Company Number 09481161
MEREO BIOPHARMA GROUP PLC
Annual Report and Accounts
Year ended December 31, 2019
MEREO BIOPHARMA GROUP PLC
CONTENTS
Introduction
Directors, secretary and advisers
Strategic report
Introduction
Business strategy
Chairman and CEO’s statement
Financial review
Principal risks and uncertainties
Corporate governance
Corporate Governance Report
Audit and Risk Committee Report
Directors’ Remuneration Report
Directors’ Report
Statement of Directors’ responsibilities
Financial statements
Independent auditors’ report
Consolidated Statement of Comprehensive loss
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Equity
Notes to the consolidated financial statements
Company Balance Sheet
Notes to the Company financial statements
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146
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MEREO BIOPHARMA GROUP PLC
DIRECTORS, SECRETARY AND ADVISERS
Directors Dr. Denise Scots-Knight (Chief Executive Officer)
Richard Jones (Chief Financial Officer)
Dr. Peter Fellner
Dr. Anders Ekblom
Peter Bains
Paul Blackburn
Kunal Kashyap
Dr. Deepa Pakianathan (appointed April 23, 2019)
Michael Wyzga (appointed April 23, 2019)
Dr. Frank Armstrong (resigned February 8, 2019)
Company Secretary Charles Sermon
Registered Office 4th Floor, One Cavendish Place
London
W1G 0QF
Company Number 09481161
Auditors Ernst & Young LLP
Apex Plaza
Reading
RG1 1YE
Nominated Adviser and Broker Cantor Fitzgerald Europe
5 Churchill Place
London
E14 5HU
Solicitors Mayer Brown International LLP
201 Bishopsgate
London EC2M 3AF
Registrars Link Asset Services
PXS 1
34 Beckenham Road
Beckenham
Kent BR3 4ZF
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: INTRODUCTION
The Directors present their strategic report together with the corporate governance report, audited
consolidated financial statements, audited company financial statements and auditors’ report for the year
ended December 31, 2019.
This strategic report is broken down into the following sections:
•
•
•
•
Business strategy;
Chairman and CEO’s statement;
Financial review; and
Principal risks and uncertainties.
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: BUSINESS STRATEGY
We are a biopharmaceutical company focused on the development and commercialization of innovative
therapeutics that aim to improve outcomes for oncology and rare diseases. Our existing portfolio consists
of six clinical stage product candidates. Our lead oncology product candidate, etigilimab (an “Anti-TIGIT”),
has completed a Phase 1a dose escalation clinical trial in patients with advanced solid tumors and has been
evaluated in a Phase 1b study in combination with nivolumab in select tumor types. Our second oncology
product, navicixizumab for the treatment of late line ovarian cancer has completed a Phase 1 study and has
been partnered with Oncologie, Inc. Our rare disease product candidates are setrusumab for the treatment
of osteogenesis imperfecta (“OI”) and alvelestat for the treatment of severe alpha-1 antitrypsin deficiency
(“AATD”) which is being investigated in an ongoing Phase 2 proof-of-concept study. We plan to complete a
strategic partnership for the development of setrusumab in adults and children following the the Phase 2b
study in adults and alignment with the FDA and EMA on the pivotal study design for children with OI.
We plan to develop our product candidates for oncology and rare diseases through the next key clinical
milestone and then partner or in selected cases to develop through regulatory approval and potentially
commercialization.
We plan to partner or sell our other two product candidates (which do not target oncology or rare diseases),
acumapimod for the treatment of acute exacerbations of chronic obstructive pulmonary disease (“AECOPD”)
and leflutrozole for the treatment of infertility and hypogonadatropic hypogonadism (“HH”) in obese men,
recognizing the need for greater resources to take these product candidates to market.
Our strategy is selectively to acquire and develop product candidates for oncology and rare diseases that
have already received significant investment from large pharmaceutical and biotechnology companies and
that have substantial pre-clinical, clinical and manufacturing data packages. Since our formation in March
2015, we have successfully executed on this strategy by acquiring six clinical-stage product candidates, of
which four were in oncology and rare diseases. Four of these six clinical-stage product candidates were
acquired from large pharmaceutical companies and two of which we acquired in the merger with OncoMed
Pharmaceuticals, Inc. (“OncoMed”). We aim to efficiently develop our product candidates through the clinic
and have commenced or completed large, randomized Phase 2 clinical trials for four of our product
candidates.
Oncology and rare diseases represent an attractive development, and in some cases, commercialization
opportunity for us since they typically have high unmet medical need and can utilize regulatory pathways
that facilitate acceleration to approval and to the potential market. Development of products for oncology
and rare diseases both involve close collaboration with key opinion leaders and investigators. Development
of rare disease products generally involves close coordination with the patient organizations and patients
are treated at a limited number of specialized sites which helps identification of the patient population and
enables a small targeted sales infrastructure to commercialize the products in key markets.
Our team has extensive experience in the pharmaceutical and biotechnology sector in the identification,
acquisition, development, manufacturing and commercialization of product candidates in multiple
therapeutic areas. Our senior management has long-standing relationships with senior executives of large
pharmaceutical and biotechnology companies which we believe enhances our ability to form strategic
partnerships on our product candidates and to identify and acquire additional product candidates.
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: BUSINESS STRATEGY
Our Pipeline
The following tables summarize our pipeline for our oncology and rare disease product candidates and our
other product candidates. We have global commercial rights to etigilimab, setrusumab, alvelestat,
acumapimod and leflutrozole.
*Partnered with Oncologie, Inc
(cid:1)
(cid:1)(cid:1)
We intend to become a leading biopharmaceutical company developing innovative therapeutics that aim to
improve outcomes for patients with oncology and rare diseases. The key elements of our strategy to achieve
this goal include:
•
Rapidly develop our oncology and rare disease product candidates. Etigilimab, our lead oncology
program, has completed a Phase 1a dose escalating monotherapy study and has been evaluated in a
Phase 1b combination study in a range of tumor types. We plan to initiate a Phase 1b study of etigilimab
in combination with a PDL-1/PD-1 in Q4 2020. Our second oncology product Navicixizumab for the
treatment of late line ovarian cancer has completed a Phase 1 study and has been partnered with
Oncologie, Inc. We have completed and announced top-line data on a Phase 2b clinical trial of
setrusumab for the treatment of OI in adults in the United States, Europe and Canada. We reported top-
line data on the three blinded dose ranging arms in November 2019 with the results supporting
progression of setrusumab into a pediatric pivotal study in OI. Following the completion of the dosing
part of the study, patients will continue to be followed for a further twelve months to examine the off-
effects of setrusumab. We have agreed on a PIP for setrusumab with the EMA and following our end of
Phase 2 Type B meeting with the FDA in February 2020 have alignment on a pivotal study design for
children with OI fracture as the primary end point. We plan to form a strategic partnership for
setrusumab prior to initiation of the pivotal study in children with OI and believe the results from this
trial, if favorable, will be sufficient to support the submission of a BLA in the United States and MAA in
the EU for setrusumab for the treatment of children with severe OI and a CMA for the treatment of adults
with OI.
We have commenced a Phase 2 proof-of-concept clinical trial of alvelestat for the treatment of severe
AATD and as previously announced expect to report top-line data from this trial in the second half of
2021. If the results are favorable and pending regulatory feedback, we will assess the options for further
development of alvelestat towards approval and commercialization.
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: BUSINESS STRATEGY
Explore strategic relationships with third parties for further clinical development and/or
commercialization or strategic sales or out-licensing for our other product candidates (non-
oncology/non-rare disease). Based on the results from our Phase 2 clinical trial of acumapimod, we
plan to enter into one or more strategic relationships with third parties for acumapimod to undertake
the next phase of clinical development and, if approved, commercialization. In March 2018, we reported
top-line Phase 2b data for leflutrozole for the treatment of HH and in December 2018, we reported
positive results from the safety extension study for leflutrozole. We intend to explore strategic
relationships with third parties for the further development and commercialization of leflutrozole.
Continue to be a partner of choice for large pharmaceutical and biotechnology companies. We believe
that we are a preferred partner for large pharmaceutical and biotechnology companies as they seek to
unlock the potential in their development pipelines and deliver therapeutics to patients in areas of high
unmet medical need. We have strong relationships with these companies, as evidenced by our
agreements with Novartis and AstraZeneca, as well as by the merger with OncoMed, and a track record
of structuring transactions that enable us to leverage our core capabilities while creating value for all
stakeholders. We intend to continue to enter into strategic relationships that align our interests with
those of large pharmaceutical and biotechnology companies and that we believe to be mutually
beneficial.
Leverage our expertise in business development. Our senior management team has extensive
relationships with large pharmaceutical and biotechnology companies. These relationships are
important to us as we seek to form strategic partnerships on our product candidates and as appropriate,
to grow our pipeline of product candidates in oncology and rare diseases.
•
•
•
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: CHAIRMAN AND CEO’S STATEMENT
Introduction
The Group’s strategy continues to be to build a portfolio of oncology and rare disease products acquired
from pharmaceutical and large biotechnology companies and to selectively partner or potentially develop
these through regulatory approval and subsequent commercialization.
During the year, we completed our acquisition of OncoMed, became a US listed company and acquired two
clinical stage oncology programs, etigilimab (an “Anti-TIGIT”) and navicixizumab (or “Navi”). Successful
integration of OncoMed has allowed us to broaden our asset base and significantly strengthen our cash
position, enabling us to progress beyond our key clinical milestones. We have also gained the skills and
expertise of an operational base in the U.S. including highly relevant regulatory expertise. Our current portfolio
consists of six clinical-stage product candidates. Etigilimab represents an attractive investment opportunity
for the Company given the recent developments with other Anti-TIGIT programs. In January 2020, we
announced that we had signed a global licensing deal with Oncologie, Inc. on our second oncology program,
navicixizumab, for ovarian cancer. Our rare disease and orphan drug product candidates, setrusumab for
the treatment of OI and alvelestat for the treatment of severe AATD, represent attractive development
opportunities for us. We plan to partner setrusumab prior to initiation of the pivotal study and subsequent
commercialization. Prior to our acquisition of OncoMed, each of our rare disease product candidates had
generated positive clinical data for their respective target indications or for a related indication.
During the year, we made significant progress across our product development programs both in terms of
clinical development and regulatory strategy. On November 11, 2019, we reported 12-month top-line data
from our Phase 2b dose-ranging clinical trial for setrusumab in adults with Type I, III or IV OI. The study
enrolled 112 patients in the U.S. and Europe and randomized patients originally to one of four different blinded
monthly dosing regimens of setrusumab: high, medium, low and placebo. The study was subsequently
revised to convert the placebo arm into an open-label arm where patients received the high dose regimen of
setrusumab. The data demonstrated setrusumab to have a dose-dependent bone-building activity measured
by well-established bone density scans (“DXA scans”). In the high dose arm, we also saw fewer fractures
than in the medium or the low dose arms. Setrusumab was demonstrated to be safe and well-tolerated in
the patients participating in the Phase 2b adult study, as well as by the 83 subjects across the four Phase
1/2 setrusumab studies completed to date.
After the end of the year, on January 14, 2020, we reported additional positive data from our Phase 2b dose-
ranging clinical trial. Setrusumab demonstrated a dose dependent increase in bone strength stiffness and
failure load at the radius as measured by Finite Element Analysis (“FEA”). This was a second prespecified
primary end point and reached statistical significance in the high dose cohort but not in the medium and
low dose cohorts. These FEA data are consistent with an effect of setrusumab at the high dose improving
radius bone strength as evidenced by a better ability to resist experimental deformation and improved failure
load.
We announced a successful end of Phase Type B meeting on navicixizumab in July 2019 during which we
agreed the outline of a Phase 2 registrational study for ovarian cancer and an accelerated approval pathway.
Navicixizumab was also granted fast-track designation in the second half of 2019.
In February 2020, we completed a £3.8m million convertible equity financing with Novartis Pharma AG
(“Novartis”). Also in February we completed two Securities Purchase Agreements with Boxer Capital of
Tavistock Group, and Aspire Capital Fund LLC (“Aspire”) which raised a total of $6 million before expenses.
The Agreement with Aspire included the ability to issue up to an additional $25 million of American
Depositary Shares over a three-year period.
On February 28, 2020, we announced the successful completion of a Type B End-of-Phase 2 meeting with
the U.S. FDA to discuss the development of setrusumab for the treatment of children with OI. Following the
review of the data from the Phase 2b study with setrusumab in adults with OI, and the design for our proposed
Phase 3 study in children with OI, the U.S. FDA agreed on the design of a Phase 3 pediatric study in OI to be
completed prior to the submission of a potential BLA in the U.S. This is in line with our proposed pivotal
pediatric study design, which has already been agreed to in principle with the EMA in August 2018.
On June 4, 2020, we announced the completion of a private placement of $70 million (£56 million) (the
“Fundraising”) before commission and expenses with a number of new and existing principally U.S based
institutional and accredited investors. OrbiMed led the Fundraising with participants including Vivo Capital,
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: CHAIRMAN AND CEO’S STATEMENT
Surveyor Capital (a Citadel company), Pontifax Venture Capital, Samsara BioCapital, Commodore Capital,
and funds managed by Janus Henderson Investors alongside existing investors Boxer Capital of Tavistock
Group and Aspire.
Update on impact of COVID-19
Coronavirus disease 2019 (“COVID-19”) is an infectious respiratory disease that was first identified in 2019
in Wuhan, China and has since spread globally. The impact COVID-19 is evolving rapidly and its future effects
are uncertain.
We are actively monitoring how the effects and risks of COVID-19 impact our day-to-day operations,
including our ongoing clinical trial activities:
•
•
Our current activities on setrusumab for potential treatment of OI are focussed on completion of the
ASTEROID Phase 2b extension study in adults with OI and preparations for the Phase 3 pediatric trial,
which subject to partnering, we intend to start in the second half of 2020. We currently expect no change
to this timeline. Our Phase 2b ASTEROID study in OI is fully recruited with topline results, as discussed
above, previously announced in November 2019. Patients who enrolled in this study are in a one-year
follow up post treatment extension phase.
Our Phase 2 alvelestat trial recruits individuals with alpha-1 antitrypsin deficiency-related lung disease,
who are potentially at greater risk from COVID-19 exposure. As a result, and as we announced in March
2020, recruitment into our Phase 2 alpta-1 antitrypsin study will be delayed, with topline data now
expected in the second half of 2021.
As a business, we have taken necessary measures across our sites in the U.K. and U.S. to ensure that our
employees and other key stakeholders best adhere to the advice set out by the relevant authorities. Such
measures have included the introduction of remote working arrangements, reduced face to face contact by
encouraging the use of teleconferencing, a ban on domestic and international travel as well as other
measures considered necessary by our recently formed COVID-19 committee which is responsible for
business continuity planning during this challenging time.
Organizational change
On March 27, 2020, we announced that Michael Wyzga who currently serves as a Non-Executive Director,
will become the Interim Chief Financial Officer following the announced departure of Richard Jones, the
Company’s current Chief Financial Officer (“CFO”). Richard Jones will remain in his position as CFO for a
transitionary period of up to five months from March 2020.
Michael Wyzga previously served as President and Chief Executive Officer and a member of the Board of
Directors of Radius Health, Inc. Prior to that he served in various senior management positions at Genzyme
Corporation, including as CFO from July 1999 until November 2011. Following completion of the Fundraising,
we now intend to commence a search for a permanent CFO.
Section 172(1) Companies Act 2006
The Directors are required by law to act in good faith to promote the success of the Group for the benefit of
the shareholders. As set out within the content of this annual report, the Directors have considered the
following matters throughout the year and in formulating the future strategy of the business:
The likely long-term consequences of any decision, as set out within our Business Strategy and
Chairman and CEO’s Statement on pages 4 to 13;
The interests of the Group’s employees as set out within our Corporate Governance Report on pages 35
to 45;
The need to foster the Group’s business relationships with suppliers, customers and others on page 7
to 13;
The impact of the Group’s operations on the community and the environment, as set out within our
summary of environmental matters on pages 12-13,
The desirability of the Group maintaining a reputation for high standards of business conduct on page 7
to 13; and
•
•
•
•
•
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: CHAIRMAN AND CEO’S STATEMENT
•
The need to act fairly as between shareholders of the Group, as set out within our Corporate Governance
Report on page 35 to 45.
The Group endeavours to maintain good relationships with our suppliers by contracting, where possible, on
their standard business terms and paying them in accordance with the relevant terms agreed. We meet with
our significant suppliers regularly, using the meetings to ensure that our research programs are planned and
delivered and effectively in a timely and cost-efficient manner. This ensures that the Group’s and our
significant suppliers’ interest are aligned.
The Board recognizes the importance of maintain high standards of business conduct. The Group operates
a Code of Business Conduct and Ethics, publicly available on our website, which contains general guidelines
for conducting the business of the Group consistent with the highest standard of business ethics. In addition,
the Group has an Employee Handbook which employees are required to read and acknowledge on an at least
annual basis.
Business overview
Oncology Disease Product Candidates
•
Etigilimab (OMP-313M32): Etigilimab is an antibody against TIGIT (T-cell immunoreceptor with Ig and
ITIM domains). TIGIT is a next generation checkpoint receptor shown to block T-cell activation and the
body’s natural anti-cancer immune response. Etigilimab is an IgG1 monoclonal antibody which binds
to the human TIGIT receptor on immune cells with a goal of improving the activation and effectiveness
of T-cell and NK cell anti-tumor activity. Mereo completed a Phase 1a dose escalation clinical trial with
etigilimab in patients with advanced solid tumors and enrolled patients in a Phase 1b study in
combination with nivolumab in selected tumor types.
23 patients were treated in the Phase 1a dose escalation study with doses up to 20mg/kg Q2W. Tumor
types included colorectal cancer, endometrial cancer, pancreatic cancer and other tumor types. No dose
limiting toxicities were observed. In the Phase 1b combination study, a total of ten patients, nine of
whom had progressed on prior anti-PD1/PD-L1 therapies were enrolled at doses of 3, 10, and 20 mg/kg.
Tumor types included gastric cancer and six other tumor types. Eight patients were evaluable for tumor
growth assessment, and all of these patients had progressed on PD1/PD-L1 therapies with best
responses including two patients with a partial response and stable disease. Patients remained on
study for up to 224 days. No dose limiting toxicities (DLTs) were observed.
The only treatment-related adverse event in the Phase 1a portion of the study with an incidence rate
greater than 20 per cent. was rash (35 per cent.), and the most common treatment-related adverse
events in the Phase 1b portion of the study were rash (40 per cent.), fatigue (30 per cent.) and pruritus
(20 per cent.) There was only one treatment-related serious adverse event in the Phase 1a portion
(autoimmune hepatitis) and there were no treatment-related serious adverse events in the Phase 1b
portion of the study. The Phase 1b study has now completed.
The etigilimab program was previously subject to an exclusive license option with Celgene Corporation
(“Celgene”) as part of a collaboration agreement from 2013 with OncoMed (“the Collaboration
Agreement”). In June 2019, we announced that Celgene had notified OncoMed that Celgene had decided,
in light of strategic product portfolio considerations, not to exercise its option to license etigilimab. The
Collaboration Agreement was terminated with respect to etigilimab effective on October 11, 2019. As a
result, we have worldwide rights to the etigilimab program.
•
Navicixizumab (OMP-305B83): Navi is a bispecific antibody that inhibits delta-like ligand 4 (DLL4) and
vascular endothelial growth factor VEGF). We acquired this therapeutic product in the merger with
OncoMed. This antibody is intended to have anti-angiogenic and anticancer stem cell activity. In a
Phase 1a clinical trial, Navi demonstrated single agent activity. Following this we conducted a Phase
1b clinical trial in ovarian cancer, in combination with paclitaxel, in platinum-resistant ovarian cancer.
A successful FDA Type B meeting was held in July 2019 and the potential for accelerated approval was
discussed. Navicixizumab has also been granted Fast Track Approval by the FDA. In January 2020 we
completed a global license agreement with Oncologie, Inc. (“Oncologie”) for the further development
and commercialization of Navi.
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: CHAIRMAN AND CEO’S STATEMENT
Rare Disease Product Candidates
•
Setrusumab (BPS-804): Setrusumab is a novel antibody we are developing as a treatment for OI, a rare
genetic disease that results in bones that can break easily and is commonly known as brittle bone
disease. OI is a debilitating orphan disease for which there are no treatments approved by the FDA or
EMA. It is estimated that OI affects a minimum of 25,000 people in the United States and approximately
32,000 people in Germany, Spain, France, Italy, and the United Kingdom. Setrusumab is designed to
inhibit sclerostin, a protein that inhibits the activity of bone-forming cells. We believe setrusumab’s
mechanism of action is well suited for the treatment of OI and has the potential to become a novel
treatment option for patients that could reduce fractures and improve patient quality of life.
In 2016, we obtained orphan drug designation in OI for setrusumab in the United States and the EU and,
in November 2017, it was accepted into the Priority Medicines scheme (“PRIME”) of the EMA. Prior to
our acquisition of setrusumab, Novartis conducted four clinical trials in 106 patients and healthy
volunteers. A Phase 2 clinical trial of setrusumab in OI showed statistically significant improvements
in bone formation biomarkers and bone mineral density. In April 2017, we initiated a Phase 2b clinical
trial for setrusumab in adults in the United States, Europe and Canada. The trial is randomized with
three blinded arms at high, medium and low doses to establish the dose response curve and an open
label arm at the top dose. We reported top-line data on the three blinded dose ranging arms in November
2019 with the results supporting progression of setrusumab into a pediatric pivotal study in OI.
Following the completion of the dosing part of the study, patients are continuing to be followed for a
further twelve months to examine the off-effects of setrusumab. We have also agreed on a PIP for
setrusumab with the EMA and in February 2020, we announced the successful completion of a Type B
End-of-Phase 2 meeting with the FDA to discuss the development of setrusumab for the treatment of
children with OI in the United States. We intend to partner setrusumab prior to conducting a pivotal trial
of setrusumab in children with severe OI to begin in late 2020, with fracture rate as the primary endpoint.
We believe that the results from this trial, if favorable, will be sufficient to support the submission of an
MAA to the EMA for setrusumab for the treatment of children with severe OI and a CMA for the treatment
of OI in adults in the EU.
•
Alvelestat (MPH-966): Alvelestat is a novel, oral small molecule we are developing for the treatment of
severe AATD, a potentially life-threatening, rare, genetic condition caused by a lack of effective alpha-
1 antitrypsin (“AAT”), a protein that protects the lungs from enzymatic degradation. This degradation
leads to severe debilitating diseases, including early-onset pulmonary emphysema, a disease that
irreversibly destroys the tissues that support lung function. There are an estimated 50,000 patients in
North America and 60,000 patients in Europe with severe AATD. Alvelestat is designed to inhibit NE, a
neutrophil protease, which is a key enzyme involved in the destruction of lung tissue. We believe the
inhibition of NE has the potential to protect AATD patients from further lung damage.
Prior to our license of alvelestat, AstraZeneca conducted 12 clinical trials involving 1,776 subjects,
including trials in bronchiectasis and CF. Although these trials were conducted in diseases other than
AATD, we believe the data demonstrated potential clinical benefit and biomarker evidence of treatment
effect for AATD patients. We have initiated a Phase 2 proof-of-concept clinical trial in patients with
severe AATD in the United States and the EU and as previously announced, expect to report top-line
data from this trial in the second half of 2021.
Other Product Candidates for Partnering
Our portfolio of non-oncology/non-rare disease products consists of the following product candidates:
•
Acumapimod (BCT-197): Acumapimod is a p38 MAP kinase inhibitor we are developing as an oral first-
line acute therapy for patients with AECOPD. COPD is a non-fully-reversible, progressive lung disease
in which inflammation plays a central role. There are an estimated 16 million people in the United States
diagnosed with COPD. Of all hospital admissions in the United States related to COPD, approximately
63 per cent. are for AECOPD patients. We believe acumapimod offers a potential new treatment for
controlling inflammation by targeting pathways that drive the pathological mechanism behind AECOPD.
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Since there are currently no approved therapies in the United States or the EU to treat AECOPD, we
believe that there is significant medical need for a drug which is disease-modifying. We believe
acumapimod could potentially prevent AECOPD instead of just treating the symptoms and has the
potential to improve quality of life, slow the progression of the disease, and significantly reduce direct
healthcare costs.
Prior to our acquisition of acumapimod, Novartis conducted five clinical trials in 459 patients and
healthy volunteers, including a Phase 2a trial in AECOPD patients that showed a clinically meaningful
improvement in lung function at the highest dose.
We conducted a Phase 2 dose-ranging clinical trial for acumapimod in 282 patients with AECOPD to
explore two different dosing regimens on top of standard of care, which included steroids, antibiotics,
and bronchodilators. Both dosing regimens showed a statistically significant change in FEV1 from
baseline to Day 7, meeting the trial’s primary endpoint on an intent-to-treat patient population basis.
In addition, dose-dependent, statistically significant reductions in hsCRP and fibrinogen were shown
with treatment with acumapimod, with hsCRP remaining suppressed through the 26-week observation
period. Treatment with acumapimod also showed a statistically significant reduction in the number of
COPD exacerbations that required hospitalization. Consistent with these results, there was a significant
reduction in the use of corticosteroid and antibiotics in the follow-up portion of the study. In addition,
acumapimod was reported to be safe and well tolerated. Based on these results, we intend to explore
strategic options with third parties for the further development of acumapimod.
In addition, in April 2019, we announced a successful end of Phase 2 meeting with the FDA regarding
acumapimod. In the meeting, we and the FDA agreed on a development plan for acumapimod. In
September 2019, we had a positive SAWP meeting with the EMA.
•
Leflutrozole (BGS-649): Leflutrozole is a once-weekly oral therapy we are developing for the treatment
of HH in obese men. HH is a clinical syndrome that results from inadequate levels of testosterone.
Based on WHO estimates and scientific data, we estimate there are approximately seven million cases
of HH in obese men in the United States. In these men, a decline in testosterone is exacerbated by high
levels of the aromatase enzyme, which is present in fat tissue and leads to a reduction in testosterone.
Leflutrozole is designed to inhibit the aromatase enzyme and is being developed to restore normal
levels of testosterone without causing excessively high testosterone levels or reducing the levels of LH
or FSH. Both LH and FSH play key roles in sperm formation and LH plays a key role in endogenous
testosterone formation. In contrast to current therapies for HH, which involve the exogenous
administration of testosterone and lead to further down regulation of LH and FSH, we believe that
leflutrozole, by preserving sperm formation through LH and FSH production, may present a benefit to
patients.
Prior to our acquisition of leflutrozole, Novartis conducted seven clinical trials exposing 131 patients
and healthy volunteers to leflutrozole, including a Phase 2 proof-of-concept trial for HH in obese men
in which leflutrozole normalized testosterone levels in all patients and demonstrated an increase in LH
and FSH levels.
In March 2018, we reported top-line data from our completed Phase 2b dose-ranging clinical trial of
leflutrozole for the treatment of HH in obese men. The trial enrolled 271 patients who were administered
placebo or one of three doses of leflutrozole. The trial met our primary endpoint of normalizing
testosterone levels in at least 75 per cent. of subjects after 24 weeks of treatment and all of the
secondary endpoints, including normalizing testosterone in at least 90 per cent. of patients after 24
weeks of treatment at the two highest doses and improvement in LH and FSH levels at all three doses.
Leflutrozole was reported to be well-tolerated in the trial. A subset of 143 patients entered into a six-
month safety extension study. Following the positive result of the safety extension study for leflutrozole,
we convened an advisory board meeting and concluded that the future development of leflutrozole
should focus on male infertility. We intend to explore strategic options with third parties for the further
development of leflutrozole.
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New product opportunities
To support our aim of becoming a leading oncology and rare disease company, we continue to seek and
review new product opportunities to expand and grow our portfolio in oncology and rare diseases. There
continues to be a good number of opportunities arising from large pharma and biotechnology companies
as they continue to reappraise development pipelines on an ongoing basis to allow them to focus on a
smaller number of strategically targeted therapeutic areas.
Future outlook
With the closing of the Fundraising with a very high-quality group of institutional and accredited investors
in June 2020 and the evolution of our strategy to focus on oncology and rare diseases, 2020 is set to be an
important year for the Company. We expect to initiate our phase 1b for etigilimab in a number of solid tumors,
to continue to enrol the Phase 2 study for alvelestat in AATD patients and to report on the Phase 2b adult
extension study for setrusumab in adults with OI.
TIGIT blockade in combination with anti-PD1/PD-L1 antibodies has recently been highlighted as a potential
next generation immuno-oncology target for the treatment of patients with advanced solid malignancies.
We are excited to move our program forward on the back of our Phase 1a mono therapy and Phase 1b
combination data.
Setrusumab for OI is now Phase 3 ready as a result of the successful end of Phase 2b meeting with the FDA
and the approval of a Paediatric Investigational Plan (“PIP”) by the EMA. We plan to initiate the Phase 3 study
in children with OI once we have secured a strategic partnership for this program which may include regional
partnerships or a global licensing deal.
Following the partnership with Oncologie for Navi, we continue to focus on partnering opportunities for our
other product candidates (non-oncology/non-rare disease) acumapimod and leflutrozole.
Finally, we are now funded into early 2022 providing the Company sufficient balance sheet strength and
runway to deliver on our clinical and business development milestones.
Information about the Group’s employees
Within our corporate governance report on page 42, further information about the Group’s employees and
gender diversity can be found.
The Board has a good relationship with the Group’s employees. The Board maintains constructive dialogue
with employees through the Chief Executive Officer (“CEO”) and through regular “town hall” all-employee
meetings and video conference calls where the Executive Team provides updates on strategic progress and
a forum for answering questions. Appropriate remuneration and incentive schemes are maintained to align
employees’ objectives with those of the Group.
As set out in our Code of Business Conduct and Ethics, the Group is committed to providing a safe and
healthy working environment for its employees and to avoiding adverse impact and injury to the environment
and the communities in which we do business. To achieve this, Group employees must comply with all
applicable external environmental, health and safety laws and other regulations as well as our own internal
standards.
We present our Directors’ Remuneration Report on pages 49 to 71.
Environmental matters
We currently outsource our research, development, testing and manufacturing activities. These activities are
subject to various environmental, health and safety laws and regulations, which govern, among other things,
the controlled use, handling, release and disposal of, including the maintenance of a registry for, hazardous
materials and biological materials. If we or our partners fail to comply with such laws and regulations, we
could be subject to fines or other sanctions.
12
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: CHAIRMAN AND CEO’S STATEMENT
As with other companies engaged in similar activities, we face a risk of environmental liability that is inherent
in our current and historical activities, including liability relating to releases of or exposure to hazardous or
biological materials. Environmental, health and safety laws and regulations are becoming more stringent.
We may be required to incur substantial expenses in connection with future environmental compliance or
remediation activities, in which case, production and development efforts being carried out by our outsourced
partners relating to our products may be interrupted or delayed.
As noted in our Directors’ report, a report on greenhouse gas emissions will be included in our annual report
and accounts for the year ended December 31, 2020.
Dr. Peter Fellner Dr. Denise Scots-Knight
Chairman Chief Executive Officer
June 15, 2020 June 15, 2020
13
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: FINANCIAL REVIEW
The financial statements contained within this annual report are presented on a consolidated Group basis
prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”) and adopted in the E.U. for the year ended December 31,
2019. Comparative data is shown on the same basis for the year ended December 31, 2018.
Financial KPIs
The directors consider that our underlying cash burn, cash balances and future cash runway and our
committed and planned expenditure on research and development (“R&D”) to be the Group’s key financial
KPIs at its current stage of development. Progress and performance against these key financial KPIs are
discussed further in this financial review.
The Directors consider that the most important non-financial KPIs are:
•
•
•
Progress with our R&D pipeline including our clinical studies and related manufacturing activities;
The management and development of our patent portfolio; and
Business development including partnering or out-licensing activities.
These activities are discussed in the Chairman and CEO’s Statement and our product overview.
The following table sets forth Mereo’s results of operations for the years ended December 31, 2018 and
2019.
Year Ended December 31,
(in thousands of pounds)
2018
2019
Research and development expenses
Administrative expenses
Operating loss
Net income recognized on acquisition of subsidiary
Finance income
Finance charge
Net foreign exchange (loss)/gain
Loss before tax
Income tax benefit
Loss attributable to equity holders of the parent
Net fair value gain /(loss) on investments in debt instruments held at fair value
Exchange differences on translation of foreign operations
Total comprehensive loss attributable to equity holders of the parent
(22,703)
(11,775)
––––––––––
(34,478)
–
307
(3,091)
(44)
––––––––––
(37,306)
5,277
––––––––––
(32,029)
––––––––––
––––––––––
–
–
––––––––––
––––––––––
(32,029)
––––––––––
––––––––––
(23,608)
(15,909)
––––––––––
(39,517)
1,035
377
(3,496)
483
––––––––––
(41,118)
6,274
––––––––––
(34,844)
––––––––––
––––––––––
–
(499)
––––––––––
––––––––––
(35,343)
––––––––––
––––––––––
14
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: FINANCIAL REVIEW
R&D expenses
The following table sets forth our R&D expenses by product development program for the years ended
December 31, 2018 and 2019:
Year Ended December 31,
(in thousands of pounds)
2018
2019
Setrusumab (BPS-804)
Alvelestat (MPH-966)
Leflutrozole (BGS-649)
Acumapimod (BCT-197)
Navicixizumab (“Navi”)
Etigilimab
GITR-Fc (1)
Unallocated costs
Total R&D expenses
11,304
3,722
5,091
2,285
–
–
–
301
––––––––––
22,703
––––––––––
––––––––––
13,734
4,976
1,089
388
1,721
767
432
501
––––––––––
23,608
––––––––––
––––––––––
(1) Consists of R&D expenses incurred by OncoMed. Development of this candidate ceased during 2019.
Total R&D expenses increased by £0.9 million, or 4%, from £22.7 million in 2018 to £23.6 million in 2019.
Direct R&D expenses relating to setrusumab increased by £2.4 million, or 21%. The increase was driven
primarily by the manufacture of additional drug product during 2019 which is planned to be used in upcoming
clinical studies together with ongoing costs related to the adult Phase 2b study which reported top-line data
in November 2019. R&D expenses relating to alvelestat increased by £1.3 million, or 34% to £5.0 million,
reflecting a full year of costs for the Phase 2 proof of concept study, which commenced in the fourth quarter
of 2018.
In total, £2.9 million of total R&D expenses in the current year is specific to programs acquired through the
acquisition of OncoMed in April 2019 for which there is no relevant prior year comparative (Navi, Etigilimab
and GITR-Fc). Of this, £1.7 million relates to Navi, which was subject to a global out-licensing agreement
announced in January 2020. The licensee, Oncologie, assumed all future ongoing development costs
following an agreed transition period to close out the existing Phase 1b study. Following completion of the
Phase 1 study in 2019, further significant development for etigilimab has yet to be undertaken.
Largely offsetting the increase, R&D expenses relating to leflutrozole and acumapimod decreased by £5.9
million, or 80%. The decrease in spend was driven by the completion of the Phase 2b clinical study on
leflutrozole in early 2019 and limited activity mainly relating to regulatory activity for acumapimod following
the completion of the study.
Unallocated costs increased by £0.2 million to £0.5 million in 2019. This increase is attributable to certain
R&D expenses incurred by OncoMed that are not allocated to a specific product development program.
Administrative expenses
Administrative expenses increased by £4.1 million, or 35%, from £11.8 million in 2018 to £15.9 million in
2019.
The increase was primarily due to an increase in costs following the acquisition of OncoMed. In particular,
payroll costs increased by £1.2 million to £3.4 million in 2019. In addition, following the Company’s listing
on the Nasdaq Global Market, professional fees, including the significantly increased costs of Directors and
Officers (“D&O”) insurance, have increased by £1.0 million in 2019.
Following the adoption of IFRS 16 (Leases), right-of-use assets were recognized which are subsequently
depreciated over their expected term of use. In 2019 this resulted in depreciation costs of £1.5 million in
administrative expenses compared to £0.3 million in 2018 prior to the implementation of IFRS 16 (Leases).
15
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: FINANCIAL REVIEW
Professional fees increased during the year from £1.5 million to £3.1 million reflecting higher costs
associated with the Nasdaq listing and managing a larger business in two jurisdictions.
Transaction costs relating to the acquisition of OncoMed are presented separately and are included within
net income recognized on acquisition of subsidiary (see below).
Net income recognized on acquisition of subsidiary
As OncoMed was acquired for an amount less than the fair market value of the net assets acquired on the
date that control was obtained, a gain on bargain purchase of £3.7 million was realized (recognized net
against the acquisition transaction costs within the consolidated statement of comprehensive loss). Total
acquisition transaction costs amounted to £2.7 million which were wholly incurred in connection with the
acquisition. Therefore, the net income recognized on acquisition of OncoMed was £1.0 million.
Finance income and charges
Total finance income was £0.4 million in 2019, up from £0.3 million in 2018. The increase was attributable
to an increase in interest income earned on additional short-term investments acquired through the
acquisition of OncoMed. All short-term investments were sold by December 31, 2019.
Total finance charges increased from £3.1 million in 2018 to £3.5 million in 2019. Following the adoption of
IFRS 16 (Leases), interest costs on recognized lease liabilities of £1.3 million were incurred as an expense
during the year. In the prior year, no such interest costs were recognized. In addition, non-cash interest costs
on the bank loan increased by £0.8 million following modifications made to the terms of the bank loan
following the refinancing in May 2019.
The increase in finance costs attributable to interest costs on lease liabilities and the bank loan was partly
offset by fair value movements on outstanding warrants accounted for as a financial liability. The overall
movement was a decrease in the value of the liability by £0.9 million up from £0.7 million in 2018, which is
recorded as income. The increase in finance costs was further reduced by a re-classification of the loan
modification loss occurring in 2018 as a finance charge resulting the increase in finance charges in 2018 of
£0.7 million. In 2019 there was a corresponding loan modification gain of £0.5 million.Net foreign exchange
gain / (loss).
The net foreign exchange gain for the year was £0.5 million, up by £0.5 million from a £nil million loss in
2018. The net foreign exchange gain consists of a £0.1 million foreign exchange loss on the translation of
cash deposits which are primarily held in U.S. dollars throughout the year. The foreign exchange loss has
been offset by a foreign exchange gain of approximately £0.6 million relating to the retranslation of U.S.
dollar denominated intercompany funds held by an entity in the Group with a British pound functional
currency.
Taxation
The tax credit for the year was £6.3 million, up by £1.0 million from 2018. The tax credit represents eligible
cash rebates paid or receivable from the tax authorities in the jurisdictions within which we operate. In the
U.K., certain subsidiaries within the Group qualify for cash rebates for eligible types of research and
development activities and associated expenditure (the “R&D tax credit”) which amounted to a total benefit
of £5.1 million for 2019.
Further, in August 2019, OncoMed received a tax refund in respect of Alternative Minimum Tax (“AMT”) of
£1.1 million from the U.S. Internal Revenue Service (“IRS”), of which approximately £0.2 million has been
recognized as income tax benefit during the year. It is currently estimated that an additional £1.0 million of
tax refund in respect of AMT will be received in 2020 with respect to the current financial year.
As at December 31, 2019, total receivables related to tax credits previously recognized amount to £11.4
million, of which £10.4 million relates to R&D tax credit in the U.K. Included within the £10.4 million cash
rebate is £5.3 million from the claim for the financial year ended December 31, 2018 as the amount was not
repaid until early 2020. The claim for the financial year ended December 31, 2019 will be submitted around
mid-2020 and the Group expects to receive an estimated claim amount of £5.1 million in the second half of
2020.
16
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: FINANCIAL REVIEW
Loss per share
After taking account of the £3.3 million increase in loss attributable to equity holders and an increase in
weighted average number of shares from 71.1 million to 89.4 million, basic and diluted loss per share for
the year was 39 pence, down from 45 pence in 2018.
Adoption of IFRS 16 (Leases)
Effective January 1, 2019, the Group adopted IFRS 16 (Leases). The new standard introduces new or
amended requirements with respect to lease accounting. In previous years, the Group’s lease portfolio
consisted of operating leases which have now been recognized on the balance sheet as a right-of-use asset,
offset by a corresponding lease liability.
The total impact on assets on adoption was £2.5 million, offset by a lease liability recognized for the same
amount. The lease portfolio on adoption consisted of a property lease and a number of specialist equipment
leases for use in clinical trial activities.
Following the acquisition of OncoMed, a right-of-use asset of £10.8 million was recognized, offset by a lease
liability of £10.7 million. The OncoMed lease portfolio consisted of a property lease in the U.S.
During the year ended December 31, 2019, total depreciation charges of £1.5 million and interest charges of
£1.3 million have been recognized under IFRS 16 (Leases).
Acquisition of OncoMed Pharmaceuticals, Inc.
On April 23, 2019, we completed the acquisition of OncoMed, a California-based and Nasdaq-listed company,
at which time OncoMed became an unlisted U.S. subsidiary of Mereo. At completion, we acquired cash and
short-term deposits and short-term investments of £39.1 million. The estimated fair value of the intangible
assets acquired was £12.7 million.
In connection with the acquisition, 24,783,320 ordinary shares were issued and listed on the AIM Market of
the London Stock Exchange (“AIM”). On April 24, 2019, 4,956,664 American Depositary Shares (“ADSs”) were
listed on the Nasdaq Global Market, with each ADS representing five ordinary shares. Following completion
of the acquisition, former OncoMed shareholders owned 25.8% of the enlarged share capital of the Group.
As a consequence of the license agreement with Oncologie (the “License Agreement”), and in accordance
with the terms and conditions of the Contingent Value Rights Agreement (the “CVR Agreement”) for former
stockholders of OncoMed, dated April 23, 2019, by and among Mereo and Computershare Inc., as rights
agent, holders of contingent value rights (“CVRs”) pursuant to the CVR Agreement will be entitled to receive
certain eligible cash milestone payments made to Mereo under the License Agreement .
Mereo accounts for the CVR Agreement as contingent consideration at fair value. As at December 31, 2019,
the fair value of the contingent consideration is estimated at £0.4 million. As at acquisition date, the fair
value of the contingent consideration was estimated at £nil. The estimated contingent consideration payable
is based on a risk-adjusted, probability-based scenario. Under this approach, the likelihood of future
payments being made to the former shareholders of OncoMed under the CVR Agreement is considered. The
estimate could materially change over time in line with the development plan and subsequent
commercialization of the Navi product.
17
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: FINANCIAL REVIEW
Liquidity and capital resources
As of December 31, 2019, we had cash and short-term deposits and short-term investments (together “cash
resources”) of £16.3 million compared to £27.5 million as at December 31, 2018.
The table below summarizes our cash flows for the for the years ended December 31, 2018 and 2019:
Year Ended December 31,
(in thousands of pounds)
2018
2019
Net cash used in operating activities
Net cash from investing activities
Net cash used in financing activities
Net decrease in cash and cash equivalents
(23,139)
252
(2,075)
––––––––––
(24,962)
––––––––––
––––––––––
(45,931)
43,295
(5,710)
––––––––––
(8,346)
––––––––––
––––––––––
Net cash used in operating activities for the year ended December 31, 2019 was £45.9 million, an increase
of £22.8 from £23.1 million in 2018.
The loss for the year increased from £37.3 million to £41.1 million due to an increase in R&D activity and
administrative expenses. This was impacted by a decrease in trade payables of £8.3 million and an increase
in trade payables of £1.7 million in 2019 compared to 2018. There was also an increase in tax received of
£2.8 million in 2019 compared to 2018.
In addition various non-cash items impacted 2019 compared to 2018 including the gain on bargain purchase
on the acquisition of OncoMed of £3.7 million, a reduction in share based payment charges (including
associated taxes) of £4.1 million, a modification gain of £0.5 million on the bank loan following the
refinancing of debt was recorded compared to a modification loss of £0.7 million recorded in 2018 and an
increase in finance charges of £0.9 million.
In previous years, the impact of tax credits has offset increase in operational expenditure. For the current
year, tax credits received in cash decreased by £7.0 million to £1.1 million. Tax credits of £1.1 million received
during the current year relate in part to a refund of Alternative Minimum Tax (“AMT”) in the U.S. following the
acquisition of OncoMed. In addition, Tax credits received in cash during the current year in the UK decreased
compared to the prior year as the Group had not yet received repayment of the 2018 R&D tax credit from the
U.K. tax authorities in 2019, this being received in early 2020. As at December 31, 2019, total receivables
related to tax credits previously recognized amount to £11.4 million, of which £10.4 million relates to R&D
tax credit from the U.K. tax authorities being the balance due for FY 2018 and the credit recognized for FY
2019.
Net cash from investing activities was £43.3 million in 2019, up from £0.3 million in 2018. The increase was
due to the acquisition of OncoMed in April 2019, which provided a net cash inflow on acquisition of £10.1
million and receipt of £32.9 million of short-term investments in the form of short-dated US treasuries, all
of which were sold by December 31, 2019.
Net cash used in financing activities was £5.7 million in 2019, an increase of £3.6 million from 2018. The
increase is attributable to the payment of lease liabilities, now reported as a financing activity following the
adoption of IFRS 16 (Leases) and an increase in the value of treasury shares purchased in the current year
compared with the prior year. Total payments of lease liabilities amounted to £2.2 million during the year of
which £1.3 million related to the US facility acquired with OncoMed in April 2019.. Treasury shares of £1.0
million were purchased during 2019 compared with £0.3 million in 2018.
On April 23, 2019 the Group agreed an amendment to the terms of its bank loan with the lenders. The new
terms extended the interest-only period to December 31, 2019 followed by a 15-month capital and interest
repayment period.
18
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: FINANCIAL REVIEW
Subsequent to the end of the financial year, the Company has entered into certain arrangements which
provide additional liquidity and capital resource. Those arrangements include:
•
•
•
•
•
On January 13, 2020, the Company announced the License Agreement with Oncologie for the
development and commercialization of Navi. Under the terms of the License Agreement, the Company
received an upfront payment of £3.2 million ($4 million) with an additional payment of £1.6 million ($2
million) conditional on a Chemistry, Manufacturing and Controls (“CMC”) milestone. Additionally, the
Company will be eligible to receive up to $300 million in future milestones and royalties.
On February 10, 2020, the Company entered into a £3.8m million convertible equity financing with
Novartis. Under the terms of the convertible equity financing, Novartis purchased £3.8 million in a
convertible loan note. The loan note is convertible at any time at a fixed price of £0.265 per ordinary
share. In connection with the loan note, the Company issued a warrant instrument to Novartis to
purchase up to 1,449,614 of the Company’s ordinary shares.
On February 10, 2020, the Company entered into a Securities Purchase Agreement to issue up to
£22.4 million ($28 million) $28 million of the Company’s ordinary shares exchangeable for American
Depositary Shares, including a £2.4 million ($3 million initial purchase, with Aspire Capital Fund, LLC.
In exchange for the £2.4 million ($3 million) initial purchase the Company issued 11,423,925 ordinary
shares (equivalent to 2,286,585 ADSs).
On February 19, 2020, the Company entered into a Securities Purchase Agreement with Boxer Capital,
LLC to make an investment of £2.4 million ($ 3 million) to purchase 12,252,715 of the Company’s
ordinary shares (equivalent to 2,450,543 ADSs).
On June 4, 2020 the Company announced the completion of a £56 million ($70 million) fundraising, or
approximately £51.4 million ($64.2 million) net from the issue of equity, loan notes and warrants to new
and existing shareholders.
Financial Outlook
Under the current business plan and cash flow forecasts, with ongoing research and development efforts
focused on etigilimab, our oncology product candidate and on our rare disease product candidates,
setrusumab and alvelestat, and taking into account our recently completed fundraising which raised
approximately £51.4 million ($64.2 million) of net funds, we expect that our current on-hand cash resources
will extend to early 2022.
Richard Jones
Chief Financial Officer
June 15, 2020
19
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Risk factors
We are a biopharmaceutical company focused on the development and commercialization of innovative
therapeutics that aim to improve outcomes for patients with oncology and rare diseases. As such, and in
common with other such companies, we face significant risks and uncertainties relevant to our operations.
The Board has adopted a strategy designed to identify, quantify, manage and mitigate the risks we face,
whilst recognizing that no risk management strategy can provide absolute assurance against loss and that
drug development and commercialization is inherently uncertain.
The Audit and Risk Committee (“ARC”) reviews risks and receives presentations from risk owners at its
regular meetings to oversee the management and mitigation of the principal risks faced by the Group and
reports its findings to the Board. Members of the Executive Committee routinely attend meetings. The Board
reviews risks at its regular Board meetings, including, but not limited to, an update on progress with our
clinical trials and manufacturing, our patents, our financial results and projections, and our corporate
development activities. Progress against objectives is measured by financial and non-financial key
performance indicators (“KPIs”).
We set out below our key risk factors that have been identified through our risk management review process.
Some of these risk factors are specific to us and others are more generally applicable to the
biopharmaceutical industry in which we operate.
The Board believes that it has taken all reasonable steps to satisfy itself that the risk management process
is effective and fit for purpose. Our control of risk is supported by an in-house quality team that has
developed and implemented a fully Good Practice (GxP) compliant quality management system to mitigate
risk. The Head of Quality reports to the General Counsel with appropriate escalation measures in place to
review and control new and emerging risks within the business.
The direction of change in the assessment of the risk during the year is illustrated by the arrow in the
“Change” column. Please note that this refers to the overall change in the risk to the Group, following
mitigating actions.
Mitigation and
Risk Description developments to date Change
Health epidemics
and other
widespread
outbreaks of
contagious
disease
outbreaks
of
Significant
contagious diseases, and other
adverse
health
public
developments, could have a
material impact on our business
operations and operating results.
In December 2019, a strain of
novel coronavirus, COVID-19,
which causes respiratory illness
emerged in the city of Wuhan in
the Hubei province of China. The
Chinese government has taken
certain emergency measures to
combat the spread of the virus,
including
implementation of
travel bans and closure of
factories and businesses.
New risk
We are actively monitoring how
the effects and risks of COVID-19
impact
day-to-day
operations, including our ongoing
clinical trial activities:
our
• Our current activities on
setrusumab
for potential
treatment of OI are focussed
on preparations for the Phase
trial, which,
3 pediatric
subject to partnering, we
intend to start in the second
half of 2020 and this may be
subject to delay. Our Phase
2b ASTEROID study in OI is
fully recruited with topline
results, as discussed above,
in
previously announced
November 2019. Patients
who enrolled in this study are
in a one-year follow up post
treatment extension phase.
20
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
Risk Description developments to date Change
Health epidemics
and other
widespread
outbreaks of
contagious
disease
Since that time, similar measures
have extended broadly across the
globe as the virus has spread.
Multiple
countries
other
throughout the world, including
the U.K. and U.S., have been
affected by the spread of the
virus and have implemented a
variety of measures aimed at
reducing or halting the spread of
the infection. The World Health
Organisation
has
declared it at pandemic status.
(“WHO”)
We continue to monitor the global
spread of COVID-19 and have put
in place and will continue to put
in place measures as appropriate
and necessary for our business.
Any prolonged deviations from
normal daily operations could
negatively impact our business.
New risk
• Our Phase 2 alvelestat trial
recruits
individuals with
alpha-1 antitrypsin deficiency-
related lung disease, who are
potentially at greater risk
from COVID-19 exposure. As
a result, recruitment into our
Phase 2 alpta-1 antitrypsin
study will be delayed, with
topline data now expected in
the second half of 2021.
of
by
• As a business, we have taken
necessary measures across
our sites in the U.K. and U.S.
to ensure that our employees
and other key stakeholders
best adhere to the advice set
relevant
the
out
authorities. Such measures
the
have
included
introduction
remote
arrangements,
working
reduced face to face contact
by encouraging the use of
teleconferencing, a ban on
domestic and international
travel as well as other
measures
considered
necessary by our newly
formed COVID-19 committee
for
which
business continuity planning
during this challenging time.
responsible
is
Any prolonged disruption of
our clinical trials, suppliers or
contract
manufacturers,
closures of facilities, such as
clinical trial sites, suppliers,
and
manufacturers
distributors, including single-
source
could
suppliers
impact our ability to advance
our development programs
as planned, and could have
impacts such as delaying
regulatory approvals or the
commercialization of any
current or future products.
21
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
Risk Description developments to date Change
Integration of
OncoMed
In April 2019, we completed the
of
acquisition
OncoMed.
Acquisitions
inherently have
risks, including misjudging key
elements in an acquisition or
failing to integrate the acquired
company
in an efficient and
timely manner which would
disrupt operations.
Decrease
We have now completed a
financial year with OncoMed as
part of the Group and have
the
integrated
successfully
and
people
business,
development programs.
a
developed
In January 2020, we announced a
global out-licensing deal for
product
navicixizumab,
previously
by
OncoMed. Our license partner,
Oncologie, Inc. (“Oncologie”) has
assumed future development and
commercialization rights.
Following
the acquisition of
OncoMed, we conducted a
thorough assessment of the
integration
requirements and
established an integration plan,
including working methods. We
Mereo
restructured
the
fully
team
management
integrate OncoMed
the
Group. From the completion of
the acquisition of OncoMed, we
have taken steps to align and
integrate OncoMed’s quality
process
and
procedures with those of the
Group.
and policies
to
into
22
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
Risk Description developments to date Change
Further
successful
development of
product
candidates
Our
clinical-stage
Our existing portfolio consists of
six
product
candidates.
oncology
product candidates etigilimab
and navicixizumab and our rare
disease,
product
“orphan”
candidates, setrusumab and
alvelestat,
generated
have
positive clinical data for their
target indications or for a related
indication. We plan to partner or
sell our existing non-oncology/
non-rare
product
disease
leflutrozole and,
candidates,
acumapimod.
substantial
Our portfolio
remains under
development. Whilst we have
progress
made
throughout 2019, our ability to
successfully further develop our
product candidates could be
influenced by several factors.
in
including
Those factors include the ability
to demonstrate satisfactory
safety and efficacy in clinical
in completing
trials; delays
clinical trials, which may cause
us to incur additional costs;
delays or difficulties
the
enrolment of patients into clinical
other
if
trials,
competing clinical
trials are
initiated in the same therapeutic
area; unforeseen adverse events
in connection with clinical trials;
reliance on the completeness and
accuracy of data packages
provided
product
originator; reliance on third-party
contract research organizations
(“CROs”) for the conduct of
clinical trials; and reliance on
contract
manufacturing
organizations (“CMOs”) for the
manufacturing
product
candidates in sufficient quantity
and to the requisite quality and in
good
compliance
manufacturing practice (“GMP”).
with
the
by
of
No change
external
Our highly experienced in-house
team manages the control over
vendors
our
and
partners
that assist us as
sponsor in managing our clinical
trials under GxP.
In addition to quality audits of our
CROs and clinical trial sites, we
also undertake specialized data
analytics that are designed to
validate the quality of data
generated from our clinical trials.
2019,
During the year ended December
31,
following
achievements are notable across
our product portfolio:
the
Etigilimab
In 2019 we completed a Phase 1b
combination study of etigilimab
in selected tumor types with two
patients of eight evaluable
showing a partial and stable
response.
Navicixizumab (“Navi”)
In January 2020 we announced a
global license agreement with
Oncologie, Inc. (“Oncologie”), for
the
and
development
commercialization of Navi. Under
the terms of the global license
agreement, Oncologie will receive
an exclusive worldwide license to
develop and commercialize Navi
in return for potential milestones
and royalties.
23
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
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Further
successful
development of
product
candidates
Setrusumab
In September 2019, Dr. Arun
Mistry was appointed as the
Therapeutic Area Head
for
Setrusumab.
No change
2019,
November
In
we
announced positive results from
the Phase 2b dose-ranging
clinical study. The study was the
largest, prospectively designed,
interventional clinical study to be
performed in the selected patient
group. The topline results from
the study demonstrated a clear,
dose-dependent,
statistically
significant bone building effect of
multiple
setrusumab
in adult OI
anatomical sites
irrespective of OI
patients,
subtype.
data
analyses continue; and further
regarding
results
positive
setrusumab effect on bone
stiffness and strength were
published in January 2020.
Additional
at
and
Food
In February 2020 we announced
positive feedback from Type B
End-of-Phase 2 Meeting with the
U.S.
Drug
Administration (“U.S. FDA”) in
which the U.S. FDA agreed the
design of our planned Phase 3
pediatric study. The European
Medicines Agency (“EMA”) had
principle
already
agreement in August 2018. As
such, the pivotal trial is planned to
commence in late-2020 subject
to completion of a strategic
partnership.
given
in
doses
Alvelestat
In late 2018 we commenced a
Phase 2, 12-week randomized,
placebo-controlled Phase
II
proof-of-concept clinical trial
evaluating
of
two
alvelestat versus placebo that is
expected to enrol approximately
165 patients. It is now expected
that top line data will be reported
in the second half of 2021 and, if
positive,
the
regulatory advice on the design
of a pivotal trial in the U.S. and
the E.U. will be sought.
results
are
24
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
Risk Description developments to date Change
Further
successful
development of
product
candidates
Manufacturing
its
The Group does not have its own
manufacturing infrastructure but
relies on third-party CMOs to
produce its product candidates.
Mereo’s ability to commence or
development
continue
activities could be impacted by a
failure of the CMOs to meet the
required output
in terms of
quality, scheduling, scale-up,
reproducibility, yield, purity, cost,
potency or quality; or a failure on
the part of the CMO to adhere to
In
regulatory
addition, setrusumab is a large
molecule monoclonal antibody,
which, as a result, has a more
complex manufacturing process
than our other small molecule
candidate products.
requirements.
cause
In addition, setrusumab is of the
IgG2 type subclass monoclonal
antibody. The IgG2 subclass is
known for having a tendency to
reversibly self-associate and this
can
an opalescent
appearance to the liquid antibody
formulation, which can be
protein
mediated
concentration,
and
temperature. The presence of an
opalescence in the solution does
not have an impact on product
potency and effectiveness and
does not generally correlate with
the formation of aggregates or
particles.
pH
by
No change
Leflutrozole
Following the completion of the
Phase 2 dose-ranging clinical
trial, in April 2019, we announced
a successful end of Phase 2
meeting with the U.S. FDA. In the
meeting, a development plan for
the product was agreed with the
U.S. FDA.
In September 2019, we had a
meeting with the EMA’s Scientific
Advice Working Party (“SAWP”)
that resulted in positive guidance
on the next development steps
for the program.
In August 2019, Richard Francis
was appointed as Head of
Pharmaceutical Development.
No change
of
number
The Group has an experienced in-
house team that is working with
a
specialist
manufacturers in respect of its
drug manufacturing capabilities.
We have a comprehensive in-
house quality management
process that covers the selection,
monitoring and audit inspection
of our CMOs
and other
associated vendors.
Specific to setrusumab, studies
are being conducted to in order to
minimize any risk of significant
opalescence or of aggregate
formation. Whilst we have
recently conducted several large
scale manufacturing runs of drug
substance and drug product at
third-party
without
observing any opalescence, there
can be no assurances that this
opalescence will not occur in
future manufacturing runs.
CMOs
25
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
Risk Description developments to date Change
a
in
operate
highly
We
competitive and rapidly changing
industry, which may result in
others acquiring, developing or
competing
commercializing
product candidates before, or
more successfully than we do.
Future success for the Group is
dependent on obtaining a
commercial return from products,
either
into
arrangements with third parties
for
or
commercialization
commercializing certain product
candidates ourselves.
entering
by
remain
At present, none of our existing
portfolio is commercialized as
yet, because all our candidate
products
under
development and have yet to
receive approval / marketing
is an
authorization, which
essential
to
pharmaceutical
and
commercialization.
pre-requisite
launch
or
Our ability to obtain a commercial
return on product candidates
could be influenced by a number
of factors in addition to receiving
/marketing
approval
authorization including the ability
to establish effective sales and
marketing capabilities; the ability
to enter into product divestment,
licensing
co-
commercialization agreements
with third parties; competition
that may lead to third parties
developing or commercializing
products
or more
earlier
successfully than Mereo; the
ability to achieve commercially
reasonable rates for pricing and
reimbursement
product
candidates commercialized by
Mereo; and physician and patient
product
acceptance
for
candidates
commercial
amongst
others.
approved
sale,
for
of
No change
For our rare disease programs,
we engage with regulators, health
technology assessment (“HTA”)
bodies, treating physicians and
representative
patient
organisations at all stages of our
development.
Setrusumab has been designated
a Priority Medicine in Europe
under the EMA’s PRIME scheme.
As such, we benefit from ongoing
advice from regulators, payers
and HTA bodies on an ongoing
basis.
We are also in regular dialogue
with the European payers through
the Mechanism of Coordinated
Access to Orphan Medicinal
Products (“MoCA”). This work will
be extended to the U.S. payers
following the receipt of positive
feedback from the U.S. FDA
about our planned Phase 3
pivotal pediatric trial.
Treating physicians, notably
those in the lead Centres of
Expertise are part of our
development work on an ongoing
basis; and we also consult
patient
regularly with
representative organisations from
the therapeutic areas we intend to
address with setrusumab and
alvelestat in particular.
the
Market research work, including
pricing, has been initiated for our
two
rare disease candidate
productsWe constantly monitor
development programs from other
target
in
companies
our
indications,
to
to allow us
effectively understand and evaluate
landscape for
the competitive
etigilimab,
and
alvelestat on an ongoing basis.
setrusumab
We have commenced licensing
and/or partnering discussions for
setrusumab, acumapimod and
leflutrozole
these
discussions are ongoing.
and
Successful
commercial-
ization
26
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
Risk Description developments to date Change
Successful
commercial-
ization
Failure to obtain
regulatory
approvals
if
addition,
In
etigilimab,
alvelestat,
setrusumab,
acumapimod, or leflutrozole is
approved and launched on the
market, we will face
intense
competition from a variety of
businesses, including large, fully
integrated
pharmaceutical
companies, other rare disease
pharmaceutical or biotechnology
non-rare
companies,
pharmaceutical
and
biopharmaceutical companies in
the U.S., Europe and other
jurisdictions.
risks
approvals.
We operate in a highly regulated
industry, giving rise to a number
that could affect
of
the
and
development
commercialization of our product
candidates, including the ability
to obtain required regulatory
marketing
The
regulatory approval processes of
the U.S. FDA, the EMA and
comparable foreign authorities
are lengthy, time consuming, and
with
inherently unpredictable
outcomes, because they rely on
third-party decisions outside of
our control. If we are ultimately
regulatory
unable
approval
product
candidates, our business will be
impacted.
to obtain
for
our
Even
if any of our product
candidates obtains regulatory
approval, we will be subject to
and
ongoing
continued
review
including potential additional
studies or data generation, which
significant
may
additional time and expense.
obligations
regulatory
result
in
No change
Decrease
Following
the acquisition of
OncoMed, Jill Henrich joined the
management team as the U.S.
Site Head and SVP of Regulatory
Affairs,
significant
expertise and experience to the
Company.
bringing
To supplement our experienced
in-house team, we work with
several specialized regulatory
advisors to give guidance on
regulatory strategy for each of
our candidate products.
fail
their
that we
As our programs continue
through
respective
development plans, the relative
risk
to obtain
regulatory approval continues to
decrease. Matters that remain
outside our control, e.g., the
scientific performance of a
compound in a clinical study, or
the ultimate decision-making of
a regulatory body, are mitigated
by dialogue with decision-
makers and
rigorous study
preparation and design.
in which
In July 2019 we announced a
successful Type B meeting for
Navicixizumab
the
outline of a Phase 2 registrational
trial was agreed through an
accelerated
pathway.
Navicixizumab was also granted
Fast Track designation.
27
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
Risk Description developments to date Change
in
to obtain
Regulatory approval of any
product candidate in a major
market, such as the U.S. or E.U.,
does not guarantee that we are
reimbursed
able
inclusion
government
healthcare systems or by private
insurance providers. Regulatory
approval to commercialize that
product in one jurisdiction does
not guarantee that we are able to
receive such authorisation
in
other markets.
We
face an ever-increasing
amount of corporate regulation
as a dual-listed publicly traded
company based both in the U.S.
and U.K.
We are subject to the U.K. Bribery
Act, the U.S. Foreign Corrupt
Practices Act and other anti-
competition laws, as well as
export control laws, customs
laws, sanctions laws and other
laws governing our operations. If
we fail to comply with these laws,
we could be subject to civil or
criminal penalties, other remedial
measures, and legal expenses,
which could adversely affect our
business, results of operations
and financial condition.
required
As a Foreign Private Issuer (“FPI”),
we are required to comply with
the reporting regime under the
U.S. Exchange Act, and will incur
significant legal, accounting and
other expenses should we deviate
from this. Our management is
now
devote
substantial additional time to new
compliance initiatives, financial
controls and monitoring activities
and
governance
matters. With respect to the 2019
financial year, we provided
attestation under Section 404(a)
of the Sarbanes-Oxley Act of
2002 for the first time.
corporate
to
Decrease
In January 2020 we announced
positive feedback from a Type B
End-of-Phase 2 meeting with the
U.S. FDA in which the U.S. FDA
also agreed the design of our
planned Phase 3 pediatric study
for setrusumab in OI. This is in
line with our proposed pivotal
paediatric study design that has
in
already been agreed
principle with the EMA.
to
Increase
Following our U.S. listing of our
American Depository Shares
(“ADSs”) in 2019, we introduced
new policies and procedures to
ensure
that our business
practices are aligned with those
expected of
a dual-listed
Company in the U.S. and the U.K.
This has included updates to the
Terms of Reference for the Board
Committees which are available
for inspection on our website.
The Group’s General Counsel and
Company Secretary, who serves
as an Executive Officer,
is
ensuring
for
responsible
compliance with
laws and
regulations. For certain matters,
the Company will
engage
external counsel or regulatory
advisors.
attestation
Substantial progress was made
the year, ahead of
during
under
providing
Section 404(a) of the Sarbanes-
Oxley Act of 2002. Measures
taken included creating a Risk
and Control Matrix (“RACM”) for
financial processes and controls,
evaluating our internal control
framework and
involving our
Audit and Risk Committee
(“ARC”) throughout the transition
process.
Failure to obtain
regulatory
approvals
Continued
compliance with
new laws and
regulations
28
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Mitigation and
Risk Description developments to date Change
No change
We continue to actively monitor
the developments relating to the
U.K.’s exit from the E.U. and will
remain alert to any developments
that may impact our business or
the wider industry.
our
E.U.
In 2018, we established a wholly
owned Irish subsidiary that now
orphan
holds
designation and acts as our E.U.
representative for all ongoing E.U.
clinical
regulatory
dialogue and eventual regulatory
submissions.
studies,
Brexit
The U.K. formally exited the
European Union
(“E.U.”) on
January 31, 2020. Under the
terms of the departure, the U.K.
will enter a transition period
during which it will continue to
follow all E.U. rules and the
trading relationship will remain
the same. The transition period is
scheduled to end on December
31, 2020.
that
Long-term effects of Brexit will
depend on agreements and
the U.K.
arrangements
negotiates with the E.U. following
the end of the transition period,
including whether and to what
extent the U.K. will retain access
to the E.U. markets after the
transition period. This uncertainty
has the potential to impact our
business as we are engaged with
drug development
in Europe,
where we are currently subject to
regulation by the EMA and the
E.U. Commission as well as
national competent authorities in
the E.U. Member States.
29
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Risk Description developments to date Change
Cybersecurity
risks including
loss of data
protection
and
functioning of
continues
importance
threat
to
Cybersecurity
to
in
increase
to data
the
mitigate
of
privacy,
the
the
confidential data
the
effective
Company’s infrastructure. The
threat from online attacks or data
breaches continues to increase,
becoming more complex for all
companies and we are no
exception.
During the year we continued to
implement further controls over
our cybersecurity.
No change
the OncoMed
We
Following
the acquisition of
OncoMed, we performed a full
IT
review of
environment.
also
implemented group cybersecurity
policies
the U.S., which
included upgrading software and
hardware. Further, in early 2020
we moved our IT hardware in the
U.S. into a more secure off-site
specialist data centre.
in
We also regularly test our IT
control environment and our
undertake
personnel
and
training
additional employee
measures where required, based
on the outcome of this testing.
Where
relevant, we obtain
external third-party support to
the extent that risks evolve or
require specialist consideration.
Since 2019, our
IT control
environment is also subject to
evaluation under Section 404(a)
of the Sarbanes-Oxley Act of
2002, with relation to financial
accounting
reporting
and
processes
Continued
maintenance of
strong
intellectual
property (IP)
portfolio
No change
Our ability to successfully license,
divest or commercialize our
product candidates depends in
large part on our ability to obtain
and maintain effective patent
protection for our products in the
U.S., Europe and other territories.
If we are unable to obtain or
maintain patent protection for
our product candidates, or if the
scope of the patent protection is
not
broad,
competitors could develop and
commercialize similar products,
which would materially affect our
potential commercial return from
our products.
sufficiently
We have had a dedicated Head of
IP since 2015 and, in addition, we
utilize expert external counsel in
the prosecution and maintenance
of our IP portfolio.
The etigilimab patent portfolio
contains one core patent family
that covers the product per se as
well as medical uses thereof.
Patents in this family will expire
in 2036. The portfolio also
includes a second patent family
that relates to specific methods
of treatment using etigilimab.
Patents that
issue from this
family will expire in 2037
30
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Risk Description developments to date Change
Continued
maintenance of
strong
intellectual
property (IP)
portfolio
We are subject to additional risks,
including infringement of patent
rights and inability to protect the
confidentiality of our know-how,
which could have an adverse
competitive
the
effect on
advantage of our product
candidates.
Our key patents for setrusumab
include claims directed to the
antibody itself as well as the
antibody’s use as a medicinal
product. Patents in this family
will expire in 2028. Further patent
applications have been filed
relating to the use of anti-
sclerostin antibodies
the
treatment of OI, which, if granted,
in 2037. The
will
setrusumab antibody also has
orphan status in both the U.S.
and the E.U.
expire
in
Two families of patents for
alvelestat have been licensed
under our agreement with
AstraZeneca. The first family
includes claims to the alvelestat
compound and its uses, and
these patents will expire in 2024.
The second
includes
claims to the specific tosylate
salt
the alvelestat
compound and these patents will
expire in 2030. Further patent
applications have recently been
filed relating to dosage regimens
for alvelestat, which, if granted,
will expire in 2041.
form of
family
The leflutrozole (BGS-649) patent
portfolio includes claims directed
to leflutrozole formulations and to
the use of leflutrozole in treating
hypogonadism according to a
specific dosing regimen, with
expiry dates in 2032.
No change
31
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Risk Description developments to date Change
No change
to
The first patent family of our
acumapimod patent portfolio
relates
the acumapimod
compound and other five-
membered heterocycle-based
p38 kinase inhibitors and these
patents will expire in 2024. The
second patent family relates to
the use of pyrazole derivatives in
the treatment of AECOPD, and
these patents will expire in 2033.
Further patent applications have
been filed relating to dosage
regimens of acumapimod, the
the
use of acumapimod
treatment of specific patient
subpopulations, methods of
producing specific polymorphs of
synthetic
acumapimod
methods of production of
acumapimod, with expected
expiry dates not earlier than
between 2036 and 2039.
and
in
The patent portfolio relating to
Navi contains two core patent
families, both of which cover the
product per se as well as medical
uses thereof. Patents and patent
applications, if issued, in these
core families are expected to
expire between 2030 and 2032.
includes
The portfolio also
several other patent families
including issued U.S. and foreign
patents and pending applications
that relate to specific methods of
treatment using Navi. Patents
and patent applications, if issued,
in these families are expected to
expire between 2030 and 2039.
Navi was licensed by the Group
to Oncologie Inc. in January 2020
pursuant to the terms of a global
licensing agreement.
Continued
maintenance of
strong
intellectual
property (IP)
portfolio
32
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Risk Description developments to date Change
Availability of
finance
for
incur
We have incurred losses since
our inception and do not yet have
any approved or
revenue-
generating products. We expect
to
the
losses
foreseeable future, and there is
no certainty that we will ever
generate a profit. We may not be
able to raise the additional funds
that will be needed to support
or
development
commercialization of our product
candidates, and any additional
funds that are raised could cause
dilution to existing investors.
has
Mereo
significant
expenditures in US Dollars and
Euros; consequently, our financial
results could be adversely
impacted by foreign currency
movements.
Decrease
As at May 31, 2020 the Group had
total cash resources (being cash
and short term deposits and
short term investments) of £10.1
million. Taken together with the
which
placement
private
completed on June 3, 2020 and
which raised net proceeds of
approximately £51.4 million, the
group has current total cash
resources of £61.5 million. The
Directors have prepared detailed
cashflow forecasts for the 30-
month period to December 31,
2022 based on the delivering the
business plan objectives set out
in the strategic report which
include:
• Commencement later in 2020
of a new Phase 1b study for
etigilimab
• Completion of
extension
setrusumab
the adult
for
study
• Completion of the current
Phase 2 study for alvelestat
These forecasts indicate that the
group has a total cash runway
into 2022 and will have sufficient
funds to meet its liabilities as
they fall due for at least the next
12 months.
33
MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT: PRINCIPAL RISKS AND UNCERTAINTIES
Risk Description developments to date Change
Constraints in
the growth of the
Group
retain
expanding
difficulties
Our future success depends upon
key
to
our ability
employees,
the
including
executive directors and executive
officers, and to attract, retain and
motivate qualified individuals. We
anticipate
our
operational capabilities, and
there is a risk that we may
encounter
in
managing this growth, which
could disrupt our business. Our
growth plans are dependent upon
only
to
our
not
ability
and
develop
successfully
commercialize
existing
our
product candidates but also to
successfully
identify
product
further
onboard
candidates as well as to integrate
such products into our business.
Our operations may be adversely
impacted if we are unable to
successfully accomplish this; or
are unable to comply with the
terms of licensing or acquisition
agreements and applicable laws
and regulations, including data
privacy, amongst others.
and
No change
people
We continue to attract highly
and
experienced
continued to expand our team in
terms of numbers and breadth of
speciality
industry-relevant
experience.
the
includes
During 2019 we grew from a total
of 37 to 50 full-time employees,
which
new
employees from the acquisition
of OncoMed as well as an
increase in our U.K. employee
base. The OncoMed team is now
fully integrated into the Group
and we welcome the valuable
additional
operational
capabilities and expertise that
they bring to the Group, which is
a critical part of our continued
business growth strategy and
execution.
reviewed our
We
incentive
arrangements during the year
and have implemented new long-
term incentives in April 2019,
which will allow us to incentivize
and retain employees across the
Group. We granted options under
these new schemes to both
employees and Non-Executive
Directors in 2019 and early 2020.
Further details are set out in our
Director’s Remuneration Report
on pages 49 to 71.
This strategic report, which has been prepared in accordance with Companies Act 2006, has been approved
and signed by order of the Board:
Dr. Peter Fellner Dr. Denise Scots-Knight
Chairman Chief Executive Officer
June 15, 2020 June 15, 2020
34
MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: CORPORATE GOVERNANCE REPORT
Chairman’s governance overview
I am pleased to present the Corporate Governance Report for the year ended December 31, 2019.
The role of Chairman is to ensure that the Board of Mereo operates effectively in delivering the long-term
success of the Company. In fulfilling this role, the Chairman seeks to ensure that the Board proceedings are
conducted in such a way to as to allow all directors to have the opportunity to express their views openly
and, in particular, the Non-Executive Directors (“NEDs”) are able to provide constructive support and
challenge to the Company’s executive leadership team.
Good corporate 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 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 December 31, 2019 and up to the date of this report in
2020.
The Board also takes into consideration how the Group’s growth may result in the evolution of the corporate
governance framework. Following completion of the acquisition of OncoMed in April 2019, many of the
Company’s corporate governance policies and procedures as well as the terms of reference for the Board
Committees were updated to meet the requirements of the Nasdaq Global Market. Throughout 2019 and up
to the date of this report, those terms of reference have been consistently applied in the activities performed
by the Board Committees.
The Board recognizes that a healthy corporate culture is important to Mereo’s business purpose and strategy.
The Executive Officers of Mereo have a key role in establishing the key elements of our culture and the
behaviours we expect to see. They provide feedback to the Board on this on a regular basis. Executive Officers
of Mereo hold monthly meetings with the Company employees at which they highlight our values and
approach to business integrity. In addition, we work with business management consultants at a Company
and Executive team level to assess the state of our culture and to agree and embed any modifications.
The Quoted Companies Alliance Code
The Board complies with and reports against the standards of corporate governance prescribed by the
Corporate Governance Code for Small and Mid-Sized Companies from the Quoted Companies Alliance (the
“QCA Code”). The Board believes that this corporate governance framework is appropriate for the Company,
having regard to its size and nature. The Board periodically reviews the QCA Code and updates the framework
if necessary.
A general overview of how the Company complies with the Principles of the QCA Code can be found on our
website at www.mereobiopharma.com/investors-page/corporate-governance.
The Nasdaq Global Market and U.S. securities laws
Following completion of the acquisition of OncoMed and the listing of American Depositary Shares (“ADSs”),
each representing five Mereo ordinary shares, on the Nasdaq Global Market we are required to comply with
certain U.S. securities laws and Nasdaq rules that are relevant to us an Emerging Growth Company (“EGC”)
(as defined under US securities laws) and as a non-U.S. company with foreign private issuer status (as
defined under US securities laws). As an EGC, we are subject to reduced public company disclosure
requirements and, as a non-U.S. company with foreign private issuer status, we are exempted from certain
corporate governance provisions of U.S. securities laws and Nasdaq rules that are generally applicable to
U.S. domestic public companies.
Other Board reports
I am pleased to include the following stand-alone reports:
•
•
Audit and Risk Committee Report, see page 46 to 48
Directors’ Remuneration Report, see pages 49 to 71
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MEREO BIOPHARMA GROUP PLC
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The Board and Board changes
As at the date of this report the Board comprises the Chairman, two Executive Directors and six Non-
Executive Directors. 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.
The Board also reflects a good balance of skills, diversity and experience from financial, operational and
sector specific backgrounds as described in the Directors’ biographies on pages 43 to 45.
On March 27, 2020, we announced that Michael Wyzga who currently serves as a Non-Executive Director,
will become the Interim Chief Financial Officer following the announced departure of Richard Jones, the
Company’s current Chief Financial Officer (“CFO”). Richard Jones will remain in his position as CFO for a
transitionary period of up to five months.
The Board has considered and concluded that the appointment of a Senior Independent Director is not
necessary at this time.
In recognition of OrbiMed’s participation in, and assistance with, the Fundraising, the Company has agreed
to grant OrbiMed the right to nominate two persons to be appointed to the Board of Directors (out of a
maximum number of nine directors), within a period of 180 days from 3 June 2020 subject to the
appropriateness of the nominees.
Our Non-Executive Directors currently have a limited number of equity incentive awards issued to them from
the Mereo BioPharma Group Limited Share Option Plan (the “2015 Plan”) or the 2019 Non-Executive Director
Equity Incentive Plan (the “NED EIP”). Equity incentive awards awarded to Non-Executive Directors are
discussed in further detail in the Directors’ Remuneration Report. Considering the limited number of equity
incentive awards issued to Non-Executive Directors, the Board does not consider that the awards impact
the independence of the Non-Executive Directors.
Dr. Peter Fellner, Peter Bains, Paul Blackburn, Kunal Kashyap, Dr. Anders Ekblom, Michael Wyzga and Dr.
Deepa Pakianathan qualify as “independent” under U.S. securities laws and Nasdaq rules.
Name
Non-Executive Directors
Dr. Peter Fellner
Frank Armstrong(1)
Peter Bains
Paul Blackburn
Dr. Anders Ekblom
Kunal Kashyap
Michael Wyzga
Dr. Deepa Pakianathan
Executive directors
Dr. Denise Scots-Knight, Chief Executive Officer
Richard Jones, Chief Financial Officer
Company Secretary
Charles Sermon
(1)
Frank Armstrong resigned from the Board on February 8, 2019
Date of appointment
July 29, 2015
July 29, 2015
July 29, 2015
October 6, 2015
July 29, 2015
July 29, 2015
April 23, 2019
April 23, 2019
March 10, 2015
January 30, 2017
May 19, 2015
The Board typically has five scheduled meetings per year with additional Board meetings and Board
Committee meetings as circumstances and business needs dictate. 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 specific business opportunities
and other matters that require more immediate Board input. The key responsibilities of the Board are as
follows:
Setting the Company’s values and standards;
Approval of long-term objectives and strategy;
•
•
36
MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: CORPORATE GOVERNANCE REPORT
•
•
•
•
•
•
•
Approval of budgets and plans;
Oversight of operations, ensuring that 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 considering 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 the structure, size and composition of the Board;
Determining the remuneration policy for the directors and approval of the remuneration of the Non-
Executive Directors; and
Approval of communications with shareholders and the market.
There is a clear separation of the roles of the Chief Executive Officer and the 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.
In accordance with the Company’s articles of association each of its Directors serves for a term of three
years. Retiring directors are eligible for re-election at the Company’s Annual General Meeting (“AGM”) and,
if no other director is elected to fill his or her position, and if the director is willing, shall be re-elected by
default. The current term for all our directors expires in 2021, except for Richard Jones, whose current term
expires in 2020 and who will not be standing for re-election, and for Michael Wyzga and Dr. Deepa
Pakianathan, whose current terms expire in 2022 following their re-appointment at our last AGM held on
June 19, 2019.
Directors are required to notify the Board of any conflicts of interest and a register of such interests is
maintained by the Company Secretary and reviewed at Board meetings. Any planned changes to their
interests, including directorships outside the Mereo Group are notified to the Board.
Development, information and support
Updates are given to the Board on developments in governance and regulations as appropriate, including
presentations from the Company’s Nominated Advisor (“Nomad”) and financial, legal and remuneration
advisors. The Board has access to the advice of the Company Secretary, who is a qualified lawyer and acts
as secretary to the Board and its committees and is responsible for ensuring that Board procedures are
followed, and applicable rules and regulations are complied with.
Performance evaluation
The Board recognizes the need to regularly review the effectiveness of its performance as well as that of its
committees and individual directors.
The Nominations Committee is responsible for performance evaluation of the Board including that of its
Committees and individual directors, including the Chairman. The Nomination Committee has initiated a
performance effectiveness process which has yet to be completed.
The Nomination Committee recognizes the need for membership of the Board to be periodically refreshed
and on April 4, 2019 approved the appointment of Michael Wyzga and Dr. Deepa Pakianathan as additional
Non-Executive Directors of the Company on completion of the acquisition of OncoMed.
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Attendance at Board and Committee meetings
There were ten Board meetings during 2019. Directors’ attendance at Board and Committee meetings was
as follows:
Current directors
Dr. Peter Fellner
Peter Bains
Paul Blackburn
Dr. Anders Ekblom
Kunal Kashyap
Michael Wyzga(3)
Dr. Deepa Pakianathan(4)
Dr. Denise Scots-Knight
Richard Jones
Past directors
Frank Armstrong(5)
Board
(out of 10)
Remuneration Audit and Risk
Committee
(out of 8)
Committee
(out of 4)
R&D
Committee
(out of 4)
Nomination
Committee
(out of 1)
10
10
10
10
10
7
6
10
10
1
n/a
4
n/a
4
n/a
n/a
1
n/a
n/a
1
n/a
n/a
8
4(2)
8
4
n/a
n/a
n/a
n/a
n/a
3(1)
n/a
4
n/a
n/a
2
n/a
n/a
1
1
1
n/a
1
n/a
n/a
n/a
n/a
n/a
n/a
(1)
(2)
(3)
(4)
Peter Bains was absent for one R&D Committee meeting because of personal reasons.
Anders Ekblom served as a member of the Audit and Risk Committee for part of the year. Anders Ekblom has attended all scheduled meetings.
Michael Wyzga was appointed to the Board of Directors on April 23, 2019. Since that date, Michael Wyzga has attended all scheduled meetings.
Deepa Pakianathan was appointed to the Board of Directors on April 23, 2019. Since that date, Dr. Deepa Pakianathan has attended all scheduled
meetings except one Board meeting because of personal reasons.
(5)
Frank Armstrong resigned from the Board on February 8, 2019
Board members’ time commitment is considered necessary for the performance of their duties and Board
members are expected to attend all Board and relevant Committee meetings, unless other previous
commitments have been arranged. All Board and relevant Committee meetings through 2019 were fully
attended except for the two instances noted above (relating to a Board meeting and a R&D Committee
meeting) due to personal reasons.
Board Committees
To effectively manage governance of the Group, the Board has delegated certain responsibilities to sub-
committees, as detailed below. As noted above with the re-organization of the Board on completion of the
acquisition of OncoMed, the composition of the sub committees was reviewed. These and other changes
were implemented as noted below.
Audit and Risk Committee
Paul Blackburn (Chair)
Kunal Kashyap
Michael Wyzga (from May 1, 2019)
Dr. Anders Ekblom (until May 1, 2019)
Remuneration Committee
Peter Bains (Chair from May 1, 2019)
Dr. Anders Ekblom (Chair until May 1, 2019)
Dr. Deepa Pakianathan (from May 1, 2019)
Frank Armstrong (until February 8, 2019)
Nomination Committee
Dr. Peter Fellner (Chair)
Peter Bains
Dr. Anders Ekblom
Frank Armstrong (until February 8, 2019)
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Research and Development Committee
Dr. Anders Ekblom (Chair from May 1, 2019)
Frank Armstrong (Chair and member until February 8, 2019)
Peter Bains
Dr. Deepa Pakianathan (from May 1, 2019)
The detailed charters for each of the committees can be found on the Group’s website at
www.mereobiopharma.com. All the Board committees are authorized to obtain, at the Company’s expense,
professional advice on any matter within their terms of reference and to have access to enough resources
to carry out their duties.
Audit and Risk Committee
The Audit and Risk Committee, which consists of Paul Blackburn, Kunal Kashyap and Michael Wyzga, assists
the Board in overseeing our accounting and financial reporting processes and the audits of our financial
statements. Mr. Blackburn serves as Chairman of the Audit and Risk Committee.
The Audit and Risk Committee consists exclusively of members of our Board who are financially literate, and
Paul Blackburn is considered an “audit committee financial expert” as defined by applicable SEC rules and
has the requisite financial sophistication as defined under the applicable Nasdaq rules and regulations. Our
Board has determined that all of the members of the Audit and Risk Committee satisfy the “independence”
requirements set forth in Rule 10A-3 under the Exchange Act. The Audit and Risk Committee is governed by
a charter that complies with Nasdaq rules.
The Audit and Risk Committee’s responsibilities include:
•
•
•
•
•
•
Recommending the appointment of the independent auditor to the general meeting of shareholders;
The appointment, compensation, retention and oversight of any accounting firm engaged for the
purpose of preparing or issuing an audit report or performing other audit services;
Pre-approving the audit services and non-audit services to be provided by our independent auditor
before the auditor is engaged to render such services;
Evaluating the independent auditor’s qualifications, performance and independence, and presenting
their conclusions to the full Board on at least an annual basis;
Reviewing and discussing our financial statements and our financial reporting process with the
executive officers, the Board and the independent auditor; and
Approving or ratifying any related person transaction (as defined in our Related Person Transaction
Policy) in accordance with our Related Person Transaction Policy.
The Audit and Risk Committee meets as often as one or more members of the Audit and Risk Committee
deem necessary, but in any event meets at least four times per year. The Audit and Risk Committee meets
at least once per year with our independent auditor, without our senior management being present.
The Audit and Risk Committee Report is presented on pages 46 to 48.
Remuneration Committee
The Remuneration Committee, which consists of Peter Bains, Dr. Deepa Pakianathan and Dr. Anders Ekblom,
assists the Board in determining senior management compensation. Mr. Bains serves as Chairman of the
committee. Under SEC and Nasdaq rules, there are heightened independence standards for members of the
Remuneration Committee, including a prohibition against the receipt of any compensation from the Company
other than standard board member fees. However, foreign private issuers are not required to meet this
heightened standard. Nonetheless, our Board has determined that Peter Bains, Dr. Deepa Pakianathan and
Dr. Anders Ekblom meet this heightened standard. The Remuneration Committee is governed by a charter
that complies with Nasdaq rules.
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MEREO BIOPHARMA GROUP PLC
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The Remuneration Committee’s responsibilities include:
•
•
•
•
•
Identifying, reviewing, and proposing policies relevant to senior management compensation;
Evaluating each member of senior management’s performance in light of such policies and reporting
to the Board;
Analyzing the possible outcomes of the variable compensation components and how they may affect
the compensation of senior management;
Recommending any equity long-term incentive component of each member of senior management’s
compensation in line with any compensation policy and reviewing our senior management
compensation and benefits policies generally; and
Reviewing and assessing risks arising from our compensation policies and practices.
Following the Company’s listing on the Nasdaq Global Market, it is required to publish a Directors’
Remuneration Report, because the Company meets the definition of a “quoted company” as defined in
Section 385 of the Companies Act 2006. The Directors’ Remuneration Report for the financial year ended
December 31, 2019, is presented on pages 49 to 71.
Nomination Committee
The Nomination Committee, which consists of Dr. Peter Fellner, Peter Bains and Dr. Anders Ekblom, assists
our Board in identifying individuals qualified to become members of our board and senior management
consistent with criteria established by our Board and in developing our corporate governance principles. Dr.
Peter Fellner serves as Chairman of the Nomination Committee. The Nomination Committee is governed by
a charter that complies with Nasdaq rules.
The Nomination Committee’s responsibilities include:
•
•
•
•
•
Drawing up selection criteria and appointment procedures for board members;
Reviewing and evaluating the size and composition of our Board and making a proposal for a
composition profile of the Board at least annually;
Recommending nominees for election to our Board and its corresponding committees;
Assessing the functioning of individual members of the Board and senior management and reporting
the results of such assessment to the Board; and
Developing and recommending to the Board rules governing the Board, reviewing and reassessing the
adequacy of such rules governing the Board, and recommending any proposed changes to the Board.
Research and Development Committee
The Research and Development Committee, which consists of Dr. Anders Ekblom, Peter Bains and Dr. Deepa
Pakianathan, assists our senior management with oversight and guidance related to strategic research and
development matters and provides guidance and makes recommendations to our Board regarding strategic
research and development matters. Dr. Anders Ekblom serves as Chairman of the Research and Development
Committee.
The Research and Development Committee’s responsibilities include oversight of:
•
•
Our strategic development plans for product candidates, taking into account any regulatory feedback;
and
The acquisition of new product candidates.
In addition, the Research and Development Committee is tasked with keeping the Board informed of strategic
issues and commercial changes affecting our development programs and potential product acquisitions.
Corporate social responsibility
The Board recognizes the importance of social, environmental and ethical matters and it endeavours to
consider the differing interests of the Group’s stakeholders, including its investors, employees, suppliers and
business partners, when operating its business.
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: CORPORATE GOVERNANCE REPORT
General Data Protection Regulation (“GDPR”)
Prior to the adoption of GDPR in 2018 we updated our data protection guidelines, training and processes.
Throughout the year we have continued to maintain and update these guidelines, training and processes,
including targeted awareness sessions delivered to our employees.
Risk management and internal control
The Board is responsible for the systems of internal control and for reviewing their effectiveness. Details of
the Board’s review of the Company’s risk management and internal control procedures are set out in the Audit
and Risk Committee Report on page 46 to 48. Details of our principal risks are set out on pages 20 to 34.
Financial reporting
The Board is responsible for reviewing and approving the Annual Report and Accounts and the interim
financial information and for ensuring that these reports present a fair and balanced assessment of the
Group’s position. Drafts of these reports are provided to the Board in a timely manner and Directors’ feedback
is discussed and incorporated, where appropriate, prior to publication.
In addition, the Board ensures that controls over the financial reporting process and preparation of the
consolidated accounts include extensive reviews by qualified and experienced individuals to ensure that all
elements of the financial statements and appropriate disclosures are considered and accurately stated.
With respect to the financial year ended December 31, 2019, the Board acknowledges the steps taken by
management and the Audit and Risk Committee to ensure appropriate actions are taken with respect to the
requirement to provide attestation over Section 404(a) of the Sarbanes-Oxley Act of 2002.
Market Abuse Regulation
The Board has in place procedures to assist the Company in complying with its obligations relating to the
disclosure and control of inside information under the Market Abuse Regulation and the AIM Rules. These
procedures include identifying inside information, ensuring the appropriate disclosure of inside information,
the maintenance of insider lists and that effective controls are in place to keep any inside information
confidential.
Whistleblowing
The Group operates a whistleblowing policy which allows all employees to raise concerns to senior
management in strict confidence about any unethical business practices, fraud, misconduct or wrongdoing.
The Company has implemented a whistleblowing hotline through which employees can raise questions and
concerns anonymously. Any concerns with the whistleblowing policy are reviewed by the Audit and Risk
Committee.
Relations with stakeholders and shareholders
The Board recognizes the importance of communication with its shareholders to ensure that its strategy
and performance are understood and that it remains accountable to shareholders and we therefore maintain
a regular dialog with our institutional investors.
Executive officers of the Company also engage with stakeholders and receive feedback from a range of such
stakeholders including the Company’s employees which is then shared with the Board. The Board recognizes
that the Company’s employees are a valuable asset and a key driver of the Company’s success. The Board
and the Board’s committees, including the R&D Committee, also receive regular feedback directly from key
advisers and third-party experts.
Our website, www.mereobiopharma.com, has a dedicated investor section, which is fully compliant with AIM
Rule 26 and provides useful information for our shareholders including the latest announcements, press
releases, published financial information, details of our products and our current development pipeline and
other information about the Company. The Board as a whole is responsible for ensuring that a satisfactory
dialog with shareholders takes place, while the Chief Executive Officer and I, as Chairman, ensure that the
views of the shareholders are communicated to the Board as a whole. The Board ensures that our strategic
plans have been carefully reviewed in terms of their ability to deliver long-term shareholder value.
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CORPORATE GOVERNANCE: CORPORATE GOVERNANCE REPORT
Annual General Meeting (“AGM”)
This year’s AGM of the Company will be held on June 29, 2020. The notice of AGM, which includes all
proposed resolutions, has been posted to shareholders and is available on the Group’s website
www.mereobiopharma.com. All shareholders will have had at least 21 days’ notice of the AGM.
Due to COVID-19 and the current social distancing measures set out by the UK Government, the Company’s
AGM will be a closed meeting. As iterated in the Company’s press release on May 22, 2020, this means that
ordinary shareholders will not be allowed to attend the AGM in person and any ordinary shareholder seeking
to attend the AGM in person will be refused entry.
Under the Companies Act 2006, the directors of a public company are required to lay its annual report and
accounts before the company in general meeting (an “accounts meeting”) by no later than the end of the
period for the filing of those reports and accounts with the Registrar of Companies. The period for filing the
annual report and accounts is ordinarily six months from the accounting reference date. There is a separate
requirement under the Companies Act 2006 for a public company to hold an AGM within the period of six
months from its accounting reference date.
Ordinarily the Company’s AGM would also serve as its accounts meeting. However, in response to the COVID-
19 pandemic, Companies House has allowed companies to apply for a three-month extension of time to file
their accounts. The Company has applied for, and been granted, such an extension in respect of its annual
report and accounts for the financial year ended December 31, 2019 (the “Annual Accounts”). The Company
announced and published the Annual Accounts on June 16, 2020, however the extension allows until
September 30, 2020 to file the Annual Accounts, if required.
In light of this extension, the Company’s accounts meeting may now be held as a general meeting no later
than September 30, 2020. However, the Company is currently still required to hold its AGM by June 30, 2020,
hence the meeting going ahead as stated above. It is noted that the Annual Accounts will not be able to be
sent out to shareholders in sufficient time ahead of the AGM and therefore will not be laid before the AGM
but at a general meeting of the Company to be convened and held prior to September 30, 2020.
Our employees
Our employee base includes key people in strategic areas including in corporate development, patient access
and commercial planning, as we move our rare disease programs forward and seek to partner our speciality
products. We have been fortunate to attract and retain highly experienced individuals in clinical development,
clinical operations, manufacturing, intellectual property and quality assurance, supporting them with strong
leadership at the executive and Board level.
Our internal expertise is leveraged with external organisations, including contract research organisations
(“CROs”) and contract manufacturing organisations (“CMOs”) as well as bespoke consulting agreements.
This combination has allowed the Group to initiate international clinical trial studies within a relatively short
period of time since acquiring products from large pharma, whilst also maintaining a lean internal
infrastructure.
Across the U.K. and the U.S., we now have approximately 45 employees. Mereo seeks to appoint employees
with appropriate skills, knowledge and experience for the roles they undertake and thereafter to develop,
incentivize and retain staff. The Board recognizes its legal responsibility to ensure the well-being, safety and
welfare of the Group’s employees and maintain a safe and healthy working environment for them and for
our visitors. If an employee has a concern about unsafe conditions or tasks, they are encouraged to report
their concerns immediately to their manager or the General Counsel. Employees may also contact a
dedicated whistleblowing hotline, independent of the Group, if anonymity is sought.
The Group is fully committed to the elimination of unlawful and unfair discrimination and values the
differences that a diverse workforce brings to the organization. The Group endeavours to not discriminate
because of age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity,
race (which includes colour, nationality and ethnic or national origins), religion or belief, sex or sexual
orientation. This is captured in our Employee Handbook, which all employees are required to read and
acknowledge on an at least annual basis. The Group will undertake an annual review of its policies and
procedures to establish its position about compliance and best practice and monitor and promote a healthy
corporate culture.
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: CORPORATE GOVERNANCE REPORT
A breakdown of employment statistics by gender as at December 31, 2019 is as follows:
Position
Female
Male
Total
Directors of the Company (CEO, CFO and Non-Executive)
Executive officers
Employees
Total
2
2
18
22
7
3
18
28
9
5
36
50
Executive officers consist of senior managers who have responsibility for planning, director or controlling
the activities of the Group. As at December 31, 2019, this includes the Chief Medical Officer, General Counsel
and Company Secretary, Head of Corporate Development, Head of Patient Access and Commercial Planning
and U.S. Site Head and SVP Regulatory Affairs.
Our Directors have significant operational experience in leadership positions in large and small
pharmaceutical and biotechnology companies. They provide valuable strategic input into our corporate
development programs and our corporate and financing strategies. We welcomed two new Non-Executive
Directors from OncoMed, brining additional skills and diversity to the Mereo Board.
Biographies for our team of highly experienced directors and executive officers can be found below:
Executive Directors
Dr. Denise Scots-Knight (CEO and co-founder)
Dr. Scots-Knight has served as our Chief Executive Officer since July 2015 and as a member of our Board
since our formation. From 2010 until joining us, Dr. Scots-Knight was the Managing Partner of Phase4
Partners Ltd. (“Phase4”), a global life science venture capital firm. Dr. Scots-Knight is currently a board
member of Elanco Animal Health Incorporated (NYSE: ELAN. Dr. Scots-Knight previously served as a member
of the board of directors of Idenix Pharmaceuticals, Nabriva, Albireo and OncoMed. Dr. Scots-Knight holds
a B.Sc. (Hons.) and a Ph.D. from Birmingham University.
Richard Jones (CFO)
Mr. Jones has served as our Chief Financial Officer and as a member of our Board from January 2017. As a
consequence of Mr. Jones serving notice in March 2020 that he will be leaving the Board of the Company
and will remain in his position as Chief Financial Officer for a transitionary period of up to 5 months, Mr.
Jones is not standing for re-election to the Board at the Annual General Meeting to be held on June 29, 2020.
From 2011 until joining us, Mr. Jones was the Chief Financial Officer and Company Secretary of Shield
Therapeutics plc, where he also served as a Non-Executive Director from 2010 to 2011. Mr. Jones serves as
a non-executive director on the board of Alliance Pharma plc. Mr. Jones is a qualified chartered accountant
(ACA) with the Institute of Chartered Accountants in England and Wales (ICAEW) and holds a B.Eng. (Hons.)
from the University of Newcastle upon Tyne. Non-Executive Directors
Dr. Peter Fellner (Chairman)
Dr. Fellner has been Chairman of our Board since July 2015. He served as Chairman of the board of directors
of Consort Medical plc from May 2009 until April 2019 and was Chairman of the board of directors of Ablynx
NV from November 2013 until January 2018 and Vernalis plc until October 2018. Dr. Fellner was previously
Chairman of the board of directors of Acambis plc from 2006 until its acquisition by Sanofi Pasteur and
Optos plc from 2000 until its acquisition by Nikon Corporation, and Vice Chairman of Astex Pharmaceuticals
Inc. until its acquisition by Otsuka Pharmaceutical Company. He also served as a Director of UCB S.A. and
was CEO and then Chairman of Celltech Group plc. Dr. Fellner holds a B.Sc. (Hons.) from the University of
Sheffield and a Ph.D. from the University of Cambridge.
Dr. Fellner serves as Chair of the Nomination Committee.
Paul Blackburn
Mr. Blackburn has served on our Board since October 2015. Mr. Blackburn was Senior Vice President
Strategic Finance Projects and Financial Controller at GlaxoSmithKline. Mr. Blackburn currently serves on
the Board of Directors of Syngene. Mr. Blackburn is a member of the Chartered Institute of Management
Accountants. Mr. Blackburn holds a B.Sc. from Warwick University.
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Mr. Blackburn serves as Chair of the Audit and Risk Committee.
Dr. Anders Ekblom
Dr. Ekblom has served on our Board since July 2015. Dr. Ekblom has held a number of executive positions
at AstraZeneca, including Executive Vice President Global Drug Development, Executive Vice President Global
Medicines Development, Global Head Clinical Development, and Chief Executive Officer of AstraZeneca AB
Sweden. He currently serves as Chairman of the Board of Elypta AB, as Vice Chairman of the Board of LEO
Pharma A/S, and on the boards of directors of Alligator Bioscience AB and AnaMar AB. Dr. Ekblom is a board-
certified medical doctor and an Associate Professor at the Karolinska Institutet. Dr. Ekblom holds a M.D.,
Ph.D. and a D.D.S from Karolinska Institutet. Dr. Ekblom serves as Chair of the R&D Committee and is a
member of the Remuneration Committee and Nomination Committee.
Kunal Kashyap
Mr. Kashyap has served on our Board since July 2015. Mr. Kashyap is Chairman and Managing Director of
Allegro Capital Advisors. He had also served as an Independent Director of GlaxoSmithKline Consumer
Healthcare Ltd until June 2019. Mr. Kashyap was a partner with Arthur Andersen responsible for establishing
and managing their operations in South India. Mr. Kashyap is also the Founder and was the Executive Director
of Celstream Technologies Private Limited. Mr. Kashyap is a Chartered Accountant from the Institute of
Chartered Accountants of India. Mr. Kashyap is a member of the Audit and Risk Committee.
Peter Bains
Mr. Bains has served on our Board since July 2015. Mr. Bains was a Representative Executive Officer and
Chief Executive Officer of Sosei Group Corporation, a Japanese listed biotechnology company until
31 December 2018. Previously, he was Chief Executive Officer and Executive Director of Syngene International
Ltd, a BSE listed contract research organization, where he served as a Non-Executive Director until 2016.
Mr. Bains also served as Non-Executive Chairman of Fermenta Biotech Ltd, an Indian speciality
manufacturing company until April 2018. Mr. Bains currently serves as a Non-Executive Director for MiNA
Therapeutics Ltd and Apterna Ltd, both privately held UK biotechnology companies, and Indivior PLC, a FTSE
listed speciality pharmaceuticals company. Mr. Bains holds a B.Sc. (Hons.) from Sheffield University. Mr
Bains serves as Chair of the Remuneration Committee and is a member of the Nomination Committee and
R&D Committee.
Michael Wyzga
Mr. Wyzga has served on our Board since April 2019 following completion of the Merger and had served as
a director of OncoMed since October 2013 until the closing of the Merger. On May 14, 2020, we entered into
the Consulting and Interim Chief Financial Officer Agreement with MSW Consulting Inc. and Michael Wyzga
by which Mr. Wyzga will serve as Interim Chief Financial Officer following the departure of Mr. Jones.
Mr. Wyzga is currently the President of MSW Consulting Inc., a strategic consulting group focused in the life
sciences area. From December 2011 until November 2013, Mr. Wyzga served as President and Chief
Executive Officer and a member of the board of directors of Radius Health, Inc. Prior to that, Mr. Wyzga served
in various senior management positions at Genzyme Corporation, including as Chief Financial Officer from
July 1999 until November 2011. Mr. Wyzga is a member of the boards of directors of Exact Sciences
Corporation and LogicBio, and is Chairman of the board of directors of GenSight Biologics S.A. and of X4
Biologics. Mr. Wyzga previously served as a member of the boards of directors of Idenix Pharmaceuticals,
Inc. and Altus Pharmaceuticals, Inc., and as a member of the supervisory board of Prosensa Holding B.V. He
received an M.B.A. from Providence College and a B.S. from Suffolk University.
Mr. Wyzga is a member of the Audit and Risk Committee.
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CORPORATE GOVERNANCE: CORPORATE GOVERNANCE REPORT
Dr. Deepa Pakianathan
Dr. Pakianathan has served on our Board since April 2019 following completion of the Merger and served as
a director of OncoMed since December 2008 until the closing of the Merger. Since 2001, Dr. Pakianathan
has been a Managing Member at Delphi Ventures, a venture capital firm focused on biotechnology and
medical device investments. Dr. Pakianathan serves on the boards of directors of Karyopharm Therapeutics,
Inc., and Calithera Biosciences, Inc. Dr. Pakianathan previously served on the boards of directors of Alexza
Pharmaceuticals, Inc., Alder Biopharmaceuticals, Inc., PTC Therapeutics, Inc. and Relypsa, Inc.
Dr. Pakianathan received a B.Sc. from the University of Bombay, India, a M.Sc. from The Cancer Research
Institute at the University of Bombay, India, and an M.S. and Ph.D. from Wake Forest University Dr.
Pakianathan is a member of the Remuneration Committee and the R&D Committee.
Executive Officers
Dr. Alastair Mackinnon (Chief Medical Officer, co-founder)
Dr. MacKinnon has served as our Chief Medical Officer since July 2015. From 2010 until joining us,
Dr. MacKinnon was a Partner of Phase4. Dr. MacKinnon holds a B.Sc. and a MBBS from King’s College
London and is a Member of the Royal College of Surgeons in Edinburgh. .
John Richard (Head of Corporate Development, co founder)
Mr. Richard has served as our Head of Corporate Development since July 2015.
Prior to joining us, he was a consultant for Nomura, a global investment bank, and Phase4, and previously
served as the head of business development for Sequus Pharmaceuticals Inc., VIVUS Inc. and Genome
Therapeutics Corporation. Mr. Richard serves on the boards of QUE Oncology, and previously served on the
boards of Catalyst Biosciences, Vaxart, Inc., Aviragen Therapeutics, Inc., and Targacept, Inc. Mr. Richard
holds a B.S. from Stanford University and an MBA from Harvard Business School.
Charles Sermon (General Counsel, Company Secretary, co-founder)
Mr. Sermon has served as our General Counsel and Company Secretary since July 2015. From 2010 until
joining us, Mr. Sermon was a Partner of Phase4, where he currently serves as a member of the board of
directors. Mr. Sermon trained and qualified as a lawyer with Freshfields after completing the Law Society’s
Final Examination. Mr. Sermon holds an LL.B. (Hons.) from Hull University.
Wills Hughes-Wilson (Head of Patient Access and Commercial Planning)
Ms. Hughes-Wilson has served as our Head of Patient Access and Commercial Planning since March 2018.
Prior to joining us, Ms. Hughes-Wilson was Senior Vice President, Chief Patient Access Officer at Swedish
Orphan Biovitrum (publ.) AB, a biotechnology company, from 2012 to 2018, and prior to that served as Vice
President Health & Market Access Policy EMEA at Genzyme (now Sanofi Genzyme), a biotechnology
company. Ms. Hughes-Wilson holds a bachelor’s degree in Law and Politics (Hons.) from the University of
Durham, U.K.
Jill Henrich (U.S. Site Head and SVP of Regulatory Affairs)
Ms. Henrich serves as our U.S. Site Head and Senior Vice President of Regulatory Affairs. Prior to the Merger
she was Senior Vice President of Regulatory Affairs and QA at OncoMed Pharmaceuticals Inc. Prior to joining
OncoMed, Ms. Henrich was at PDL BioPharma, Inc. (Facet Biotech, acquired by Abbott) as Executive Director
of Regulatory Affairs with additional responsibility for Regulatory Operations, Corporate Document Control,
Medical Writing and Quality Assurance Compliance. She was Senior Director of Regulatory Affairs at Corixa
Corporation (formerly Coulter Pharmaceutical, Inc.), and held various positions in Research (Cell
Genetics/Molecular Biology) and Regulatory Affairs at Genentech. Ms. Henrich received her Bachelor of
Science degree in Biological Sciences/Microbiology from the University of Connecticut.
Dr. Peter Fellner
Chairman
June 15, 2020
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: AUDIT AND RISK COMMITTEE REPORT
The Board has delegated certain responsibilities to the Audit and Risk Committee (“ARC”), as more fully
explained within the Corporate Governance Report on pages 35 to 45.
Those responsibilities include oversight for the financial accounting and reporting process, internal control,
risk management, and management and evaluation of the independent external auditor.
The ARC met eight times in 2019. A summary of the Committee’s key activities during 2019 is as follows:
Review of the independent external auditor and tax adviser
The ARC monitors the relationship with the independent external auditor, Ernst & Young LLP, which was
appointed in 2015 and reappointed at the 2019 AGM, to ensure that auditor independence and objectivity
are maintained. We also reviewed and approved the 2019 audit plan and fee schedule. We have also assessed
the performance of the independent external auditor during the year.
As part of its review we monitor the provision of non-audit services by the independent external auditor. The
breakdown of fees between audit and non-audit services for 2019 is provided in Note 7 of the consolidated
financial statements.
During the year, Ernst & Young LLP provided certain non-audit services. These non-audit services were in
relation to:
•
•
Regulatory requirements relating to the audit of the financial information contained within Registration
Statements filed with the U.S. Securities and Exchange Commission (“SEC”);
Contractual requirements relating to one-off agreed upon procedure assignments which require
completion by the Company’s independent external auditor. During the year this included an opinion
relating to the issue of warrants to our lenders.
The audit to non-audit fee ratio is impacted by the volume of additional work required as part of the audit of
financial information contained within the Registration Statement (on Form F-4) filed with the SEC in early
2019 relating to the initial registration of the Company’s American Depository Shares (“ADSs”) onto the
Nasdaq Global Market and subsequently as part of a review of information incorporated by reference within
a Securities Registration Statement (on Form S-8). In addition to the Registration Statements, the
independent external auditor has also reviewed similar financial information contained within other
documents proposed to be filed with the SEC throughout the year.
We expect that the audit to non-audit fee ratio will improve in future years and do not consider the ratio at
present to impact auditor independence or objectivity given the regulatory and contractual requirement that
the independent external auditor performs the relevant service, as well as the nature of work performed.
Having reviewed the independent external auditor’s independence and performance, we recommended to
the Board that the appointment of Ernst & Young LLP as auditors from the conclusion of the Company’s
Annual General Meeting on June 19, 2019 be confirmed to continue until the conclusion of the next general
meeting at which the Company’s annual report and accounts are presented.
During the year we also reviewed our advisors for corporate tax and agreed the appointment of Deloitte LLP
as our corporate tax advisors for our tax compliance and any ad-hoc taxation advice. We also agreed the
appointment of Moss Adams for routine US based tax compliance.
Auditor rotation
After the year end, the audit and risk committee considered the Ethical Standards in respect of audit partner
rotation as the Ernst and Young engagement partner, D Hales, will complete his five year term for the UK
audit when Mereo files its 2019 Annual report. The committee considered the extenuating circumstances
arising from the impact of Covid19 on the ongoing business activity, the impact of recent corporate deals
and fundraising on our business, and the resignation of our CFO. We concluded that there is a need for
continuity when completing the 2020 audit including the additional audit and related work in respect of the
recently completed financing and concluded that the integrity, objectivity or independence of the audit would
not be compromised. Consequently, the committee approved an extension of up to one year. Ernst and Young
will work on succession plans to identify a partner to take over after 2020.
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CORPORATE GOVERNANCE: AUDIT AND RISK COMMITTEE REPORT
Financial statements
During the year we met with the Chief Financial Officer (“CFO”), wider finance team and the independent
external auditor to agree the scope of the 2019 audit plan. We also reviewed and approved the FY 2018
financial statements, the FY 2019 interim statements, the FY 2016 and FY 2017 financial statements audited
under U.S. PCAOB standards and the proforma consolidated combined financial statements for FY 2017 and
FY 2018 and H1 2019 and the proforma consolidated combined balance sheets as at June 30, 2018 and
December 31, 2018.
As a dual-listed organization, the Company has reporting requirements in both the U.K. and U.S. Throughout
the year, the ARC has monitored the progress made by the Company to ensure those reporting requirements
are met on a timely basis through holding regular discussions with the CFO and wider finance team as well
as reviewing internal action plans.
As part of our review of the financial statements for the current accounting period, the ARC considered and
approved existing and new accounting policies as well as updated judgments and estimates. Specifically,
we considered:
•
•
•
•
The sufficiency and adequacy of disclosures made by management with respect to the Group’s liquidity
and funding position as at the date of this report.
The acquisition of OncoMed in April 2019 which required the Company to account for a transaction for
the first time under IFRS 3 (Business Combinations). As part of the review of the proposed accounting
treatment, the ARC challenged the assumptions made by management within the purchase price
allocation (“PPA”) assessment and other considerations made throughout the one-year measurement
period within which certain changes to the PPA are permissible.
The adoption of IFRS 16 (Leases), effective January 1, 2019. The adoption of this new standard had a
material impact on the statement of financial position as it established a right-of-use asset offset by
a lease liability whereas previously no such asset or liability was recognized under IAS 17 (Leases).
The materiality of IFRS 16 (Leases) was further impacted by the acquisition of OncoMed through which
the Group acquired an operating lease over OncoMed’s operational facility in Redwood City, California.
Management’s impairment assessment, which is required annually under IAS 36 (Impairment of Assets)
given all intangible assets held by the Group, are not yet amortized as they remain under development.
As part of our review of the impairment assessment, the ARC understood the rationale for key changes
in the valuation methodology and inputs used in determining the recoverable value of the respective
intangible assets.
Internal controls
The Board and ARC are responsible for ensuring systems of internal control are appropriate and hold ultimate
responsibility 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 and ARC review the effectiveness of these systems annually by considering the risks potentially
affecting the Group.
Following the listing on the Nasdaq Global Market in April 2019, the Group is required by December 31, 2019,
to adhere to Section 404(a) of the Sarbanes-Oxley Act of 2002 which holds management responsible for
establishing and maintaining adequate internal controls and financial reporting procedures. As an Emerging
Growth Company (“EGC”), as defined in the Jumpstart Our Business Start-Ups Act of 2012, our independent
external auditor is not required to attest our assessment of internal control. This exemption will be lost either
when the Group fails to qualify as an EGC, or at the conclusion of the financial year ended December 31,
2014, whichever occurs earlier.
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CORPORATE GOVERNANCE: AUDIT AND RISK COMMITTEE REPORT
During the year the ARC noted that the Company:
•
•
•
•
Appointed an experienced individual within the finance team to hold internal responsibility for the
transition to compliance with Section 404(a) requirements;
Established a Risk and Control Matrix (“RACM”) which was reviewed by the ARC. The RACM establishes
baseline controls across the Group’s financial processes with consideration for differences in practice
following the acquisition of OncoMed;
Documented a full assessment of identified control deficiencies relating to control design and operating
effectiveness which included, where relevant, the measures taken by management to mitigate the
deficiency. The assessment was reviewed and approved by the ARC; and
Engaged a third party to independently validate key evaluations by management with respect to design
and operating effectiveness testing performed during the year.
At each meeting of the ARC throughout 2019, the CFO and wider finance team provided the ARC with a status
update of the roll-out and implementation of the RACM and other control procedures to ensure attestation
under Section 404(a) of the Sarbanes-Oxley Act of 2002 can be provided. The ARC considers that in 2019
the Company had an effective internal control environment during the year. This consideration is based on
a detailed testing plan which considered the design and operating effectiveness of internal control and a
completed assessment of the severity and subsequent mitigation of control deficiencies identified during
the year.
At present, the ARC does not consider it necessary for the Group to have an internal audit function due to
the small size of the finance function. This need will be evaluated annually.
Treasury management
During the year we reviewed the treasury management policy and procedures to ensure that the oversight
of cash balances and the translation of currencies were appropriate for the business needs. We have ensured
that appropriate levels of foreign currency cash balances are held to meet business requirements and
appropriate policies are in place in respect of the investment of cash balances surplus to immediate working
capital requirements.
Risk management
During the year we agreed the principal risks in the business and reviewed a number of principal risk mitigation
plans presented by individual risk owners. Principal risks identified are set out in the Strategic Report on
pages 20 to 34.
Paul Blackburn
Chairman of the Audit and Risk Committee
June 15, 2020
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: LETTER
Dear Shareholder,
Introduction
As Chair of the Remuneration Committee (the “Committee”), I am pleased to present, on behalf of the Board
of Directors of Mereo BioPharma Group plc (the “Company”) the first Directors’ Remuneration Report for the
year ended December 31, 2019 (the “Report”). The requirement to prepare this report follows the Company’s
listing in the U.S. on the Nasdaq Global Market in April 2019.
This Report will be subject to an advisory vote and our Remuneration Policy (the “Policy”) will be subject to
a binding vote under resolutions to be proposed at a general meeting of the Company to be convened later
this year (“the General Meeting”). The outcome of these votes will be considered carefully by the Committee
in the formulation and approval of the Company’s future remuneration strategy.
Remuneration policy
This is the first year that the Company has been required to put the Policy to shareholders for approval. The
Policy is set out in full within this Report and will be proposed at a General Meeting of the Company, a notice
of which will be sent out in due course setting out the time, date and location of such General Meeting,
together with resolutions to be proposed at such meeting.
The Committee considers that the Policy provides a fair basis for the remuneration of Executive Directors,
rewarding performance against short-term objectives which provide the foundations for the achievement
of longer-term corporate goals. In addition, the Policy allows for the use of equity incentives to encourage
longer-term commitment and sustainable performance. The Committee has also considered Non-Executive
Directors within the Policy and considers that the current remuneration strategy provides an appropriate
level of remuneration for their services.
Key decision and activities in the year ended December 31, 2019
Since January 1, 2019, the Committee has undertaken the following key decisions and activities:
•
•
•
•
•
•
In the first half of the year, we engaged an external consultant to support the Committee to conduct a
benchmarking exercise over the remuneration structure and strategy following completion of the
Company’s acquisition of OncoMed Pharmaceuticals, Inc. (“OncoMed”) and the Company’s subsequent
U.S. listing on the Nasdaq Global Market. This benchmarking exercise covered both Executive and Non-
Executive Directors and considered a comparator group of companies that were at a similar
development stage to Mereo and that had a range of market capitalisations. The comparator group
also included companies with dual listings (London and the U.S.) and market capitalisation similar to
that of Mereo. The overall conclusion from the benchmarking exercise was that the remuneration
structure is in line with the increased size and complexity of the Group and that the remuneration
strategy is aligned to the Group’s industry and location;
Adopted a new equity incentive award plan for both employees (including Executive Directors) and Non-
Executive Directors. The new equity incentive award plan allows the Committee to grant equity-based
incentive awards to eligible individuals in order to retain, recruit and reward the workforce required to
create sustainable growth and progress the development of our products;
Awarded both employees (including Executive Directors) and Non-Executive Directors with market value
share options under the newly adopted equity incentive award plan;
Considered, reviewed and approved the short-term objectives for the annual bonus for the financial
year ended December 31, 2019 for the Executive Directors;
Assessed performance against the short-term objectives established for the financial year ended
December 31, 2019 for the Executive Directors. The Committee approved the level of bonuses to be
paid to the Executive Directors and other Executive Officers, determined according to performance
against the short-term annual objectives. Such amounts are included as a liability within financial
statements for the year ending December 31, 2019; and
Considered and agreed the short-term objectives for the annual bonus for the financial year ending
December 31, 2020 for the Executive Directors.
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CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: LETTER
Achievements
The Policy for the remuneration of the Executive Directors ensures that variable incentives are structured to
align with the achievement of both short-term and long-term corporate objectives to deliver sustainable
growth and value.
During the 2019 performance period, the performance of our Executive Directors and employees was
evaluated against the criteria set at the start of the financial year, which outlined the relevant objectives to
be met. The Committee considers that the Company has made substantial progress and delivered on many
operational objectives during the performance period, reflective of the dedication, hard work and support
provided by the Company’s employees.
Key achievements during the 2019 performance period include:
•
•
•
•
Progressed activities to deliver positive data readouts on the Setrusumab Phase 2b clinical trial in
adults. Whilst the primary endpoint from the Phase 2b trial was not met, the secondary endpoint was
achieved and the topline 12-month results from the study demonstrated a clear, dose-dependent,
statistically significant bone-building effect of Setrusumab and supported further progression into
Phase 3. Alongside this positive data readout, the management team and wider employee base have
further progressed the late-stage development and commercialisation plans for this product candidate.
On Acumapimod, a successful End of Phase 2 meeting with the U.S. FDA was held in April 2019 which
provided the outline for pivotal trial design for the drug in patients with acute exacerbations of chronic
obstructive pulmonary disease (“AECOPD”).
On Navicixizumab (“Navi”), a successful Type B meeting was held with the U.S. FDA in July 2019 which
outlined an accelerated approval pathway for Navi in patients with advanced ovarian cancer. In addition,
the Company received U.S. FDA Fast Track designation for the treatment of patients with heavily pre-
treated ovarian cancer. Subsequent to the year end, a global license agreement was signed with
Oncologie, Inc. (“Oncologie”) for the development and commercialization of Navi.
Following the Company’s acquisition of OncoMed in April 2019, we have successfully integrated a new
business into Mereo which included the retention of a number of employees who continue to deliver
on our ongoing development programmes. In addition, the Company is now listed on the Nasdaq Global
Market and has delivered its first financial year as dual-listed company.
Subsequent to the 2019 performance period, the Company announced positive feedback following a
successful Type B End-of-Phase 2 meeting with the U.S. FDA with an outline of the pivotal Phase 3 pediatric
study design for setrusumab in OI patients. This combined with the previously approved E.U. Pediatric
Investigational Plan (“PIP”) allows a single global Phase 3 study. Whilst this event falls outside the 2019
performance period, it nonetheless provides testament to the success and achievements of the Executive
Directors and employees.
With consideration for the achievement of objectives during the performance period, the Committee has
decided to award both Executive Directors a bonus which will pay out at 75% of annual base salary. The
maximum potential pay out of 100% of annual base salary was not met, because certain objectives, related
to a clinical milestone for the ongoing Phase 2 study of alvelestat in alpha-1 antitrypsin deficiency (“AATD”)
and a specific corporate development target relating to acumapimod, were either not met or not fully achieved
during the performance period.
As the bonuses are now approved, such amounts are included as a liability within financial statements for
the year ending December 31, 2019. The level of pay out achieved is the result of strong performance against
the short-term objectives, which were considered, reviewed and approved by the Committee at the start of
the 2019 performance period. Further details are discussed within this Report.
During the 2019 performance period no long-term incentives with performance conditions were awarded to
Executive Directors.
Termination arrangements for Richard Jones (Chief Financial Officer)
In March 2020 we announced that Richard Jones had informed the Board of his intention to leave the
Company to pursue other opportunities. It is anticipated that Richard will leave the Board and the Company
no later than early September 2020.
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: LETTER
In light of Richard’s contribution to the Company over the last three years, the Committee has exercised its
discretion to award him a reduced bonus payment in respect of his services which is due to be paid out in
the current year. Payment of this bonus is subject to certain conditions to be achieved prior to Richard’s
departure. The Committee has also exercised its discretion to allow exercise of Richard’s share options held
under The Mereo BioPharma Group plc Share Option Plan and the 2019 EIP for a period of two years following
his departure in light of Richard’s contribution to the Company over the last three years including over his
notice period. All other unvested long-term incentives at the point of departure will lapse.
Corporate Governance
Mereo is a dual-listed Company whose shares are traded on the AIM Market of the London Stock Exchange
(“AIM”) and Nasdaq Global Market. Therefore, we are subject to corporate governance standards and
regulations applicable in both the U.S. and U.K. It is the Committee’s belief that the Policy ensures relevant
corporate governance standards and regulations with regard to ensuring that remuneration practices are
met.
The Committee comprises three members who are all independent Non-Executive Directors under the
Corporate Governance Code as published by the Quoted Companies Alliance (the “QCA Code”), under U.S.
securities laws and Nasdaq listing rules.
Summary
The Committee believes that this Report and the Policy contained within the Report provides a remuneration
philosophy that encourages both Executive and Non-Executive Directors to serve in the best interests of the
Company to support the delivery of value to shareholders in the future in a sustainable way.
Further, the Committee trusts that the both the Report and the Policy is helpful and looks forward to the
Company’s General Meeting where we hope to have your support.
Yours sincerely,
Peter Bains
Chair of the Remuneration Committee
June 15, 2020
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: POLICY
The following section of this Report describes the formal remuneration policy applying to the Company’s
Executive and Non-Executive Directors. This Policy will be put to a binding shareholder vote at the Company’s
General Meeting, and if approved, will become effective from the date of such General Meeting
It is intended that the Policy will remain in place for a period of three years, unless the Remuneration
Committee (the “Committee”) determines that it is necessary to seek approval for an amended Policy during
that period.
The Policy, which is maintained by the Committee, is designed to:
•
•
•
•
Attract, retain and motivate outstanding individuals who have the potential to support the growth of
the Company and to attract and retain Non-Executive Directors who can substantially contribute to our
success;
Align Executive Directors’ incentives with shareholder value creation;
Tie short- and long-term cash and equity incentives to the achievement of measurable corporate
objectives; and
Consider practices for comparable companies that are dual-listed in the U.K. and U.S.
1.1 Remuneration policy table – Executive Directors
The total remuneration for Executive Directors is made up of the following elements:
•
•
•
•
•
Base salary;
Benefits;
Pension;
Annual bonus (short-term benefit);
Equity incentives (long-term benefit).
The following section of this report describes the formal remuneration policy applying to the Company’s
Executive Directors:
Base salary
Purpose and link to strategy Provides a core level of reward for the completion of duties by the Executive
Directors.
Set at a level to attract and retain employees of a sufficient calibre to drive
the Company’s success, taking into account the global nature of the
business and the key talent markets (including the U.K. and U.S.) in which
we must compete.
Maximum opportunity There is no maximum salary limit. When considering salary levels, the
Committee will consider the specific nature and responsibilities of the role
held by the Executive Director, the capabilities and experience of the
individual, as well as pay levels in the wider market.
Operation Salaries are typically reviewed annually, with any increases normally taking
effect from 1 January. When awarding salary increases, the Committee will
consider the level of increase proposed for the wider workforce, as well as
employee pay conditions more broadly and inflation. Where there has been
a change in the role, or if the individual is new to the role, increases could be
higher.
The Committee retains discretion to retrospectively increase salaries for
Executive Directors.
Performance framework A broad assessment of individual and corporate performance is considered
as part of the annual review process.
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CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: POLICY
Benefits
Purpose and link to strategy Provides market-competitive and cost-effective employment benefits
Maximum opportunity There is no formal maximum limit as the value of insured benefits will vary
from year-to-year based on the cost quoted by third party providers.
Operation For Executive Directors, this includes private medical insurance and life
insurance. Other employment benefits may be provided from time to time
on similar terms as those of other employees.
In the event that an Executive Director is required to relocate, reasonable
expenses or an allowance may be payable.
Any reasonable business-related expenses can be reimbursed, including tax
Performance framework Not applicable.
thereon.
Pension
Purpose and link to strategy Provides employees with long-term savings for their future.
Maximum opportunity The Company operates a defined contribution pension plan and has a policy
of encouraging all employees to plan responsibly for their retirement,
including the Executive Directors. The policy also complies with the
provisions of auto-enrolment.
The Company makes payments of 15% of basic salary for the Chief Executive
Officer and 10% of basic salary for the Chief Financial Officer into any
pension scheme or similar arrangement as the individual may reasonably
request (or a payment in lieu). Such payments are not counted for the
purposes of determining bonuses.
Operation Payments are made directly to a nominated pension scheme or, where
payments are made in cash, delivered monthly through payroll.
Only base salary is pensionable.
Performance framework Not applicable.
Annual bonus (short-term benefit)
Purpose and link to strategy To focus attention on the achievement of short-term corporate objectives
and incentivize successful delivery of the Company’s strategic goals.
Further, the annual bonus creates a tangible link between annual
performance and individual pay opportunity.
Maximum opportunity Executive Directors are eligible for a maximum annual bonus of 100% of base
salary per annum. The Committee will determine an appropriate award size
each year within this parameter based on achievement against annual
performance.
Operation Annual performance is measured through short-term corporate objectives
which are set at the start of each year and reflect the key milestones and
other objectives for that year that make progress towards the Company’s
strategic goals. The target annual cash bonus is based on a percentage of
salary and is payable in cash after the award has been approved by the
Committee, usually at the end of the financial year.
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CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: POLICY
Under the Deferred Bonus Plan (“2019 DBSP”), 100% of the annual bonus is
paid in cash, of which 30% net of amounts granted to executive officers (after
deduction of income tax and the relevant employee’s national insurance
contributions) is normally required to be utilized by the executive to acquire
Mereo shares in the open market within 12 months of the grant of the award.
Performance framework Short-term corporate objectives are set annually and approved by the
Committee. In any given year they typically include targets relating to clinical
development, corporate development, finance, manufacturing and
intellectual property / legal.
Once set, short-term corporate objectives can be revised during the
performance period but require pre-approval by the Committee. In
accordance with the regulations, any changes would be disclosed in the
relevant year’s report and accounts.
At the end of the performance period (typically the end of a financial year)
short-term corporate objectives are reviewed and their achievement is
evaluated by the Committee. Short-term corporate objectives can be fully
achieved, partially achieved or lapse under poor performance. Once the
evaluation is complete, an overall proposal of bonus payment (against a
maximum annual bonus of 100% of base salary per annum) is approved by
the Committee. The minimum potential level of bonus opportunity is 0% of
the maximum.
Equity incentives (long-term benefit)
Purpose and link to strategy Historically, equity incentive awards have been granted to Executive
Directors under The Mereo 2015 Plan (the “2015 Plan”), the Mereo
BioPharma Group plc Share Option Plan (the “Share Option Plan”) and,
following the IPO on the AIM Market of the London Stock Exchange (“AIM”),
a long-term incentive plan (the “LTIP”).
Following the implementation of the 2019 Equity Incentive Plan (the “2019
EIP”), equity incentive awards from the start of 2019 are granted to Executive
Directors under the 2019 EIP.
The Committee envisages further grants under the 2019 EIP to motivate and
reward employees, including Executive Directors, to perform at the highest
level and to further the best interest of the Company and its shareholders.
In addition, the 2019 EIP is designed to align the interests of Executive
Directors with those of shareholders and also encourage retention, as the
benefits accrue over a period of years.
The Committee does not anticipate further issuances of other types of equity
incentive awards but reserves the right to make such awards.
Maximum opportunity There is no maximum opportunity under the 2019 EIP. However, the
Committee will generally work within the benchmarking guidelines provided
by our external compensation consultants.
Operation The 2019 EIP provides for the grant of market value options, share
appreciation rights, restricted stock unit awards, performance awards
(subject to performance conditions) and other share-based awards. Further,
subject to the terms of the award agreement, awards can be granted in
respect of ordinary shares, American Depository Shares (“ADSs”), cash or a
combination thereof.
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Awards vest in accordance with the vesting schedule set for the relevant
award in its award agreement. The Committee maintains discretion over the
type and terms of equity awards granted.
The 2019 EIP is administered by the Committee. The Board may also choose
to administer the 2019 EIP itself.
Performance framework In the determination of the award agreement, the Committee will select the
most appropriate form of award to be granted.
Rights, payments and benefits which accrue to Executive Directors under
the 2019 EIP are subject to repayment or to recoupment (“clawback”) by the
Company in accordance with policies and procedures that the Committee
or Board may adopt from time to time.
1.2 Remuneration policy table – Non-Executive Directors
The total remuneration for Non-Executive Directors is made up of the following elements:
•
•
Fees; and
Equity incentives (long-term benefit).
The following section of this report describes the formal remuneration policy applying to the Company’s
Non-Executive Directors:
Fees
Purpose and link to strategy Supports the recruitment and retention of Non-Executive Directors with the
required skills and experience to support the growth of the Company.
Maximum opportunity Aggregate fees are subject to the amount per the letter of appointment with
the Non-Executive Director, subject to periodic review by the Board of
Directors.
Non-Executive Directors are excluded from any discussions relating to their
own fees.
Operation Non-Executive Directors receive a base fee for performance of their duties.
The Company may also pay additional fees in recognition of any additional
responsibilities.
Fees paid to Non-Executive Directors are reviewed on a regular basis with
reference to pay levels in relevant markets, taking into account the specific
roles and responsibilities, as well as expected time commitment. The
Company reserves the right to pay additional fees in any given year to reflect
a material, but temporary, increase in time commitment during the period.
Any reasonable business-related expenses may be reimbursed, including
any taxes payable thereon if determined to be a taxable benefit. Business-
related expenses are only reimbursable where they relate to the Non-
Executive Directors’ discharge of responsibilities in relation to the Company.
Performance framework Not applicable.
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Equity incentives (long-term benefit)
Purpose and link to strategy Historically, equity incentive awards have been granted to Non-Executive
Directors under The Mereo 2015 Plan (the “2015 Plan”).
Following the implementation of the 2019 Non-Executive Director Equity
Incentive Plan (the “2019 NED EIP”), equity incentive awards from the start
of 2019 are granted to Non-Executive Directors under the 2019 NED EIP.
The Committee envisages further grants under the 2019 NED EIP to facilitate
share ownership by Non-Executive Directors in the Company.
Maximum opportunity There is no maximum opportunity under the 2019 NED EIP. However, the
Committee will generally work within the benchmarking guidelines provided
by our external compensation consultants.
Operation The 2019 NED EIP provides for the grant of market value options, share
appreciation rights, restricted stock unit awards, performance awards
(subject to performance conditions) and other share-based awards. Further,
subject to the terms of the award agreement, awards can be granted in
respect of ordinary shares, ADSs, cash or a combination thereof. However,
performance awards (subject to performance conditions) are not intended
to be issued to Non-Executive Directors.
Awards vest in accordance with the vesting schedule set for the relevant
award in its award agreement. The Committee maintains discretion over the
type and terms of equity awards granted.
The 2019 NED EIP is administered by the Committee. The Board may also
choose to administer the 2019 NED EIP itself.
Performance framework In the determination of the award agreement, the Committee will select the
most appropriate form of award to be granted.
Rights, payments and benefits which accrue to Non-Executive Directors
under the 2019 NED EIP are subject to repayment or to recoupment
(“clawback”) by the Company in accordance with policies and procedures
that the Committee or Board may adopt from time to time.
Notes to the Remuneration Policy tables
Legacy arrangements
For the duration of this Remuneration Policy, the Company will honour any commitments made in respect
of current or former Directors before the date on which either: (i) the Remuneration Policy becomes effective;
or (ii) an individual becomes a Director, even where not consistent with the Remuneration Policy set out in
this report or prevailing at the time such commitment is fulfilled. Through approval of this Remuneration
Policy, approval is given to the Company to honour any such commitments.
Details of any legacy arrangements made outside this Policy will be disclosed in future Directors’
Remuneration Reports as and when they arise.
Performance conditions
The Committee’s discretion over the determination, review and appraisal of short-term objectives linked to
the annual bonus reflects the Committee’s belief that any incentive-based remuneration should be
appropriately challenging and tied to the delivery of key financial and strategic targets intended to ensure
that Executive Directors are incentivized to deliver across a range of objectives for which they are
accountable. The Committee has retained some flexibility on the specific measures that will be used to
ensure that any measures are fully aligned with the strategic imperatives prevailing at the time they are set.
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The targets for the bonus scheme for the forthcoming year will be set out in general terms, subject to
limitations with regards to commercial sensitivity. Short-term corporate objectives in any given year typically
include targets relating to clinical development, corporate development, commercial planning, finance,
manufacturing and intellectual property / legal.
The Committee will determine appropriate performance conditions for EIP awards granted to Executive
Directors at the time each EIP award grant is made. With respect to the 2019 performance period, no EIP
awards granted to Executive Directors had performance conditions attached.
As at December 31, 2019, the only equity incentive awards outstanding subject to performance conditions
are the Long-Term Incentive Plan (“LTIP”) awards granted to the Chief Executive Officer and Chief Financial
Officer in 2016 and 2017 respectively.
1.3 Committee discretion in operation of variable pay schemes
The Committee operates under the powers it has been delegated by the Board. In addition, it complies with
rules that are either subject to shareholder approval or by approval from the Board. These rules provide the
Committee with certain discretions which serve to ensure that the implementation of the Policy is fair and
in the interests of shareholders.
To ensure the efficient administration of the variable pay schemes outlined above, the Committee will apply
certain operational discretions.
These operational discretions include the following:
i.
ii.
iii.
iv.
v.
The eligibility of participants to participate in variable pay schemes operated by the Company;
The timing of grant of awards and relevant payments made relating to variable pay schemes;
The size of awards and payments (subject to maximum limits set out in the respective plan rules);
The determination of whether any performance conditions have been met relating to variable pay
schemes with a performance condition;
Discretion to override formulaic outcomes of incentive schemes where the payment would otherwise
be inappropriate;
vi. Determination of whether an employee is to be considered a ‘good’ or ‘bad’ leaver for the purposes of
exit payments made under this Policy and the relevant terms of any variable pay schemes;
vii. Whether recovery and / or withholding shall be applied to any award and, if so, the extent to which they
shall apply;
viii. Adjustments required in certain capital events such as rights issues, corporate restructuring, other
events and special dividends; and
ix.
The setting and annual review of short-term corporate objectives.
The Committee also retains the ability to adjust the targets (up or down) and / or set different measures and
alter weightings for the annual bonus plan and to adjust targets for the bonus if events occur (e.g., material
divestment of a Group business or events relating to the Company’s issued share capital) which cause it to
determine that the conditions are no longer appropriate in the circumstances and the amendment is required
so that the conditions achieve their original purpose and are not, in the opinion of the Committee, materially
more or less challenging to satisfy in the circumstances.
1.4 Shareholder and other stakeholder views
The Board is committed to dialogue with shareholders. The Committee will consider shareholder feedback
received following the General Meeting, as well as any additional feedback and guidance received from time
to time. This feedback will be considered by the Committee as it develops the Company’s remuneration
framework and practices going forward.
The Committee’s independent advisor actively monitors developments within comparator companies and
provides feedback to the Committee. Where relevant, such developments are considered in the structure of
remuneration for both Executive Directors and Non-Executive Directors.
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The Company operates a coherent approach to remuneration across the organisation. Annual bonuses for
Executive Directors are subject to the same performance criteria as all employees in the bonus scheme, with
additional personal objectives set for other participants where relevant. Employees are also eligible to
participate in the equity incentive awards, to encourage broad employee share ownership and alignment
with the Company’s success. Although the Committee does not consult with employees directly, it is
appraised of any decisions relating to pay for the broader workforce and will consider pay conditions
throughout the Group when making decisions on Executive Directors’ remuneration.
1.5 Executive Directors’ service agreements and payments for loss of office
Executive Directors are employed under rolling service agreements with a notice period of twelve months
(in the case of the Chief Executive Officer) and six months (in the case of the Chief Financial Officer) from
either party. A copy of these contracts may be viewed at the Company’s head office or may be requested
from the Company Secretary at the General Meeting. Executive Directors retire from their position upon the
third AGM following the AGM at which they were elected or last re-elected. They are eligible for re-election
at the AGM at which the retire.
Executive Director
Denise Scots-Knight
Richard Jones
Date of contract
July 29, 2015
November 7, 2016
The Company shall be entitled at its sole and absolute discretion lawfully to terminate the employment of
an Executive Director at any time and with immediate effect by written notification to the Executive Director
and pay, within one month following the date of such termination, a payment in lieu of notice. The total
payment in lieu of notice will be equal to the basic salary due to the Executive Director during the notice
period.
In the event of a breach of service agreement or other summary termination of employment, no such
payments will be made.
1.6 Non-Executive Directors’ service agreement and payments for loss of office
Each of the Non-Executive Directors is engaged under a Non-Executive Director letter of appointment. A
copy of these letters of appointment may be viewed at the Company’s head office or may be requested from
the Company Secretary at the General Meeting. Non-Executive Directors retire from their position upon the
third AGM following the AGM at which they were elected or last re-elected. They are eligible for re-election
at the AGM at which the retire.
Each Non-Executive Director appointment is terminable by either party on not less than three months written
notice. Non-Executive Directors are only entitled to fees accrued to the date of termination.
The dates of appointment of each of the Non-Executive Directors serving at December 31, 2019, are
summarized in the table below:
Non-Executive Director
Dr Peter Fellner
Dr Anders Ekblom
Peter Bains
Kunal Kashyap
Paul Blackburn
Michael Wyzga
Dr Deepa Pakianathan
Date of appointment
July 29, 2015
July 29, 2015
July 29, 2015
July 29, 2015
October 6, 2015
April 23, 2019
April 23, 2019
1.7 Treatment of leavers
The default treatment of outstanding incentive awards on termination of employment is described in the
relevant plan rules and related policy documents, but the Committee retains the discretion to adopt any
treatment that it determines fair and appropriate given the circumstances applicable to individual leavers.
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Generally, in the event of termination, the Executive Directors’ service contracts may provide for payment of
basic salary and benefits over the notice period. The Company may elect to make a payment in lieu of notice
equivalent in value to basic salary for any unexpired portion of the notice period. The notice period for exiting
the Executive Directors service contract is twelve months (for the CEO) and six months (for the CFO).
The Committee’s approach to payments in the event that an Executive Director’s employment is terminated
is to take account of the individual circumstances, including the reason for termination, individual
performance, contractual obligations and the terms of any remaining or outstanding equity awards in which
the Executive Director participates.
Annual bonus (short-term incentives)
If an Executive Director is working a period of notice at the date any bonus is payable to the Executive Director,
no bonus or pro-rata bonus is contractually payable. However, the Committee may consider a payment at
its discretion in the case of good leavers. Any bonus paid to a good leaver would normally be paid in cash
and would not normally be subject to the requirement that part of the proceeds are used to acquire shares.
Equity awards (long-term incentives)
Whether any equity awards, which are long-term incentives, would vest and be exercisable upon loss of
office would be subject to the relevant plan rules. These allow for vesting and exercise of awards in the event
of death, retirement, ill-health, injury, redundancy and any other reason at the discretion of the Committee.
The Committee retains discretion to determine the extent to which the award will vest, taking into
consideration the circumstances. Unvested awards will normally lapse, although the Committee retains the
power to determine, in accordance with the ‘good leaver’ provisions of the relevant plan rules, what proportion
of unvested awards will be retained and what proportion will lapse and whether to impose or vary any
conditions on vesting or exercise. In determining this, the Committee will give consideration to the reason
for leaving, the extent of achievement of performance objectives at the date of leaving and may decide to
time pro-rate awards.
Additional payments
The Committee reserves the right to make payments it considers reasonable under a compromise or
settlement agreement, including payment or reimbursement of reasonable legal and professional fees,
accrued holiday and any payment in respect of statutory rights under employment law in the U.K. and other
jurisdictions.
1.8 Remuneration on recruitment
The remuneration package for any new Executive Director will be determined by the Remuneration Committee
in accordance with the terms of the Policy at the time of appointment (including salary, benefits, annual
bonus, long-term incentive awards and pension). It is recognized that in order to attract and recruit talented
individuals the Policy needs to allow for sufficient flexibility with respect to remuneration on recruitment.
The following policies apply to the remuneration of recruitment of new Executive Directors:
Salary
Base salary levels will be set in accordance with our remuneration policy, taking into account the experience
and calibre of the individual and the relevant market rates at the time of appointment. Where it is appropriate
to offer a lower salary initially, progressive increases may be offered to achieve the desired salary positioning
over the following years subject to individual performance and continued development in the role.
Pension
Pension contributions or a cash supplement up to the maximum level indicated in the policy table may be
provided, although the Committee retains discretion to structure any arrangements as necessary to comply
with the relevant legislation and market practice if an overseas Executive Director is appointed.
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Benefits
Benefits will be provided in line with those offered to other employees, with relocation expenses and other
arrangements provided for if necessary. Should it be appropriate to recruit an Executive Director from
overseas, flexibility is retained to provide benefits that take account of those typically provided in their country
of residence (e.g., it may be appropriate to provide benefits that are tailored to the unique circumstances of
such an appointment).
Annual bonus (short-term incentives)
In the year of appointment, the annual bonus opportunity will be the subject to the same performance
conditions as offered to existing Executive Directors, pro-rated for the period of service. The Committee
retains the discretion to set different performance measures, taking into account the responsibilities of the
individual, and the point in the financial year that they joined the Company.
For internal appointments, annual bonuses award in respect of the prior role will be allowed to pay out
according to their existing terms. In addition, any other contractual remuneration obligations existing prior
to appointment may continue.
Equity awards (long-term incentives)
Equity awards will be granted to new Executive Directors in line with the policy outlined for existing Executive
Directors. An award may be made shortly following an appointment. The Committee maintains discretion
over the type and terms of equity awards granted to new Executive Directors, as well as the timing of grant.
For internal appointments, existing equity awards will continue on their original terms.
Buy-out awards
The Committee may offer additional cash and/or share-based elements to compensate an individual for
remuneration forfeited on leaving a former employer, in connection with an executive joining the company
following merger and acquisition activity or for any other reason at the discretion of the Committee, if it
considers these to be in the best interests of the company and its shareholders. Depending on individual
circumstances at the time, the Committee has the discretion to determine the type of award (i.e., cash, shares,
options, vesting and holding periods and whether or not performance conditions would apply). When
exercising its discretion, the Committee will carefully consider the balance between the need to secure an
individual in the best interests of the company against the concern of shareholders about the quantum of
remuneration. Any use of discretion would be disclosed to shareholders if considered appropriate.
Non-Executive Directors
On the appointment of a new Non-Executive Director, the fees will be set taking into account the experience
and calibre of the individual and the expected time commitments of the role.
Equity awards will be granted to new Non-Executive Directors in line with the policy outlined for existing
Non-Executive Directors.
1.9 Policy on external appointments
Executive Directors may, subject to approval from the Board of Directors, accept appropriate external Non-
Executive Director appointments, so long as this commitment is not thought to interfere with the business
of the Company or the individual’s ability to carry out their duties. Any fees payable for such appointments
may be retained by the individual.
As at December 31, 2019, both Executive Directors serve as a Non-Executive Director for public companies.
Dr. Denise Scots-Knight (CEO) is currently a Non-Executive Director of Elanco Animal Health Incorporated
(“Elanco”) (NYSE: ELAN) and Richard Jones (CFO) is currently a Non-Executive Director of Alliance Pharma
Plc (“Alliance”) (LSE: APH).
1.10 Illustration of application of the policy
The charts set out for illustrative purposes only, what the annual remuneration the Company expects the
Chief Executive Officer (“CEO”) will obtain if performance levels are below threshold (minimum), meet
expectations (target) or exceed the maximum targets (maximum) in the 2020 performance period.
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The assumptions used in the calculations are set out below:
– Minimum: fixed pay;
–
Target: fixed pay, annual bonus at threshold level (50% of annual salary) and 50% of the fair value of
equity incentive awards granted in 20191;
– Maximum: fixed pay, annual bonus at maximum pay-out (100% of annual salary) and 100% of the fair
value of equity incentive awards granted in 2019;
– Maximum plus 50% share price growth scenario: For the equity incentive award this results in a lower
amount than the fair value used in the maximum scenario as the fair value at maximum includes all
possible future outcomes.
Fixed pay comprises:
–
–
–
Salaries: salary effective as at January 1, 2020;
Benefits: value of all benefits received in the 2019 financial year;
Pension: 15% and 10% of salary respectively for the CEO.
(cid:14)(cid:13)(cid:12)(cid:11)(cid:10)(cid:9)(cid:8)(cid:7)(cid:11)(cid:6)(cid:5)(cid:4)(cid:12)(cid:3)(cid:11)(cid:9)(cid:2)(cid:10)(cid:10)(cid:12)(cid:6)(cid:11)(cid:1)
(cid:3)
(cid:1)
(cid:2)
(cid:2)
(cid:2)
(cid:4)
(cid:5)
(cid:6)
(cid:12)
(cid:7)
(cid:8)
(cid:9)
(cid:10)
(cid:11)
(cid:15)
(cid:12)
(cid:13)
(cid:14)
(cid:15)
(cid:16)
(cid:31)(cid:15)(cid:12)(cid:1)(cid:11)(cid:28)(cid:28)
(cid:31)(cid:15)(cid:12)(cid:1)(cid:13)(cid:28)(cid:28)
(cid:31)(cid:15)(cid:12)(cid:1)(cid:28)(cid:28)(cid:28)
(cid:31)(cid:15)(cid:3)(cid:28)(cid:28)
(cid:31)(cid:15)(cid:2)(cid:28)(cid:28)
(cid:31)(cid:15)(cid:11)(cid:28)(cid:28)
(cid:31)(cid:15)(cid:13)(cid:28)(cid:28)
(cid:31)(cid:15)(cid:14)
(cid:13)(cid:29)(cid:27)
(cid:13)(cid:5)(cid:27)
(cid:29)(cid:5)(cid:27)
(cid:12)(cid:28)(cid:28)(cid:27)
(cid:5)(cid:5)(cid:27)
(cid:5)(cid:12)(cid:27)
(cid:5)(cid:2)(cid:27)
(cid:5)(cid:28)(cid:27)
(cid:5)(cid:13)(cid:27)
(cid:5)(cid:3)(cid:27)
(cid:43)(cid:42)(cid:41)(cid:42)(cid:40)(cid:39)(cid:40)
(cid:38)(cid:37)(cid:36)(cid:35)(cid:34)(cid:33)
(cid:43)(cid:37)(cid:32)(cid:42)(cid:40)(cid:39)(cid:40)
(cid:21)(cid:20)(cid:39)(cid:42)(cid:33)(cid:19)(cid:31)(cid:42)(cid:41)(cid:23)(cid:34)(cid:41)(cid:33)(cid:42)(cid:18)(cid:34)(cid:31)(cid:37)(cid:17)(cid:37)(cid:36)(cid:16)
(cid:9)(cid:41)(cid:41)(cid:39)(cid:37)(cid:8)(cid:31)(cid:7)(cid:6)(cid:41)(cid:39)(cid:26)
(cid:4)(cid:42)(cid:32)(cid:34)(cid:16)(cid:31)(cid:24)(cid:37)(cid:19)
(cid:15)(cid:14)
(cid:15)(cid:14)
(cid:15)(cid:11)(cid:29)(cid:3)
(cid:15)(cid:13)(cid:12)(cid:13)
(cid:15)(cid:12)(cid:10)(cid:29)
(cid:15)(cid:11)(cid:29)(cid:3)
(cid:15)(cid:11)(cid:13)(cid:29)
(cid:15)(cid:5)(cid:10)(cid:12)
(cid:15)(cid:11)(cid:29)(cid:3)
(cid:43)(cid:37)(cid:32)(cid:42)(cid:40)(cid:39)(cid:40)(cid:31)(cid:30)(cid:29)(cid:28)(cid:27)
(cid:26)(cid:25)(cid:37)(cid:36)(cid:34)(cid:31)(cid:24)(cid:36)(cid:42)(cid:23)(cid:34)
(cid:42)(cid:41)(cid:23)(cid:36)(cid:34)(cid:37)(cid:26)(cid:34)(cid:22)
(cid:15)(cid:13)(cid:10)(cid:12)
(cid:15)(cid:5)(cid:10)(cid:12)
(cid:15)(cid:11)(cid:29)(cid:3)
(cid:1)
With respect to the maximum scenario which assumes a 50% share price increase in share price, we have
included an outcome for the equity incentive award which reflects the share price at the time of grant
increasing by 50% over the service period. The share price at the time of grant is equal to the exercise price.
1 The Committee has not determined a set number of equity incentive awards to be granted to the CEO in the 2020 performance period, nor is there a
guided minimum or maximum level of equity incentive awards issuable. Therefore, for the purposes of this illustrative disclosure, the fair value of equity
incentive awards granted in 2019 has been used a guide.
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2.1 Single total figure of remuneration of each Director (audited)
The Directors proportion of fixed and variable remuneration is shown in the below table for the years ended
December 31, 2019 and 2018. Fixed remuneration is the sum of salary, taxable benefits and pension (columns
a, b and e of the single total figure table). Variable remuneration is the sum of any annual bonus, share options
or other types of remuneration (columns c, d and other of the single total figure table).
Year Ended (a) (b)
December 31, 2019 Salary/fees Benefits (i)
Variable
Fixed remuneration
(c, d
(d) Share Other remuneration
and other)
(c) Bonus options (v) (e) Pensions (ii)/(iii) 2019 Total (a, b and e)
(in £)
Executive
Dr. Denise
718,054
Scots-Knight 390,988 8,497
Richard Jones 291,200 8,168
133,513
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
293,241 – 58,648 424,813 1,176,187 458,133
– – 29,120 133,513 462,001 328,488
Non-Executive
26,703
Dr. Peter Fellner 100,000 –
26,703
Dr. Anders Ekblom 48,000 –
26,703
Peter Bains 46,667 —
26,703
Kunal Kashyap 40,000 –
26,703
Paul Blackburn 48,000 –
26,703
Michael Wyzga (1) 27,590 –
26,703
Dr. Deepa Pakianathan (1) 30,349 –
Dr. Frank Armstrong (2) 19,959 –
–
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
– – – 26,703 126,703 100,000
– – – 26,703 74,703 48,000
– – – 26,703 73,370 46,667
– – – 26,703 66,703 40,000
– – – 26,703 74,703 48,000
– – – 26,703 54,293 27,590
– – – 26,703 57,052 30,349
– – – – 19,959 19,959
(1) Michael Wyzga and Dr. Deepa Pakianathan were appointed on April 23, 2019
(2) Dr. Frank Armstrong resigned on February 8, 2019
Year Ended (a) (b)
December 31, 2018 Salary/fees Benefits (i)
Variable
Fixed remuneration
(c, d
(d) Share Other remuneration
and other)
(c) Bonus options (v) (e) Pensions (iv) 2018 Total (a, b and e)
(in £)
Executive
408,021
Dr. Denise Scots-Knight 379,600 7,620
Richard Jones 260,000 7,481
279,446
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
303,680 – 59,640 – 854,881 446,860
208,000 – 26,000 – 572,927 293,481
Non-Executive
–
Dr. Peter Fellner 100,000 –
–
Dr. Anders Ekblom 48,000 –
–
Peter Bains 44,000 —
–
Kunal Kashyap 40,000 –
–
Paul Blackburn 48,000 –
Dr. Frank Armstrong 56,000 –
–
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
– – – – 100,000 100,000
– – – – 48,000 48,000
– – – – 44,000 44,000
– – – – 40,000 40,000
– – – – 48,000 48,000
– – – – 56,000 56,000
Benefits represent private medical insurance during the years ended December 31, 2019 and 2018.
(i)
(ii) During the year ended December 31, 2019, market value options were granted as an equity incentive award to both Executive Directors. The market
value options do not have performance conditions and are therefore presented as other variable remuneration. The value of the market value options
granted to both Executive Directors included in the single figure table is the grant date fair value as computed in accordance with IFRS 2 (Share
Based Payments) using a Black-Scholes option pricing model. No outstanding equity incentive awards with performance conditions vested during
the year ended December 31, 2019.
(iii) During the year ended December 31, 2019, other share-based awards were granted as an equity incentive award to Non-Executive Directors. The
other share-based awards do not have performance conditions and are therefore presented as other variable remuneration. The value of the other
share-based awards granted to Non-Executive Directors included in the single figure table is the grant date fair value as computed in accordance
with IFRS 2 (Share Based Payments) using a Black-Scholes option pricing model.
(iv) During the year ended December 31, 2018, no equity incentive awards were granted to Executive or Non-Executive Directors. No outstanding equity
incentive awards with performance conditions vested during the year ended December 31, 2018.
(v) During the years ended December 31, 2019 and 2018, no equity incentive awards with performance conditions or measures were granted or vested.
Annual performance bonus
The Company has a discretionary bonus scheme for all employees and the Executive Directors. Bonus
payments for employees are a percentage of base salary based on performance-based measures against
personal and Company-wide target objectives. Bonus payments for Executive Directors are a percentage of
base salary, based on performance-based measures against Company-wide target objectives.
62
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For the 2019 performance period the CEO was entitled to an annual performance bonus of 100% of base
salary. The agreed Company wide target objectives were met at 75%, meaning the bonus pay-out for the
2019 performance period will be 75% of the base salary for the CEO.
As a result of his departure, Richard Jones is not automatically eligible to receive a bonus in respect of 2019.
In light of his contribution and performance over the past three years, the Committee has exercised its
discretion to award Richard Jones a bonus of £100,000. This bonus will be payable in instalments in the
current year, subject to certain additional conditions which are disclosed later in this report. The bonus will
be paid in cash and not subject to a requirement to purchase shares out of the proceeds of the bonus. This
amount is not included within the single total figure of remuneration table, disclosed above, as it is not
considered to be a form of remuneration directly attributable to the 2019 performance period.
Non-Executive Directors are not entitled to a bonus payment. The annual performance bonus for 2019 was
paid in June 2020.
Specific details of the actual Company wide target objectives are considered commercially sensitive and
therefore not disclosed in detail. However, the objectives used to measure the performance of the Executive
Directors included the following:
–
–
–
–
Clinical milestone targets relating to products under development;
Corporate-related objectives (including the successful integration of OncoMed);
Corporate development targets; and
Financial goals.
From January 1, 2018, under the new Deferred Bonus Plan (“2019 DBP”), 100% of the annual bonus is paid
in cash, of which 30% of amounts granted to Executive Directors (after deduction of income tax and the
relevant employee’s national insurance contributions) is required to be utilized to acquire shares in the
Company in the open market within 12 months of the grant of the award. With respect to the 2018
performance period, Executive Directors have satisfied the condition to acquire shares under the 2019 DBP.
Executive Directors are required to hold the shares purchased subject to the 2019 DBP for a period of two
years from the date of purchase. With respect to the 2019 performance period, the Committee has not yet
finalized the conditions relating to the annual bonus and the 2019 DBP for Dr. Denise Scots-Knight.
Prior to January 1, 2018, under the old Deferred Bonus Share Plan (“DBSP”), 30% of the annual bonus awarded
to Executive Directors was deferred into rights to acquire shares equal in value to the amount deferred, free
of charge. The DBSP vests three years after the date of grant with no performance conditions nor any service
conditions attached (including no requirement for continued employment once the awards have been made).
Long-term incentive awards during the financial year (audited)
Directors may be granted long-term incentive awards at the discretion of the Committee. During the year
ended December 31, 2019:
–
–
Both Executive Directors were awarded options under the Company’s 2019 Equity Incentive Plan (“EIP”)
to subscribe for market value options over a four-year vesting period. The awards vest 25% after one
year and in 36 equal monthly instalments thereafter. The options awarded under the EIP were in respect
of ADSs and do not have performance conditions.
All Non-Executive Directors were awarded options under the Company’s 2019 Non-Executive Director
Equity Incentive Plan (“NED EIP”) to subscribe for other-share based awards over a one-year vesting
period. The awards vest monthly over an annual period from the grant date. The other-share based
awards granted under the NED EIP were in respect of ADSs and do not have performance conditions.
All awards granted under the EIP and NED EIP during the year ended December 31, 2019, are subject to a
service condition and may be exercised at any time between the relevant vesting date and the tenth
anniversary of the date of grant. Awards which do not vest at the end of the vesting period will lapse
permanently.
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CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: REPORT
As at December 31, 2018, both Executive Directors and Non-Executive Directors had outstanding long-term
incentive awards under the following equity award plans:
Equity award plan Granted to Vesting condition
The Mereo 2015 Plan (the “2015 Plan”) Executive Directors Service only
Non-Executive Directors
The Mereo BioPharma Group Executive Directors Service only
lc Share Option Plan Non-Executive Directors
(the “Share Option Plan”)
Long-term incentive plan (“LTIP”) Executive Directors Performance conditions
linked to share price
appreciation and strategic
objectives
Deferred Bonus Share Plan (“DBSP”) Executive Directors No vesting conditions
All equity award plans granted prior to December 31, 2018 were in respect of ordinary shares.
Awards granted during the year to December 31, 2019 (audited)
During the year to December 31, 2019, Executive Directors were granted options under the Company’s 2019
EIP, those awards vest based on continued employment only with no performance conditions. The awards
vest 25% after one year and in 36 equal monthly instalments thereafter.
Director
Dr. Denise Scots-Knight
Richard Jones
Grant date
May 20, 2019
July 23, 2019
May 20, 2019
July 23, 2019
ADSs
Underlying
Grant
87,500
87,500
27,500
27,500
Exercise
Price
per ADS ($) Face value ($)
Expiration
Date
5.40
3.00
5.40
3.00
472,500 May 20, 2029
262,500
July 23, 2029
148,500 May 20, 2029
July 23, 2029
82,500
During the year to December 31, 2019, Non-Executive Directors were granted other share-based awards
under the Company’s 2019 NED EIP, those awards vest based on continued service only with no performance
conditions. The awards vest monthly over an annual period from the grant date.
Director
Peter Fellner
Peter Bains
Paul Blackburn
Dr. Anders Ekblom
Kunal Kashyap
Dr. Deepa Pakianathan
Michael Wyzga
Grant date
May 20, 2019
July 23, 2019
May 20, 2019
July 23, 2019
May 20, 2019
July 23, 2019
May 20, 2019
July 23, 2019
May 20, 2019
July 23, 2019
May 20, 2019
July 23, 2019
May 20, 2019
July 23, 2019
ADSs
Underlying
Grant
Exercise
Price
per ADS ($) Face value ($)
Expiration
Date
5,500
5,500
5,500
5,500
5,500
5,500
5,500
5,500
5,500
5,500
5,500
5,500
5,500
5,500
5.40
3.00
5.40
3.00
5.40
3.00
5.40
3.00
5.40
3.00
5.40
3.00
5.40
3.00
29,700 May 20, 2029
July 23, 2029
16,500
29,700 May 20, 2029
16,500
July 23, 2029
29,700 May 20, 2029
16,500
July 23, 2029
29,700 May 20, 2029
16,500
July 23, 2029
29,700 May 20, 2029
16,500
July 23, 2029
29,700 May 20, 2029
16,500
July 23, 2029
29,700 May 20, 2029
July 23, 2029
16,500
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: REPORT
The exercise price of all options granted during the year under the 2019 EIP and 2019 NED EIP was the market
value of the shares upon closing on the day before the grant.
Awards lapsed during the year to December 31, 2019 (audited)
During the year to December 31, 2019, certain awards previously made to Dr. Denise Scots-Knight under the
LTIP were eligible to vest, however they lapsed as they did not meet the relevant vesting criteria (a share
price performance condition).
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.
Director
Form of award
Grant date
Options
outstanding
(December 31,
2018)
Options
lapsed
Options
outstanding
(December 31,
2019)
Dr. Denise Scots-Knight
LTIP
June 9, 2016
461,538
(115,385)
346,154
There were no LTIP awards granted during the year to December 31, 2019.
No other awards lapsed during the year to December 31, 2019.
On January 1, 2020, a further 115,383 options awarded to Dr. Denise Scots-Knight lapsed as they did not
meet the relevant vesting criteria (a share price performance condition). As at the date of this Report, Dr.
Denise Scots-Knight has 230,860 options outstanding under the LTIP. On the same date, 46,487 options
awarded to Richard Jones lapsed as they did not meet the relevant vesting criteria (a share price performance
condition). As at the date of this Report, Richard Jones has 139,463 options outstanding under the LTIP.
2.2 Payments to past Directors (audited)
There were no payments to past Directors made during the financial year ending December 31, 2019.
2.3 Payments for Loss of Office (audited)
There were no payments made to Directors for Loss of Office during the financial year ending December 31,
2019.
In accordance with his contract and the terms agreed for his departure, Richard Jones will receive the
following remuneration in 2020:
•
•
•
•
•
Salary, benefits and pension up to the termination date;
An amount in respect of accrued untaken annual leave;
Payment of a bonus of £100,000, payable in three instalments on: the earlier of 15 May 2020 and the
filing of the Company’s Annual Report on Form 20-F; the earlier of the date of cessation and 15 June
2020; the payment of the 2019 bonuses to other executives of the Company. In light of his departure,
the Committee has determined that Richard will not be required to purchase shares using the proceeds
of the bonus;
Vested options granted under the Share Option Plan and the 2019 EIP at the time of cessation of
employment will be allowed to be exercised for a period of two years following termination in light of
Richard’s contribution to the Company over the last three years including over his notice period.
Richard’s other unvested share awards will lapse on cessation; and
A contribution towards legal fees of £1,500.
In accordance with the Companies Act, full details of these payments will be disclosed to shareholders via
the Company’s website at the time Richard Jones ceases to be a Director and in next year’s remuneration
report.
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CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: REPORT
2.4 Statement of Directors’ Shareholding and Share Interests (audited)
The table below sets out, as at December 31, 2019, the beneficial interest in the Company’s shares of the
Directors (together with interests held by his or her connected persons). In addition, the table below also
sets out the total number of shares held by Directors which are unvested, the total number of options held
by Directors which are vested but not yet exercised and the total number of options held by Directors which
are unvested.
The total number of shares which are unvested are disclosed by those with and without performance
conditions.
Shares
Vested
Shares
Unvested
Awards
Vested
Unvested
Beneficially
LTIP
DBSP
(Unvested,
(Unvested,
without
with
owned performance performance
conditions)
shares(1)
conditions)
2015 Plan/
Share
Option Plan
(ordinary
shares
vested
but not yet
exercised)
2019
NED EIP
(ADSs,
vested
but not yet
exercised)
2019
2015 Plan
(ordinary EIP/NED EIP
(ADSs,
unvested)
shares,
unvested)
935,999(2)
66,915
57,524
22,058
346,154 1,544,745
–
185,950
–
–
–
650,000
175,000
55,000
65,500
189,702
206,796
1,497,735
22,624
1,283,670(3)
–
–
–
–
–
–
–
–
– 1,692,673
216,264
–
710,583
–
216,264
–
236,974
–
–
–
–
–
5,496
5,496
5,496
5,496
5,496
5,496
5,496
–
–
–
–
–
–
–
5,504
5,504
5,504
5,504
5,504
5,504
5,504
Director
Executive
Dr. Denise
Scots-Knight
Richard Jones
Non-Executive
Dr. Peter Fellner
Dr. Anders Ekblom
Peter Bains
Kunal Kashyap
Paul Blackburn
Dr. Deepa
Pakianathan
Michael Wyzga
Includes 6,300 ordinary shares held by Dr. Denise Scots-Knight’s husband.
(1) Ordinary shares (each ADS held has been converted into five ordinary shares)
(2)
(3) Delphi Ventures VIII, L.P. (“Delphi VIII”) directly holds 254,327 ADSs. Delphi Bio Investments VIII, L.P. (“DBI VIII”) directly holds 2,407 ADSs. Delphi
Management Partners VIII, L.L.C. (“DMP VIII”) is the general partner of Delphi VIII and DBI VIII (together, the “Delphi VIII Funds”), and may be deemed
to have sole voting and dispositive power over the ADSs held by the Delphi VIII Funds. DMP VIII and each of James J. Bochnowski, David L. Douglass,
Douglas A. Roeder and Deepika R. Pakianathan, Ph.D., the Managing Members of DMP VIII who may be deemed to share voting and dispositive power
over the reported securities, disclaim beneficial ownership of the reported securities held by the Delphi VIII Funds except to the extent of any pecuniary
interest therein.
The Company does not have a formal policy on Executive or Non-Executive Director shareholdings.
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As at December 31, 2019, no unvested equity incentive awards are subject to performance conditions. The
interests of the Directors in the Company’s share options as at December 31, 2019, is as follows:
Exercise
Price
Ordinary Per Exercise
Shares Ordinary ADSs Price
Equity Underlying Share Underlying Per ADS
Director Award Plan Grant (£) Grant ($)
Grant Date
Expiration Date
Executive
Dr. Denise 2015 Plan 1,544,745 1.29 – – September 25, 2015
June 9, 2016
Scots-Knight LTIP 346,154 nil – –
April 4, 2017
DBSP 25,319 nil – –
April 26, 2018
DBSP 32,205 nil – –
May 20, 2019
2019 EIP – – 87,500 5.40
July 23,2019
2019 EIP – – 87,500 3.00
Richard Share Option Plan 650,000 3.03 – –
Jones LTIP 185,950 nil – –
DBSP 22,058 nil – –
2019 EIP – – 27,500 5.40
2019 EIP – – 27,500 3.00
April 4, 2017
April 4, 2017
April 26, 2018
May 20, 2019
July 23,2019
Non-Executive
Peter Fellner 2015 Plan 1,692,673 1.29 – – September 29, 2015
May 20, 2019
2019 NED EIP – – 5,500 5.40
July 23,2019
2019 NED EIP – – 5,500 3.00
Peter Bains 2015 Plan 710,583 1.29 – – September 29, 2015
May 20, 2019
2019 NED EIP – – 5,500 5.40
July 23,2019
2019 NED EIP – – 5,500 3.00
Paul Blackburn 2015 Plan 236,974 1.84 – –
2019 NED EIP – – 5,500 5.40
2019 NED EIP – – 5,500 3.00
May 11, 2016
May 20, 2019
July 23,2019
Dr. Anders 2015 Plan 216,264 1.29 – – September 29, 2015
May 20, 2019
Ekblom 2019 NED EIP – – 5,500 5.40
July 23,2019
2019 NED EIP – – 5,500 3.00
Kunal Kashyap 2015 Plan 216,264 1.29 – – September 29, 2015
May 20, 2019
2019 NED EIP – – 5,500 5.40
July 23,2019
2019 NED EIP – – 5,500 3.00
Dr. Deepa 2019 NED EIP – – 5,500 5.40
Pakianathan 2019 NED EIP – – 5,500 3.00
Michael Wyzga 2019 NED EIP – – 5,500 5.40
2019 NED EIP – – 5,500 3.00
May 20, 2019
July 23,2019
May 20, 2019
July 23,2019
September 25, 2025
June 9, 2026
April 4, 2021
January 31, 2022
May 20, 2029
July 23, 2029
April 4, 2027
June 9, 2026
January 31, 2022
May 20, 2029
July 23, 2029
September 29, 2025
May 20, 2029
July 23, 2029
September 29, 2025
May 20, 2029
July 23, 2029
May 11, 2026
May 20, 2029
July 23, 2029
September 29, 2025
May 20, 2029
July 23, 2029
September 29, 2025
May 20, 2029
July 23, 2029
May 20, 2029
July 23, 2029
May 20, 2029
July 23, 2029
Executive Directors
–
Under the 2019 EIP, we have granted market value options to our Executive Directors. These market
value options vest over four years with 25% vesting 12 months after the grant date and the balance
vesting equally over the next 36 months. There are no performance conditions attached to share options
granted under the 2019 EIP. Subject to the terms of the grant, awards under the 2019 EIP can be granted
in respect of ordinary shares, ADSs, cash or a combination thereof. All grants to Executive Directors
during the 2019 performance period were in respect of ADSs.
–
–
Under the 2015 Plan, we have granted market value options to our Executive Directors. These market
value options vest over four years with 25% vesting 12 months after the grant date and the balance
vesting equally over the next 36 months. There are no performance conditions attached to share options
granted under the 2015 Plan.
Under the Share Option Plan, we have granted share options to our Executive Directors. These share
options vest over three years. There are no performance conditions attached to share options granted
under the Share Option Plan.
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CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: REPORT
–
–
Under the DBSP, we have granted share awards to our Chief Executive Officer. These share awards vest
three years from grant date and are exercisable within one year of vesting. There are no performance
conditions, nor any service conditions attached to share options granted under the DBSP.
Under the LTIP, we have granted share awards to our Executive Directors. 75% of these share awards
have specific performance conditions and vest depending on achieving share price appreciation relative
to the share price on specified future dates against the share price at admission to the AIM Market of
the London Stock Exchange (“AIM”) (75% of the grant) and the achievement of strategic operational
targets (25% of the total grant).
Non-Executive Directors
–
Under the 2015 Plan, we have granted share options to our Non-Executive Directors. These share
options vested over three years from grant date in three equal annual instalments. There are no
performance conditions attached to share options granted under the 2015 Plan.
–
Under the 2019 NED EIP, we have granted other share-based awards to our Non-Executive Directors.
These other share-based awards vest in equal monthly instalments over the one-year period following
their grant date. There are no performance conditions attached to the other share-based awards
granted under the 2019 NED EIP. Subject to the terms of the grant, awards under the 2019 NED EIP can
be granted in respect of ordinary shares, ADSs, cash or a combination thereof. All grants to Non-
Executive Directors during the 2019 performance period were in respect of ADSs, however the award
may be cash settled at the Company’s sole discretion.
2.5 Performance Graph and Table (audited)
The graph below shows the Company’s performance, measured by total shareholder return, for U.K. ordinary
shares listed on AIM Market of the London Stock Exchange (“AIM”) against the AIM All Share Index. The AIM
All Share Index has been selected for this comparison because the Company has been trading on this
exchange since 2016 and is therefore considered to be the most suitable comparator index.
(cid:1)
(cid:4)
(cid:17)
(cid:12)
(cid:11)
(cid:5)
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(cid:14)
(cid:2)
(cid:3)
(cid:8)
(cid:4)
(cid:12)
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(cid:8)
(cid:5)
(cid:6)
(cid:7)
(cid:10)
(cid:14)
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(cid:14)
(cid:9)
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(cid:11)
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(cid:14)
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(cid:16)
(cid:17)
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(cid:12)
(cid:13)(cid:5)(cid:7)(cid:10)(cid:9)(cid:10)(cid:10)
(cid:13)(cid:5)(cid:8)(cid:10)(cid:9)(cid:10)(cid:10)
(cid:13)(cid:5)(cid:11)(cid:10)(cid:9)(cid:10)(cid:10)
(cid:13)(cid:5)(cid:10)(cid:10)(cid:9)(cid:10)(cid:10)
(cid:13)(cid:6)(cid:10)(cid:9)(cid:10)(cid:10)
(cid:13)(cid:7)(cid:10)(cid:9)(cid:10)(cid:10)
(cid:13)(cid:8)(cid:10)(cid:9)(cid:10)(cid:10)
(cid:13)(cid:11)(cid:10)(cid:9)(cid:10)(cid:10)
(cid:13)(cid:12)
(cid:7)(cid:4)(cid:3)(cid:4)(cid:11)(cid:10)(cid:5)(cid:7)
(cid:5)(cid:11)(cid:4)(cid:2)(cid:5)(cid:4)(cid:11)(cid:10)(cid:5)(cid:7)
(cid:5)(cid:11)(cid:4)(cid:2)(cid:5)(cid:4)(cid:11)(cid:10)(cid:5)(cid:1)
(cid:5)(cid:11)(cid:4)(cid:2)(cid:5)(cid:4)(cid:11)(cid:10)(cid:5)(cid:6)
(cid:5)(cid:11)(cid:4)(cid:2)(cid:5)(cid:4)(cid:11)(cid:10)(cid:5)(cid:3)
(cid:23)(cid:22)(cid:21)(cid:22)(cid:20)(cid:19)(cid:18)(cid:17)(cid:20)(cid:16)(cid:15)(cid:14)(cid:21)(cid:13)(cid:14)(cid:19)(cid:12)(cid:21)(cid:20)(cid:11)(cid:10)(cid:19)(cid:10)(cid:9)(cid:8)
(cid:7)(cid:6)(cid:5)(cid:4)(cid:19)(cid:3)(cid:2)(cid:23)(cid:19)(cid:3)(cid:9)(cid:9)(cid:1)(cid:5)(cid:15)(cid:14)(cid:21)(cid:22)
(cid:1)
The graph shows the value, by December 31, 2019, of £100 invested in the Company on June 6, 2016,
compared with the value of £100 invested in the FTSE AIM All-Share on the same date.
Chief Executive Officer Total Remuneration History
As this is the Company’s first Directors’ Remuneration Report, the exemption not to disclose the history of
remuneration for the Chief Executive Officer prior to 2019 has been taken. The Company has chosen to
disclose remuneration history from 2019 onwards.
68
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CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: REPORT
Total CEO remuneration
CEO bonus (as a % of maximum available)
CEO LTIP(1) vesting (as a % of maximum available)
2019
£1,176,187
75%
0%
(1) During the 2019 performance period the only long-term incentive award to potentially vest with a performance condition attached was the LTIP.
2.6 Percentage Change in Remuneration of Directors and Employees (audited)
As this is the Company’s first Directors’ Remuneration Report, there has been no change in the remuneration
of Directors and employees. It is therefore not possible to provide meaningful comparative data. However,
full disclosure of the year-on-year movement will be provided in future remuneration reports.
2.7 Relative Importance of Spend on Pay (audited)
The Remuneration Committee considers the Company’s research and development (“R&D”) expenditure
relative to salary expenditure for all employees, to be the most appropriate metric for assessing overall spend
on pay due to the nature and stage of the Company’s business. Dividend distribution and share buy-back
comparators have not been included because the Company has no history of such transactions. The table
below illustrates the gross pay to all employees, per year, as compared to R&D expenditure and illustrates
the year-on-year change.
Gross pay to all employees*
R&D expenditure
2019 (£’000)
2018 (£’000)
% change
£8,221
£23,608
£6,198
£22,703
33%
4%
Gross pay to all employees, up by £2.0 million (or 33%) on the prior year, increased following the acquisition
of OncoMed on April 23, 2019. As a result of the acquisition, the Group’s headcount increased, which had an
impact on employee costs. Further information can be found within the Financial Review (Strategic Report).
2.8 Membership of the Remuneration Committee and its Advisors (audited)
The Remuneration Committee currently comprises of three independent Non-Executive Directors: Peter Bains
(Chair), Dr. Anders Ekblom and Dr. Deepa Pakianathan. On May 1, 2019, Peter Bains assumed the role of
Chair of the Committee from Dr. Anders Ekblom. The Chief Executive Officer, Chief Financial Officer and
General Counsel, as well as others, are invited to attend Remuneration Committee meetings as required to
provide advice and assistance. The terms of reference of the Committee can be found on our website at
www.mereobiopharma.com.
During the year, the Remuneration Committee engaged Radford (part of Aon plc) to provide advice on certain
remuneration matters, including:
–
–
–
–
–
Support in the preparation of the Group’s first Directors’ Remuneration Policy;
An evaluation of the compensation provided to the non-executive directors during the financial year
and recommendations for a go-forward compensation program;
A cash compensation benchmarking analysis (competitive assessment) for the U.K. and U.S. workforce;
A further review of cash compensation provided to Executive Directors and other members of the senior
management team, with recommendations for a go-forward compensation program; and
Strategic review of equity compensation practices in the U.K. and U.S. given the Company’s acquisition
of OncoMed in April 2019 and subsequent listing on the Nasdaq Global Market.
The Remuneration Committee is satisfied that Radford (part of Aon plc) provides independent and objective
advice. During 2019, total fees of approximately £0.1 million were paid to Radford (part of Aon plc).
2.9 Statement of Voting at a general meeting of the Company
The Company will hold a general meeting on a date to be announced in due course. At this general meeting,
shareholders will be asked to approve the remuneration policy through a binding vote, and the annual report
on remuneration through an advisory vote. Results of these two votes will be included in next year’s Directors’
Remuneration Report.
69
MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: REPORT
2.10 Statement of Implementation of Remuneration Policy in Current Financial Year (audited)
Annual salary
As at the date of this report, there has been no change in the annual base salary for both Executive Directors
against the 2019 performance period. The Committee has deferred the decision to review a change in annual
base salary for both Executive Directors, however the Committee reserves the right to apply any subsequent
review with effect from January 1, 2020, at a point later in the year. The outcome of this will be reported to
shareholders in next year’s report. Any increase is expected to be in line with that of the general workforce.
Benefits and pension
Both Executive Directors will continue to receive pension contributions (or cash payments in lieu) to the
value of 15% (in respect of the CEO) and 10% (in respect of the CFO) of basic salary. No changes will be made
to the provision of other benefits.
Bonus
In line with the Policy provided within this Directors’ Remuneration Report, the CEO will be eligible for a
maximum annual bonus of 100% of basic salary for the 2020 financial year.
The bonus will be subject to the achievement of short-term corporate objectives which have been set by the
Committee with respect to the current performance period. The short-term objectives cover key objectives
that relate to the achievement of the Group’s wider strategic goals.
For the current performance period, short-term corporate objectives include measures relating to clinical
development, corporate development, commercial planning, finance, manufacturing and intellectual property
/legal.
The amount of bonus payable is at the discretion of the Committee subject to review of performance against
the short-term corporate objectives at the end of the performance period (which is aligned with the financial
year).
Long-term incentive plan
In line with the Policy, the Committee reserves the right to issue market value options to Executive Directors
during 2020. The Committee may also, with discretion, consider the issuance of other option types to
Executive Directors in line with the 2019 EIP.
On February 20, 2020, equity incentive awards were granted to Executive Directors under the 2019 EIP. These
equity incentive awards were market value options over ADSs, and the vesting period is four years; 25% of
the award vesting on the first anniversary of the grant date and the balance vesting in equal monthly
instalments over the following three years. No performance conditions were attached to the awards.
Dr. Denise Scots-Knight
Richard Jones
ADS options
granted
February 20,
2020
Exercise
Price
per ADS
($)
Face value
($)
175,000
85,000
$1.84
$1.84
322,000
156,400
Non-Executive Directors’ fees
No changes are foreseen to the fees paid to Non-Executive Directors during the 2020 financial year.
In addition to fees paid, the Committee foresees the issuance of market value options to Non-Executive
Directors during 2020.
In line with the Policy, the Committee reserves the right to issue other share-based awards to Non-Executive
Directors during 2020. The Committee may also, with discretion, consider the issuance of other option types
to Non-Executive Directors in line with the 2019 NED EIP.
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REMUNERATION REPORT: REPORT
On February 20, 2020, equity incentive awards were granted to Non-Executive Directors in line with the 2019
EIP. These equity incentive awards were market value options over ADSs, and the vesting period is one year;
vesting in equal monthly instalments over the one-year period following grant date. No performance
conditions were attached to the awards.
ADS options
granted
February 20,
2020
Exercise
Price
per ADS
($)
Face value
($)
11,000
11,000
11,000
11,000
11,000
11,000
11,000
1.84
1.84
1.84
1.84
1.84
1.84
1.84
20,240
20,240
20,240
20,240
20,240
20,240
20,240
Dr. Peter Fellner
Dr. Anders Ekblom
Peter Bains
Kunal Kashyap
Paul Blackburn
Dr. Deepa Pakianathan
Michael Wyzga
On behalf of the Board,
Peter Bains
Chair of the Remuneration Committee
June 15, 2020
71
MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REPORT
The Directors present their report together with the audited financial statements for the year ended December
31, 2019.
Principal activities
The Strategic Report on pages 4 to 34 describes the Group’s principal development activities and strategy.
We are a biopharmaceutical company focused on the development and commercialization of innovative
therapeutics that aim to improve outcomes for oncology and rare diseases. On April 23, 2019 we completed
the acquisition of OncoMed, Pharmaceuticals, Inc, (“OncoMed”) and a new listing of American Depository
Shares (“ADSs”) on the Nasdaq Global Market (NASDAQ: MREO) whilst retaining our AIM listing (AIM: MPH).
Since completing the acquisition, we now operate from sites in the U.K. and the U.S.
Results and dividends
The Group recorded a total comprehensive loss for the year attributable to equity holders of the parent of
£35.3 million (2018: £32.0 million). Further details are given in the Strategic Report and in the consolidated
financial statements.
The Directors do not recommend payment of a dividend.
Research and development
For the financial year ended December 31, 2019, we spent £23.6 million (2018: £22.7 million) on research
and development activity.
Research and development spend primarily reflects the underlying activity on clinical trials for our products
as well as the manufacturing of drug product together with the internal costs, including payroll directly
attributable to these activities. In addition, we acquired additional product programs through our acquisition
of OncoMed. Further details of our product programs and research and development spend can be found
within the Strategic Report.
Statement of corporate governance arrangements
The Board of Directors of the Company recognises the importance of corporate governance and, since 2018,
has decided to apply the Corporate Governance Code published by the Quoted Companies Alliance (the “QCA
Code”). The QCA Code sets out a standard of minimum best practice for small and mid-size quoted
companies.
The QCA’s ten principles of corporate governance are set out in the content on our website, which links each
principle of corporate governance to our annual report and / or other location on the website.
The Company has not departed from the QCA Code during the year.
Information on environmental matters
The Company is required to measure and report its greenhouse gas emissions.
Our greenhouse gas emissions report period will be aligned to the financial reporting year and, as such, the
first year will be reported as the baseline year against which future performance will be measured. Therefore,
no greenhouse gas emissions report is included in this Directors’ report for the period between April 2019
and December 2019.
72
MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REPORT
Post-balance sheet events
Further information on post-balance sheet events is provided in Note 30 within the consolidated financial
statements contained within this report.
•
•
•
•
•
•
•
•
On January 13, 2020, the Company announced a global licensing agreement with Oncologie, Inc.
(“Oncologie”) for the development and commercialization of navicixizumab.
On February 10, 2020, the Company entered into a $3.8 million convertible equity financing with Novartis
Pharma (AG) (“Novartis”). Under the terms of the convertible equity financing, Novartis invested £3.8
million through a convertible loan note. The loan note is convertible at any time at a fixed price of £0.265
per ordinary share. In connection with the loan note, the Company issued a warrant instrument to
Novartis to purchase up to 1,449,614 of the Company’s ordinary shares.
On February 10, 2020, the Company entered into a Securities Purchase Agreement to issue up to $28
million of the Company’s ordinary shares exchangeable for American Depositary Shares, including a
$3 million initial purchase, with Aspire Capital Fund, LLC. In exchange for the $3 million initial purchase
the Company issued 11,423,925 ordinary shares (equivalent to 2,286,585 ADSs).
On February 19, 2020, the Company entered into a Securities Purchase Agreement with Boxer Capital,
LLC to make an investment of $3 million to purchase 12,252,715 of the Company’s ordinary shares
(equivalent to 2,450,543 ADSs).
On February 20, 2020, the Company granted 962,836 market value options over ADSs under the Mereo
2019 Equity Incentive Plan to certain Executive Directors and other employees at an exercise price of
$1.84 per ADS. On the same date, the Company granted 77,000 market value options over ADSs under
the Mereo 2019 Non-Executive Director Equity Incentive Plan to certain Non-Executive Directors at an
exercise price of $1.84 per ADS.
Following the transactions noted above, it is anticipated that a further 362,534 additional warrants will
be issued to the lenders of the bank loan facility giving them the right to subscribe for ordinary shares
at an exercise price of £2.95.
On March 27, 2020, we announced the resignation of Richard Jones. Michael Wyzga, a Non-Executive
Director, will assume the role of Interim Chief Financial Officer following the departure of Richard Jones.
Richard Jones will remain in his position as CFO for a transitionary period of up to five months.
On 4 June 2020, we announced completion of a private placement offering of $70 million (£56 million)
(the “Fundraising”) before commission and expenses with a number of new and existing principally U.S
based institutional and accredited investors. OrbiMed led the Fundraising with participants including
Vivo Capital, Surveyor Capital (a Citadel company), Pontifax Venture Capital, Samsara BioCapital,
Commodore Capital, and funds managed by Janus Henderson Investors alongside existing investors
Boxer Capital of Tavistock Group and Aspire Capital Fund, LLC.
Going concern
As at May 31, 2020 the group had total cash resources(1) £10.1 million. Taken together with the private
placement which completed on June 3, 2020 and which raised net proceeds of approximately £51.4 million,
the group has current total cash resources of £61.5 million.
The Directors have prepared detailed cashflow forecasts for the 30-month period to December 31, 2022
based on the delivering the business plan objectives set out in the strategic report which include:
•
•
•
Completion of the adult Phase 2b extension study for setrusumab
Completion of the current Phase 2 study for alvelestat
Commencement later in 2020 of a new Phase 1b study for etiligimab
These forecasts indicate that the group has a total cash runway into 2022 and will have sufficient funds to
meet its liabilities as they fall due for at least the next 12 months.
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REPORT
In preparing these forecasts the directors have considered the impact of COVID-19 and in particular the
unprecedented burden on health systems in impacted countries around the world. As a result, clinical centres
have diverted resources away from the performance of clinical trials and because of that and the vulnerability
of patients in the Company’s setrusumab clinical development program for osteogenesis imperfecta (OI)
and its Phase 2 alvelestat program for patients with alpha-1 antitrypsin deficiency (AATD), the Company’s
clinical activities will face some delays. AATD patients, in particular, are at greater risk from COVID-19 given
that the condition is a respiratory and lung condition, for this reason, our Phase 2 alvelestat trial will be
delayed with topline data now expected in 2021. Subject to a partnership, we are also currently planning to
initiate a Phase 3 study in children with OI in late 2020, however, the initiation of the study may also be
delayed.
In addition, the Directors have considered a downside scenario involving an increase in operating overheads,
an increase in the costs of setting up and running the planned Phase 1b study for etiligimab when this study
is contracted out to third parties and increased investment in manufacturing development costs for
setrusumab. In addition, In this scenario the forecasts also indicate that the group will have sufficient funds
to meet its liabilities as they fall due for at least the next 12 months.
In both scenarios the Directors have not taken into account potential income from partnering one or more
of its assets which would increase the cash resources available to the Group.
In conclusion, although the Group continues to make losses, the directors believe it is appropriate to prepare
the financial information on the going concern basis. This is because the Group’s development into new
products continues to progress according to plan and the funding secured to date, together with the funds
that have come into the Group since the year end (as described more fully in Note 30) will allow it to meet
its liabilities as they fall due for at least 12 months from the date of authorization for the issue of these
consolidated financial statements.
(1) Total cash resources are a non-GAAP measure being cash and short-term deposits and short-term investments.
Directors
The directors of the Company who held office during the year and up to the date of this report, unless
otherwise noted, were:
Executive directors
Dr. Denise Scots-Knight – Chief Executive Officer
Richard Jones – Chief Financial Officer
Non-executive directors
Dr. Peter Fellner
Peter Bains
Paul Blackburn
Dr. Anders Ekblom
Kunal Kashyap
Michael Wyzga appointed April 23, 2019
Dr. Deepa Pakianathan appointed April 23, 2019
Frank Armstrong resigned February 8, 2019
On March 27, 2020, we announced the resignation of Richard Jones. Michael Wyzga, a Non-Executive
Director, will assume the role of Interim Chief Financial Officer following the departure of Richard Jones.
Richard Jones will remain in his position as CFO for a transitionary period of up to five months.
Brief biographical details of the current directors of the Company are provided within the Corporate
Governance report on pages 43 to 45.
As at the date of this report, the directors held shares representing 2.0%% of the equity of the Company.
Details of the directors’ shareholdings and their options over shares in the Company are disclosed in the
Directors’ Remuneration Report on pages 49 to 71.
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MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REPORT
Financial risk management objectives and policies (including information on exposure to price risk, credit
risk, liquidity risk and cash flow risk)
Refer to Note 25 of the consolidated financial statements for further details on our financial risk management
objectives and policies.
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 minimizing
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 years ended December 31, 2019 and December 31, 2018.
Share capital
As at the date of this report, the Company had total issued and fully paid up share capital of £640,957.46
representing 213,652,487 ordinary shares of £0.003, all of which rank pari passu. All shares are admitted to
trading on the AIM Market of the London Stock Exchange (“AIM”) and each share carries the right to one
vote at general meetings of the Company. No shareholder holds shares carrying special rights with regard
to control of the Company.
ADSs are traded on the Nasdaq Global Market. Each ADS represents five ordinary shares.
Purchases of own shares during the year
During the year ended December 31, 2019, the Group purchased £1.0 million of its own shares through an
Employee Benefit Trust (“EBT”), which is controlled by the Group.
As at December 31, 2019, a total of 1,237,274 own shares were held by the EBT.
Branches outside the U.K.
As at December 31, 2019, the Group consists of certain subsidiaries which are incorporated outside the
United Kingdom. Further information can be found in Note 6 of consolidated financial statements.
Substantial interests
As at June 8, 2020, on the basis of the best information available to the Company, derived from the register
of members as at May 29, 2020, the details of the Fundraising and notifications of Shareholders' voting rights
received by the Company up to June 8, 2020, the following investors are currently believed to have interests
of 3 per cent. or more of the issued share capital of the Company:
Name and address of beneficial owner
3% or Greater Shareholders:
Tavistock Group
OrbiMed funds
Baker Brothers
Link Fund Solutions
Aspire Capital Fund, LLC
Novartis Pharma AG
Vivo funds
Schroders plc
Invesco Ltd
Number of
Ordinary Percentage of
Ordinary
Shares
Beneficially
Owned
Shares
Beneficially
Owned as of
June 8, 2020
21,151,595
20,061,437
20,061,437
19,031,915
16,970,378
15,703,871
13,374,291
7,845,873
7,620,000
9.9%
9.4%
9.4%
8.9%
7.9%
7.4%
6.3%
3.7%
3.6%
Website publication
The Directors are responsible for ensuring that the annual report, including the financial statements, are
made available on our website.
75
MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: DIRECTORS’ REPORT
Annual general meeting (“AGM”)
The 2019 AGM of the Company will be held on June 29, 2020. The notice of the meeting, together with an
explanation of the business to be dealt with including proposed resolutions, has been prepared as a separate
document and was distributed to shareholders and posted to our website.
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 they ought to have taken as a director in order to make
themselves aware of any relevant audit information and to establish that the Group’s Auditor is aware
of that information.
Directors’ and officers’ liability insurance
The Company has, as permitted by the Companies Act 2006, purchased and maintained throughout the
financial year suitable insurance cover on behalf of the directors, indemnifying them against certain liabilities
which may be incurred by them in relation to the Group. We have also entered into a deed of indemnity with
each of our directors and executive officers.
Effective date
This report was approved by the Board of Directors by written resolution and signed on its behalf by:
Peter Fellner Charles Sermon
Chairman General Counsel and Company Secretary
June 15, 2020 June 15, 2020
76
MEREO BIOPHARMA GROUP PLC
CORPORATE GOVERNANCE: STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the annual 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. Under the AIM
Rules of the London Stock Exchange we are required to prepare our Group financial statements in accordance
with International Accounting Standards. For the financial year ended December 31, 2019, we have chosen
to prepare our Group and Company accounts according to International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and adopted by the E.U. and in
accordance with Companies Act 2006.
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.
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 judgments and accounting estimates that are reasonable and prudent;
State whether they have been prepared in accordance with IFRS as issued by the IASB or as adopted
by the E.U.; 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 safeguarding the assets of the Group and parent company and hence for
taking reasonable steps for the prevention and detection of fraud and other irregularities.
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 the Group and to enable them to ensure that its financial
statements and Directors’ Remuneration Report comply with the Companies Act 2006.
The Directo rs are responsible for the maintenance and integrity of the corporate and financial information
included on the Company’s website. Legislation in the U.K. governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Directors’ confirmations
In the case of each Director in office at the date the Directors’ Report is approved:
•
•
So far as the director is aware there is no relevant audit information of which the Group and parent
company’s Auditor is unaware; and
They have taken all the steps that they ought to have taken as a director in order to make themselves
aware of any relevant audit information and to establish that the Group and parent company’s Auditor
is aware of that information.
On behalf of the Board:
Charles Sermon
General Counsel and Company Secretary
June 15, 2020
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Opinion
In our opinion:
•
•
•
•
Mereo BioPharma Group plc’s group financial statements and parent company financial statements
(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 2019 and of the group’s loss for the year then ended;
the group 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 United
Kingdom Generally Accepted Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the Companies
Act 2006.
We have audited the financial statements of Mereo BioPharma Group plc which comprise:
Group Parent company
Consolidated balance sheet as at 31 December
2019
Balance sheet as at 31 December 2019
Consolidated statement of comprehensive loss for
the year then ended
Statement of changes in equity for the year then
ended
Consolidated statement of changes in equity for the
year then ended
Related notes 1 to 12 to the financial statements
including a summary of significant accounting
policies
Consolidated statement of cash flows for the year
then ended
Related notes 1 to 30 to the financial statements,
including a summary of significant accounting
policies
The financial reporting framework that has been applied in the preparation of the group financial statements
is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union,
and, as regards to the parent company financial statements, United Kingdom Accounting Standards,
including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting
Practice).
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and
applicable law. Our responsibilities under those standards are further described in the Auditor’s
responsibilities for the audit of the financial statements section of our report below. We are independent of
the group and parent company in accordance with the ethical requirements that are relevant to our audit of
the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we
have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to
report to you where:
•
•
the directors’ use of the going concern basis of accounting in the preparation of the financial statements
is not appropriate; or
the directors have not disclosed in the financial statements any identified material uncertainties that
may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the
going concern basis of accounting for a period of at least twelve months from the date when the
financial statements are authorised for issue.
Overview of our audit approach
Key audit matters
•
Assessment of carrying value of intangible assets
•
•
•
•
•
•
Acquisition accounting, including purchase price allocation
Going concern assessment and impact of COVID-19
Investment in subsidiaries (parent)
We performed an audit of the complete financial information of four
components and audit procedures on specific balances of one component
The components where we performed full or specific audit procedures
accounted for 100% of group operating costs and 100% of total assets
Overall group materiality of £0.8 million which represents 2% of operating costs
excluding share-based payment expenses
Audit scope
Materiality
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the financial statements of the current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These matters included those which had the
greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts
of the engagement team. These matters were addressed in the context of our audit of the financial
statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these
matters.
Key observations
communicated to the Audit
Risk Our response to the risk Committee
Assessment of carrying value
of intangible assets
to
Refer
the Accounting
policies (pages 92 to 100); and
Note 13 of the Consolidated
Financial Statements (pages
114 to 116)
£44.5 million (2018 – £32.6
million)
The Group has significant
intangible assets arising from
the acquisition of products in
development. Recoverability of
these assets
is based on
forecasting and discounting
future cash flows, which are
inherently highly judgemental.
For products in development
the key assumptions include;
development costs,
launch
dates of products, probability
of successful development,
sales price and projections,
flow
expense and
projections and discount rate.
The risk is that there may be
errors
judgments
resulting in the misstatement
of
the carrying value of
intangible assets.
in these
cash
We have concluded that the
assumptions made
by
management are reasonable
and we concurred with
management
no
impairments were required at
year-end.
that
Management describes the
sensitivities appropriately in
the intangible assets notes to
the
financial
in accordance
statements
with IAS 36 Impairment of
assets.
Group
Our principal audit procedures included:
• We understood
the methodology
applied by management in performing
its impairment test and walked through
the controls over the process.
• We performed audit procedures to test
the arithmetic accuracy and assess the
integrity of the model. We evaluated,
including the key assumptions being
used, such as the reasonableness of
future revenues, development costs
the
and cash
probability of obtaining regulatory
approvals, launch dates of products
and the discount rate. We considered
comparable drug development projects
and corroborated
third party
assessments.
flow projections,
to
• Performed sensitivity analyses over
individual intangible asset models, to
assess the level of sensitivity to the key
assumptions and focused our work in
those areas.
• Assessed the reasonableness of the
Group’s
regarding
assumptions
probability of obtaining regulatory
approval through consideration of the
current phase of development and
comparison to industry practice.
•
key
Interviewed
and
development personnel to corroborate
the assumptions used.
research
• We engaged EY valuations specialists
who tested the Group’s discount rate.
Their procedures
included using
independent data sources to assess
the key assumptions including the
Group specific risk premium and
comparison with peer companies. We
recalculated the discount rate to ensure
management’s discount
rate was
within an acceptable range.
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FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Key observations
communicated to the Audit
Risk Our response to the risk Committee
• Challenged management’s
key
assumptions regarding the size of the
therapeutic area market and
the
product’s projected share of this
market through comparison to external
scientific
and market
research.
literature
• Analysed the historical accuracy of
budget to actual results to determine
whether the forecasts are reliable based
on past performance and considering
commentary in analyst forecasts to
identify any contrary views.
Acquisition accounting,
including purchase price
allocation
to
Refer
the Accounting
policies (pages 92 to 100); and
Note 5 of the Consolidated
Financial Statements (pages
104 to 106).
On 23 April 2019 the Group
acquired 100% of OncoMed
Pharmaceuticals Inc. for a
total consideration of £40.9
million settled through the
issue of shares. We have
determined this to be a key
the
audit matter
in
management
determining
this
transaction met the definition
of a business combination, the
estimates made on
the
the
provisional PPA and
adjustments made to align
accounting policies with those
of the Group.
given
judgement
that
with
• Discussed the post year-end change in
business
key
strategy
management and confirmed this has
not
underlying
assumptions within the impairment
models, validating to market data as
appropriate.
impacted
the
• Assessed the adequacy of related
disclosures in the Group’s financial
statements.
Our principal audit procedures included:
• Obtained and evaluated the accounting
analysis
Business
IFRS
Combinations prepared by management.
of
3
• Verified
the
paid
(including contingent consideration) to
supporting evidence.
consideration
• Tested the professional fees incurred
and verified appropriate classification
between capitalised and expensed fees.
• Selected a sample of items from the
opening balance sheet of OncoMed
Pharmaceuticals, Inc. and corroborated
the
supporting
documentation, including invoices and
third party support to ensure they have
been appropriately recognised in line
with Group accounting policies.
amounts
to
made
We have concluded that the
judgements
by
management in accounting
for the acquisition as a
business combination are
reasonable, and that the fair
values ascribed
the
acquired assets and liabilities
are appropriate.
to
in
We are satisfied that the
additional
disclosures
relating to the acquisition
the financial
included
statements are consistent
with our knowledge from the
audit and are in compliance
with
business
combinations.
IFRS
3
• Engaged our EY valuation specialists to
test the methodology and discount rate
used in the valuation of the acquired
identified intangible assets, comparing
key assumptions
to comparable
biotechs including the risk beta and
market data.
81
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Key observations
communicated to the Audit
Risk Our response to the risk Committee
Under business combination
accounting, a gain on bargain
purchase of £3.7 million was
recognised and a separately
identifiable intangible asset of
£12.7 million was recognised.
There is a risk for the financial
statements that the fair value
of the intangible asset has not
been determined appropriately.
• We assessed the appropriateness of
the valuation model used through
discussions with management and
comparison to market data. Tested the
cash flow forecasts and assumptions
included within, notably the future
revenues, development costs and cash
flow projections, the probability of
obtaining regulatory approvals and
launch dates of products, in respect of
the acquired intangible assets.
• Assessed the availability of information
at acquisition date and management’s
conclusions that no revisions to the
initial purchase price allocation were
required at year end.
• Assessed
and
appropriateness of the disclosures in
the financial statements.
adequacy
Our principal audit procedures included:
• We
analysed
management’s
assessment of going concern to gain
an understanding of the inputs and
process underpinning the cash flow
model prepared for the purpose of the
going concern conclusion.
• We verified that the cash flow model
accurately reflects the post balance
sheet events by agreeing all proceeds
received to bank statements and
reviewing executed deal documents.
• We obtained an understanding of the
terms
included within the private
placement and ensured the cashflow
model was prepared on a consistent
basis.
The disclosures in note 2 and
note 30 appropriately reflect
the basis for the Directors’
going concern assessment
including the impact of the
change in business strategy
and COVID-19. We conclude
concern
the
remains
assumption
the
appropriate,
disclosures
appropriately
reflect the key assumptions
and uncertainties inherent in
the forecasts upon which that
conclusion relies.
going
and
• We challenged
the
inputs and
assumptions within the going concern
model including the level of forecast
research and development (R&D) and
general and administrative expenditure,
particularly those updated for the
changes in R&D activity and COVID-19
impact. We compared the assumptions
and estimates used to those applied
elsewhere in the preparation of the
financial statements and corroborated
amounts to supporting evidence
Going concern assessment
and impact of COVID-19
to
Refer
the Accounting
policies (pages 92 to 100); and
the
Note 2 and 30 of
Consolidated
Financial
Statements.
identified
We
have
the
the going
assessment of
concern basis of accounting
as a key audit matter as the
Group had £16.4 million cash
as at 31 December 2019 and
required a future fundraising
event to continue as a going
concern. On [4] June 2020 the
Group completed a £56 million
($70 million) private placement
resulting in a revised cash flow
in
forecast and a change
business strategy
the
Group.
for
The revised forecast reflects
management’s assessment of
the COVID-19 impact on the
Group which is disclosed in the
going concern Note 2 and the
post balance sheet Note 30.
82
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Key observations
communicated to the Audit
Risk Our response to the risk Committee
The Group believes
it has
sufficient liquidity to meet its
financial obligations as they
fall due for the twelve months
subsequent to the approval of
the financial statements.
• Analysed the historical accuracy of
budget to actual results to determine
whether the forecasts are reliable based
on past performance and considering
commentary in analyst forecasts to
identify any contrary views.
• We held meetings with key clinical
personnel to validate the planned R&D
spend profile
included within the
forecast.
testing
• We challenged the sensitivities and
that management
stress
performed on the going concern
forecast and agreed with
the
sensitivities applied.
• We evaluated the appropriateness of
management’s conclusions in light of
the revised forecast and executed
private placement agreement.
Investment in subsidiaries
(parent)
to
Refer
the Accounting
policies (pages 92 to 100); and
Note 4 of the parent Financial
Statements (page148).
£156 million (2018 – £123
million).
the
being
Parent
Company’s
The
principal activity is to manage
and support the investment in
a number of subsidiaries
intangible
which hold
assets
progressed
through clinical trials. There is
judgement
in
recoverable
the
assessing
amount of the investments
which
involves significant
judgement over the future
activities of each subsidiary.
the
There
investments may be impaired
below their carrying value.
is a risk
involved
that
• Assessed
and
appropriateness of the disclosures in
the financial statements.
adequacy
that
of
the
We concluded
the
carrying
value
investments recognised
in
the parent company balance
sheet is supportable, and the
impairment of £19.2 million
recognised is appropriate.
We are satisfied that the
disclosures are appropriate.
Our principal audit procedures included:
• We obtained details of the investment
carrying amounts in subsidiaries and
compared this to the net assets of
those entities.
• We compared the market capitalisation
of the group to the carrying value of the
investments to identify if any indicators
of impairment existed.
• We leveraged the intangible asset
impairment work to test whether the
carrying value of
is
supportable at year end by comparing
it to the investment carrying value.
investments
• We
assessed
that
management’s
impairment was
conclusion
required in respect of one subsidiary.
• Analysed the historical accuracy of
budgets to actual results to determine
whether the forecasts are reliable based
on past performance and considering
commentary in analyst forecasts to
identify any contrary views.
• Assessed the adequacy of related
disclosures in the parent company’s
financial statements.
83
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality
determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion
on the consolidated financial statements. We take into account size, risk profile, the organisation of the
group, changes in the business environment and other factors such as local statutory reporting requirements
when assessing the level of work to be performed at each entity.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had
adequate quantitative coverage of significant accounts in the financial statements, we selected 5
components of the 8 components in total covering entities within the United Kingdom and United States,
which represent the principal business units within the Group.
Of the five components, we performed an audit of the complete financial information of four components
(“full scope components”) which were selected based on their size or risk characteristics. For the remaining
one component (“specific scope component”), we performed audit procedures on specific accounts within
that component that we considered had the potential for the greatest impact on the significant accounts in
the financial statements either because of the size of these accounts or their risk profile.
We performed audit procedures accounting for 100% (2018: 100%) of the Group’s operating costs and 100%
(2018: 100%) of the Group’s Total assets. All audit procedures were undertaken by the central UK audit team.
For the current year, the full scope components contributed 85% (2018: 100%) of the Group’s operating costs
and 58% (2018: 100%) of the Group’s Total assets. The specific scope component contributed 15% (2018:
0%) of the Group’s operating costs and 42% (2018: 0%) of the Group’s Total assets.
Changes from the prior year
Pursuant to the Group completing the acquisition of OncoMed Pharmaceuticals Inc. during the year, we
included this as a specific scope component.
Involvement with component teams
All audit work performed for the purposes of the audit was undertaken by the Group audit team.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified
misstatements on the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be
expected to influence the economic decisions of the users of the financial statements. Materiality provides
a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £0.8 million (2018: £0.7 million), which is 2% (2018: 2%) of
operating costs excluding share-based payment expense. We believe that operating costs provides us with
an appropriate basis upon which to set materiality, since the Group is in the development stage of its life
cycle and is investing in research and development, with no operating income to date.
(cid:42)
(cid:42)
(cid:18)(cid:15)(cid:16)(cid:18)(cid:19)(cid:18)(cid:17)(cid:16)
(cid:14)(cid:13)(cid:12)
(cid:10)(cid:10)(cid:15)(cid:17)(cid:11)
(cid:9)
(cid:10)(cid:18)(cid:14)(cid:4)(cid:5)(cid:10)(cid:18)(cid:6)(cid:7)(cid:8)
(cid:32)
(cid:32)
(cid:34)(cid:30)(cid:35)(cid:31)(cid:31)(cid:35)(cid:23)(cid:24)(cid:25)(cid:26)(cid:27)(cid:28)(cid:29)(cid:29)(cid:30)(cid:31)(cid:33)(cid:34)(cid:35)(cid:36)(cid:37)(cid:38)(cid:39)(cid:41)(cid:40)
(cid:32)
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(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:20)(cid:39)(cid:38)(cid:37)(cid:22)(cid:21)
(cid:19)(cid:37)(cid:29)
(cid:39)(cid:18)(cid:32)
(cid:32)
(cid:39)(cid:34)(cid:36)(cid:23)(cid:40)(cid:37)(cid:17)
(cid:39)(cid:16)
(cid:32)
(cid:32)
(cid:32)
(cid:40)(cid:39)(cid:34)(cid:29)
(cid:39)(cid:32)
(cid:28)(cid:15)(cid:25)
(cid:30)(cid:34)(cid:35)(cid:31)(cid:31)(cid:35)(cid:23)(cid:14)(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:42)
(cid:29)(cid:36)(cid:29)(cid:30)(cid:9)(cid:33)(cid:34)(cid:35)(cid:36)(cid:37)(cid:38)(cid:39)(cid:40)(cid:30)(cid:18)(cid:39)(cid:36)(cid:29)(cid:10)(cid:11)(cid:18)(cid:37)(cid:34)(cid:30)(cid:35)(cid:31)(cid:31)(cid:35)(cid:23)(cid:26)(cid:25)(cid:12)(cid:27)(cid:28)(cid:29)(cid:31)(cid:37)(cid:36)(cid:13)(cid:30)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:1)(cid:29)(cid:35)(cid:29)(cid:37)(cid:19)(cid:17)(cid:36)(cid:35)(cid:31)(cid:35)(cid:37)(cid:38)(cid:39)(cid:36)(cid:23)(cid:37)(cid:7)(cid:30)(cid:2)(cid:3)(cid:4)(cid:34)(cid:30)(cid:35)(cid:31)(cid:31)(cid:23)(cid:35)(cid:5)(cid:25)(cid:6)(cid:28)(cid:7)(cid:30)(cid:17)(cid:36)(cid:35)(cid:31)(cid:37)(cid:35)(cid:38)(cid:39)(cid:36)(cid:8)(cid:37)(cid:42)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:32)
(cid:3)(cid:17)
(cid:16)(cid:15)(cid:17)(cid:4)(cid:18)
(cid:1)(cid:2)(cid:15)(cid:18)
84
(cid:59)
(cid:59)
(cid:59)
(cid:59)
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
We determined materiality for the Parent Company to be £5.0 million (2018: £3.9 million), which is 3% (2018:
3%) of Equity. Materiality for the Parent Company is higher than for Group, due to the underlying basis on
which it is calculated. The Parent Company’s purpose is to raise funds to finance the Group’s operations,
and therefore we believe Equity is the most suitable basis on which to calculate materiality.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to
an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control
environment, our judgement was that performance materiality was 50% (2018: 50%) of our planning
materiality, namely £0.38 million (2018: £0.35 million). We have set performance materiality at this
percentage due to the rate of change in the business.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial
statement accounts is undertaken based on a percentage of total performance materiality. The performance
materiality set for each component is based on the relative scale and risk of the component to the Group as
a whole and our assessment of the risk of misstatement at that component. In the current year, the range of
performance materiality allocated to components was £0.08 million to £0.23 million (2018: £0.1 million to
£0.35 million).
Reporting threshold
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess
of £0.038 million (2018: £0.035 million), which is set at 5% of planning materiality, as well as differences
below that threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed
above and in light of other relevant qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the annual report set out on pages 1 to 77,
other than the financial statements and our auditor’s report thereon. The directors are responsible for the
other information.
Our opinion on the financial statements does not cover the other information and, except to the extent
otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of
the other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in
accordance with 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; and
the strategic report and directors’ report have been prepared in accordance with applicable legal
requirements.
85
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the parent company and its environment
obtained in the course of the audit, we have not identified material misstatements in the strategic report or
the directors’ report.
We have nothing to report in respect of the following matters in relation to which 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 and the part of the Directors’ remuneration report to be
audited 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.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 77, the directors are
responsible for the preparation of the financial statements and for being satisfied that they give a true and
fair view, and for such internal control as the directors determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group and parent
company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless the directors either intend to liquidate the group or
the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial
Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part
of our auditor’s report.
Use of our report
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.
David Hales (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
Reading
June 15, 2020
Notes:
The maintenance and integrity of the Mereo BioPharma Group plc web site is the responsibility of the directors; the work carried
out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements since they were initially presented on the web site.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation
in other jurisdictions.
1.
2.
86
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
for the years ended December 31, 2017, 2018 and 2019
Year ended December 31,
2018
(in £’000)
Notes
2017
Research and development expenses
Administrative expenses
Operating loss
Net income recognized on acquisition of subsidiary
Finance income
Finance charge
Net foreign exchange (loss)/gain
Loss before tax
Taxation
Loss attributable to equity holders of the parent
Other comprehensive income – items that may
be reclassified to profit or loss
Net fair value gain/(loss) on investments in
debt instruments held at fair value
Exchange differences on translation of foreign
operations
Other comprehensive income, net of tax
Total comprehensive loss attributable to equity
holders of the parent
Basic and diluted loss per share
11
(34,607)
(10,697)
––––––––––
(45,304)
—
827
(1,090)
(1,384)
––––––––––
(46,951)
8,152
––––––––––
(38,799)
(22,703)
(11,775)
––––––––––
(34,478)
–
307
(3,091)
(44)
––––––––––
(37,306)
5,277
––––––––––
(32,029)
5
9.1
9.2
7
10
2019
(23,608)
(15,909)
––––––––––
(39,517)
1,035
377
(3,496)
483
––––––––––
(41,118)
6,274
––––––––––
(34,844)
25
–
–
–
–
––––––––––
–
––––––––––
—
––––––––––
–
––––––––––
(499)
––––––––––
(499)
––––––––––
(38,799)
––––––––––
(0.56)
––––––––––
––––––––––
(32,029)
––––––––––
(0.45)
––––––––––
––––––––––
(35,343)
––––––––––
(0.39)
––––––––––
––––––––––
The accompanying notes form an integral part of these consolidated financial statements.
87
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEET
as at December 31, 2018 and 2019
Year Ended December 31,
2019
Notes
2018
Assets (in £’000)
Non-current assets
Property, plant and equipment
Intangible assets
12
13
Current assets
Prepayments
R&D tax credits
Other taxes recoverable
Other receivables
Short-term investments
Cash and short-term deposits
Total assets
Equity and liabilities
Equity
Issued capital
Share premium
Other capital reserves
Employee Benefit Trust shares
Other reserves
Accumulated loss
Translation reserve
Total equity
Non-current liabilities
Provisions
Interest-bearing loans and borrowings
Warrant liability
Other liabilities
Lease liability
Current liabilities
Trade and other payables
Accruals
Provisions
Interest-bearing loans and borrowings
Contingent consideration liability
Lease liability
Total liabilities
Total equity and liabilities
149
32,632
––––––––––
32,781
11,558
44,456
––––––––––
56,014
10
10
15
17
16
18
18
18
28
18
18
18
20
19
21
22
4
23
23
20
19
25
4
1,067
5,277
–
609
2,500
25,042
––––––––––
34,495
––––––––––
67,276
––––––––––
––––––––––
214
118,492
18,593
(307)
7,000
(111,221)
–
––––––––––
32,771
––––––––––
2,641
14,647
1,006
34
–
––––––––––
18,328
4,570
4,437
332
6,838
—
–
––––––––––
16,177
––––––––––
34,505
––––––––––
67,276
––––––––––
––––––––––
2,111
10,426
979
572
–
16,347
––––––––––
30,435
––––––––––
86,449
––––––––––
––––––––––
294
121,684
59,147
(1,305)
7,000
(146,065)
(499)
––––––––––
40,256
––––––––––
1,449
5,373
131
44
9,318
––––––––––
16,315
6,352
5,138
309
15,139
354
2,586
––––––––––
29,878
––––––––––
46,193
––––––––––
86,449
––––––––––
––––––––––
The accompanying notes form an integral part of these consolidated financial statements.
Approved by the Board on June 14, 2020 and signed on its behalf by:
Dr. Denise Scots-Knight Richard Jones
Director Director
Company number: 09481161 (England and Wales)
88
2019
(41,118)
1,577
1,636
(483)
(738)
221
(377)
3,731
(456)
–
(3,681)
354
(936)
(6,730)
1,069
––––––––––
(45,931)
––––––––––
10,074
(21)
–
–
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 2017, 2018 and 2019
Year ended December 31,
2017
12
26
Notes
(37,306)
(46,951)
36
3,652
1,384
2018
(in £’000)
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
Net foreign exchange loss/(gain)
Provision for social security contributions on
employee share options
Provision for deferred cash consideration
Interest earned
Finance charges
Modification gain on bank loan
Modification loss on bank loan
Gain on bargain purchase
Fair value remeasurement on contingent
consideration
Working capital adjustments:
(Increase)/decrease in trade and other
receivables
Increase/(decrease) in trade and other payables
Tax received
20
9.1 & 20
9.1
9.2
9.2 & 19
9.2 & 19
5
1,116
–
(827)
1,090
–
–
–
(1,446)
443
(307)
1,916
–
730
—
39
2,190
44
10
25
–
–
Net cash flows (used in) operating activities
Investing activities
Cash acquired from acquisition
Purchase of property, plant and equipment
Disposal of property, plant and equipment
Purchase of license
(Investments)/proceeds from sale of short-term
investments
Interest earned
Net cash flows (used in)/from investing
activities
Financing activities
Proceeds from issue of ordinary shares
Transaction costs on issue of shares
Proceeds from issue of bank loan
Transaction costs on bank loan
Interest paid on bank loan
Proceeds from TAP agreement
Purchase of treasury shares
Payment of lease liabilities
Net cash flows from/(used in) financing
activities
5
12
12
13
17
18
18
19
22
28
4
Net (decrease) in cash and cash equivalents
Cash and cash equivalents at January 1
Effect of exchange rate changes on cash and
cash equivalents
Cash and cash equivalents at December 31
16
(840)
3,860
5,331
––––––––––
(32,149)
––––––––––
804
1,602
8,152
––––––––––
(23,139)
––––––––––
–
(16)
—
(2,280)
–
(36)
2
–
(2,500)
1,052
––––––––––
–
286
––––––––––
32,865
377
––––––––––
(3,744)
––––––––––
252
––––––––––
43,295
––––––––––
15,000
(730)
20,000
(200)
(327)
—
–
–
––––––––––
33,743
––––––––––
(2,150)
53,578
273
(8)
455
(921)
(1,645)
78
(307)
–
––––––––––
(2,075)
––––––––––
(24,962)
50,045
–
(761)
–
–
(1,739)
–
(998)
(2,212)
––––––––––
(5,710)
––––––––––
(8,346)
25,042
(1,383)
––––––––––
50,045
––––––––––
––––––––––
(41)
––––––––––
25,042
––––––––––
––––––––––
(349)
––––––––––
16,347
––––––––––
––––––––––
The accompanying notes form an integral part of these consolidated financial statements.
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the years ended December 31, 2017, 2018 and 2019
Other Employee Accum-
Issued Share capital Benefit Other ulated Translation Total
capital premium reserves Trust reserves losses reserve equity
(in £’000)
At December 31, 2016 193 99,975 12,666 – 7,000 (40,579) – 79,255
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Loss for the year to
December 31, 2017 – – – – – (38,799) – (38,799)
Share-based payments
– share options (Note 26) – – 3,028 – – – – 3,028
Share-based payments
– LTIPs (Note 26) – – 298 – – – – 298
Share-based payments
– deferred bonus shares
(Note 26) – – 326 – – – – 326
Share-based payments
– deferred equity
consideration (Note 26) – – 1,331 – – – – 1,331
Issue of share capital on
April 4, 2017 (Note 18) 15 14,985 – – – – – 15,000
Issue of share capital on
conversion of loan note
(Note 18) 2 1,397 – – – – – 1,399
Issue of share capital for
Novartis bonus shares
(Note 18) 2 1,081 (1,083) – – – – –
Equity element of
convertible loan (Note 19) – – (207) – – – – (207)
Conversion of convertible
loan (Note 19) – – — – – 62 – 62
Issue of share capital on
October 31, 2017
(Note 18) 1 1,519 – – – – – 1,520
Transaction costs on
issuance of share
capital (Note 18) – (730) – – – – – (730)
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2017 213 118,227 16,359 – 7,000 (79,316) – 62,483
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Loss for the year to
December 31, 2018 – – – – – (32,029) – (32,029)
Adoption of IFRS 9 (Note 4) – – – – – 124 – 124
Share-based payments
– share options (Note 26) – – 1,871 – – – – 1,871
Share-based payments
– LTIPs (Note 26) – – 319 – – – – 319
Issue of share capital on
June 1, 2018 (Note 18) – 150 – – – – – 150
Issue of share capital on
August 3, 2018 on
exercise of options
(Note 18) – 13 – – – – – 13
Issue of share capital on
October 22, 2018 on
exercise of options
(Note 18) 1 110 – – – – – 111
Issue of warrants for
TAP agreement (Note 18) – – 44 – – – – 44
Transaction costs on
issuance of share
capital (Note 18) – (8) – – – – – (8)
Purchase of treasury
shares (Note 28) – – — (307) – – – (307)
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2018 214 118,492 18,593 (307) 7,000 (111,221) – 32,771
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)
Other Employee Accum-
Issued Share capital Benefit Other ulated Translation Total
capital premium reserves Trust reserves losses reserve equity
(in £’000)
Loss for the year to
December 31, 2019 – – – – – (34,844) – (34,844)
Currency translation
of foreign operations – — – – – – (499) (499)
Net fair value gain/(loss)
on investments in debt
instruments held at fair
value (Note 25) – – — – – – – –
Share-based payments
– share options (Note 26) – – 1,543 – – – – 1,543
Share-based payments
– LTIPs (Note 26) – – 93 – – – – 93
Issue of share capital on
April 23, 2019 (Note 18) 74 – 40,818 – – – – 40,892
Transaction costs related
to issuance of share
capital on April 23, 2019
(Note 18) – (761) – – – – – (761)
Issue of share capital on
conversion of loan note
(Note 18) 3 2,366 – – – – – 2,369
Issue of share capital on
Novartis bonus shares
(Note 18) 3 1,587 (1,590) – – – – –
Equity element of
convertible loan note
(Note 18) – – (310) – – – – (310)
Purchase of treasury
shares (Note 28) – – — (998) – – – (998)
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2019 294 121,684 59,147 (1,305) 7,000 (146,065) (499) 40,256
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
91
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate information
Mereo BioPharma Group plc (the “Company”) is a clinical-stage, U.K.-based biopharmaceutical company
focused on oncology and rare diseases.
The Company is a public limited company incorporated and domiciled in the U.K., and registered in England,
with our shares publicly traded on the Alternative Investment Market of the London Stock Exchange under
the ticker symbol MPH. The Company is also listed on the Nasdaq Global Market via American Depositary
Shares (“ADSs”) under the ticker symbol MREO. The Company’s registered office is located at Fourth Floor,
1 Cavendish Place, London, W1G 0QF, United Kingdom.
The consolidated financial statements of Mereo BioPharma Group plc and its subsidiaries (collectively, the
“Group”) for the year ended December 31, 2019 were authorized for issue in accordance with a resolution of
the Directors on June 14, 2020. The principal activities of the Group is the research and development of novel
pharmaceutical products.
On April 23, 2019, the Group completed the acquisition of OncoMed Pharmaceuticals, Inc. (“OncoMed”), a
company which is based in California and was previously a public company listed on the Nasdaq Global
Market in the U.S.
2. Significant accounting policies
2.1 Basis of preparation
The Group’s consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and adopted
by the E.U. and in accordance with the Companies Act 2006.
The financial statements are presented in pound sterling (“£’000”), which is the functional and presentational
currency of the Group. All amounts disclosed in the financial statements and notes have been rounded off
to the nearest thousand currency units, unless otherwise stated.
2.2 Revision of previously issued financial statements
During 2019, we identified a classification error in our statement of comprehensive loss for the year ended
December 31, 2018 related to loan modification expense. In correcting the error, administrative expenses
reduced by £0.7 million and finance charges increased by an equivalent amount. There was no impact on
net loss. We evaluated the materiality of the error quantitatively and qualitatively and concluded it was not
material to our previously issued Consolidated Financial Statements as a whole for the year ended and as
of December 31, 2018. Please refer to Financial statement notes 9 and 19.
2.3 Basis of consolidation
The consolidated financial information comprises the financial statements of Mereo BioPharma Group plc
and its subsidiaries as at December 31, 2019. Subsidiaries are all entities over which the Group has control.
The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those returns through its power over the entity.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are
deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealized gains
on transactions between Group companies are eliminated in preparing the consolidated financial statements.
Accounting policies of subsidiaries are consistent with the policies adopted by the Group.
The Company has an employee share trust to facilitate share transactions pursuant to employee share
schemes. Although the trust is a separate legal entity from the Group, it is consolidated into the Group’s
results in accordance with the IFRS 10 rules on special purpose vehicles. The Company is deemed to control
the trust principally because the trust cannot operate without the funding the Group provides.
2.4 Segmental information
Management views the Group as a single portfolio of product candidates. Only research and development
expenses are monitored at a product candidate level, however the Chief Operating Decision Maker (“CODM”)
makes decisions over resource allocation at an overall portfolio level. The Group’s financing is managed and
monitored on a consolidated basis.
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Following the acquisition of OncoMed during the year, non-current assets held by the Group are located in
the United Kingdom and United States. As at December 31, 2019, approximately £22.4 million of non-current
assets are located in the United States.
The Group’s CODM is the executive leadership team which is comprised of several individuals including the
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). The executive leadership team is
responsible for managing the operating results of the business.
The operations of the Group are mostly influenced by the timing of progression on underlying clinical
development programmes across product candidates which remain under development.
2.5 Going concern
As at May 31, 2020 the group had total cash resources ¹£10.1 million. Taken together with the private
placement which completed on June 3, 2020 and which raised net proceeds of approximately £51.4 million,
the group has current total cash resources of £61.5 million.
The Directors have prepared detailed cashflow forecasts for the 30-month period to December 31, 2022
based on the delivering the business plan objectives set out in the strategic report which include:
•
•
•
Completion of the adult Phase 2b extension study for setrusumab
Completion of the current Phase 2 study for alvelestat
Commencement later in 2020 of a new Phase 1b study for etiligimab
These forecasts indicate that the group has a total cash runway into 2022 and will have sufficient funds to
meet its liabilities as they fall due for at least the next 12 months.
In preparing these forecasts the directors have considered the impact of COVID-19 and in particular the
unprecedented burden on health systems in impacted countries around the world. As a result, clinical centres
have diverted resources away from the performance of clinical trials and because of that and the vulnerability
of patients in the Company’s setrusumab clinical development program for osteogenesis imperfecta (OI)
and its Phase 2 alvelestat program for patients with alpha-1 antitrypsin deficiency (AATD), the Company’s
clinical activities will face some delays. AATD patients, in particular, are at greater risk from COVID-19 given
that the condition is a respiratory and lung condition, for this reason, our Phase 2 alvelestat trial will be
delayed with topline data now expected in 2021. Subject to a partnership, we are also currently planning to
initiate a Phase 3 study in children with OI in late 2020, however, the initiation of the study may also be
delayed.
In addition, the Directors have considered a downside scenario involving an increase in operating overheads,
an increase in the costs of setting up and running the planned Phase 1b study for etiligimab when this study
is contracted out to third parties and increased investment in manufacturing development costs for
setrusumab. In addition, In this scenario the forecasts also indicate that the group will have sufficient funds
to meet its liabilities as they fall due for at least the next 12 months.
In both scenarios the Directors have not taken into account potential income from partnering one or more
of its assets which would increase the cash resources available to the Group.
In conclusion, although the Group continues to make losses, the directors believe it is appropriate to prepare
the financial information on the going concern basis. This is because the Group’s development into new
products continues to progress according to plan and the funding secured to date, together with the funds
that have come into the Group since the year end (as described more fully in Note 30) will allow it to meet
its liabilities as they fall due for at least 12 months from the date of authorization for the issue of these
consolidated financial statements.
¹Total cash resources are a non-GAAP measure being cash and short-term deposits and short-term
investments
93
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.6 Summary of significant accounting policies
a) Taxes
Tax expense recognized in the statement of comprehensive income comprises the sum of deferred tax and
current tax not recognized in other comprehensive income or directly in equity.
Current income tax
Current income tax assets and / or liabilities are measured at the amount expected to be recovered from or
paid to the taxation authorities that are unpaid at the reporting date. Current tax is payable on taxable profit,
which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates
and tax laws that have been enacted or substantively enacted by the end of the reporting period within the
jurisdictions that the Group operates in.
Amounts receivable in respect of research and development tax credits are recognized in the financial
statements provided there is sufficient evidence that the amounts are recoverable. These credits are
recognized within income tax in the consolidated statement of comprehensive loss.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused
tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against
which the deductible temporary differences and the carry-forward of unused tax credits and unused tax
losses can be utilized. The carrying amount of deferred income tax assets is reviewed at the end of each
reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be
available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income
tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has
become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected
to apply to the year when the asset is realized, based on tax rates (and tax laws) enacted or substantively
enacted at the end of the reporting period.
IFRIC 23, Uncertainty over Income Tax Treatments
In June 2017, the IASB issued IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (IFRIC 23),
which addresses how uncertain tax positions should be accounted for under IFRS. IFRIC 23 requires that,
where acceptance of the tax treatment by the relevant tax authority is considered probable, it should be
assumed as an accounting recognition matter that treatment of the item will ultimately be accepted.
Therefore, no tax provision would be required in such cases. However, if acceptance of the tax treatment is
not considered probable, the entity is required to reflect that uncertainty using an expected value (i.e., a
probability-weighted approach) or the single most likely amount. IFRIC 23 is mandatorily effective for
accounting periods beginning on or after 1 January 2019 and any resulting change to the tax provisions
should be recognized in retained earnings. Mereo has recognized a net tax expense of nil in retained earnings
on 1 January 2019 in respect of the adoption of IFRIC 23.
b) Foreign currencies
Items included in the financial statements are measured using the currency of the primary economic
environment in which the entity operates (“the functional currency”). The consolidated financial statements
are presented in pound sterling (“£”), which is the functional and presentational currency of the Group.
Transactions in foreign currencies are initially recorded by the Group’s entities at the rate ruling on the date
the transaction first qualifies for recognition. Differences arising on settlement or translation of monetary
items are recognized in the consolidated statement of comprehensive loss, as well as gains or losses on
the retranslation of foreign currency balances at the year end.
The results and financial position of Group entities that have a functional currency different from the
presentational currency of the Group are translated into the presentational currency (pound sterling). The
assets and liabilities of such entities are translated into pound sterling at the rate of exchange ruling at the
94
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
balance sheet date. Income and expenses are translated at the average rate for the period. Fair value
adjustments arising on acquisition of such entities are treated as assets and liabilities of the relevant entity
and translated into pound sterling at the closing rate. The exchange differences arising on translation for
consolidation are recognized in other comprehensive income.
c) Property, plant and equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and accumulated
impairment losses, if any. Such cost includes the cost of replacing part of the plant and equipment if the
recognition criteria are met. All other repair and maintenance costs are recognized in profit or loss as
incurred.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:
•
•
•
Leasehold improvements ten years
Office equipment five years
IT equipment three years
The right-of-use assets are presented within the same line item as that within which the corresponding
underlying assets would be presented if they were owned – for the Group this is property, plant and
equipment. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the
underlying asset:
•
•
Right-of-use asset (building) six to nine years
Right-of-use asset (equipment) one to two years
An item of property, plant and equipment and any significant part initially recognized is derecognized upon
disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising
on derecognition of the asset (calculated as the difference between the net disposal proceeds and the
carrying amount of the asset) is included in the statement of comprehensive loss when the asset is
derecognized.
The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed
at each financial year end and adjusted prospectively, if appropriate.
d) Business combinations
Business combinations are accounted for using the acquisition method of accounting. At the date of the
acquisition, the Group initially recognizes the fair value of the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquired business.
The consideration transferred is measured at fair value at the date acquisition. The excess of the
consideration transferred over the fair value of net identifiable assets of the business acquired is recorded
as goodwill, unless the amount of consideration transferred is less than the fair value of net identifiable
assets of the business acquired in which case the difference is recognized directly in the consolidated
statement of comprehensive loss as a bargain purchase. A valuation is performed of assets and liabilities
assumed on each acquisition accounted for as a business combination based on our best estimate of fair
value.
Where the settlement of any part of cash consideration is deferred, the amounts payable in the future are
discounted to their present value. Contingent consideration is classified either as equity or a financial liability
and is recognized at fair value on the acquisition date. Amounts classified as a financial liability are
subsequently remeasured to fair value in accordance with IFRS 9 (Financial Instruments), with changes in
fair value recognized in the consolidated statement of comprehensive loss as an administrative expense.
Directly attributable acquisition-related costs are expensed as incurred within the consolidated statement
of comprehensive loss.
95
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
d) Leases (IFRS 16)
Effective January 1, 2019, the Group implemented IFRS 16 (Leases). IFRS 16 (Leases) replaces existing
guidance, including IAS 17 (Leases), and sets out the principles for recognition and measurement of leases.
The new standard results in an increased volume of disclosure information in these consolidated financial
statements.
For further information, refer to Note 4.
e) Intangible assets
Intangible assets are initially recorded at cost which has been determined as the fair value of the
consideration paid and payable. Assets that have been acquired through a business combination are initially
recorded at fair value. The fair value of consideration is regularly reviewed based on the probability of
achieving contractual milestones.
Intangible assets are reviewed for impairment at each reporting date by allocating the assets to the cash-
generating units to which they relate. The estimated useful life is the lower of the legal duration and economic
useful life. The estimated useful lives of intangible assets are reviewed on an at least annual basis.
Where the consideration paid or payable is in shares, the cost is measured in accordance with IFRS 2 (Share
Based Payments).
Amortization would commence when product candidates underpinned by the intangible asset become
available for commercial use. No amortization has been charged to date, as the product candidates
underpinned by the intellectual property rights are not yet available for commercial use.
f) Financial instruments
Financial assets and liabilities are recognized in the consolidated balance sheet only when the Group
becomes party to the contractual provisions of the instrument.
Financial assets
On initial recognition, a financial asset is classified into one of three primary measurement categories:
•
•
•
Amortized cost;
Fair value through OCI (“FVOCI”); or
Fair value through profit or loss (“FVTPL”).
The initial classification into a primary measurement category depends on the nature and purpose of the
financial asset.
For each reporting period covered herein, the Group’s financial assets were restricted to financial assets held
at FVOCI. This relates to short-term investments which are not classified as cash and short-term deposits
and are held in a business model whose objective is achieved by both collecting contractual cash flows and
selling the short-term investment on maturity.
For short-term investments, interest income and impairment gains or losses are recognized directly in the
consolidated statement of comprehensive loss. The difference between cumulative fair value gains or losses
and the cumulative amounts recognized in the consolidated statement of comprehensive loss is recognized
in other comprehensive income until derecognition, when the amounts in other comprehensive income are
reclassified to the consolidated statement of comprehensive loss.
g) Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is based on
the presumption that the transaction to sell the asset or transfer the liability takes place either:
In the principal market for the asset or liability; or
In the absence of a principal market, in the most advantageous market for the asset or liability.
•
•
96
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would
use when pricing the asset or liability, assuming that market participants act in their economic best interest.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data
are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the
use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are
categorized within the fair value hierarchy, described as follows, based on the lowest level input that is
significant to the fair value measurement as a whole:
•
•
•
Level 1 — quoted (unadjusted) market prices in active markets for identical assets or liabilities.
Level 2 — valuation techniques for which the lowest level input that is significant to the fair value
measurement is directly or indirectly observable.
Level 3 — valuation techniques for which the lowest level input that is significant to the fair value
measurement is unobservable.
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group
determines whether transfers have occurred between levels in the hierarchy by reassessing categorization
(based on the lowest level input that is significant to the fair value measurement as a whole) at the end of
each reporting period.
h) Impairment of non-financial assets
Further disclosures relating to impairment of non-financial assets are also provided in the following notes:
•
•
•
Disclosures for significant assumptions Note 3
Property, plant and equipment Note 12
Intangible assets not yet available for use Notes 13 and 14
The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If
any indication exists, or when annual impairment testing for an asset is required, the Group estimates the
asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating
unit’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an
individual asset, unless the asset does not generate cash inflows that are largely independent of those from
other assets or groups of assets. When the carrying amount of an asset or cash-generating unit exceeds its
recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-
tax discount rate that reflects current market assessments of the time value of money and the risks specific
to the asset. In determining fair value less costs of disposal, recent market transactions are taken into
account. If no such transactions can be identified, an appropriate valuation model is used. These calculations
are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available
fair value indicators.
Impairment losses are recognized in the statement of comprehensive loss in expense categories consistent
with the function of the impaired asset.
An assessment is made at each reporting date to determine whether there is an indication that previously
recognized impairment losses no longer exist or have decreased. If such indication exists, the Group
estimates the asset’s or cash-generating unit’s recoverable amount. A previously recognized impairment
loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable
amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount
of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such
reversal is recognized in the statement of comprehensive loss unless the asset is carried at a revalued
amount, in which case the reversal is treated as a revaluation increase.
97
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
i) Cash and short-term deposits
Cash and short-term deposits in the balance sheet comprise cash at banks and on hand and short-term
deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in
value.
j) Short-term investments
Cash held on deposit for terms greater than three months are recognized at fair value in the balance sheet
with fair value changes recognized in other comprehensive income. Interest revenue, impairment gains and
losses, and a portion of foreign exchange gains and losses, are recognized in profit and loss.
When the short-term investment is derecognized or reclassified, changes in fair value previously recognized
in other comprehensive income and accumulated in equity are reclassified to profit and loss.
k) Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a
past event, it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects
some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is
recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating
to a provision is presented in the statement of comprehensive loss net of any reimbursement.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate
that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in
the provision due to the passage of time is recognized as a finance cost.
l) Share-based payments
Employees (including executives) of the Group receive remuneration in the form of share-based payments,
whereby employees render services as consideration for equity instruments (equity settled transactions).
Incentives in the form of shares are provided to employees under various plans (Note 26). Executive officer
have outstanding shares under a deferred bonus share plan (“DBSP Plan”) and a long-term incentive plan
(“LTIP Plan”).
In accordance with IFRS 2 Share-based Payment (“IFRS 2”), charges for these incentives are expensed
through the consolidated statement of comprehensive loss on a straight-line basis over their vesting period,
based on the Group’s estimate of shares that will eventually vest. The total amount to be expensed is
determined by reference to the fair value of the options or awards at the date they were granted. For LTIP
shares, the fair value on grant date excludes the impact of any non-market vesting conditions – these are
instead taken into account by adjusting the number of equity instruments included in the measurement of
the share-based payment transaction and are adjusted each period until such time as the equity instruments
vest.
Share options awarded to non-employees are accounted for as options awarded to employees as the value
of non-employee services could be readily determined.
In accordance with IFRS 2, the cancellation of share options is accounted for as an acceleration of the vesting
period and therefore any amount unrecognized that would otherwise have been charged in future accounting
periods is recognized immediately. When options are forfeited, the accounting expense for any unvested
awards is reversed.
Purchases, where consideration is satisfied by issuing equity shares, is accounted for as equity settled share-
based payment transactions in accordance with IFRS 2. Fair value is determined by the share price at the
date of purchase.
m) Costs of issuing capital
Incremental costs incurred and directly attributable to the offering of equity securities are deducted from
the related proceeds of the offering. The net amount is recorded as share premium in the period when such
shares are issued. Where such expenses are incurred prior to the offering they are recorded in prepayments
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
until the offering completes. Other costs incurred in such offerings are expensed as incurred and included
in general and administrative expenses.
n) Convertible loan instrument
Convertible loan notes are regarded as compound instruments consisting of a liability component and an
equity component. At the date of issue, the fair value of the liability component is estimated using a discount
rate for an equivalent liability without the conversion feature. The difference between the proceeds of issue
of the convertible loan note and the fair value assigned to the liability component is included in equity.
o) Employee Benefit Trust
The Group operates an Employee Benefit Trust (“EBT”), the Mereo BioPharma Group plc Employee Benefit
Trust.
The EBT has been established to fulfil awards made under the DBSP Plan and the LTIP Plan. The EBT is a
Jersey-based trust which is funded by a loan from the Company, which it will utilize to buy shares at nominal
value from the Company in sufficient quantity to fulfil the envisaged awards. The EBT will acquire shares in
the Company and these will be deducted from the shareholders’ funds on the consolidated balance sheet at
the cost of acquisition less proceeds on disposal.
Shares held by the EBT are included in the consolidated balance sheet as a reduction in equity.
The Group treats the EBT as an extension of the Group and the Company as it is ultimately controlled by the
Company and therefore consolidated.
p) R&D costs
Expenditure on product development is capitalized as an intangible asset and amortized over the expected
useful economic life of the product candidate concerned. Capitalization commences from the point at which
technical feasibility and commercial viability of the product candidate can be demonstrated and the Group
is satisfied that it is probable that future economic benefits will result from the product candidate once
completed. Capitalization ceases when the product candidate receives regulatory approval for launch. No
such costs have been capitalized to date.
Expenditure on R&D activities that do not meet the above criteria, including ongoing costs associated with
acquired intellectual property rights and intellectual property rights generated internally by the Group, is
charged to the statement of comprehensive loss as incurred. Intellectual property and in-process R&D from
asset acquisitions are recognized as intangible assets at cost.
q) Provision for deferred cash consideration
Provision for deferred cash consideration consists of future payments which are contractually committed
but not yet certain. In respect of products which are not yet approved, such deferred cash consideration
excludes potential milestones, royalties or other payments that are deemed to be so uncertain as to be
unquantifiable. Deferred cash consideration is recognized as a liability with the amounts calculated as the
risk adjusted net present value of anticipated deferred payments.
The provision is reviewed at each balance sheet date and adjusted based on the likelihood of contractual
milestones being achieved and therefore the deferred payment being settled. Increases in the provision
relating to changes in the probability are recognized as an intangible asset. Increases in the provision relating
to the unwinding of the time value of money are recognized as a finance expense.
r) Bank loan
Borrowings (including interest-bearing loans) are initially recognized at fair value, net of transaction costs
incurred. Borrowings are subsequently measured at amortized cost. Any difference between the proceeds
(net of transaction costs) and the redemption amount is recognized in profit or loss over the period of the
borrowings using the effective interest method. Under the effective interest method, amortization is included
as a finance charge in the consolidated statement of comprehensive loss.
The Group’s policy is to account for non-substantial modifications to financial liabilities measured at
amortized cost through a gain or loss which is recorded in the consolidated statement of comprehensive
99
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
loss. The gain or loss is calculated as the difference between the original contractual cash flows and the
modified cash flows, discounted at the original effective interest rate.
For substantial modifications, the Group’s policy is to derecognize the existing financial liability and in turn
recognize a new financial liability.
Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged,
cancelled or expired.
s) Associated warrants
The Group has issued certain warrant instruments to its lenders (Note 19).
As the terms of the warrant instruments allow for a cashless exercise, the Group’s policy is to account for
the associated warrant instruments at fair value with changes in the fair value recognized in the consolidated
statement of comprehensive loss (see Note 21).
t) The Alpha-1 Project (TAP) funding agreement and associated warrants
The agreement is accounted for as a compound instrument which includes both debt and equity
components. The liability is measured first at fair value and the residual value allocated to the equity
component. The difference between the funding payment amount received and the measurement of the
liability will be allocated to the warrants and recognized in equity. The value of warrants in equity will not be
subsequently remeasured as the warrants will be settled by providing a fixed number of shares for a fixed
amount of cash.
3. Significant judgments, estimates and assumptions
The preparation of these financial statements requires the management of the Group to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Group bases
its estimates and judgments on historical experience and on various other assumptions that it considers to
be reasonable. Actual results may differ from these estimates under different assumptions or conditions.
3.1 Judgments
a) Share-based compensation
Incentives in the form of shares are provided to employees under certain equity award plans (which consist
of both share awards and option grants). The fair value of the employee services received in exchange for
equity award plans is recognized as an expense. The expense is based upon a number of assumptions
disclosed in Note 26. The selection of different assumptions in the measurement of fair value of the equity
award plans could affect the results of the Group.
b) Business combination
On April 23, 2019, the Group obtained a 100% controlling interest in OncoMed, a Company based in the U.S.
which was previously listed on the Nasdaq Global Market.
Judgement is applied under IFRS 3 (Business Combinations) in determining whether a transaction meets
the definition of a business combination, and so accounted for in accordance with its requirements. In
applying this judgement, management has considered the underlying economic substance of the transaction
in addition to the contractual terms. Our assessment is that OncoMed meets the definition of a ‘business’
and the transaction has therefore been accounted for as a business combination. Please refer to Note 5 for
further details regarding the OncoMed acquisition.
c) Impairment of intangible assets and property, plant and equipment
An assessment was made in respect of indicators of impairment in the carrying value of the Group’s
intangible assets (see Note 14), right-of-use assets, leasehold improvements, office equipment and IT
equipment as at December 31, 2019.
If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value
less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s
carrying value over its recoverable amount is expensed to the income statement. The assessment of
intangible assets involves a number of significant judgments regarding the likelihood of successful product
100
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
approval, the costs of reaching approval, the estimated useful life of intangible assets following
commercialization and the subsequent commercial profitability of the product once approved.
d) IFRS 16 (Leases) discount rate
Following the adoption of IFRS 16 (Leases) on January 1, 2019, the Group is required discount future lease
payments using the interest rate implicit in the lease, or, if that rate cannot be readily determined, the
incremental borrowing rate. IFRS 16 (Leases) defines the incremental borrowing rate as the rate of interest
a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to
obtain an asset of similar value to the right-of-use assets in a similar economic environment.
For the year ended December 31, 2019, the determination of an appropriate discount rate has a significant
effect on the lease liabilities recognized (see Note 4). For the current lease portfolio, the Group has determined
an incremental borrowing rate based on relevant and available information as the interest rate implicit in the
lease arrangements cannot be readily determined.
In addition to the determination of an appropriate discount rate, the Group was also required to assess the
lease term for qualifying leases. The determination of the lease term is judgmental as for certain qualifying
leases held by the Group, the contract includes an extension option beyond the non-cancellable period for
which the Group has the right to use the underlying asset. In applying this judgment, the Group considered
the period over which it was reasonably certain to make use of the extension option.
3.2 Estimates
a) Fair value of intangible assets acquired in business combination
The Group performed a full valuation of the fair value of assets acquired and liabilities assumed following
the acquisition of OncoMed.
Based on the assets acquired and liabilities assumed, specific consideration was applied to the valuation of
the intangible asset acquired which required an estimation of the expected useful life and future cash flows
of the intangible asset alongside the determination of an appropriate discount rate. The intangible asset
acquired was valued using a risk adjusted net present value model.
b) Contingent consideration
The Group makes provision for the estimated fair value of amounts payable to the former shareholders of
OncoMed under the Contingent Value Rights Agreement (“CVR”), which is accounted for as a contingent
consideration liability.
At December 31, 2019, the Group estimates the fair value of the contingent consideration liability to be £0.4
million ($0.5 million), which is an increase from £nil on the date of acquisition (see Note 5). The increase in
the fair value of the contingent consideration liability reflects the terms subsequently agreed with Oncologie,
Inc. (“Oncologie”) with respect to the global licensing agreement of navicixizumab (“Navi”) (see Note 30).
Total potential payments under the CVR on a gross, undiscounted basis, are approximately $80.0 million
(see Note 5).
The estimated contingent consideration payable is based on a risk-adjusted, probability-based scenario.
Under this approach the likelihood of future payments being made to the former shareholders of OncoMed
under the CVR is considered. The estimate could materially change over time in line with the development
plan and subsequent commercialization of the Navi product.
c) Deferred license consideration
Deferred consideration in the form of cash is recognized as a provision at each balance sheet date, to the
extent its amount is quantifiable at the inception of the arrangement (see Note 20). The amount provided is
based on a number of estimates regarding the timing and progress of the related research.
Deferred consideration in the form of shares is recognized as a share-based payment when it is probable
that shares will be transferred.
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. Changes in accounting policies
4.1 Changes in accounting policies 2019
Effective January 1, 2019, the Group has adopted IFRS 16 (Leases). IFRS 16 (Leases) replaces existing
guidance, including IAS 17 (Leases), and sets out the principles for the recognition and measurement of
leases. The new standard has resulted in an increased volume of disclosure information within these
consolidated financial statements.
The Group has also implemented other minor amendments to existing standards and interpretations, which
have no material impact on the Group’s overall results and financial position.
a) General impact of application of IFRS 16 (Leases)
The date of initial application of IFRS 16 for the Group is January 1, 2019.
The Group has applied IFRS 16 using the modified retrospective approach, without restatement of the
comparative information.
IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant
changes to the lessee accounting by removing the distinction between operating and finance lease, requiring
the recognition of a right-of-use asset and a lease liability at commencement for all leases, except for short-
term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor
accounting have remained largely unchanged.
b) Definition of a lease
Previously, the Group determined at contract inception whether an arrangement was or contained a lease
under IFRIC 4 (Determining Whether an Arrangement contains a Lease). The Group now assesses whether
a contract is or contains a lease based on the new definition of a lease under IFRS 16 (Leases). Under IFRS
16 (Leases), a contract is or contains a lease, if the contract conveys a right to control the use of an identified
asset in exchange for consideration.
On transition to IFRS 16 (Leases), the Group elected to apply the practical expedient to grandfather the
assessment of which transactions are leases. It applied IFRS 16 (Leases) only to contracts that were
previously not identified as leases. Contracts that were identified as leases under IAS 17 and IFRIC 4 were
not reassessed. In preparation for the first-time application of IFRS 16, the Group has carried out an
implementation project.
The new definition in IFRS 16 will not significantly change the scope of contracts that meet the definition of
a lease for the Group. At inception or on reassessment of a contract that contains a lease component, the
Group allocates the consideration in the contract to each lease and non-lease component based on their
relative stand-alone prices.
c) Practical expedients adopted on transition
Certain practical expedients permitted by IFRS 16 are used by the Group, notably:
1)
2)
3)
To not reassess, upon transition, whether an existing contract contains a lease (grandfather the previous
assessment of whether a transaction was a lease under IAS 17 or IFRIC 4). The definition of a lease
under IFRS 16 has been applied only to contracts entered into or changed on or after January 1, 2019;
The recognition exemptions for short-term leases (less than 12 months of lease term) and the leases
of low-value assets; and
Used hindsight when determining the lease term, if the contract contains options to extend or terminate
the lease.
d) Financial impact
The application of IFRS 16 to leases previously classified as operating leases under IAS 17 resulted in the
recognition of right-of-use assets and lease liabilities.
The table below sets out the adjustments recognized at the date of initial application of IFRS 16 which does
not include the lease acquired as part of the OncoMed acquisition.
102
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at
December 31,
2018
Impact
of IFRS 16
Non-current assets
Property, plant and equipment
Prepayments and other
Total impact on assets
Current liabilities
Trade and other payables
Lease liabilities
Non-current liabilities
Lease liabilities
Accruals
Total impact on liabilities
Total impact on retained earnings
149
1,067
–––––––––
4,570
–
—
4,437
–––––––––
Restated
as at
January 1,
2019
2,701
1,017
–––––––––
2,552
(50)
–––––––––
2,502
–––––––––
–
607
4,570
607
1,927
4,405
–––––––––
1,927
(32)
–––––––––
(2,502)
–––––––––
–
–––––––––
–––––––––
As at January 1, 2019, right-of-use assets related to a leased property (£1.2 million) and a lease of medical
equipment used in ongoing clinical trials (£1.3 million).
Following the acquisition of OncoMed on April 23, 2019, the Group acquired an additional right-of-use asset
related to a leased property in Redwood City, U.S. (£10.8 million).
The table below presents a reconciliation from operating lease commitments disclosed as at December 31,
2018 to lease liabilities recognized as at January 1, 2019.
Operating lease commitments disclosed under IAS 17 (at December 31, 2018)
Effect of discounting
Reassessment of lease term under IFRS 16
Lease liabilities recognised under IFRS 16 (at January 1, 2019)
536
(944)
2,942
–––––––––
2,534
–––––––––
–––––––––
Certain lease agreements include an option which allows the Group to extend the lease. The Group is
reasonably certain that it will invoke the extension option on the lease of medical equipment used in ongoing
clinical trials, as the Group expects that the studies will extend beyond the initial lease term. Where the Group
is reasonably certain that the lease will be extended, the cash flows are included in the calculation of the
lease liability.
The adoption of IFRS 16 (Leases) results in a decrease in other operating expenses in the consolidated
statement of comprehensive loss where lease payments were previously recorded. IFRS 16 (Leases) results
in an increase in depreciation and interest expense going forwards following the recognition of a right-of-
use asset and lease liability.
The weighted average incremental borrowing rate applied to lease liabilities recognized on transition was
15.0%.
As at December 31, 2019, in relation to leases under IFRS 16 (Leases) the Group has recognized the following
amounts in the consolidated statement of comprehensive loss:
Depreciation
Interest expense
Foreign exchange gain
Income from sub-leasing right-of-use assets
1,505
1,314
29
855
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2019, within the consolidated statement of cash flows under IFRS 16
(Leases) the Group has opted to disclose both the cash paid for the interest portion and cash payments for
the principal portion of the lease liability as part of financing activities. The adoption of IFRS 16 (Leases) did
not have an impact on net cash flows.
The total cash outflow for leases amounted to £2.2 million during the year (2018: £0.3 million).
e) Subsequent updates
As at December 31, 2019, the lease term remaining on the medical equipment has been reassessed in line
with the contractual agreement. The reassessment of lease term has been accounted for as a change in
accounting estimate and the lease liability has been remeasured accordingly to reflect the change in
estimated future lease payments. The carrying amount of the right-of-use asset has been adjusted for the
remeasurement of the lease liability, both reduced by £0.3 million respectively.
4.2 Changes in accounting policies 2018
Effective January 1, 2018, the Group has adopted IFRS 9 (Financial Instruments) which introduces new
requirements for:
1.
2.
3.
4.
The classification and measurement of financial assets and financial liabilities;
Impairment for financial assets;
General hedge accounting; and
New accounting for certain modifications and exchanges of financial liabilities measured at amortized
cost.
The only impact on the Group is in relation to the non-substantial modification of the convertible loan notes,
as detailed below. The Group has applied IFRS 9 (Financial Instruments) in full without restating
comparatives with an initial date of application of January 1, 2018.
In relation to the non-substantial modification of financial liabilities, IFRS 9 (Financial Instruments) requires
the recognition of a modification gain or loss for exchanges or modifications of financial liabilities that do
not result in the of a financial liability. As a result, under IFRS 9 (Financial Instruments) the carrying value of
the convertible loan note as at the date of modification was adjusted to recognize the modification gain in
retained earnings as of the date of initial application of January 1, 2018.
At January 1, 2018 (as calculated under IAS 39)
Amounts restated through retained earnings
At January 1, 2018 (as calculated under IFRS 9)
1,977
(124)
–––––––––
1,853
–––––––––
–––––––––
The Group has considered the adoption of IFRS 9 on receivables and determined the expected credit loss to
be immaterial, and therefore no adjustment has been made for this.
5. Acquisition of subsidiary
On April 23, 2019, the Group obtained control of OncoMed, a Company based in the U.S., which was previously
listed on the Nasdaq Global Market, by acquiring 100 per cent of its issued share capital.
OncoMed is a clinical-stage biopharmaceutical company focused on discovering and developing novel
therapeutics that address the fundamental biology driving cancer’s growth, resistance, recurrence and
metastasis. OncoMed was acquired in order to broaden the Group's asset base, strengthen its cash position
and obtain a US listing to diversify international shareholder base of the combined group.
104
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The final acquisition accounting is set out below:
Cash and short-term deposits
Short-term investments
Other receivables
Prepayments
Property, plant and equipment
Right-of-use assets
Identifiable intangible assets
Other liabilities
Lease liabilities
Net identifiable assets
Bargain purchase
Total consideration
Equity instruments (24.8 million ordinary shares)
Contingent consideration arrangement
Total consideration
OncoMed
10,074
29,019
155
1,699
82
10,755
12,693
(9,215)
(10,689)
–––––––––
44,573
–––––––––
(3,681)
–––––––––
40,892
–––––––––
40,892
–––––––––
—
–––––––––
40,892
–––––––––
–––––––––
The Group acquired net cash of £10.1 million with the acquisition of OncoMed, being the value of the cash
and short-term deposits on April 23, 2019.
The fair value of the 24.8 million ordinary shares issued as the consideration paid for OncoMed was
measured based on the Group’s quoted share price on April 23, 2019.
As the Group acquired OncoMed for an amount less than the fair market value of the net assets acquired, a
gain on bargain purchase of £3.7 million was realized. The was attributable to the following factors:
•
•
Subject to working capital adjustments, the immediately pre-closing proportion of shares in the
Company due to be issued to OncoMed’s shareholders was agreed in December 2018, based on the
Group’s 90-day volume-weighted average share price ending on December 4, 2018. Following a
movement downward in the Group’s quoted share price on the completion date in comparison with the
reference share price, this reduced the overall fair value of the consideration paid. The impact in the
reduction in the fair value of consideration paid was partly offset by;
In the period from announcement of the deal and the date of acquisition (April 23, 2019), a period of
approximately five months, OncoMed continued to generate losses, reflecting continue research and
development activity, together with recurring expenditure on its overheads. This had the effect of
reducing net assets acquired on the acquisition date compared with net assets at the time the
acquisition was agreed.
Additional cash consideration, accounted for as contingent consideration, becomes payable under a
Contingent Value Rights Agreement (“CVR”) relating to OncoMed’s etigilimab (“TIGIT”) and navicixizumab
(“Navi”) products. The contingent consideration would become payable upon the achievement of certain
milestones in the future specific to TIGIT (“the TIGIT milestone”) and Navi (“the Navi milestone”).
As at the date of acquisition the fair value of the contingent consideration was estimated to be close to £nil.
In making that assessment, the following information and factors were considered:
1)
2)
3)
4)
The uncertain outcomes of current clinical studies;
The level of uncertainty regarding the availability of future funding partners;
The level of uncertainty relating to the success of future development of such products;
The dependency of the CVR milestones on the occurrence of events that are outside of the control of
the Group; and
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5)
The likelihood of Celgene exercising the exclusive option granted by OncoMed to Celgene in relation to
OncoMed’s TIGIT product, particularly given Bristol-Myers Squibb’s proposed acquisition of Celgene.
In June 2019 it was announced that Celgene had decided, in light of strategic product portfolio
considerations, not to exercise its option to license TIGIT. Accordingly, the TIGIT milestone can no longer be
achieved.
As at December 31, 2019, the Group estimates the fair value of the Navi milestone to be £0.4 million ($0.5
million) which is accounted for as a contingent consideration liability (see Note 25 and Note 30). The
maximum undiscounted amount of the Navi milestone is subject to an aggregate cap of $80 million.
The fair value of the financial assets includes receivables from the landlord under OncoMed's office lease
arrangement in relation to tenant improvements with a fair value and a gross contractual value of £0.2
million. It is estimated at acquisition date that all contractual cash flows are collectable in full. Short-term
investments acquired with OncoMed were treasury bills (recognized at fair value through other
comprehensive income), in line with the Group’s accounting policy (see Note 25).
Acquisition related costs (presented net against the gain on bargain purchase in the consolidated statement
of comprehensive loss) amounted to £2.6 million (rounded). Transaction costs incremental and directly
attributable to the issuance of new share capital associated with the acquisition of OncoMed amounted to
£0.8 million, which is accounted for within equity. The net gain on bargain purchase in the consolidated
statement of comprehensive loss is therefore £1.0 million (rounded).
OncoMed contributed £nil revenue and £5.7 million to the Group’s loss for the period between the date of
acquisition and the balance sheet date. If the acquisition of OncoMed had been completed on the first day
of the financial year, group revenues for the period would have been £3.3 million and the Group’s loss would
have been £42.9 million. This information is provided for illustrative purposes only and is not necessarily
indicative of the results that the Group would have occurred had OncoMed been acquired at the beginning
of the year, or indicative of future results of the Group.
6. Group information
Information about subsidiaries
The consolidated financial statements of the Group include:
% equity
% equity
interest
interest
December December
31,
Country of 31,
2018
Name Principal activities incorporation 2019
Mereo BioPharma 1 Limited Pharmaceutical R&D U.K. 100
Mereo BioPharma 2 Limited Pharmaceutical R&D U.K. 100
Mereo BioPharma 3 Limited Pharmaceutical R&D U.K. 100
Mereo BioPharma 4 Limited Pharmaceutical R&D U.K. 100
Mereo BioPharma Ireland Limited Pharmaceutical R&D Ireland 100
OncoMed Pharmaceuticals, Inc. Pharmaceutical R&D U.S. 100
Navi Subsidiary, Inc. Pharmaceutical R&D U.S. 100
Mereo US Holdings Inc. Holding company U.S. 100
Mereo MergerCo One Inc. Holding company U.S. –
Mereo BioPharma Group plc
Employee Benefit Trust Employee share scheme Jersey –
100
100
100
100
100
–
–
100
100
–
The registered office of Mereo BioPharma 1 Limited, Mereo BioPharma 2 Limited, Mereo BioPharma 3 Limited
and Mereo BioPharma 4 Limited is located at Fourth Floor, 1 Cavendish Place, London W1G 0QF. The
registered office of Mereo BioPharma Ireland Limited is 25/28 North Wall Quay, Dublin 1 D01H104, Ireland.
Mereo US Holdings Inc. and Mereo MergerCo One Inc. were incorporated on December 3, 2018 for the sole
purpose of effecting the business combination with OncoMed (see Note 5). Following the business
combination with OncoMed, Mereo MergerCo One Inc. ceased to exist. The registered office of Mereo US
106
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Holdings Inc. is 251 Little Falls Drive, City of Wilmington, County of New Castle, Delaware 19808, U.S. Mereo
MergerCo One Inc. was a 100% owned subsidiary of Mereo US Holdings Inc.
OncoMed became a wholly owned subsidiary of Mereo US Holdings Inc. on April 23, 2019 and is therefore
an indirect, wholly owned subsidiary of Mereo BioPharma Group plc. The registered office of OncoMed
Pharmaceuticals, Inc. is 251 Little Falls Drive, City of Wilmington, Country of New Castle, Delaware 19808,
U.S. Navi Subsidiary, Inc, incorporated on April 15, 2019, is a wholly owned subsidiary of OncoMed.
Under IFRS, the Employee Benefit Trust is treated as an extension of the Group and the Company as it is
controlled and therefore consolidated.
7. Loss before taxation
Loss before tax is stated after charging:
Year ended
December 31,
Fees payable to the Company’s Auditor for the audit of Group accounts
Fees payable to the Company’s Auditor for other services:
Audit of subsidiary accounts
Audit-related assurance services
Accounting advisory services
Legal and professional fees including patent costs
Operating lease expense (IAS 17)
Depreciation of right-of-use assets (IFRS 16)
Depreciation (excluding right-of-use assets)
2018
323
30
171
10
936
293
–
40
2019
514
45
311
–
2,413
–
1,505
52
Following the adoption of IFRS 16 (Leases) on January 1, 2019, the Group has recognized £1.5 million of
expense relating to depreciation of right-of-use assets and £1.3 million of interest expense relating to finance
lease liabilities in the consolidated statement of comprehensive loss. No prior year comparative is disclosed,
however under IAS 17 (Leases) the Group previously recognized £0.3 million relating to operating lease
expense in the consolidated statement of comprehensive loss.
8. Employees
The average monthly number of persons employed by the Group (including Directors) during the year was:
Year ended
December 31,
By activity
Administrative
Research and development
Total
2018
2019
24
12
–––––––––
36
–––––––––
–––––––––
28
18
–––––––––
46
–––––––––
–––––––––
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Total compensation costs for persons employed by the Group (including Directors) during the year was:
Year ended
December 31,
Included in research and development expenses:
Salaries
Social security costs
Pension contributions
Share-based payment expenses
Included in administrative expenses:
Salaries
Social security costs
Pension contributions
Share-based payment expenses
Total employee benefit expenses
2018
1,792
(30)
73
526
2019
2,824
110
62
152
2,903
(828)
99
1,663
–––––––––
6,198
–––––––––
–––––––––
3,384
(124)
114
1,485
–––––––––
8,007
–––––––––
–––––––––
Total compensation costs for Directors during the year was:
Year ended
December 31,
Salaries and fees
Benefits in kind
Pension contributions
Bonus
Total
2018
2019
1,047
15
11
512
–––––––––
1,585
–––––––––
–––––––––
1,106
17
25
294
–––––––––
1,442
–––––––––
–––––––––
During 2019, two Directors were members of a defined contribution pension scheme (period ended December
31, 2018: two).
Further details concerning the remuneration of Key Management Personnel can be found in Note 28.
9. Other income/expenses and adjustments
9.1 Finance income
Year ended December 31,
Bank interest earned
Interest earned on short-term investments
Gain on short-term investments
Total finance income
2017
2018
2019
827
–
–
–––––––––
827
–––––––––
–––––––––
307
–
–
–––––––––
307
–––––––––
–––––––––
42
141
194
–––––––––
377
–––––––––
–––––––––
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9.2 Finance charge
Year ended December 31,
Interest payable on convertible loan
Interest on TAP funding
Interest payable on bank loan
Interest on lease liabilities
Accreted interest on bank loan
Transaction costs on bank loan
Modification (loss)/gain on bank loan
Loss on short-term deposits
Discounting of provision for deferred cash consideration
Change in warrant fair value
Total finance charge
2017
2018
2019
(103)
–
(327)
–
(67)
(200)
–
(339)
–
(54)
–––––––––
(1,090)
–––––––––
–––––––––
(185)
–
(1,645)
–
(782)
–
(730)*
(22)
(443)
716
–––––––––
(3,091)
–––––––––
–––––––––
(20)
(10)
(1,739)
(1,314)
(1,523)
—
456
–
(221)
875
–––––––––
(3,496)
–––––––––
–––––––––
* We have reclassified the loan modification loss occurring in 2018 resulting in the reduction of administrative
expenses by £0.7 million, and the increase in finance charges of an equivalent amount. Please refer to Note 2
for further details.
10. Income tax
Year ended December 31,
U.K. corporation tax R&D credit
Other tax income / (expense)
Income tax credit
2017
2018
2019
8,152
–
–––––––––
8,152
–––––––––
–––––––––
5,277
–
–––––––––
5,277
–––––––––
–––––––––
5,149
1,125
–––––––––
6,274
–––––––––
–––––––––
U.K. income tax
The Group is entitled to claim tax credits in the U.K. under the U.K. R&D small or medium-sized enterprise
(SME) scheme, which provides additional taxation relief for qualifying expenditure on R&D activities and
includes an option to surrender a portion of tax losses arising from qualifying activities in return for a cash
payment from HM Revenue & Customs (HMRC). The amount included in the financial statements represents
the credit for the year ended December 31, 2018 which was received in early 2020 together with the estimated
recoverable credit for the year ended December 31, 2019.
U.S. income tax
On December 22, 2017, the Tax Cuts and Jobs Act were entered into law. Following the acquisition of
OncoMed during the year, the Group has analyzed the effects of the tax reform for the financial year ended
December 31, 2019. The new tax law permanently repeals the corporate Alternative Minimum Tax (“AMT”)
and provides a transition period where existing AMT credits are refundable. Other tax income of £1.1 million
reflects amounts received or receivable by the Group as AMT credits. As at December 31, 2019, £1.0 million
is receivable, recognized as other taxes recoverable within the consolidated balance sheet. At December 31,
2019, the Group had an Uncertain Tax Position of £2.5 million being held off the Balance Sheet, in respect of
the R&D tax credits in the US. The Uncertain Tax Position is calculated based upon historic US R&D claims
and equates to around 20% of the outstanding US R&D claims.
109
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of effective tax rate
Year-ended December 31,
Loss on ordinary activities before income tax
Loss on ordinary activities before tax at the U.K.’s
statutory income tax rate of 19% (2018: 19%)
Expenses not deductible for income tax purposes
(permanent differences)
Temporary timing differences
R&D relief uplift
Losses (unrecognized)
Deferred income from MBG loan guarantee costs
Differences in overseas tax rates
Gain on bargain purchase
Other
Tax credit for the year
2017
2018
2019
(46,951)
(37,306)
(41,118)
9,038
7,088
7,812
(13)
(712)
3,447
(3,785)
177
–
–
–
–––––––––
8,152
–––––––––
–––––––––
(1,070)
(277)
2,271
(2,804)
69
–
–
–
–––––––––
5,277
–––––––––
–––––––––
(317)
(343)
2,540
(4,380)
(54)
340
699
(23)
–––––––––
6,274
–––––––––
–––––––––
Deferred tax
The analysis of unrecognized deferred tax is set out below:
December 31,
Losses
US tax credits
Accruals
Fixed assets
Other
Temporary differences trading
Net deferred tax asset (unrecognized)
2017
2018
2019
6,121
–
–
–
–
2,267
–––––––––
8,388
–––––––––
–––––––––
8,604
–
–
–
6
495
–––––––––
9,105
–––––––––
–––––––––
19,443
10,032
947
400
202
4
–––––––––
31,028
–––––––––
–––––––––
The analysis of recognized deferred tax is set out below:
At January 1,
2019
Acquisition of
subsidiary
(Note 5)
Recognized
in income
At December
31, 2019
Deferred tax liabilities
Intangible asset
Deferred tax asset
Net operating losses
–
–––––––––
Net deferred tax asset / (liability)
–
–––––––––
–––––––––
–
(2,686)
–
(2,686)
–
–––––––––
(2,686)
–––––––––
–––––––––
2,686
–––––––––
2,686
–––––––––
–––––––––
2,686
–––––––––
–
–––––––––
–––––––––
The deferred tax liability has arisen from the recognition of separately identifiable intangible assets on the
acquisition of OncoMed (see Note 5). A deferred tax asset on losses has been recognized up to the level of
the deferred tax liability, resulting in a net deferred tax liability of £nil.
The remaining deferred tax assets, as set out in the table above, have not been recognized as there is
uncertainty regarding when suitable future profits against which to offset the accumulated tax losses will
arise.
U.K. deferred tax
A reduction in the rate of UK corporation tax to 19% from April 1, 2017 and to 17% from April 1, 2020 was
substantively enacted at the Balance Sheet date. However subsequently, the UK Government announced
that the UK corporation tax rate would remain at 19% and not reduce to 17% on 1 April 2020. This was
110
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
substantively enacted on 17 March 2020. The standard rate of UK corporation tax applied to reported loss
is 19% (2018: 19%). Unrecognized UK deferred tax assets and liabilities are calculated at a rate of 17%, being
the rate that was substantively enacted at the Balance Sheet date.
There is no expiration date for accumulated tax losses in the U.K. entities.
At December 31, 2019, the Group had U.K. tax losses to be carried forward of approximately £70.2 million
(2018: £50.0 million).
U.S. deferred tax
In the U.S., the Tax Cuts and Jobs Act reduced the corporation tax rate to 21% from January 1, 2018. The
effect of the new U.S. corporation tax rate has been considered in these financial statements. U.S. deferred
tax assets and liabilities are calculated at a blended rate of approximately 21%.
For OncoMed, with respect to accumulated tax losses carried forward prior to the acquisition of the Company,
there is a change of control restriction which will limit the amount available in any one year.
At December 31, 2019, the Group had U.S. federal tax losses to be carried forward of approximately £47.5
million, of which £40.9 million can be carried forward indefinitely and £6.6 million which will begin to expire
in 2023. At December 31, 2019, the Group had U.S. state tax losses to be carried forward of approximately
£3.2 million which begin to expire in 2028.
11. Loss per share
Basic loss per share is calculated by dividing the loss attributable for the year to ordinary equity holders of
the parent by the weighted average number of ordinary shares outstanding during the year.
As the net amount attributable for the year to ordinary equity holders of the parent was a loss in the year
(2018: loss), the dilutive potential shares are anti-dilutive for the earnings per share calculation.
2017
Weighted
Loss shares
£’000 number
Loss per
share
£
December 31,
2018
Weighted
shares
number
Loss
£’000
Loss per
share
£
2019
Weighted
shares
number
Loss
£’000
Loss per
share
£
Basic and diluted (38,799) 69,012,348
(0.56)
(32,029) 71,144,786
(0.45)
(34,844) 89,424,476
(0.39)
The Company operates share option schemes (see Note 26) which could potentially dilute basic earnings
per share in the future. In addition, there exist within equity nil (2018: 864,988) shares to be issued which
also have the potential to dilute basic earnings per share in the future (see Note 18).
As part of a license and option agreement with AstraZeneca (see Note 26) additional future payments of a
maximum of 1,349,692 new ordinary shares would be payable on reaching certain clinical milestones.
Warrants totaling 321,444 were issued in 2019 (2018: 41,286) that could potentially dilute basic earnings
per share if converted.
The equity-settled transactions were considered to be anti-dilutive as they would have decreased the loss
per share and were therefore excluded from the calculation of diluted loss per share.
For transactions involving ordinary shares or potential ordinary shares between the reporting date and the
date of authorization of these financial statements, see Note 30.
12. Property, plant and equipment
The Group has decided to present right-of-use assets within property, plant and equipment.
On initial application of IFRS 16 (Leases), the Group recognized a right-of-use asset of £2.6 million.
Subsequently, following the acquisition of OncoMed, the Group recognized a right-of-use asset of £10.8
million relating to an acquired property lease.
111
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Further details on the initial application of IFRS 16 (Leases) are presented in Note 4.
Right-of-use Right-of-use
asset
(equipment)
asset
(building)
Leasehold
improve-
ments
Office
equipment
IT
equipment
–
–
–
–
1,237
1,314
10,755
–
–
–
–
(290)
164
–
–
–
–
–
31
–
–
58
(18)
–
71
21
–
24
–
–
Total
266
21
2,551
10,837
(18)
(290)
(115)
–––––––––
11,877
–––––––––
–––––––––
–
–––––––––
1,024
–––––––––
–––––––––
–
–––––––––
164
–––––––––
–––––––––
–
–––––––––
71
–––––––––
–––––––––
–
–––––––––
116
–––––––––
–––––––––
(115)
–––––––––
13,252
–––––––––
–––––––––
Depreciation and impairment
At January 1, 2019
Disposals
Depreciation for
the year
–
–
–
–
(53)
–
(16)
–
(48)
–
(117)
–
(996)
–––––––––
(996)
–––––––––
–––––––––
(509)
–––––––––
(509)
–––––––––
–––––––––
(16)
–––––––––
(69)
–––––––––
–––––––––
(14)
–––––––––
(30)
–––––––––
–––––––––
(42)
–––––––––
(90)
–––––––––
–––––––––
(1,577)
–––––––––
(1,694)
–––––––––
–––––––––
–
–––––––––
10,881
–––––––––
–––––––––
–
–––––––––
515
–––––––––
–––––––––
111
–––––––––
95
–––––––––
–––––––––
15
–––––––––
41
–––––––––
–––––––––
23
–––––––––
26
–––––––––
–––––––––
149
–––––––––
11,558
–––––––––
–––––––––
Cost or valuation
At January 1, 2019
Additions
Transition to IFRS 16
(Leases)
Acquisition of
subsidiary (Note 5)
Disposals
Adjustment to
carrying value
Currency translation
effects
At December 31, 2019
At December 31, 2019
Net book value
At January 1, 2019
At December 31, 2019
112
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Leasehold
improvements
Office
equipment
IT
equipment
Cost or valuation
155
At January 1, 2018
9
Additions
Disposals
–
–––––––––
At December 31, 2018
164
–––––––––
–––––––––
Depreciation and impairment
(37)
At January 1, 2018
–
Disposals
Depreciation for the year
(16)
–––––––––
At December 31, 2018
(53)
–––––––––
–––––––––
30
1
—
–––––––––
31
–––––––––
–––––––––
(10)
—
(6)
–––––––––
(16)
–––––––––
–––––––––
48
25
(2)
–––––––––
71
–––––––––
–––––––––
(33)
2
(17)
–––––––––
(48)
–––––––––
–––––––––
Total
233
35
(2)
–––––––––
266
–––––––––
–––––––––
(80)
2
(39)
–––––––––
(117)
–––––––––
–––––––––
Net book value
At January 1, 2018
118
–––––––––
At December 31, 2018
111
–––––––––
–––––––––
20
–––––––––
15
–––––––––
–––––––––
15
–––––––––
23
–––––––––
–––––––––
153
–––––––––
149
–––––––––
–––––––––
Leasehold
improvements
Office
equipment
IT
equipment
Cost or valuation
155
At January 1, 2017
–
Additions
Disposals
–
–––––––––
155
At December 31, 2017
–––––––––
–––––––––
Depreciation and impairment
(21)
At January 1, 2017
–
Disposals
Depreciation for the year
(16)
–––––––––
At December 31, 2017
(37)
–––––––––
–––––––––
20
10
–
–––––––––
30
–––––––––
–––––––––
(5)
–
(5)
–––––––––
(10)
–––––––––
–––––––––
43
5
–
–––––––––
48
–––––––––
–––––––––
(18)
–
(15)
–––––––––
(33)
–––––––––
–––––––––
Total
218
15
–
–––––––––
233
–––––––––
–––––––––
(44)
–
(36)
–––––––––
(80)
–––––––––
–––––––––
Net book value
At January 1, 2017
134
–––––––––
At December 31, 2017
118
–––––––––
–––––––––
15
–––––––––
20
–––––––––
–––––––––
25
–––––––––
15
–––––––––
–––––––––
174
–––––––––
153
–––––––––
–––––––––
113
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. Intangible assets
Cost at January 1, 2018
Cost at December 31, 2018
Acquisition of subsidiary (Note 5)
Currency translation effects
Cost at December 31, 2019
Revision to estimated value at January 1, 2018
Revisions to estimated value
Revision to estimated value at December 31, 2018
Revision to estimated value
Revision to estimated value at December 31, 2019
Net book value at January 1, 2018
Net book value at December 31, 2018
Net book value at December 31, 2019
Acquired
development
programs
33,005
33,005
–––––––––
12,693
(171)
–––––––––
45,527
–––––––––
–
(373)
–––––––––
(373)
–––––––––
(698)
–––––––––
(1,071)
–––––––––
33,005
32,632
–––––––––
44,456
–––––––––
The Group’s strategy is to acquire and develop clinical-stage development programs for the treatment of
non-rare and rare diseases from large pharmaceutical companies.
On April 23, 2019, the Group acquired an intangible asset of £12.7 million following the acquisition of
OncoMed (Note 5).
On October 28, 2017, the Group acquired the exclusive license for MPH-966 and included the option to
acquire certain assets from AstraZeneca AB (“AstraZeneca”). On that date the fair value of MPH-966 was
measured at £7.2 million which consisted of upfront cash and equity payments as well as deferred cash and
equity consideration. The provision for deferred cash consideration, in line with the Group’s accounting policy,
is re-measured to fair value at each balance sheet date and recognized in the intangible asset. During the
year, the provision for deferred cash consideration has decreased by £0.7 million (2018: £0.4 million) due to
changes in timelines and the probability of contractual milestones being achieved.
Cost at January 1, 2017
Cost at December 31, 2017
Cost at December 31, 2018
Revision to estimated value at January 1, 2017
Revisions to estimated value
Revision to estimated value at December 31, 2017
Revision to estimated value
Revision to estimated value at December 31, 2018
Net book value at January 1, 2017
Net book value at December 31, 2017
Net book value at December 31, 2018
114
Acquired
development
programs
25,813
33,005
–––––––––
33,005
–––––––––
–
–
–––––––––
–
–––––––––
(373)
–––––––––
(373)
–––––––––
25,813
33,005
–––––––––
32,632
–––––––––
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. Impairment testing of acquired development programs not yet available for use
Acquired development programs not yet available for use are assessed annually for impairment.
The carrying amount of acquired development programs is as follows:
Navicixizumab
BPS-804
(navi) (setrusumab)
As at December 31, 2019
BGS-649
MPH-966
(alvelestat)
BCT-197
(leflutrozole)(acumapimod)
Total
Acquired
development
programs
Acquired
development
programs
12,522
–––––––––
11,616
–––––––––
6,121
–––––––––
9,886
–––––––––
4,311
–––––––––
44,456
–––––––––
BPS-804
(setrusumab)
As at December 31, 2018
BGS-649
MPH-966
(alvelestat)
BCT-197
(leflutrozole)(acumapimod)
Total
11,616
–––––––––
6,819
–––––––––
9,886
–––––––––
4,311
–––––––––
32,632
–––––––––
The Group considers the future development costs, the probability of successfully progressing each program
to product approval and the 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 December 31, 2019. Management believe that the likelihood of a
materially different outcome using different assumptions is remote.
The acquired development programs are assets which are not used in launched products. These assets have
not yet begun to be amortized but have been tested for impairment by assessing their value in use. Value in
use calculations for each program are utilized 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. Approved products are assumed to be out-licensed such that the Group receives signature fees,
milestone receipts and royalties on sales; therefore, the Group does not incur any costs of commercialization
after out-licensing.
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. Management have developed cost
estimates based on their previous experience and in conjunction with the expertise of their clinical
development partners;
Launch dates of products – these reflect management’s expected date of launch for products based
on the timeline of development programs required to obtain regulatory approval. The assumptions are
based on management’s and clinical development partners’ prior experience;
Probability of successful development – management estimates probabilities of success for each
phase of development based on industry averages and knowledge of specific programs;
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 – for all assets, cash flows are assessed over an industry-standard asset life of
20 years; and
115
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
•
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 15.3% (2018: 15.3%).
Where an out-licensing agreement has been reached with a third party, known and observable inputs replace
management assumptions if available.
At this stage of product development, the key sensitivity for all development programs is the probability of
successful completion of clinical trials in order to obtain regulatory approval for sale. Therefore, full
impairment of a development program is expected should such related trials be unsuccessful.
15. Other receivables
Rent deposit
VAT recoverable
Other receivables
16. Cash and short-term deposits
Cash at banks and on hand
Short-term deposits
December 31,
2018
2019
293
316
–
–––––––––
609
–––––––––
–––––––––
293
269
10
–––––––––
572
–––––––––
–––––––––
December 31,
2018
2019
5,344
19,698
–––––––––
25,042
–––––––––
–––––––––
15,803
544
–––––––––
16,347
–––––––––
–––––––––
Cash at banks earns interest at floating rates based on daily bank deposit rates, with maturity of three months
or less. Short-term deposits are available immediately and earn fixed interest at the respective short-term
deposit rates and are held in a diversified portfolio of counterparties.
17. Short-term investments
Short-term investments
December 31,
2018
2019
2,500
–––––––––
–––––––––
–
–––––––––
–––––––––
Short-term investments consist of cash deposits held with greater than three months term to maturity. None
of these investments are held with terms greater than a year.
116
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. Issued capital and reserves
Ordinary share capital
Balance at beginning of year
Issuances in the year
Nominal share capital as at December 31
Ordinary shares issued and fully paid
Issued on April 3, 2017 for private placement financing round
Issued on April 26, 2017 for conversion of loan note
Issued on October 28, 2017 for acquisition of license
At December 31, 2017
Nominal value at December 31, 2017 (£)
Issued capital at December 31, 2017 (£)
Ordinary share capital
Balance at beginning of year
Issuances in the year
Nominal share capital as at December 31
Ordinary shares issued and fully paid
At January 1, 2018
Issued on June 1, 2018 for public offering
Issued on August 3, 2018 for exercise of share options
Issued on October 22, 2018 for exercise of share options
At December 31, 2018
Nominal value at December 31, 2018 (£)
Issued capital at December 31, 2018 (£)
Ordinary share capital
Balance at beginning of year
Issuances in the year
Nominal share capital as at December 31
Ordinary shares issued and fully paid
At January 1, 2019
Issued on April 23, 2019 for OncoMed acquisition
Issued on June 21, 2019 for conversion of loan note
At December 31, 2019
Nominal value at December 31, 2019 (£)
Issued capital at December 31, 2019 (£)
2017
193
20
––––––––––
213
––––––––––
––––––––––
5,042,017
1,221,361
490,798
––––––––––
71,094,974
––––––––––
0.003
213,285
––––––––––
––––––––––
2018
213
1
––––––––––
214
––––––––––
––––––––––
71,094,974
50,076
10,000
85,222
––––––––––
71,240,272
––––––––––
0.003
213,721
––––––––––
––––––––––
2019
214
80
––––––––––
294
––––––––––
––––––––––
71,240,272
24,783,320
1,936,030
––––––––––
97,959,622
––––––––––
0.003
293,879
––––––––––
––––––––––
Since January 1, 2017, the following alterations to the Company’s share capital have been made:
•
Under the private placement dated April 3, 2017, the Company issued and allotted 5,042,017 ordinary
shares of £0.003 in nominal value in the capital of the Company on April 3, 2017 at a price of £2.975
per share to institutional investors. Gross cash received was £15,000,000;
117
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
•
•
•
•
•
•
•
On April 26, 2017 Novartis converted £1,398,552 of loan notes dated June 3, 2016 into 632,829 ordinary
shares of £0.003 in nominal value in the capital of the Company at the fixed conversion price of £2.21
per share. Under the terms of the notes, Novartis also received 588,532 bonus shares;
On October 31, 2017, Mereo BioPharma Group plc issued 490,798 ordinary shares of £0.003 in nominal
value in the capital of the Company to AstraZeneca AB as part payment for the acquisition by Mereo
BioPharma 4 Limited of an exclusive license and option to acquire certain assets;
Under the public offering dated June 1, 2018, the Company issued and allotted 50,076 ordinary shares
of £0.003 in nominal value in the capital of the Company on June 1, 2018 at a price of £3.00 per share
to investors. Gross cash received was £150,228;
On August 3, 2018 the Company issued and allotted 10,000 ordinary shares of £0.003 in nominal value
in the capital of the Company pursuant to an exercise of employee share options;
On October 22, 2018 the Company issued and allotted 85,222 ordinary shares of £0.003 in nominal
value in the capital of the Company pursuant to an exercise of employee share options;
On April 23, 2019, the Company issued and allotted 24,783,320 ordinary shares of £0.003 in nominal
value in the capital of the Company as consideration for the acquisition of OncoMed. The fair value of
the ordinary shares, measured on the date of acquisition, was £1.65; and
On June 21, 2019, Novartis converted £2.4 million of loan notes dated June 3, 2016 into 1,071,042
ordinary shares of £0.003 in nominal value in the capital of the Company at a fixed conversion price of
£2.21 per share. Under the terms of the notes, Novartis also received 864,988 bonus shares.
Share premium
At January 1, 2017
Issued on April 3, 2017 for private placement financing round
Issued on April 26, 2017 for conversion of loan note
Issued on October 28, 2017 for acquisition of license
Transaction costs for issued share capital
At December 31, 2017
Share premium
At January 1, 2018
Issued on June 1, 2018 for public offering
Issued on August 3, 2018 for exercise of share options
Issued on October 22, 2018 for exercise of share options
Transaction costs for issued share capital
At December 31, 2018
Share premium
At January 1, 2019
Issued on June 21, 2019 for conversion of loan note
Transaction costs for issued share capital
At December 31, 2019
118
December 31,
2017
99,975
14,985
2,478
1,519
(730)
–––––––––
118,227
–––––––––
December 31,
2018
118,227
150
13
110
(8)
–––––––––
118,492
–––––––––
December 31,
2019
118,492
3,953
(761)
–––––––––
121,684
–––––––––
Total
12,666
4,983
(1,083)
(207)
–––––––––
16,359
–––––––––
–––––––––
Total
16,359
2,302
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other capital reserves
Shares to
be issued
Share-based
payments
Equity
component of
convertible
loan
2,673
At January 1, 2017
–
Share-based payments expense during the year
(1,083)
Shares issued
Equity component of convertible loan instrument
—
–––––––––
At December 31, 2017
1,590
–––––––––
–––––––––
9,476
4,983
–
—
–––––––––
14,459
–––––––––
–––––––––
517
—
–
(207)
–––––––––
310
–––––––––
–––––––––
Shares to
be issued
Share-based
payments
Equity
component of
convertible
loan
Warrants
issued for
TAP funding
1,590
14,459
–
2,302
310
—
–
–
At January 1, 2018
Share-based payments
expense during the year
Share-based payments release
for exercise of options
Warrants issued for TAP funding
At December 31, 2018
–
–
–––––––––
1,590
–––––––––
–––––––––
(112)
–
–––––––––
16,649
–––––––––
–––––––––
–
–
–––––––––
310
–––––––––
–––––––––
–
44
–––––––––
44
–––––––––
–––––––––
(112)
44
–––––––––
18,593
–––––––––
–––––––––
Shares to Share-based
payments
be issued
Equity
component of
convertible
Warrants
issued for
loan TAP funding
1,590
16,649
310
–
(1,590)
–
–
–
—
—
1,636
–
–
(310)
—
44
–
–
–
–
Merger
reserve
Total
–
18,593
40,818
40,818
–
–
–
(1,590)
(310)
1,636
–
–––––––––
–
–––––––––
–––––––––
–
–––––––––
18,285
–––––––––
–––––––––
–
–––––––––
–
–––––––––
–––––––––
–
–––––––––
44
–––––––––
–––––––––
–
–––––––––
40,818
–––––––––
–––––––––
–
–––––––––
59,147
–––––––––
–––––––––
At January 1, 2019
Acquisition of OncoMed
(Note 5)
Shares issued during
the year
Convertible loan
conversion
Share-based payments
expense during the year
Share-based payments
release for exercise
of options
At December 31, 2019
Share-based payments
The Group has various share option schemes under which options to subscribe for the Group’s shares have
been granted to certain executives, NEDs and employees.
The share-based payment reserve is used to recognize a) the value of equity settled share-based payments
provided to employees, including key management personnel, as part of their remuneration and b) deferred
equity consideration. Refer to Note 26 for further details.
119
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Shares issued or to be issued
At January 1, 2019, a maximum of 864,988 shares were remaining to be issued to Novartis pro rata to their
percentage shareholding as and when the Company issued further ordinary shares. The fair value of these
shares was £1.84 per share.
On June 21, 2019, the remaining 864,988 shares were issued to Novartis as fully paid up bonus shares for
£nil consideration.
Equity component of convertible loan instrument
The convertible loan notes issued to Novartis were a compound instrument consisting of a liability and an
equity component.
On June 21, 2019, Novartis exercised the right to convert the instrument therefore the value of the equity
component as at December 31, 2019 is £nil.
Merger reserve
The consideration paid to acquire OncoMed was 24,783,320 ordinary shares with an acquisition date fair
value of £40.9 million, based on the Group’s quoted share price. The nominal value of the issued capital was
£0.1 million with the excess, £40.8 million, classified within other capital reserves as a ‘Merger reserve’.
Warrants issued for TAP funding
The funding arrangements with The Alpha-1 Project are a compound instrument consisting of a liability and
an equity component (see Note 21). The value of the equity component (consideration received for the
warrants) as at December 31, 2019 is £44,156 (2018: £44,156).
Accumulated loss
Year ended December 31,
Other reserves
Accumulated losses
Accumulated deficit
2017
2018
2019
7,000
(79,316)
–––––––––
(72,316)
–––––––––
–––––––––
7,000
(111,221)
–––––––––
(104,221)
–––––––––
–––––––––
7,000
(146,065)
–––––––––
(139,065)
–––––––––
–––––––––
On March 21, 2016, the Directors of the Company signed a solvency statement with the agreement of all
shareholders and undertook a capital reduction, reducing the share premium account by £7.0 million and
crediting a new other reserve by the same amount.
19. Interest-bearing loans and borrowings
Year ended
December 31,
Convertible loan notes (“Novartis Notes”)
Bank loan
At December 31
Current
Non-current
2018
2019
2,039
19,446
–––––––––
21,485
–––––––––
–––––––––
6,838
14,647
–––––––––
–––––––––
–
20,512
–––––––––
20,512
–––––––––
–––––––––
15,139
5,373
–––––––––
–––––––––
19.1 Convertible loan notes (“Novartis Notes”)
On June 21, 2019, Novartis converted the remaining balance of principal and interest of £2.4 million of
convertible loan notes into 1,071,042 ordinary shares at a fixed conversion price of £2.21 per share.
This has been recorded as a reduction in interest bearing loans and borrowings of £2.0 million and a
reduction in other capital reserves of £0.3 million. Under the terms of the arrangement, Novartis also received
864,988 bonus shares (for £nil consideration).
120
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
There are no convertible loan notes outstanding as at December 31, 2019.
As at December 31, 2018, the carrying value of the convertible loan notes was £2.0 million. The value of the
debt component of the convertible loan notes on the date of issuance of the instrument was £2.9 million.
Cash flows attached to the convertible loan note up to the date of maturity were calculated and discounted
at an appropriate venture debt rate of 10%. The value of the equity component of the instrument as at
December 31, 2018 was £0.3 million.
19.2 Bank loan
The bank loan has a principal amount of £20.5 million and will mature on March 1, 2021, unless extended
on reaching certain milestones. The terms of the bank loan required interest-only payments up until April
30, 2019, and thereafter payments of interest and principle in 23 equal monthly instalments through maturity.
The bank loan bears interest at an annual fixed rate of 8.5% and is secured by substantially all of the Group’s
assets, including intellectual property rights owned or controlled by the Group.
On April 23, 2019, the Group agreed an amendment to the terms of its bank loan with its lenders. The new
terms extended the interest-only period through to December 31, 2019 followed by a 15-month capital and
interest repayment period. The Group has undertaken an assessment believes that the change in terms
should not be accounted for as a modification, but instead as a change in expected cash flows. The cash
flows under the bank loan were revised from May 1, 2019.
Management estimated the revised carrying value of the loan on May 1, 2019 to be £19.9 million by
discounting the revised cash flows at the original discount rate of 18%. The difference between the previous
and revised carrying value of the loan on May 1, 2019 was £0.5 million. The gain as a result of the changes
in estimated cash flows is recognized as a true-up in total finance cost (i.e. together with interest expense).
Following the re-estimation, the financial liability continues to be accounted for at amortized cost using the
original effective interest rate.
On May 3, 2019, under the terms of the loan agreement, the Company issued 321,444 additional warrants
(Note 21) to its lenders giving them the right to subscribe for ordinary shares at an exercise price of £2.95.
The fair value of the additional warrants on their grant date was £0.1 million.
A total of £1.5 million (2018: £0.8 million) of non-cash interest has been charged to the consolidated
statement of comprehensive loss in the year.
The fair value of the bank loan is not materially different from the carrying amount, since the interest payable
on the borrowings is reflective of market rates following the most recent amendment to the bank loan on
May 1, 2019. In the prior year, the bank loan was modified and a modification loss of £0.7 million was
recognized on the consolidated statement of comprehensive loss on the date of modification. This balance
has been reclassified from administrative expenses to finance charges within the statement of
comprehensive loss.
20. Provisions
Year ended
December 31,
Social security contributions on share options
Provision for deferred cash consideration
At December 31
Current
Non-current
2018
2019
842
2,131
–––––––––
2,973
–––––––––
–––––––––
332
2,641
–––––––––
–––––––––
104
1,654
–––––––––
1,758
–––––––––
–––––––––
309
1,449
–––––––––
–––––––––
121
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31,
Social security contributions on share options
2018
2017
2019
At beginning of year
Arising during the year
Released
At December 31
Current
Non-current
1,172
1,116
–
–––––––––
2,288
–––––––––
–––––––––
–
2,288
–––––––––
–––––––––
2,288
–
(1,446)
–––––––––
842
–––––––––
–––––––––
–
842
–––––––––
–––––––––
842
–
(738)
–––––––––
104
–––––––––
–––––––––
–
104
–––––––––
–––––––––
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
taxable gain arising on exercise of the share options, using the best estimate of the market price at the
balance sheet date.
Management assume the options will be held for their full contractual life of ten years (see Note 26) therefore
the provision has been classified as non-current. The provision has been discounted.
The negative charge in 2019 is due to the fall in the Company’s share price between December 31, 2018 and
December 31, 2019.
Year ended December 31,
Provisions for deferred cash consideration
2017
2018
2019
At beginning of year
Arising during the year
Increase in provision due to the unwinding of the time
value of money
Decrease in provision due to a change in estimates relating to
timelines and probabilities of contractual milestones being
achieved (see Note 12)
At December 31
Current
Non-current
–
2,061
—
2,061
–
443
2,131
—
221
—
–––––––––
2,061
–––––––––
–––––––––
274
1,787
–––––––––
–––––––––
(373)
–––––––––
2,131
–––––––––
–––––––––
332
1,799
–––––––––
–––––––––
(698)
–––––––––
1,654
–––––––––
–––––––––
309
1,345
–––––––––
–––––––––
The deferred cash consideration is the estimate of the quantifiable but not certain future cash payment
obligations due to AstraZeneca for the acquisition of certain assets (see Note 13).
This liability is calculated as the risk-adjusted net present value of future cash payments to be made by the
Group. The payments are dependent on reaching certain milestones based on the commencement and
outcome of clinical trials.
The likelihood of achieving such milestones is reviewed at the balance sheet date and increased or decreased
as appropriate.
21. Warrant liability
Year ended December 31,
At beginning of year
Issued during the year
Movement during the year
At December 31
122
2017
2018
2019
–
1,292
54
–––––––––
1,346
–––––––––
–––––––––
1,346
376
(716)
–––––––––
1,006
–––––––––
–––––––––
1,006
131
(1,006)
–––––––––
131
–––––––––
–––––––––
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2018, as part of the bank loan facility, the Company had issued 922,464 warrants (Note 19)
to its lenders giving them the right to subscribe for ordinary shares at a range of exercise price between
£2.31 and £3.30.
On May 3, 2019, the Company issued a further 321,444 warrants to its lenders giving them the right to
subscribe for ordinary shares at an exercise price of £2.95. The fair value of the additional warrants on their
grant date was £0.1 million.
At December 31, 2019, a total of 1,243,908 warrants are outstanding which are held by lenders of the bank
loan facility. The warrants outstanding are equivalent to 1.27% of the ordinary share capital of the Company.
The movement during the year ended December 31, 2019 of £1.0 million was mostly due to the decrease in
the market price of ordinary shares (refer to table below).
The warrant instrument is classified as a financial liability as the terms of the instrument allow for a cashless
exercise. At each balance sheet date, the fair value of the warrants will be assessed using the Black Scholes
model considering appropriate amendments to inputs in respect of volatility and remaining expected life of
the warrants.
The following table lists the weighted average inputs to the models used for the fair value of warrants granted
during the year ended December 31:
Year ended
December 31,
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ordinary shares (£)
Model used
2018
2019
67
1.26
10.0
0.83
Black Scholes Black Scholes
65
1.56
10
2.31
Since there is no historical data in relation to the expected life of the warrants, the contractual life of the
options was used in calculating the expense for the year.
Volatility was estimated by reference to the share price volatility of a group of comparable companies over
a retrospective year equal to the expected life of the warrants.
22. Other liability
Year ended
December 31,
At beginning of year
Interest accretion
Arising during the year
At December 31
2018
2019
–
–
34
–––––––––
34
–––––––––
–––––––––
34
10
–
–––––––––
44
–––––––––
–––––––––
On October 8, 2018, the Group entered into a funding agreement with The Alpha-1 Project (“TAP”), which
provides for total potential payments to Mereo of $400,000 as contributions towards the development of
MPH-966 upon completion of certain milestones by the Group. In exchange, on receipt of such funding, the
Group will issue warrants allowing TAP to subscribe for shares in the company (see Note 18). Under the
agreement, TAP is potentially entitled to receive a payment equivalent to amounts received by Mereo (up to
a maximum of $400,000) conditional on and within thirty days of the first regulatory approval received by
the Group for MPH-966.
The first payment (“Payment 1”) of $100,000 (£78,445) was made to Mereo on November 16, 2018. The fair
value of the liability of Payment 1 on November 16, 2018 was £34,289. Application of the effective interest
method is required to accrete the initial liability value up to the face value of the liability over a period of five
123
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
years, being the estimate of the earliest date that the liability could be repaid and assuming that the
agreement is not terminated earlier. This non-cash interest charge will be made in each statutory reporting
period. The annual value of this interest charge is 25.8%.
The fair value of warrants issued as part of Payment 1 on November 16, 2018 was £44,156.
23. Trade and other payables
Year ended
December 31,
Trade payables
Social security and other taxes
Other payables
At December 31
2018
2019
4,393
161
16
–––––––––
4,570
–––––––––
–––––––––
6,148
183
21
–––––––––
6,352
–––––––––
–––––––––
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. Changes in liabilities arising from financing activities
Contingent
consideration
Lease
liability
Bank
loan
Novartis Warrant
Notes
Deferred
cash
liability consideration
TAP
agreement
Total
–
2,038
19,446
–
–
–
–
–
–
1,977
–
–
185
–
(124)
18,775
(2,111)
(375)
2,427
730
–
Carrying value
1,346
at January 1, 2018 –
–
Financing cash flows –
(716)
Changes in fair values –
–
Interest expense –
–
Loss on modification –
Other –
375
–––––––– –––––––– –––––––– –––––––– ––––––
Carrying value
December 31, 2018 –
1,005
–––––––– –––––––– –––––––– –––––––– ––––––
Adoption of IFRS 16
(Leases) –
Financing cash flows –
Changes in foreign
exchange –
Changes in fair values 354
Interest expense –
Gain on modification —
Issuance of equity –
Acquisition of
subsidiary (Note 5) –
Lease term
reassessment –
–
–––––––– –––––––– –––––––– –––––––– ––––––
Carrying value at
December 31, 2019 354
131
–––––––– –––––––– –––––––– –––––––– ––––––
–
–
20
–
(2,058)
(131)
–
1,314
–
–
–
—
3,262
(457)
–
–
(874)
–
–
–
–
(1,739)
2,534
(2,212)
20,512
11,904
10,689
(290)
–
–
–
–
–
–
–
–
–
–
2,061
–
70
–
–
–
24,159
(2,077)
(1,021)
2,612
730
251
–––––––– –––––––– ––––––––
–
34
–
–
–
–
2,131
24,654
–––––––– –––––––– ––––––––
34
–
–
–
(477)
–
–
–
–
–
–
10
–
–
–
2,534
(3,951)
(131)
(987)
4,596
(457)
(2,058)
–
–
10,689
(290)
–––––––– –––––––– ––––––––
–
–
1,654
34,599
–––––––– –––––––– ––––––––
44
25. Financial and capital risk management and fair value measurement
25.1 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.
124
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 R&D activities. The Group’s principal method
of adjusting the capital available is through issuing new shares or arranging suitable debt financing, including
any related warrants. The Group’s share capital and share premium are disclosed in Note 18. The Group’s
loans are disclosed in Note 19. The Group monitors the availability of capital with regard to its committed
and planned forecast future expenditure on an ongoing basis.
The Group has set up an Employee Benefit Trust which makes market purchases of the Company’s shares
to provide some cover against future exercise of options under the Company’s share option schemes (see
Note 28).
25.2 Financial risk management objectives and policies
Monitoring of financial risk is part of the Board’s ongoing risk management, the effectiveness of which is
reviewed annually. Our agreed policies are implemented by the Chief Financial Officer, who submits periodic
reports to the Board. The Group seeks to maintain a balance between equity capital and convertible and
secured debt to provide sufficient cash resources to execute the business plan. In addition, the Group
maintains a balance between cash held on deposit and short-term investments in Sterling and other
currencies to reduce its exposure to foreign exchange fluctuations in respect of its planned expenditure.
Except for the bank loan, the Group’s principal financial instruments comprise trade payables 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. The Group
does not consider that its financial instruments gave rise to any material financial risks during the year to
December 31, 2019.
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 optimize the amount of interest earned while maintaining access to
sufficient funds to meet day-to-day cash requirements.
The interest payable on the bank loan is fixed. 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 pound sterling,
Euros and U.S. Dollars. Funding to date has been secured in a mixture of pound sterling and U.S. Dollars and
therefore a level of natural hedging exists in respect of operating costs. Foreign exchange risk arises from
commercial transactions and recognized assets and liabilities in foreign currencies.
Credit risks
The Group’s policy is to place funds with financial institutions which have a minimum long-term credit rating
with Standard & Poor’s of A. The Group also allocates a quota to individual institutions in respect of cash
deposits and also 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 investment
counterparty and no more than £5 million with any one cash deposit 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 minimize 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 December 31,
2019 is the carrying amounts. The Group does not face a significant liquidity risk with regards to its lease
liabilities.
125
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 “Going concern” regarding
the Directors’ assessment of liquidity for further information.
25.3 Fair value hierarchy
Fair value measurement using
Date of valuation
Total
Quoted prices
in active
markets
(Level 1)
Significant
Significant
observable unobservable
inputs
(Level 3)
inputs
(Level 2)
Liabilities measured at fair value
Provision for deferred
cash consideration
(Note 20)
Provision for
contingent
consideration
(Note 5)
Warrant liability
(Note 21)
December 31, 2019
December 31, 2019
December 31, 2019
1,654
354
131
Liabilities for which fair values are disclosed
Bank loan (Note 19)
December 31, 2019
20,512
There were no transfers between Level 1 and Level 2 during 2019.
–
–
–
–
–
–
131
20,512
1,654
354
–
–
Fair value measurement hierarchy for liabilities as at December 31, 2018:
Fair value measurement using
Date of valuation
Total
Quoted prices
in active
markets
(Level 1)
Significant
Significant
observable unobservable
inputs
(Level 3)
inputs
(Level 2)
Liabilities measured at fair value
Provision for deferred
cash consideration
(Note 20)
Warrant liability
(Note 21)
December 31, 2018
December 31, 2018
Liabilities for which fair values are disclosed
Convertible loan
(Note 19)
Bank loan (Note 19)
December 31, 2018
December 31, 2018
2,061
1,346
1,977
18,775
–
–
–
–
–
2,061
1,346
1,977
18,775
–
–
–
There were no transfers between Level 1 and Level 2 during 2018.
The management of the Group assessed that the fair values of cash and short-term deposits, other
receivables, trade payables, and other current liabilities approximate their carrying amounts largely due to
the short-term maturities of these instruments.
The following table presents the changes in level 3 items for the periods ended December 31, 2019 and
December 31, 2018:
126
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
January 1, 2018
Unwinding of the time value of money recognised as a finance charge
Change in estimate relating to probabilities
(revision to intangible asset, see Note 13)
December 31, 2018
January 1, 2019
Unwinding of the time value of money (recognized as a finance charge)
Change in estimate relating to probabilities
(revision to intangible asset, see Note 13)
Change in estimate relating to probabilities
(recognized as an administrative expense)
December 31, 2019
Provision for Provision for
deferred cash
contingent
consideration consideration
2,061
443
(373)
–––––––––
2,131
–––––––––
2,131
221
–
–
–
–––––––––
–
–––––––––
–
–
(698)
–
–
–––––––––
1,654
–––––––––
354
–––––––––
354
–––––––––
The following methods and assumptions were used to estimate the fair values:
•
•
•
The warrant liability is estimated using a Black Scholes model, taking into account appropriate
amendments to inputs in respect of volatility, remaining expected life of the warrants, cost of capital,
probability of success and rates of interest at each reporting date.
The fair value of the provision for deferred cash consideration is estimated by discounting future cash
flows using rates currently available for debt on similar terms and credit risk. In addition to being
sensitive to a reasonably possible change in the forecast cash flows or the discount rate, the fair value
of the deferred cash consideration is also sensitive to a reasonably possible change in the probability
of reaching certain milestones. The valuation requires management to use unobservable inputs in the
model, of which the significant unobservable inputs are disclosed in the tables below. Management
regularly assesses a range of reasonably possible alternatives for those significant unobservable inputs
and determines their impact on the total fair value.
At December 31, 2019, the Group estimates the fair value of the contingent consideration liability to be
£0.4 million, which is an increase from £nil on the date of acquisition. Total potential payments under
the CVR arrangement on a gross, undiscounted basis are approximately $80.0 million (see Note 13).
The increase in the fair value of the contingent consideration liability reflects the terms subsequently
agreed with Oncologie, Inc. (“Oncologie) with respect to the global licensing agreement of navicixizumab
(“Navi”) (see Note 30). The estimated contingent consideration payable is based on a risk-adjusted,
probability-based scenario. Under this approach the likelihood of future payments being made to the
former shareholder of OncoMed under the CVR arrangement is considered. The estimate could
materially change over time as the development plan and subsequent commercialization of the Navi
product progresses.
127
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The significant unobservable inputs used in the fair value measurements categorized within Level 3 of the
fair value hierarchy, together with a quantitative sensitivity analysis as at December 31, 2019 and 2018 are
as shown below:
Significant Input range
Valuation unobservable (weighted
technique inputs average) Sensitivity of the input to fair value
Provision for DCF
deferred cash
consideration
Contingent DCF
consideration
liability
WACC 2019: 15.3% 1% increase would result in a decrease
in fair value by £38,000.
WACC 2018: 15.3% 1% decrease would result in an increase
in fair value by £18,000.
Probability of 2019: 15.8–95% 10% increase would result in an increase
success in fair value by £0.4 million.
Probability of 2018: 28%–95% 10% decrease would result in a decrease
success fair value by £0.9 million.
Ongoing Not applicable Total potential payments future payments
uncertainty relating to the contingent consideration
in the clinical liability on a gross, undiscounted basis are
development approximately $80.0 million (see Note 30).
of the Navi
Product. Sensitivity of the input to fair value is
primarily driven by uncertainty in the
Regulatory clinical development of the Navi product.
approval and As at December 31, 2019, we are
commercialisation completing a Phase 1b clinical trial.
risks.
Future potential payments under the CVR
arrangement are contingent on i) future
development milestones and ii) future
sales of the Navi product, following
commercialisation.
regulatory approval and
25.4 Financial assets at fair value through other comprehensive income
During the year, the Group acquired £29.0 million of short-term debt investments following the acquisition
of OncoMed (Note 5). The short-term debt investments acquired were in U.S. Treasury Bills (“T-Bill”)
securities.
All the short-term debt investments have reached maturity and been sold during the year, therefore the
carrying value as at December 31, 2019 is £nil. On maturity, the related balance held within other
comprehensive income has been reclassified to finance income within the consolidated statement of
comprehensive loss.
128
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25.5 Liquidity risk
The table below summarizes the maturity profile of the Group’s financial liabilities based on contractual
undiscounted payments at December 31, 2019:
Payments due by period
Up to 1 year
1–3 years
3–5 years
Over 5 years
Bank loan (Note 19)
Leases (Note 4)
Trade and other payables
(Note 23)
Contingent consideration
liability (Note 5)
17,185
2,634
6,352
5,484
4,643
–
–
4,913
–
Total
22,669
20,295
–
8,105
–
6,352
354
–––––––––
26,525
–––––––––
–––––––––
–
–––––––––
10,127
–––––––––
–––––––––
–
–––––––––
4,913
–––––––––
–––––––––
–
–––––––––
8,105
–––––––––
–––––––––
354
–––––––––
49,670
–––––––––
–––––––––
Further details regarding the contingent consideration liability following the acquisition of OncoMed are
provided in Note 5.
The table below summarizes the maturity profile of the Group’s financial liabilities based on contractual
undiscounted payments at December 31, 2018:
Payments due by period
Up to 1 year
1–3 years
3–5 years
Over 5 years
Convertible loan (Note 19)
Bank loan (Note 19)
Leases (Note 27)
Trade and other payables
(Note 23)
83
8,260
332
2,162
15,589
204
–
–
–
–
–
–
4,570
–––––––––
13,245
–––––––––
–––––––––
–
–––––––––
17,955
–––––––––
–––––––––
–
–––––––––
–
–––––––––
–––––––––
–
–––––––––
–
–––––––––
–––––––––
4,570
–––––––––
31,200
–––––––––
–––––––––
Total
2,245
23,849
536
The Group may incur potential payments upon achievement of clinical, regulatory and commercial
milestones, as applicable, or royalty payments that may be required to be made under license agreements
the Group entered into with various entities pursuant to which the Group has in-licensed certain intellectual
property, including license agreements with Novartis and AstraZeneca. Due to the uncertainty of the
achievement and timing of the events requiring payment under these agreements, the amounts to be paid
are not fixed or determinable at this time.
25.6 Market risk
The functional currency of the Company and all subsidiaries is pound sterling except for OncoMed whose
functional currency is US dollars. The Group incurs expenditures in foreign currencies and is exposed to the
risks of foreign exchange rate movements, with the impact recognized in the consolidated statement of
comprehensive loss. The Group seeks to minimize this exposure by passively maintain foreign currency
cash balances at levels appropriate to meet foreseeable foreign currency expenditures.
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The table below shows analysis of the pound sterling equivalent of period-end cash and cash equivalent
balances by currency:
Year ended
December 31,
Cash at bank and in hand:
Pound sterling
US dollars
Swiss francs
Euro
2019
2018
2,525
13,807
11
4
–––––––––
16,347
–––––––––
–––––––––
23,189
1,809
–
44
–––––––––
25,042
–––––––––
–––––––––
The table below shows those transactional exposures that give rise to net currency gains and losses
recognized in the consolidated income statement. Such exposures comprise the net monetary assets and
monetary liabilities of the Group that are not denominated in the functional currency of the relevant Group
entity. As at year end, these exposures were as follows:
Year ended
December 31,
Net foreign currency assets/(liabilities):
US dollars
Swiss francs
Euro
2019
2018
(219)
(6)
(812)
–––––––––
(1,037)
–––––––––
–––––––––
(542)
–
(1,430)
–––––––––
(1,972)
–––––––––
–––––––––
The most significant currencies in which the Group transacts, other than pound sterling, are the US dollar
and the Euro. The Group also trades in other currencies in small amounts as necessary.
The following table details the Group’s sensitivity to a 10% change in the period-end rate, which the Group
feels is the maximum likely change in rate based upon recent currency movements, in the US dollar and the
Euro against pound sterling:
Year ended December 31, 2019
Net foreign currency assets/(liabilities):
Loss before tax
Equity
Year ended December 31, 2018
Net foreign currency assets/(liabilities):
Loss before tax
Equity
US dollar
Euro
20
20
–––––––––
74
74
–––––––––
US dollar
Euro
49
49
–––––––––
130
130
–––––––––
In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk
as the period end exposure does not reflect the exposure during the period.
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. Share-based payments
The charge for share-based payments under IFRS 2 arises across the following schemes:
Year ended December 31,
2019 Equity Incentive Plan
2019 NED Equity Incentive Plan
2015 Plan
Mereo BioPharma Group plc Share Option Plan
Long Term Incentive Plan
Deferred Bonus Share Plan
2017
2018
2019
–
–
2,442
586
299
325
–––––––––
3,652
–––––––––
–––––––––
–
–
806
1,064
320
–
–––––––––
2,190
–––––––––
–––––––––
635
160
63
685
93
–
–––––––––
1,636
–––––––––
–––––––––
26.1 2019 Equity Incentive Plan (“EIP”)
Our Board adopted the 2019 EIP on April 4, 2019. The 2019 EIP provides for the grant of market value options
over ADR’s (each ADR represented by 5 ordinary shares) to executive directors and employees.
During the year, market value options were granted to executive directors and employees. Subject to the
executive director or employees continued employment, one fourth of each such market value option grant
shall vest on the first anniversary of the grant date and the remainder shall vest in equal monthly instalments
over the three-year period following the first anniversary. No performance conditions apply to such market
value options.
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. The contractual term of the share options is 10 years.
Movements during the year
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, options for the 2019 EIP during the year:
Outstanding at beginning of the year
Granted during the year
Cancelled during the year
Forfeited during the year
Exercised during the year
Outstanding at December 31
Exercisable at December 31
2019
Options over
ADR Number
WAEP
$
–
801,200
3,150
–
–
–––––––––
798,050
–––––––––
–––––––––
–
–––––––––
–––––––––
–
4.29
5.40
–
–
–––––––––
4.29
–––––––––
–––––––––
–
–––––––––
–––––––––
The weighted average remaining contractual life for the share options outstanding as at December 31, 2019
was 9.5 years.
The weighted average fair value of options granted during the year was £0.49 (2018: £nil).
Options outstanding at the end of the year had an exercise price of between $2.60 and $5.40.
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26.2 2019 Non-Executive Director Equity Incentive Plan (“NED EIP”)
Our Board adopted the 2019 NED EIP on April 4, 2019. The 2019 NED EIP provides for the grant of market
value options over ADR’s to non-executive directors.
Subject to the participant holding the participant’s current office (or being otherwise employed) through
each applicable vesting date, such awards shall vest in equal monthly instalments over a one-year period
following the grant date. No performance conditions apply to such market value options.
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. The contractual term of the share options is 10 years.
Movements during the year
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, options for the 2019 NED EIP during the year:
Outstanding at beginning of the year
Granted during the year
Cancelled during the year
Forfeited during the year
Exercised during the year
Outstanding at December 31
Exercisable at December 31
2019
Options over
ADR’s Number
WAEP
$
–
77,000
–
–
–
–––––––––
77,000
–––––––––
–––––––––
38,472
–––––––––
–––––––––
–
4.20
–
–
–
–––––––––
4.20
–––––––––
–––––––––
4.40
–––––––––
–––––––––
The weighted average remaining contractual life for the share options outstanding as at December 31, 2019
was 9.5 years.
The weighted average fair value of options granted during the year was £0.49 (2018: £nil).
Options outstanding at the end of the year had an exercise price of between $3.00 and $5.40.
26.3 The 2015 Plan
Under the Mereo BioPharma Group Limited Share Option Plan (the “2015 Plan”), the Group, at its discretion,
granted share options to employees, including executive management and NEDs. Share options vest over
four years for executive management and employees and over three years for NEDs. No further share option
grants are envisaged under the 2015 Plan.
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Movements during the year
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, options for the 2015 Plan during the year:
2017
2018
2019
WAEP
£
Number
WAEP
£
Number
WAEP
£
Number
Outstanding at
beginning of
the year
Granted during
the year
Cancelled during
the year
Forfeited during
the year
Exercised during
the year
Outstanding at
December 31
Exercisable at
December 31
9,198,655
1.32
9,124,610
1.32
8,983,133
1.32
–
–
–
–
–
–
–
–
–
–
–
–
(74,045)
1.29
(46,255)
1.29
(59,533)
1.29
–
–––––––––
–
–––––––––
(95,222)
–––––––––
1.29
–––––––––
–
–––––––––
–
–––––––––
9,124,610
–––––––––
–––––––––
1.32
–––––––––
–––––––––
8,983,133
–––––––––
–––––––––
1.32
–––––––––
–––––––––
8,923,600
–––––––––
–––––––––
1.32
–––––––––
–––––––––
5,655,676
–––––––––
–––––––––
1.31
–––––––––
–––––––––
8,007,029
–––––––––
–––––––––
1.31
–––––––––
–––––––––
8,901,478
–––––––––
–––––––––
1.32
–––––––––
–––––––––
The weighted average remaining contractual life for the share options outstanding as at December 31, 2019
was 5.6 years (2018: 6.6 years).
Options outstanding at the end of the year had an exercise price of between £1.29 and £2.21.
26.4 The Mereo BioPharma Group plc Share Option Plan
The Mereo BioPharma Group plc Share Option Plan (“Share Option Plan”) provides for the grant of options
to acquire our ordinary shares to employees, executive directors and executive officers. Options may be
granted to all eligible employees on commencement of employment and may be granted on a periodic basis
after that. Under the Share Option Plan, our Board of Directors may determine if the vesting of an option will
be subject to the satisfaction of a performance condition. Following the introduction of the EIP and NED EIP,
no further share option grants under the Share Option Plan are envisaged.
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Movements during the year
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, options for the Option Plan during the year:
2017
2018
2019
WAEP
£
Number
WAEP
£
Number
WAEP
£
Number
Outstanding at
beginning of
the year
Granted during
the year
Cancelled during
the year
Forfeited during
the year
Outstanding at
December 31
Exercisable at
December 31
–
–
1,578,188
3.05
1,881,555
3.10
1,593,188
3.05
388,000
–
–
–
3.14
–
–
–
–
–
(15,000)
3.03
(84,633)
3.03
(357,490)
3.21
1,578,188
–––––––––
3.05
–––––––––
1,881,555
–––––––––
3.10
–––––––––
1,524,065
–––––––––
3.07
–––––––––
–
–––––––––
–––––––––
–
–––––––––
–––––––––
–
–––––––––
–––––––––
–
–––––––––
–––––––––
40,141
–––––––––
–––––––––
3.03
–––––––––
–––––––––
The weighted average remaining contractual life for the share options outstanding as at December 31, 2019
was 7.6 years (2018: 8.6 years).
The weighted average fair value of options granted during the year was £nil (2018: £2.29).
Options outstanding at the end of the year had an exercise price of between £2.76 and £3.25.
26.5 Long Term Incentive Plan
Under the Company’s Long Term Incentive Plan (LTIP), initiated in 2016, the Group, at its discretion, may
grant nil-cost options to acquire shares to employees. Under the LTIP 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 non-marked based performance measures
(strategic targets).
With respect to the LTIP Strategic Element, during the year the non-market based performance measures
were reassessed. Based on that reassessment, an adjustment with respect to the cumulative compensation
expense recognized in equity has been recorded which resulted in a credit of £0.1 million recorded in the
consolidated statement of comprehensive loss.
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 recognized for employee services received during the year to December 31, 2019 was £0.1
million (2018: £0.3 million).
134
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Granted during the year
Cancelled during the year
Lapsed during the year
Outstanding at December 31
Exercisable at December 31
2017
Number
2018
Number
2019
Number
185,950
–
–
1,151,446
–––––––––
–––––––––
–
–––––––––
–––––––––
—
–
–
1,151,446
–––––––––
–––––––––
–
–––––––––
–––––––––
–
–
(241,374)
910,072
–––––––––
–––––––––
–
–––––––––
–––––––––
During the year 241,373 options under the LTIP Share Price Element lapsed as the performance conditions
for a tranche were not met.
The weighted average remaining contractual life for the LTIP options outstanding as at December 31, 2019
was 0.9 years (2018: 1.8 years).
The weighted average fair value of LTIP options granted during the year to December 31, 2019 was £nil (2018:
£nil).
The following tables list the weighted average inputs to the models used for the fair value of LTIP options
granted during the years ended December 31, 2017, 2018 and 2019.
LTIP Share Price Element
Year ended December 31,
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ordinary shares (£)
Model used
2017
2018
2019
51.7
0.17-0.39
3-5
3.03
Monte Carlo
–
–
–
–
–
–
–
—
–
–
LTIP Strategic Element
Year ended December 31,
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ordinary shares (£)
Model used
2017
2018
2019
51.7
0.39
5
3.03
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 year.
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.
26.6 Deferred Bonus Share Plan
Under the previous terms of the Company’s Deferred Bonus Share Plan (DBSP), 30% of the annual bonus for
2017 for the senior management team was payable in deferred shares, which are governed by the DBSP plan
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 DBSP. The number of shares is fixed
and not subject to adjustment between the issue date and vesting date. Under the DBSP, 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).
135
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, DBSP options during the year:
Outstanding at January 1
Awarded during the year
Granted during the year
Outstanding at December 31
Exercisable at December 31
2017
Number
2018
Number
2019
Number
62,180
100,820
–
163,000
–––––––––
–––––––––
–
–––––––––
–––––––––
163,000
—
–
163,000
–––––––––
–––––––––
–
–––––––––
–––––––––
163,000
–
–
163,000
–––––––––
–––––––––
–
–––––––––
–––––––––
The weighted average remaining contractual life for the DBSP options outstanding as at December 31, 2019
was 1.6 years (2018: 2.6 years).
The weighted average fair value of DBSP options granted during the year was £nil (2018: £nil).
From January 1, 2018, under the new Deferred Bonus Plan (“2019 DBP”), 100% of the annual bonus is paid
in cash, of which 30% of amounts granted to Executive Directors (after deduction of income tax and the
relevant employee’s national insurance contributions) is required to be utilized to acquire shares in the
Company in the open market within 12 months of the grant of the award. No further grants under the DBSP
are envisaged.
26.7 Deferred equity consideration
In October 2017, our wholly owned subsidiary Mereo BioPharma 4 Limited entered into an exclusive license
and option agreement (the “License Agreement”), to obtain from AstraZeneca an exclusive worldwide, sub-
licensable license under AstraZeneca’s intellectual property rights relating to MPH-966, with an option to
acquire such intellectual property rights following commencement of a pivotal trial and payment of related
milestone payments (the “Option”), together with the acquisition of certain related assets.
Under the agreement with AstraZeneca, the Company may issue up to 1,349,693 ordinary shares which are
dependent on achieving certain milestones.
In respect of milestones that are probable, the Group has accounted for, but not yet issued, 429,448 ordinary
shares which have been measured at fair value on grant date, being £3.10, giving a total of £1.3 million.
26.8 Weighted average inputs
The following tables list the weighted average inputs to the models used for the fair value of share options
granted during the year ended December 31, 2019:
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ordinary shares (£)
Model used
EIP 2019 NED EIP 2019
grants
grants
66
0.97
10
0.63
Black Scholes Black Scholes
66
0.95
10
0.66
During the year ended December 31, 2019, grants were issued under the EIP 2019 and NED EIP 2019 plans.
136
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FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables list the weighted average inputs to the models used for the fair value of share options
granted during the year ended December 31, 2018:
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ordinary shares (£)
Model used
Share option
plan grants
65-67
1.39-1.53
10
2.76-3.25
Black Scholes
During the year ended December 31, 2018, grants were issued under the share option plan. Grants issued in
previous years under the LTIP Strategic element are subject to fair value movements at each reporting date.
27. Commitments and contingencies
27.1 Group as a lessee
Following the adoption of IFRS 16 (Leases), information relating to the Group as a lessee can be found in
Note 4 (Changes in accounting policies), Note 12 (Property, Plant and Equipment) and Note 25 (Financial
and capital risk management).
27.2 Operating lease arrangements
Operating leases, in which the Group is the sublessor, relate to a portion of an office leased by the Group,
with lease terms of between one to two years. One of the subleases has an automatic extension on a month-
to-month basis following the initial lease term, with rental increasing at a set percentage on each annual
anniversary of the agreement. The lessee does not have an option to purchase the property at the expiry of
the lease period.
The unguaranteed residual values do not represent a significant risk for the Group, as the lease terms are
for a remaining period of 12 months or less, and the Group expects to be able to enter into new leases at
market value at the end of the sublease term.
The maturity analysis of payments receivable by the Group in its capacity as sublessor is disclosed below:
December 31,
Within one year
After one year but not more than five years
More than five years
2019
2018
552
–
–
–––––––––
552
–––––––––
–
–
–
–––––––––
–
–––––––––
The Group does not have any leasing arrangements classified as finance leases at December 31, 2019 (2018:
£nil).
27.3 Financial commitments
Each of Mereo BioPharma 1 Limited, Mereo BioPharma 2 Limited and Mereo BioPharma 3 Limited issued to
Novartis loan notes (the “Novartis 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 Limited, Mereo
BioPharma 2 Limited and Mereo BioPharma 3 Limited 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 Limited, Mereo BioPharma 2 Limited and Mereo BioPharma 3
Limited under the respective Purchase Agreements.
Each of Mereo BioPharma 1 Limited, Mereo BioPharma 2 Limited and Mereo BioPharma 3 Limited further
agreed that in the event it transfers, licenses, assigns or leases all or substantially all of its assets, it will pay
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 Limited,
Mereo BioPharma 2 Limited and Mereo BioPharma 3 Limited 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 Group plc, a merger or consolidation of Mereo BioPharma Group plc, or a sale
of any assets of Mereo BioPharma Group plc.
In October 2017, the Group’s wholly owned subsidiary Mereo BioPharma 4 Limited entered into an exclusive
license and option agreement (“the License Agreement”), to obtain from AstraZeneca an exclusive worldwide,
sub-licensable license under AstraZeneca’s intellectual property rights relating to MPH-966, with an option
to acquire such intellectual property rights following commencement of a pivotal trial and payment of related
milestone payments (“the Option”), together with the acquisition of certain related assets. Upon entering
into the License Agreement, the Group made a payment of $3.0 million and issued 490,798 ordinary shares
to AstraZeneca, for an aggregate upfront payment equal to $5.0 million. In connection with certain
development and regulatory milestones, the Group has agreed to make payments of up to $115.5 million in
the aggregate and issue additional ordinary shares to AstraZeneca for licensed products containing MPH-
966. In addition, the Group has agreed to make payments to AstraZeneca based on specified commercial
milestones of the product. The Group has also agreed to pay a specified percentage of sub-licensing revenue
to AstraZeneca and to make royalty payments to AstraZeneca equal to ascending specified percentages of
tiered annual worldwide net sales by the Group of licensed products (subject to certain reductions), ranging
from the high single digits to low double digits. Royalties will be payable on a licensed-product-by-licensed-
product and country-by-country basis until the later of ten years after the first commercial sale of such
licensed product in such country and expiration of the last patent covering such licensed product in such
country that would be sufficient to prevent generic entry. Under the License Agreement, the Group may freely
grant sub-licenses to affiliates upon notice to AstraZeneca and must obtain AstraZeneca’s consent, which
is not be unreasonably withheld, to grant sub-licenses to a third party. The Group has agreed to use
commercially reasonable efforts to develop and commercialize at least one licensed product.
The License Agreement will expire on the expiry of the last-to-expire royalty term with respect to all licensed
products. Upon the expiration of the royalty term for a licensed product in a particular country, the licenses
to the Group for such product in such country will become fully paid and irrevocable. Prior to exercise of the
Option, if at all, the Group may terminate the License Agreement upon prior written notice. Either party may
terminate the agreement upon prior written notice for the other party’s material breach that remains uncured
for a specified period of time or insolvency. AstraZeneca has agreed to a three-year non competition
restriction in relation to the direct or indirect commercialization or development of NE inhibitors for the
treatment of AATD. In addition, AstraZeneca agreed not to assert any AstraZeneca intellectual property rights
that were included in the scope of the License Agreement against the Group.
28. Related party disclosures
28.1 Compensation of key management personnel of the Group
The remuneration of key management personnel of the Group is set out below in aggregate:
Year ended December 31,
Short-term benefits
Post-employment benefits
IFRS 2 share-based payment charge
Total compensation paid to key management personnel
2017
2018
2019
2,757
87
2,726
–––––––––
5,570
–––––––––
–––––––––
3,176
60
1,470
–––––––––
4,706
–––––––––
–––––––––
3,488
64
1,152
–––––––––
4,704
–––––––––
–––––––––
The amounts disclosed in the table above are the amounts recognized as an expense during the reporting
period related to key management personnel. Key management personnel of the Group consist of executive
directors (the Chief Executive Officer and Chief Financial Officer), non-executive directors and other members
of management (the General Counsel, the Chief Medical Officer, the Head of Corporate Development, the
Head of Patient Access and Commercial Planning and the US Site Head (SVP Regulatory Affairs)).
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
28.2 Employee Benefit Trust
In 2016 the Company set up an Employee Benefit Trust (“EBT”) for the purposes of buying and selling shares
on the employees’ behalf.
A total of £1.0 million of funding was paid into the EBT by the Company during the year ended December 31,
2019 (2018: £0.3 million). A total of 1,074,274 shares were purchased by the EBT during the year ended
December 31, 2019 (2018: 163,000).
As at December 31, 2019 a cash balance of £21,762 (2018: £21,762) was held by the EBT.
28.3 Novartis Notes
On June 6, 2019, Novartis delivered to the Company a notice of conversion with respect to the aggregate
principal amount and interest of the Novartis Notes. Pursuant to such notice, on June 21, 2019, £2.4 million
aggregate principal amount of Novartis Notes was converted into 1,071,042 fully paid ordinary shares at a
fixed conversion price of £2.21 per ordinary share (see Note 18). Additionally, in connection with such
conversion, the Company issued 864,966 bonus shares to Novartis.
On February 10, 2020, the Company entered into a £3.8 million convertible equity financing with Novartis
Pharma (AG) (“Novartis”). Under the terms of the convertible equity financing, Novartis will purchase $5
million in a convertible loan note (see Note 30).
29. Standards issued but not yet effective
Certain new accounting standards and interpretations have been published that are not mandatory for
December 31, 2019 reporting periods and have not been early adopted by the Group. These standards are
not expected to have a material impact on the entity in the current or future reporting periods and on
foreseeable future transactions.
30. Events after the reporting period
30.1 Global licensing agreement
On January 13, 2020, the Company and Oncologie, Inc. (“Oncologie”) announced a global licensing agreement
for the development and commercialization of navicixizumab (“Navi”).
Under the terms of the global licensing agreement, Oncologie will receive an exclusive worldwide license to
develop and commercialize Navi. The Company received an upfront payment of $4 million on January 17,
2020. The Company is also eligible for an additional payment of $2 million conditional on a Chemistry,
Manufacturing and Controls (“CMC”) milestone. Oncologie will be responsible for all future research,
development and commercialization of Navi. Additionally, the Company will be eligible to receive up to $300
million in future clinical, regulatory and commercial milestones, tiered royalties ranging from the mid-single
digit to sub-teen percentages on global annual net sales of Navi, as well as a negotiated percentage of
sublicensing revenues from certain sublicenses.
As a consequence of the global licensing agreement with Oncologie, and in accordance with the terms and
conditions of the Contingent Value Rights Agreement for former stockholders of OncoMed, dated April 23,
2019, by and among the Company and Computershare Inc., as rights agent, (the “Mereo CVR Agreement”),
holders of contingent value rights (“CVRs”) pursuant to the Mereo CVR Agreement will be entitled to receive
certain eligible cash milestone payments made to the Company under the global licensing agreement relating
to Navi.
Those eligible cash milestone payments are equal to 70% of the aggregate principal amount received by the
Company after deduction of costs, charged and expenditures within a period of five years following
completion of the OncoMed acquisition on April 23, 2019. Such eligible milestone payments are subject to
a cash consideration cap of approximately $79.7 million.
As at December 31, 2019, the Company was reasonably certain payment of approximately $0.5 million (£0.4
million) would be made under the Mereo CVR Agreement. The full amount is recorded as a contingent
consideration payable on the consolidated balance sheet as at December 31, 2019 and was subsequently
paid out in the Q1 2020.
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
30.2 Novartis convertible equity financing
On February 10, 2020, the Company entered into a £3.8 million convertible equity financing with Novartis
Pharma (AG) (“Novartis”). Under the terms of the convertible equity financing, Novartis will purchase £3.8
million in a convertible loan note (“Loan Note”).
The Loan Note is convertible at any time at the option of the holder, at a fixed price of £0.265 per ordinary
share. The maturity of the Loan Note is three years from issuance, and it bears an interest rate of 6% per
annum.
In connection with the Loan Note issuance, the Company also issued a warrant instrument to Novartis to
purchase up to 1,449,614 of the Company’s ordinary shares, which are exercisable at an exercise price of
£0.265 per ordinary share at any time before the close of business on February 10, 2025.
30.3 Aspire Capital Securities Purchase Agreement
On February 10, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) to issue
up to $28 million of the Company’s ordinary shares exchangeable for American Depositary Shares (“ADSs”),
including a $3 million initial purchase, with Aspire Capital Fund, LLC (“Aspire Capital”), a Chicago-based
institutional investor.
Under the terms of the Agreement, Aspire Capital has made an initial investment of $3 million to purchase
11,423,925 of the Company’s ordinary shares (equivalent to 2,286,585 ADSs) at a price equivalent to $1.31
per ADS, which represents a 16% discount over Mereo’s ADS closing stock price of $1.56 on February 8,
2020.
Under the terms of the Agreement, Aspire Capital has also committed to subscribe at Mereo’s request from
time to time during a 30-month period for up to an additional $25 million of Mereo’s ordinary shares
exchangeable for ADSs at prices based on the ADS market price at the time of each sale.
In consideration for Aspire Capital’s initial investment and its commitment to purchase up to an additional
$25 million ADSs, Mereo has agreed to pay Aspire Capital a commission to be satisfied wholly by the issue
to Aspire Capital of a further 2,862,595 of the Company’s ordinary shares (equivalent to 572,519 ADSs).
30.4 Equity investment from Boxer Capital, LLC
On February 19, 2020, the Company entered into a Securities Purchase Agreement with Boxer Capital, LLC
to make an investment of $3 million to purchase 12,252,715 of the Company’s ordinary shares (equivalent
to 2,450,543 ADSs) at a price equivalent to 18.8 pence per share, which represents a 20% discount over the
Company’s closing share price of 23.5 pence on AIM on February 18, 2020.
30.5 Share-based payments
On February 20, 2020, the Company granted 962,836 market value options over ADSs under the Mereo 2019
EIP (Note 26.1) to certain Executive Directors and other employees at an exercise price of $1.84 per ADS.
On the same date, the Company granted 77,000 market value options over ADSs under the Mereo 2019 NED
EIP (Note 26.2) to certain Non-Executive Directors at an exercise price of $1.84 per ADS.
30.6 Issuance of additional warrants to lenders
Following the transactions noted above, it is anticipated that a further 362,534 additional warrants will be
issued to the lenders of the bank loan facility giving them the right to subscribe for ordinary shares at an
exercise price of £2.95 (see Note 21).
30.7 Resignation of Chief Financial Officer (“CFO”)
On March 27, 2020, we announced the resignation of Richard Jones. Michael Wyzga, a Non-Executive
Director, will assume the role of Interim Chief Financial Officer following the departure of Richard Jones.
Richard Jones will remain in his position as CFO for a transitionary period of up to five months.
For further details, refer to the Directors’ Remuneration Report within this report.
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
30.8 Coronavirus (“COVID-19”)
The outbreak of COVID-19 has developed into a global pandemic, spreading to most regions of the world
including the United States and the United Kingdom and to locations where we have facilities or ongoing
clinical trials. The pandemic has resulted in impacts both direct and indirect to businesses including
disruptions to resources, inability of workers to carry out their jobs effectively, disruptions to supply chains,
inability to travel and increased pressure on health systems required to treat COVID-19.
As a result of government and local regulation we have been required to introduce a work from home policy
for the large majority of our work force and our facilities remain open only for business critical activities.
The requirement by governments to stay at home or to “social distance” limits normal communications and
may also increase cyber security risk or create data accessibility concerns. It also significantly curtails the
numbers of individuals who can work in our offices.
COVID-19 has created an unprecedented burden on health systems in impacted countries around the world.
As a result, clinical centers have diverted resources away from the performance of clinical trials and because
of that and the vulnerability of patients in the Company’s setrusumab clinical development program for
osteogenesis imperfecta (OI) and its Phase 2 alvelestat program for patients with alpha-1 antitrypsin
deficiency (AATD), the Company’s clinical activities will face some delays. AATD patients, in particular, are
at greater risk from COVID-19 given that the condition is a respiratory and lung condition, for this reason,
our Phase 2 alvelestat trial will be delayed with topline data now expected in 2021. We are also currently
planning to initiate a Phase 3 study in children with OI in late 2020, however, the initiation of the study may
also be delayed.
30.9 Equity fund raise
On June 4, 2020, Mereo BioPharma Group plc announced completion of a private placement offering (the
"Fundraising") of $70 million (£56 million) before commission and expenses with a number of new and
existing principally U.S based institutional and accredited investors (the "Purchasers"). The net proceeds
from the Fundraising will be used primarily to fund clinical development activities of the Company’s lead
product candidates and for general corporate purposes. The Company will utilize $13 million (£10.4 million)
to reduce current indebtedness (including interest) of $17.6 million (£14.1 million). In the absence of the
receipt of any other income, the Board expects that the resulting net proceeds of the Fundraising will fund
the Company into early 2022.
The Fundraising comprised proceeds of a total of $19.4 million (£15.5 million) through the issue of 89.1
million new Ordinary Shares of £0.003 each in the Company at a price of 17.4 pence per share and proceeds
of a total of $50.6 million (£40.5 million) through the issue by the Company of convertible notes (the "Tranche
1 Notes"). The Purchasers also received conditional warrants to subscribe for further Ordinary Shares (the
"Warrants").
The ability for the Tranche 1 Notes to be converted into Ordinary Shares and for the Warrants to be exercised
is conditional on the passing of certain resolutions (the "Resolutions") at a general meeting of shareholders
scheduled for June 30, 2020 (the "General Meeting").
If the Resolutions are passed, the Tranche 1 Notes will automatically convert into Ordinary Shares at 17.4p,
subject to limitations that apply to the percentage of voting shares that may be held by Purchasers. Any
Tranche 1 Notes not so converted will remain outstanding. The Tranche 1 Notes will not be separately
admitted to trading on AIM, but the Ordinary Shares which will arise following any valid conversion of the
Tranche 1 Notes will be admitted to trading as part of the Company’s single class of shares admitted to
trading on AIM or the relevant exchange on which the Company’s shares are traded at the time the Tranche
1 Notes are converted. The Board estimates that 21,674,143 Tranche 1 Notes will convert automatically if
the Resolutions are passed on June 30, 2020, resulting in 124,564,033 Ordinary Shares (excluding Ordinary
Shares resulting in respect of interest on the converted Tranche 1 Notes) being issued, leaving 18,859,528
Tranche 1 Notes in issue.
The Tranche 1 Notes are constituted by the Note Instrument, details of which are set out below. The Warrants
are constituted by the Warrant Instrument, details of which are also set out below.
If the Resolutions are not passed on or before August 7, 2020 the convertible notes will not convert into
ordinary shares, the warrants will not become capable of exercise and the holders of the convertible notes
141
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
and warrants will become entitled to certain amounts (up to £137 million) that will represent material
liabilities for the Company. The Purchasers, representing in aggregate approximately 40 per cent. of the
Company’s total number of shares and votes have undertaken to vote in favour of the Resolutions relating
to the warrants and the convertible notes.
Note Instrument
The Note Instrument constitutes three potential tranches of Loan Note:
•
an initial tranche of 40,533,671 Tranche 1 Notes representing $50.6 million (£40.5 million) issued to all
Purchasers;
•
•
a second tranche of up to £40.0 million Tranche 2 Notes representing approximately 115,034,554
ordinary shares which may be issued following the third anniversary of the date on which the
Resolutions are passed to certain holders of Tranche 1 Notes in lieu of the holder exercising its
subscription rights under the Warrants and in return for payment by that holder of the aggregate
exercise price of the relevant Warrants; and
a third tranche of up to £56.0 million Tranche 3 Notes, which may be issued, if the Resolutions are not
passed at the General Meeting (or at any subsequent general meeting) held on or before August 7, 2020.
The Tranche 1 Notes have a maturity date of June 2023 unless otherwise extended, converted or accelerated.
The Tranche 2 Notes have a maturity date of three years from their date of issue (i.e. such that they would
be anticipated as becoming due in 2026) unless otherwise extended, converted or accelerated. The Tranche
3 Notes have a maturity date of August 2025 unless otherwise extended, converted or accelerated. The
Tranche 1 Notes and Tranche 2 Notes may be extended by certain holders beyond the initial maturity date
to have a longstop maturity date of 10 years from the date of the Note Instrument. Tranche 3 Notes may
also be extended by certain holders beyond the initial maturity date up to the same longstop maturity date
of 10 years from the date of the Loan Note Instrument, however, such extension is subject to the consent of
the Company.
Tranche 1 Notes will initially bear interest at a fixed rate of 10 per cent. per annum, which will be retroactively
reduced to a rate of 6 per cent. per annum to the date of issue if the Resolutions are passed on or before
August 7, 2020. If the Tranche 1 Notes are extended, they cease to bear interest from that extension. Tranche
2 Notes and Tranche 3 Notes do not accrue interest (unless default interest applies). Following an event of
default by the Company, default interest will accrue on all Loan Notes at 2 per cent. above the applicable
interest rate in force at that time for the relevant Loan Notes.
All the Loan Notes are unsecured and have been contractually subordinated to the Company’s existing senior
debt facility with Silicon Valley Bank and Kreos Capital pursuant to the terms of a Subordination Agreement
to which all Purchasers have acceded as part of the Fundraising.
If the Resolutions are not passed on or before August 7, 2020, the holders of Tranche 1 Notes are entitled to
an additional fee (the “Uplift Payment”). The Uplift Payment is designed to compensate the Tranche 1
Noteholders for being unable to participate in the equity of the Company through the conversion of the
Tranche 1 Notes and the exercise of Warrants. The value of the Uplift Payment for each Purchaser shall be
equal to the aggregate principal amount of the Loan Notes held by such Purchaser on August 7, 2020. Any
Purchaser who fails to attend the General Meeting (in person or by proxy) and vote in favour of the
Resolutions relating to the Warrants and the Tranche 1 Notes shall not be entitled to the Uplift Payment. Any
Uplift Payment if due, is payable on the redemption date of the relevant Loan Notes.
If the Resolutions are not passed on or before August 7, 2020, an original holder of the Warrants may elect
without payment to convert its Warrants into fully paid Tranche 3 Notes with a principal amount equal to the
aggregate exercise price (being 34.8 pence per Warrant Share) of those Warrants, in compensation for the
right to exercise those Warrants not having arisen.
If the Resolutions have not been passed at a time when the Company undergoes a change of control, each
Noteholder on the date of such change of control, shall (to the exclusion of the Uplift Payment) be entitled
to a payment equal to the amount of consideration they would have received on such change of control had
142
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the Resolutions been passed and they had received their full entitlement of Ordinary Shares and all Warrants
they held had become exercisable, less the aggregate principal and interest outstanding on the Tranche 1
Notes and certain residual interests in the Warrants (if any) they held on the date of the change of control
(the “Change of Control Payment”).
Until the Resolutions have been passed, no Tranche 1 Notes are capable of conversion. If the Resolutions
are passed on or before August 7, 2020, the Tranche 1 Notes will automatically convert into Ordinary Shares,
except that no new Ordinary Shares will be issued which would result in any person holding in excess of
9.99 per cent. of the aggregate voting rights in the Company as a result of the relevant conversion. Any
Tranche 1 Notes not converted will remain outstanding.
After the Resolutions have been passed, those Tranche 1 Notes not automatically converted and any Tranche
2 Notes that may be issued, will be convertible into Ordinary Shares at the election of the Noteholders at any
time prior to their maturity date, and subject to the 9.99 per cent. beneficial ownership limit. The Tranche 3
Notes are not capable of conversion.
The Loan Notes are required to be repaid on the earlier of (i) the applicable maturity date; and (ii) a change
of control taking place in respect of the Company, and are otherwise not able to be prepaid other than with
the consent of a noteholder majority, or if accelerated following an event of default.
The Loan Notes are subject to customary events of default (for example, insolvency events in respect of the
Company and default under the Company’s material contracts, amongst others) and any principal amount
and interest outstanding is capable of being accelerated following the occurrence of such an event of default
and the expiry of any cure periods applicable thereto.
Warrants
All the participants in the Fundraising have received conditional warrants to subscribe for further Ordinary
Shares in an aggregate number equal to 50 per cent. of both the Ordinary Shares purchased in the
Fundraising and the Ordinary Shares initially issuable upon conversion of the Tranche 1 Notes. A total of
161,048,366 Warrants have been issued.
The Warrants have an exercise price of 34.8 pence per Ordinary Share, which is equal to 200 per cent. of the
Fundraising issue price, and will be capable of being exercised at any time from and after the date the
Resolutions are passed at the General Meeting (or at any subsequent general meeting) until the third
anniversary of the date the Resolutions are passed. The Warrants can be exercised for cash or on a cashless
basis.
If the Resolutions are not passed at the General Meeting (or at any subsequent general meeting), the
Warrants remain non-exercisable but will, until August 8, 2025, continue to benefit from rights to participate
in certain transactions. These include if the Company is acquired, following which the Company is required
to use its best efforts to ensure that Warrant holders receive alternate warrants in the acquirer. In certain
circumstances, Warrant holders may require the Company (or the acquirer) pay them (to the extent lawful)
the value of the Warrants, determined in accordance with a BlackScholes valuation provision.
The Warrant exercise price and the number of shares issuable upon exercise of the Warrants will be adjusted
in certain circumstances, including if the Company effects a subdivision or consolidation of its Ordinary
Shares, declares a dividend or distribution, or there is a reorganisation of its Ordinary Shares.
Arrangements with OrbiMed
In recognition of OrbiMed’s participation in, and assistance with, the Fundraising, the Company has agreed
to grant OrbiMed certain rights. OrbiMed will have the right to nominate two persons to be appointed to the
Board of Directors (out of a maximum number of 9 directors), within a period of 180 days of the Fundraising
subject to the appropriateness of the nominees. OrbiMed has also been granted the right to participate in
future financings of the Company, subject, amongst other things, to the existing pre-emption rights of the
Shareholders under the Companies Act 2006 and certain existing agreements to which the Company is a
party. OrbiMed has been paid a subscription fee of $325,000 by the Company by way of a commission in
consideration of its participation in the Fundraising.
143
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: COMPANY BALANCE SHEET
as at December 31, 2018 and 2019
Year Ended December 31,
2019
Notes
2018
Assets (in £’000)
Non-current assets
Property, plant and equipment
Investments
6
4
149
123,374
––––––––––
123,523
––––––––––
1,696
156,280
––––––––––
157,976
––––––––––
Current assets
Prepayments
Other receivables
Short-term investments
Cash and short-term deposits
Current liabilities
Trade and other payables
Accruals
Interest-bearing loans and borrowings
Lease liability
Net current assets/(liabilities)
Total assets less current liabilities
Non-current liabilities
Provisions
Interest-bearing loans and borrowings
Warrant liability
Other liabilities
Lease liability
Net assets
Equity shareholders’ funds
Share capital
Share premium
Other capital reserves
Other reserves
Employee Benefit Trust shares
Losses brought forward
Loss for the year
Total equity shareholders’ funds
1,067
631
2,500
25,020
––––––––––
29,218
––––––––––
4,570
4,437
6,838
–
––––––––––
15,845
––––––––––
13,373
––––––––––
136,896
––––––––––
842
14,647
1,006
34
–
––––––––––
16,529
––––––––––
120,367
––––––––––
214
118,492
18,593
7,000
(307)
(13,650)
(9,975)
––––––––––
(23,625)
––––––––––
120,367
––––––––––
––––––––––
1,557
565
–
4,307
––––––––––
6,429
––––––––––
5,254
3,414
15,139
697
––––––––––
24,504
––––––––––
(18,075)
––––––––––
139,901
––––––––––
104
5,373
131
44
911
––––––––––
6,563
––––––––––
133,338
––––––––––
294
121,684
59,147
7,000
(1,305)
(23,625)
(29,857)
––––––––––
(53,482)
––––––––––
133,338
––––––––––
––––––––––
7
8
7
9
10
10
10
10
12
The accompanying notes form an integral part of these consolidated financial statements.
The 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.
Approved by the Board on June 14, 2020 and signed on its behalf by:
Dr. Denise Scots-Knight Richard Jones
Director Director
Company number: 09481161 (England and Wales)
144
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: COMPANY STATEMENT OF CHANGES IN EQUITY
for the years ended December 31, 2018 and 2019
Other Employee Accum-
Issued Share capital Benefit Other ulated Total
capital premium reserves Trust reserves losses equity
(in £’000)
At December 31, 2017 213 118,227 16,359 — 7,000 (13,774) 128,025
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Loss for the year to
December 31, 2018 — — — — — (9,975) (9,975)
Adoption of IFRS 9 — — — — — 124 124
Share-based payments –
share options — — 1,871 — — — 1,871
Share-based payments –
LTIPs — — 319 — — — 319
Issue of share capital on
June 1, 2018 — 150 — — — — 150
Issue of share capital on
August 3, 2018 on exercise
of options — 13 — — — — 13
Issue of share capital on
October 22, 2018 on
exercise of options 1 110 — — — — 111
Issue of warrants for
TAP agreement — — 44 — — — 44
Transaction costs on
issuance of share capital — (8) — — — — (8)
Purchase of treasury shares — — — (307) — — (307)
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2018 214 118,492 18,593 (307) 7,000 (23,625) 120,367
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Loss for the year to
December 31, 2019 — — — — — (29,857) (29,857)
Share-based payments –
share options — — 1,543 — — — 1,543
Share-based payments –
LTIPs — — 93 — — — 93
Issue of share capital on
April 23, 2019 74 — 40,818 — — — 40,892
Transaction costs related
to issuance of share capital
on April 23, 2019 — (761) — — — — (761)
Issue of share capital on
conversion of loan note 3 2,366 — — — — 2,369
Issue of share capital on
Novartis bonus shares 3 1,587 (1,590) — — — —
Equity element of
convertible loan note — — (310) — — — (310)
Purchase of treasury shares — — — (998) — — (998)
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2019 294 121,684 59,147 (1,305) 7,000 (53,482) 133,338
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
145
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE COMPANY FINANCIAL STATEMENTS
1. Significant accounting policies
1.1 Basis of preparation
These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced
Disclosure Framework (FRS 101).
In preparing these financial statements, the Company applies the recognition, measurement and disclosure
requirements of International Financial Reporting Standards as adopted by the EU (Adopted IFRSs) but
makes amendments where necessary in order to comply with the Companies Act 2006 and has set out below
where advantages for the FRS 101 disclosure exemptions has been taken.
Under Section 408(4) of the Companies Act 2006, the Company is exempt from the requirement to present
its own profit and loss account.
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect
of the following disclosures:
•
•
•
•
•
•
Presentation of a cash flow statement and related notes;
Comparative period reconciliations for share capital, tangible fixed assets and intangible assets;
Transactions with wholly owned subsidiaries;
The effects of new but not yet effective IFRSs;
The compensation of key management personnel; and
Required disclosures relating to capital management.
As the consolidated financial statements of Mereo BioPharma Group plc include the equivalent disclosures,
the Company has also taken the exemptions under FRS 101 available in respect of the following disclosures:
•
•
•
•
IFRS 2 (Share-Based Payments) in respect of Group-settled share-based payments;
Certain disclosures required by IAS 36 (Impairment of Assets);
Certain disclosures required by IFRS 13 (Fair Value Measurement);
Certain disclosures required by IFRS 7 (Financial Instruments Disclosures).
The Company proposes to continue to adopt the reduced disclosure framework of FRS 101 in its next
financial statements.
The financial information is presented in pound sterling and all amounts disclosed in the financial statements
and notes have been rounded off to the nearest thousand currency units, unless otherwise stated.
1.2 Changes of accounting policies
The accounting policies for the Company that relate to the adoption of IFRS 16 (Leases) can be found in
Note 4 of the consolidated financial statements.
The adoption of IFRS 16 (Leases) had a material impact on the Company.
1.3 Summary of significant accounting policies
The Company’s accounting policies are consistent with those described in the consolidated accounts of
Mereo BioPharma Group plc, within Note 2 of the consolidated financial statements. Below are accounting
policies which are specific to the Company.
a) Intercompany guarantee
The Company accounts for financial guarantees in accordance with IFRS 9 (Financial Instruments).
Financial guarantees given by subsidiaries to the Company are initially measured at fair value. The total cost
of such guarantees is charged to the profit and loss account at the time the guarantee is given.
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE COMPANY FINANCIAL STATEMENTS
b) Investment in subsidiaries
Investments in subsidiary undertakings are stated at cost less amounts written off. Amounts capitalized as
investments in subsidiary undertaking are reviewed for impairment at each period end in accordance with
IAS 36 (Impairment of Assets).
2. Significant accounting judgments, estimates and assumptions
The preparation of the Company accounts requires the management of the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company
bases its estimates and judgments on historical experience and on various other assumptions that it
considers to be reasonable. Actual results may differ from these estimates under different assumptions or
conditions.
Share-based compensation
Incentives in the form of shares are provided to employees under a share option plan, long-term incentive
plan and deferred bonus share plan. The fair value of the employee services received in exchange for the
grant of the options is recognized as an expense. The selection of different assumptions could affect the
results of the Company.
Impairment of investments in subsidiaries
An assessment was made in respect of indicators of impairment in the carrying value of the Group’s
investment in subsidiaries as at December 31, 2019. If such an indication exists, the recoverable amount of
the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the
asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to
the income statement. The assessment of intangible assets involves a number of significant judgments
regarding the likelihood of successful product approval, the costs of reaching approval, the estimated useful
life of intangible assets following commercialization and the subsequent commercial profitability of the
product once approved.
3. Loss for the year
The 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 Company’s loss for the year was £29.9 million (2018:
£10.0 million), which has been included in the Company’s profit and loss account.
The Auditor’s remuneration for audit and other services is disclosed in Note 7 of the consolidated financial
statements.
The average number of employees employed by the Company (including Directors) in the year was 37
(2018: 36).
147
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE COMPANY FINANCIAL STATEMENTS
4. Company information
4.1 Investments in subsidiaries
Cost
At January 1, 2018
Additions in the year
At December 31, 2018
Additions in the year
Share-based payments to Group employees
Acquisition of OncoMed on April 23, 2019
At December 31, 2019
Provision for impairment
Charge during the year
At December 31, 2019
Net book value
At December 31, 2019
At December 31, 2018
97,105
26,269
–––––––––
123,374
10,820
440
40,892
–––––––––
175,526
–––––––––
–––––––––
19,246
–––––––––
19,246
–––––––––
–––––––––
156,280
–––––––––
123,374
–––––––––
On April 23, 2019, the Company issued 24.8 million ordinary shares to acquire OncoMed. The fair value of
the 24.8 million ordinary shares issued as the consideration paid for OncoMed was measured based on the
Group’s quoted share price on April 23, 2019 and is recorded as an investment in subsidiary within the
Company’s financial statements. The fair value is deemed to be £40.9 million.
The Company grants rights to its own equity instruments to Group employees who are not employees of the
Company. For these grants, the Company recognizes in equity the equity-settled share-based payment with
a corresponding increase in the investment in the subsidiary in the separate financial statements.
The total amount of impairment loss recorded during the year ended December 31, 2019 was £19.2 million.
The impairment loss was due to the recoverable value of an investment in a subsidiary falling below the
carrying amount (held at cost, in accordance with the Company’s accounting policies). The recoverable value
of the investment was measured based on either the value in use or the realizable value and the discount
rate used in the calculation of value in use was 15.3%. Any change in assumptions could result in further
impairment loss in the future.
148
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE COMPANY FINANCIAL STATEMENTS
4.2 Information about subsidiaries
The following were subsidiary undertakings at the end of the year and have been included in the consolidated
financial statements of the Group:
% equity
interest
Country of December 31, December 31,
2018
% equity
interest
2019
incorporation
Name
Mereo BioPharma 1 Limited
Mereo BioPharma 2 Limited
Mereo BioPharma 3 Limited
Mereo BioPharma 4 Limited
Mereo BioPharma Ireland Limited
OncoMed Pharmaceuticals, Inc.
Navi Subsidiary, Inc.
Mereo US Holdings Inc.
Mereo MergerCo One Inc.
Mereo BioPharma Group plc
Employee Benefit Trust
Principal activities
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Holding company
Holding company
U.K.
U.K.
U.K.
U.K.
Ireland
U.S.
U.S.
U.S.
U.S.
Employee share scheme
Jersey
100
100
100
100
100
100*
100*
100
–
–
100
100
100
100
100
–
–
100
100
–
* denotes a subsidiary which is indirectly held by the Company
The registered office of Mereo BioPharma 1 Limited, Mereo BioPharma 2 Limited, Mereo BioPharma 3 Limited
and Mereo BioPharma 4 Limited is located at Fourth Floor, 1 Cavendish Place, London W1G 0QF. The
registered office of Mereo BioPharma Ireland Limited is 25/28 North Wall Quay, Dublin 1 D01H104, Ireland.
Mereo US Holdings Inc. and Mereo MergerCo One Inc. were incorporated on December 3, 2018 for the sole
purpose of effecting the business combination with OncoMed (see Note 5 of the consolidated financial
statements). Following the business combination with OncoMed, Mereo MergerCo One Inc. ceased to exist.
The registered office of Mereo US Holdings Inc. is 251 Little Falls Drive, City of Wilmington, County of New
Castle, Delaware 19808, U.S. Mereo MergerCo One Inc. was a 100% owned subsidiary of Mereo US Holdings
Inc.
OncoMed became a wholly owned subsidiary of Mereo US Holdings Inc. on April 23, 2019 and is therefore
an indirect, wholly owned subsidiary of Mereo BioPharma Group plc. The registered office of OncoMed
Pharmaceuticals, Inc. is 251 Little Falls Drive, City of Wilmington, Country of New Castle, Delaware 19808,
U.S. Navi Subsidiary, Inc, incorporated on April 15, 2019, is a wholly owned subsidiary of OncoMed.
A capital contribution of £11.3 million (2018: £26.3 million) by Mereo BioPharma Group plc to its subsidiaries
was recorded in the year to December 31, 2019. £0.4 million (2018: £0.7 million) has been recorded for the
granting of employees’ share options for services rendered by the employees to the subsidiaries. £10.8
million (2018: £25.6 million) has been recorded for the conversion of intercompany balances at original cost.
As at December 31, 2019, a total capital contribution of £4.0 million (2018: £3.6 million) 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.
As at December 31, 2019, a total capital contribution of £131.3 million (2018: £119.8 million) by Mereo
BioPharma Group plc to its subsidiaries has been recorded for the conversion of intercompany balances at
original cost.
5. Amounts owed by Group undertakings
On January 1, 2018 Mereo BioPharma Group plc resolved to capitalize the intercompany loans and all
outstanding intercompany receivables at that date.
As at December 31, 2019, amounts owed by Group undertakings is nil (2018: £nil).
149
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE COMPANY FINANCIAL STATEMENTS
6. Property, plant and equipment
Further details on the initial application of IFRS 16 (Leases) are presented in Note 4 (Adoption of new and
revised standards) of the consolidated financial statements. The Company has decided to present right-of-
use assets within property, plant and equipment.
On initial application of IFRS 16 (Leases), the Company recognized a right-of-use asset of £2.5 million
relating to a building (£1.2 million) and scanning equipment (£1.3 million). During the year, the lease term
on the scanning equipment was re-assessed.
As at December 31, 2019, the net book value of right-of-use assets is £1.5 million (of which £1.0 million
relates to a building and £0.5 million relates to scanning equipment).
7. Interest-bearing loans and borrowings
The Group’s interest-bearing loans and borrowings all reside in the Company. Details on the interest-bearing
loans and borrowings of the Company are provided in Note 19 of the consolidated financial statements.
8. Provisions
Social security contributions on share options
At beginning of year
Arising during the year
Released
At December 31
Current
Non-current
Year ended
December 31,
2018
2019
2,288
–
(1,446)
–––––––––
842
–––––––––
–
842
–––––––––
842
–
(738)
–––––––––
104
–––––––––
–
104
–––––––––
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
26 of the consolidated financial statements) the liability has been classified as non current. The provision
has been discounted
9. Warrant liability
The Group’s warrant liability resides in the Company. Details on the warrant liability of the Company are
provided in Note 21 of the consolidated financial statements.
10. Share capital, share premium and other reserves
The Group’s share capital all resides in the Company. Details on the share capital of the Company are
provided in Note 18 of the consolidated financial statements.
150
MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: NOTES TO THE COMPANY FINANCIAL STATEMENTS
11. Share-based payments
The charge for share-based payments under IFRS 2 arises across the following schemes:
2015 Plan
Mereo BioPharma Group plc Share Option Plan
Long Term Incentive Plan
2019 Equity Incentive Plan
2019 NED Equity Incentive Plan
Year ended
December 31,
2018
2019
718
499
285
–
–
–––––––––
1,502
–––––––––
85
518
87
347
160
–––––––––
1,197
–––––––––
Details on the share-based payments of the Company, including deferred equity consideration, are provided
in Note 26 of the consolidated financial statements.
12. Related party disclosures
Details on related parties are provided in Note 28 of the consolidated financial statements.
151