereo BioPharma
Group plc to Mereo BioPharma 2 Ltd. The initial amount was £9,886,356 with interest bearing at a fixed rate of 2% above the
Bank of England rate. As described above, the intercompany loan formed part of the intercompany balances that were capitalised
on 30 June 2016.
A total of £11,720,614 (2015: £12,838,180) was charged by Mereo BioPharma Group plc to Mereo BioPharma 2 Ltd in the year
in respect of recharged expenses.
As part of the extinguishing of the loan notes as described above, an intercompany loan was established from Mereo BioPharma
Group plc to Mereo BioPharma 3 Ltd. The initial amount was £11,615,824 with interest bearing at a fixed rate of 2% above the
Bank of England rate. As described above, the intercompany loan formed part of the intercompany balances that were capitalised
on 30 June 2016.
A total of £7,301,106 (2015: £14,650,182) was charged by Mereo BioPharma Group plc to Mereo BioPharma 3 Ltd in the year
in respect of recharged expenses.
The Group purchased goods and services from Novartis in the year as set out below:
Manufacture and supply of clinical trial material
31 December
2016
£
31 December
2015
£
968,219
—
The amount outstanding to be paid to Novartis at 31 December 2016 was £35,249.
Dr Frank Armstrong is a director of Dr Frank Armstrong Consulting Ltd, and a Director of the Company. During the period to
31 December 2015 the Company made purchases, in the ordinary course of business, at a cost of £120,412 from Dr Frank Armstrong
Consulting Ltd. These purchases were for assistance with diligence activities, contributed advice and reimbursement of travel costs
prior to completion of the purchase agreements.
Dr Denise Scots-Knight, Kunal Kashyap and Peter Bains are directors of Phase4 Partners Ltd and Directors of the Company.
During the period to 31 December 2015 the Group made purchases, in the ordinary course of business, at a cost of £458,359
from Phase4 Partners Ltd. These purchases were for reimbursement of pre-establishment third-party consultancy services
and reimbursement of office and travel costs.
Terms and conditions of transactions with related parties
The purchases from related parties are made on terms equivalent to those that prevail in arm’s length transactions. There have
been no guarantees provided or received for any related party receivables or payables. For the year ended 31 December 2016 the
Group has not recorded any impairment of receivables relating to amounts owed by related parties. This assessment is undertaken
each financial year through examining the financial position of the related party and the market in which the related party operates.
26. Standards issued but not yet effective
The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial
statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers.
Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange
for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and
recognising revenue.
The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS.
Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2018 with early
adoption permitted. The Group is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required
effective date.
67
FINANCIAL STATEMENTS 26. Standards issued but not yet effective continued
IFRS 16 Leases
IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee
accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is twelve months or less
or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor
accounting substantially unchanged from its predecessor, IAS 17.
IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019.
The Group is currently assessing the impact of IFRS 16 and plans to adopt the new standard on the required effective date.
Other standards
The following standards and interpretations, applicable for annual periods beginning on or after 1 January 2017, are not expected
to have any impact on the results of the Group or the presentation of the financial statements:
» IFRS 9 Financial Instruments
» IFRS 10 Consolidated Financial Statements – Amendments regarding the sale or contribution of assets between an investor
and its associate or joint venture and amendments regarding the application of the consolidation exception
» IFRS 11 Joint Arrangements – Amendments regarding the accounting for acquisitions of an interest in a joint operation
» IFRS 12 Disclosure of Interests in Other Entities – Amendments regarding the application of the consolidation exception
» IFRS 14 Regulatory Deferral Accounts
» IAS 1 Presentation of Financial Statements – Amendments resulting from the disclosure initiative
» IAS 7 Statement of Cash Flows – Amendments resulting from the disclosure initiative
» IAS 12 Income Taxes – Amendments to recognition of deferred tax assets for unrealised losses
» IAS 16 Property, Plant and Equipment – Amendments regarding the clarification of acceptable methods of depreciation
and amortisation and amendments bringing bearer plants into the scope of IAS 16
» IAS 27 Separate Financial Statements (as amended in 2011) – Amendments reinstating the equity method as an accounting
option for investments in subsidiaries, joint ventures and associates in an entity’s separate financial statements
» IAS 28 Investments in Associates and Joint Ventures – Amendments regarding the application of the consolidation exception
» IAS 38 Intangible Assets – Amendments regarding the clarification of acceptable methods of depreciation and amortisation
» IAS 41 Agriculture – Amendments bringing bearer plants into the scope of IAS 16
» Amendments resulting from September 2014 Annual Improvements to IFRSs:
» IFRS 2 Classification and Measurement of Share-based Payment Transactions
» IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
» IFRS 7 Financial Instruments: Disclosures
» IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration
» IAS 19 Employee Benefits
» IAS 34 Interim Financial Reporting
68
MEREO BIOPHARMA GROUP PLC / ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTS CONTINUED ADVISORS
Auditor
Ernst & Young LLP
Apex Plaza
Reading RG1 1YE
United Kingdom
Financial PR advisor
FTI Consulting
200 Aldergate
Aldergate Street
London EC1A 4HD
United Kingdom
Registrar
Capita Asset Services
The Registry
34 Beckenham Road
Kent BR3 4TU
United Kingdom
Nominated advisor and joint broker
Cantor Fitzgerald Europe
One Churchill Place
Canary Wharf
London E14 5RB
United Kingdom
Joint broker
RBC Europe Limited
Riverbank House
2 Swan Lane
London EC4R 3BF
United Kingdom
Financial advisor
Evercore Partners International
15 Stanhope Gate
London W1K 1LN
United Kingdom
Legal advisor
Proskauer Rose (UK) LLP
110 Bishopsgate
London EC2N 4AY
United Kingdom
Design Portfolio is committed to planting
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69
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MEREO BIOPHARMA GROUP PLC
1 Cavendish Place
London
W1G 0QF
United Kingdom