263039 Mereo Biopharma Cover.qxp 31/03/2022 13:28 Page 1
Company Number 09481161
MEREO BIOPHARMA GROUP PLC
Annual Report and Accounts
Year ended December 31, 2021
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MEREO BIOPHARMA GROUP PLC
CONTENTS
Directors, secretary and advisers
Strategic Report
Directors’ Remuneration Report
Directors’ Report
Statement of Directors’ Responsibilities
Financial Statements
Independent auditor’s report
Consolidated Statement of Comprehensive Income/(Loss)
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Equity
Notes to the Consolidated Financial Statements
Company Balance Sheet
Company Statement of Changes in Equity
Notes to the Company Financial Statements
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MEREO BIOPHARMA GROUP PLC
DIRECTORS, SECRETARY AND ADVISERS
Directors Dr. Denise Scots-Knight (Chief Executive Officer)
Dr. Peter Fellner (Chairman)
Dr. Jeremy Bender
Dr. Anders Ekblom
Peter Bains (resigned September 20, 2021)
Dr. Pierre Jacquet (appointed September 20, 2021)
Kunal Kashyap (resigned October 26, 2021)
Dr. Deepa Pakianathan
Dr. Brian Schwartz
Michael Wyzga
Anne Hyland (appointed March 1, 2022)
Company Secretary Charles Sermon
Registered Office 4th Floor, One Cavendish Place
London
W1G 0QF
Company Number 09481161
Auditors BDO LLP
Level 12, Thames Tower
Reading, Berkshire
RG1 1LX
Solicitors Mayer Brown International LLP
201 Bishopsgate
London EC2M 3AF
Registrars Link Group
10th Floor, Central Square
29 Wellington Street
Leeds, LS1 4DL
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Introduction
Mereo BioPharma Group plc (the “Company”, “Mereo” or “Parent Company”) is a public limited company
incorporated under the laws of England and Wales and is listed on the Nasdaq Global Select Market
(“NASDAQ”). The Company is a “quoted company” for the purposes of the Companies Act 2006
(the “Companies Act”).
The Directors present their strategic report together with the directors’ remuneration report, directors’
report, audited consolidated financial statements of Mereo BioPharma Group plc and its subsidiaries
(collectively, the “Group”), audited company financial statements and auditors’ report for the year ended
December 31, 2021. The Company has also filed with the U.S. Securities and Exchange Commission
(the “SEC”) its Annual Report on Form 20-F for the year ended December 31, 2021, which contains
additional disclosures regarding some of the matters discussed in this report.
Business overview and strategy
We are a biopharmaceutical company focused on the development of innovative therapeutics that aim to
improve outcomes for oncology and rare diseases and plan to commercialize selected rare disease
programs. Our existing portfolio consists of six clinical stage product candidates two of which, etigilimab
and alvelestat, are in ongoing clinical studies. Our lead oncology product candidate, etigilimab (an “anti-TIGIT
antibody”), 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. We initiated
a Phase1b/2 basket study for etigilimab in combination with nivolumab in three rare tumors, sarcoma, uveal
melanoma and germ cell cancer, three gynecological carcinomas, cervical, ovarian and endometrial
carcinomas and tumors with high mutation burden, along with a Phase 1b/2 study in clear cell ovarian cancer
with a partner. Our rare disease product candidates are alvelestat, which is being investigated in two ongoing
Phase 2 proof of-concept studies for the treatment of severe AATD and in an investigator-sponsored study
in Bronchiolitis Obliterans Syndrome (BOS) following allogenic stem cell transplant, and setrusumab for the
treatment of OI. Following the announcement of the results for setrusumab in a Phase 2b study in adults
with OI which demonstrated a dose dependent statistically significant increase in bone mineral density and
bone strength, we announced a strategic partnership with Ultragenyx in December 2020 for the development
of setrusumab in children and adults with OI. Ultragenyx plans to start a pivotal, Phase 2/3 pediatric and
young adult study (5-25 year olds) in the first half of 2022 and intend to initiate a separate Phase 2 study of
patients under age five with OI to commence in the second half of 2022.
We plan to develop our product candidates through the next key clinical milestone and then partner where
it makes sense strategically to do so but also in select cases for our rare disease product candidates, to
develop them through regulatory approval and potentially commercialization.
Our second oncology product, navicixizumab for the treatment of late line ovarian cancer, has completed a
Phase 1b study and was partnered in January 2020 for further development with OncXerna on a global basis.
We plan to out-license or sell our other two product candidates acumapimod for the treatment of AECOPD
and leflutrozole for the treatment of male infertility associated with HH, recognizing the need for greater
resources to take these product candidates to market.
Our strategy is selectively to acquire and develop product candidates for rare diseases that have already
received significant investment from large pharmaceutical and biotechnology companies and that have
substantial pre-clinical, clinical and manufacturing data packages. Since our formation in March 2015, we
have successfully executed on this strategy by acquiring six clinical-stage product candidates of which four
were in oncology and rare diseases. Four of our six clinical-stage product candidates were acquired from
large pharmaceutical companies and two were acquired in the Merger. We aim to efficiently develop our
product candidates through the clinic and have successfully commenced or completed large, randomized
Phase 2 clinical trials for five of our product candidates.
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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 including oncology and rare diseases. 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.
Our Pipeline
The following tables summarize our pipeline for our product candidates. We have global commercial rights
to etigilimab, alvelestat, acumapimod and leflutrozole and commercial rights to setrusumab in Europe and
the U.K. We have granted Ultragenyx an exclusive license to develop and commercialize setrusumab in the
U.S. and rest of the world, and we licensed global rights for navicixizumab to OncXerna.
Core Oncology and Rare Disease Product Candidates
Etigilimab (MPH-313): 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. We 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.
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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, head and neck cancer, pancreatic cancer, ovarian 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.
Treatment emergent adverse events (TEAEs) related to study drug were reported by 16 patients (69.6%) in
the Phase 1a portion of the study and 7 patients (70.0%) in the Phase 1b portion of the study. The most
commonly reported related TEAEs in the Phase 1a portion of the study were pruritus (4 patients, 17.4%) and
fatigue, nausea, rash and maculopapular rash (each reported by 3 patients, 8.7%). In the Phase 1b portion
of the study, the most commonly reported related TEAEs were fatigue (3 patients, 30.0%) and pruritus, rash
and pruritic rash (each reported by 2 patients, 20.0%).
There were no treatment-related serious adverse events in the Phase 1a portion and there was only one
treatment-related serious adverse event (autoimmune hepatitis) in the Phase 1b portion of the study. The
Phase 1b study has now been completed.
Etigilimab is currently in an open label Phase 1b/2 basket study in combination with nivolumab in a range
of tumor types. This is focused on three rare tumors, sarcoma, uveal melanoma and germ cell cancer, three
gynecological carcinomas, cervical, ovarian and endometrial carcinomas and tumors with high mutation
burden. We reported interim data on this study in November 2021. At the time of the data cut-off, 22 patients
were included in the safety analysis set, 20 patients were evaluable with a minimum of at least one scan,
and 15 patients were included in the efficacy analysis population.
As at the cut-off date, there was one complete response in cervical cancer, one partial response in ovarian
cancer and four instances of stable disease in ovarian cancer, cervical cancer and uveal melanoma. The
combination of etigilimab and nivolumab has been safe and well tolerated with no new safety signals. The
most common treatment-related adverse events were skin reactions, observed in seven patients. None of
these reactions required treatment with systemic steroids. There was one case of immune diabetes mellitus.
We expect to provide an update on the Phase 1b/2 basket study of etigilimab in combination with nivolumab
in mid-2022.
In April 2021, the Company entered into partnership with Cancer Focus Fund for a Phase 1b/2 study of
etigilimab in Clear Cell Ovarian Cancer to be conducted at The University of Texas MD Anderson Cancer
Center. The Phase 1b/2 study is being financed by Cancer Focus Fund in exchange for upfront consideration
of $1.5 million of the Company’s shares and additional payments based on the achievement of certain
milestones. Clear cell ovarian cancer is a rare cancer that accounts for approximately 5 to 10% of all ovarian
carcinomas in North America.
Alvelestat (MPH-966): Alvelestat is a novel, oral small molecule we are developing for the treatment of severe
AATD Lung Disease and BOS. AATD is a potentially life-threatening, rare, genetic condition caused by a lack
of effective alpha-1 antitrypsin (“AAT”). The lungs are normally protected from enzymatic degradation by
neutrophil elastase by the AAT protein, but in severe AATD the AAT is either misfolded and fails to be released
into the circulation, inactive or completely missing. The degradation of tissue by unopposed neutrophil
elastase 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, although due to underdiagnosis, there are estimated
to be approximately 6,000 – 10,000 patients diagnosed in North America. BOS is a progressive, ultimately
fatal fibrotic lung disease due to graft versus host disease following stem cell transplant, or lung transplant
rejection. An estimated fifty percent of lung transplant recipients will develop BOS by five years post-
transplant, with an average survival of less than five years. There are an estimated 10,000 people living with
lung transplant and BOS in the US and Europe. 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 patients with AATD from further lung damage. BOS is characterized by anti-organ auto-
immune responses, either graft versus host (in SCT) or host versus graft (in lung transplant), exacerbated
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by elevated neutrophils in the lung and excess NE activity, leading to lung damage through elastin breakdown
in the tissue and progressive fibrosis, and ultimately respiratory failure. By inhibiting NE, alvelestat will reduce
the accelerating effects of NE-driven inflammation on BOS.
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. These trials created a safety database of 1,149 subjects treated with alvelestat.
We recently closed enrollment in a Phase 2 proof-of-concept clinical trial in patients with severe AATD in
the United States and the EU and expect to report top-line data from this trial in early Q2 2022. An
investigator-initiated complementary study, including testing of alvelestat on top of AAT replacement therapy
in AATD is also underway in the US.
Emerging data on the potential of NE inhibition to reduce the inflammatory and thrombotic effects of
Neutrophil Extracellular Traps (NETs) in COVID-19, led to the initiation of a study in this disease. The top-line
results were reported in December 2021. The results demonstrated a safety profile consistent with previous
studies, and in the alvelestat arm, a reduction (an improvement) of 2 points or more in the World Health
Organization (WHO) Severity Score in 62.5% (5/9) of the patients versus 28.5% (2/7) in the placebo arm at
day 5. At day 7 87.5% (7/8) patients in the alvelestat arm had improved by 2 points or more vs 57% (4/7) in
the placebo arm. Inflammatory and pro-coagulopathy biomarkers were also supportive.
An open-label Phase 1b/2 investigator-sponsored study in BOS following allogeneic stem cell transplant is
ongoing. Interim results of Phase 1b were reported in December 2021 showing stabilization or improvement
in lung function measured by Forced Expiratory Volume in 1 second, (FEV1) in 6 of 7 patients, and supportive
biomarker responses, with reduction in neutrophil elastase and the mature elastin breakdown product
(desmosine) and reductions in markers of collagen synthesis associated with fibrosis. We expect to provide
an update on this study and on the expansion into Phase 2 during 2022.
Setrusumab (BPS-804): Setrusumab is a novel antibody designed to inhibit sclerostin, a protein that inhibits
the activity of bone-forming cells. Inhibiting sclerostin has been shown to promote increases in bone mineral
density through stimulation of bone-formation (through osteoblasts) and inhibition of bone-resorption
(through osteoclasts). We are developing setrusumab 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 an aggregate of 32,000 people in Germany,
Spain, France, Italy and the United Kingdom. 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.
Prior to our acquisition of setrusumab, Novartis conducted four clinical trials in 106 patients and healthy
volunteers. 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. In
September 2020 we received rare pediatric disease designation for setrusumab in OI from the FDA. In
November 2019 we reported top-line data on a Phase 2b clinical trial of setrusumab for adults with OI. The
Phase 2b was a dose ranging study 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. Setrusumab demonstrated statistically
significant improvements in bone formation biomarkers and bone mineral density (measured by Dual Energy
X-ray Absorptiometry) and a trend to a reduction in fractures at the high dose, compared to the other doses,
even though the study was not powered for fracture reduction. The results support the progression of
setrusumab into a pediatric pivotal study in OI. The data was also presented, as a podium presentation, at
the American Society of Bone and Mineral Research (“ASBMR”) in October 2021.
We completed a Type B end of Phase 2b meeting with the FDA in February 2020, a priority medicines scheme
(PRIME) meeting with the EMA in May 2020 and sought scientific advice from the EMA in December 2020.
These meetings resulted in alignment between the regulators on a Phase 2/3 pediatric study in children with
OI.
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In December 2020 we announced a partnership with Ultragenyx for the development of setrusumab for OI.
Under the terms of the partnership, Ultragenyx will lead future global development of setrusumab in both
pediatric and adult patients. We granted Ultragenyx an exclusive license to develop and commercialize
setrusumab in the US and rest of the world, excluding Europe and the U.K. where we retain commercial rights.
Each party will be responsible for post-marketing commitments in their respective territories.
Ultragenyx made an upfront payment of $50 million to Mereo and will fund global development of the
program until approval and has agreed to pay a total of up to $254 million upon achievement of certain
clinical, regulatory and commercial milestones. Ultragenyx will pay tiered double digit percentage royalties
to us on net sales outside of Europe and the U.K. and we will pay a fixed double digit percentage royalty to
Ultragenyx on net sales in Europe and the U.K. Under the terms of our 2015 agreement with Novartis, we will
pay Novartis a percentage of proceeds, subject to certain deductions, with Mereo receiving a substantial
majority of the payments from Ultragenyx.
Ultragenyx plans to start a pediatric and young adult Phase 2/3 study in the first half of 2022. The objective
of the Phase 2/3 study will first focus on determining the optimal dose based on increases in collagen
production using serum P1NP levels and an acceptable safety profile. Following determination of the dose,
Ultragenyx currently intend to adapt the study into a pivotal Phase 3 stage, evaluating fracture reduction
over an estimated 15 to 24 months as the primary endpoint, subject to regulatory review. Ultragenyx currently
expect a separate Phase 2 study of patients under age five with OI to start in the second half of 2022.
Ultragenyx will, also, continue to evaluate adult patients who were previously treated in the ASTEROID study.
Our Non-Core Partnering Portfolio
Following completion of successful Phase 1 or Phase 2 studies the products below are either partnered or
programs which we intend to out-license or sell.
•
•
•
Acumapimod (BCT-197): Acumapimod is a p38 MAP kinase inhibitor therapy for treatment of severe
acute exacerbations of COPD (AECOPD). In a Phase 2 trial, acumapimod given over 5 days in patients
hospitalized with AECOPD demonstrated a statistically significant reduction in re-hospitalization for
treatment failure and recurrent exacerbations. Acumapimod was reported to be safe and well tolerated.
Following meetings with FDA and EMA a global Phase 3 registrational program has been designed and
we intend to explore out-licensing or sale opportunities with third parties for the further development
of acumapimod.
Leflutrozole (BGS-649): Leflutrozole is an oral inhibitor of aromatase for the treatment of male infertility
associated with HH. Excess aromatase in fat tissue reduces testosterone, LH and FSH, leading to HH.
In Phase 2 trials, leflutrozole normalized testosterone, increased LH and FSH and was reported to be
well-tolerated. Effects on sperm counts supported that future development of leflutrozole should focus
on male infertility associated with HH. We intend to explore out-licensing or sale opportunities with
third parties for the further development of leflutrozole.
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
Mereo BioPharma 5 (formerly OncoMed). 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, Navi was licensed by the Company to OncXerna pursuant
to the terms of a global licensing agreement. Under the terms of the contingent value rights agreement
between us and Computershare from April 2019 (the “Mereo CVR Agreement”), the holders of contingent
value rights are entitled to receive the benefit of certain cash milestone payments made to Mereo under
the license agreement. Pursuant to the terms of the Mereo CVR Agreement, if a milestone occurs prior
to the fifth anniversary of the closing of the Merger, April 23, 2024, then holders of CVRs will be entitled
to receive an amount in cash equal to 70% of the aggregate principal amount received by Mereo after
deduction of costs, charges and expenditures set out in detail in the Mereo CVR Agreement. Such
milestone payments are also subject to a cash consideration cap, pursuant to which the aggregate
principal amount of all cash payments made to holders of CVRs under the Mereo CVR Agreement shall
in no case exceed $79.7 million.
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Our Strategy
We intend to become a leading biopharmaceutical company developing innovative therapeutics that aim to
improve outcomes for patients with rare diseases and select oncology indications. The key elements of our
strategy to achieve this goal include:
Rapidly develop our product candidates and potentially commercialize our 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 with nivolumab in a range of tumor types. We have
advanced etigilimab into an open label Phase 1b/2 basket study evaluating our anti- TIGIT in combination
with nivolumab in a range of tumor types including three rare tumors, sarcoma, uveal melanoma and germ
cell cancer, three gynecological carcinomas, cervical, endometrial and ovarian carcinomas and tumors with
high mutation burden. We reported interim data from this Phase 1b/2 basket study in November 2021 and
expect to provide an additional update in mid-2022. We have an on-going Phase 2 proof-of-concept clinical
trial of alvelestat for the treatment of severe AATD which we closed to enrollment in late 2021 and now
expect to report top-line data from this trial in early Q2 2022. If the results are favorable and pending
regulatory feedback, we will determine the optimum path forward for development of alvelestat towards
approval and commercialization. We also announced the completion and top-line data of a Phase 1b/2
placebo-controlled clinical trial to evaluate the safety and efficacy of alvelestat in hospitalized adult patients
with moderate to severe COVID-19 respiratory disease. The investigator-sponsored Phase 1b/2 study in
BOS following SCT has completed the Phase 1b stage (10 patients) and is expected to commence Phase 2
in the second half of 2022 to evaluate clinical efficacy on lung function (FEV1) in a 6-month study in up to
an additional 24 patients, with expansion for responders to 12 months. 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 topline 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 were followed for a further twelve months to examine
the off-effects of setrusumab. In September 2020, the FDA granted Rare Pediatric Disease designation to
setrusumab for the treatment of OI. Following our completion of the Phase 2b ASTEROID study, we met
with both the FDA (end-of-Phase 2 (EOP2) meeting in February 2020) and the EMA (PRIME meeting in May
2020) to discuss the principles of a design of a single Phase 2/3 registrational pediatric study in OI. In
December 2020, we signed a license and collaboration agreement for setrusumab in OI with Ultragenyx
Pharmaceutical Inc. Ultragenyx plans to start a Phase 2/3 study in young adults and pediatric patients (5-
25 years old) in the first half of 2022 and to provide an update on the Phase 2 dose ranging part of this
study in the second half of 2022. Following selection of the dose for the Phase 3 study, Ultragenyx intend
to initiate an additional registrational trial in young pediatric patients (2-4 years old) in the second half of
2022. We intend to commercialize our rare disease product candidates where it makes strategic sense to
do so. For example, in our global licensing collaboration with Ultragenyx we have retained commercial
rights to setrusumab for children and adults with OI in the EU and U.K.
Efficiently advance our other product candidates and explore out-licensing or sale opportunities with
third parties for further clinical development and/or commercialization. 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 out-licensing or sale opportunities with third parties for the further
development and commercialization of leflutrozole. Our second oncology product, navicixizumab, for
the treatment of late line ovarian cancer, has completed a Phase 1 study and has been partnered on a
global basis with OncXerna.
Continue to be a partner of choice for pharmaceutical and biotechnology companies. We believe that
we are a preferred partner for 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, 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 pharmaceutical and
biotechnology companies and that we believe to be mutually beneficial.
•
•
•
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•
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 rare diseases.
Financial review
The following table sets forth Mereo’s results of operations for the years ended December 31, 2021 and 2020.
Year Ended December 31,
Revenue
Cost of revenue
Research and development expenses
Administrative expenses
Operating loss
Finance income
Finance costs
Changes in fair value of financial instruments
Gain/(loss) on disposal of intangible assets
Net foreign exchange loss
Profit/(loss) before tax
Taxation
Loss attributable to equity holders of the parent
Exchange differences on translation of foreign operations
Total comprehensive loss attributable to equity holders of the parent
2021
£’000s
2020
£’000s
36,464
(17,908)
(23,559)
(15,933)
––––––––––
(20,936)
1
(4,022)
40,039
113
(954)
––––––––––
14,241
(1,516)
––––––––––
12,725
––––––––––
––––––––––
(191)
––––––––––
––––––––––
12,534
––––––––––
––––––––––
–
–
(16,347)
(21,222)
––––––––––
(37,569)
44
(6,383)
(109,849)
(10,872)
(1,821)
––––––––––
(166,450)
2,822
––––––––––
(163,628)
––––––––––
––––––––––
349
––––––––––
––––––––––
(163,279)
––––––––––
––––––––––
Revenue
Revenue was £36.5 million for the year ended December 31, 2021 compared to nil for year ended
December 31, 2020.
In January 2021, the Company’s licensing and collaboration agreement with Ultragenyx for the development
and commercialization of setrusumab for OI became effective. Under the terms of the agreement, Ultragenyx
will lead future global development of setrusumab in both pediatric and adult patients. We granted Ultragenyx
an exclusive license to develop and commercialize setrusumab in the US and rest of the world, excluding
Europe and the U.K. where we retain commercial rights. Each party will be responsible for post-marketing
commitments in their respective territories.
Ultragenyx made an upfront payment of £36.5 million ($50 million) to Mereo in January 2021 and will fund
global development of the program until approval and has agreed to pay a total of up to $254 million upon
achievement of certain clinical, regulatory and commercial milestones. Ultragenyx will pay tiered double
digit percentage royalties to us on net sales outside of Europe and the U.K. and we will pay a fixed double
digit percentage royalty to Ultragenyx on net sales in Europe and the U.K.
Cost of revenue
Cost of revenue for the year ended December 31, 2021 was £17.9 million compared to nil for the year ended
December 31, 2020. This was comprised of £9.5 million, representing the carrying value of the setrusumab
rights granted to Ultragenyx under the licensing and collaboration agreement, and £8.4 million in relation to
our 2015 agreement with Novartis, under which the Company pays a percentage of proceeds, subject to
certain exceptions. Under the terms of this agreement, we made a payment of £7.2 million to Novartis for
the year-ended December 31, 2021.
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STRATEGIC REPORT
Research and development (“R&D”) Expenses
The following table sets forth our R&D expenses by product development program for the years ended
December 31, 2021 and 2020.
Year Ended December 31,
Setrusumab (BPS-804)
Alvelestat (MPH-966)
Etigilimab (MPH-313)
Leflutrozole (BGS-649)
Acumapimod (BCT-197)
Navicixizumab (“Navi”)
Other
Unallocated costs
Total R&D expenses
2021
£’000s
2020
£’000s
3,597
5,303
13,499
157
94
15
63
831
––––––––––
23,559
––––––––––
––––––––––
7,695
4,709
1,029
135
108
1,734
153
784
––––––––––
16,347
––––––––––
––––––––––
Total R&D expenses increased by £7.2 million, or 44%, from £16.3 million in 2020 to £23.6 million in 2021.
R&D expenses relating to etigilimab increased by £12.5 million. The increase was due to the costs associated
with commencement of the open label Phase 1b/2 basket study in combination with nivolumab in a range
of tumor types. R&D expenses relating to alvelestat increased £0.6 million, or 13%, primarily related to the
ongoing Phase 2 proof-of-concept study. Partially offsetting the increases, R&D expenses relating to
setrusumab and navicixizumab decreased by £4.1 million and £1.7 million, respectively. The decrease related
to setrusumab was primarily driven by the licensing and collaboration agreement with Ultragenyx, under
which Ultragenyx will fund global development of the program, and the decrease related to navicixizumab
was driven by the global out-licensing agreement with OncXerna for the development and commercialization
of navicixizumab.
Administrative expenses
Administrative expenses decreased by £5.3 million, or 25%, from £21.2 million in 2020 to £15.9 million in 2021.
The decrease was primarily driven by a £4.0 million reduction in legal and professional fees in 2021, reflecting
lower activity and related transaction costs in 2021 compared to 2020, which included the June 2020 Private
Placement and the cancellation of admission of our ordinary shares to trading on the AIM market of London
Stock Exchange in December 2020. Premises-related costs decreased by £1.3 million in 2021 primarily due
to one-off transaction costs in 2020 associated with renegotiation of our office lease in Redwood City.
Finance income and costs
Total finance costs decreased from £6.4 million in 2020 to £4.0 million in 2021. The decrease is primarily
related to a decrease in bank loan interest of £2.9 million following the settlement of the bank loan in December
2020 and a decrease in lease liability finance charges of £0.9 million, partially offset by £1.3 million of
additional interest primarily on the June 2020 Private Placement convertible loan notes.
Changes in fair value of financial instruments
The total change in fair value of financial instruments for 2021 was a gain of £40.0 million. The gain resulted
from a £39.5 million unrealized gain on Warrants in respect of the June 2020 Private Placement and a
£0.5 million unrealized gain on warrants issued to our former lenders in connection with the loan facility.
The total change in fair value of financial instruments for 2020 was a loss of £109.8 million. The loss primarily
resulted from the Loan Notes and Warrants in respect of the June 2020 Private Placement, including:
(i) a £63.2 million loss realized on the embedded derivative associated with the Loan Notes that was
conditional on the passing of the Resolutions at a subsequent general meeting of shareholders held on June
30, 2020, and (ii) a £46.0 million unrealized loss on the Warrants. In addition, the unrealized loss on warrants
issued to our former lenders in connection with the loan facility was £0.7 million in 2020.
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MEREO BIOPHARMA GROUP PLC
STRATEGIC REPORT
Net foreign exchange gain/(loss)
The net foreign exchange loss for 2021 was £1.0 million, a decrease of £0.8 million from a £1.8 million loss
in 2020. The net foreign exchange loss consists primarily of foreign exchange loss on the translation of
non-functional currency cash deposits, primarily held in U.S. dollars.
Taxation
The income tax charge for 2021 was £1.5 million. The income tax charge arises primarily from £40.0 million
unrealized gain resulting from changes in the fair value of warrant instruments.
The income tax benefit for 2020 was £2.8 million. The income tax benefit represents eligible cash rebates
paid or receivable from the tax authorities in the jurisdictions within which we operate for eligible types of
research and development activities and associated expenditure (the “R&D tax credit”). Further, in February
2020, Mereo BioPharma 5 received a tax refund in respect of AMT of £0.2 million from the U.S. Internal
Revenue Service (“IRS”). We currently estimate that an additional £0.8 million of tax refund in respect of AMT
will be received in 2022 with respect to 2019.
Liquidity and Capital Resources
Overview
Under the current business plan and cash flow forecasts, and in consideration of (i) our ongoing research
and development efforts which are focused on our etigilimab, our oncology product candidate, and on our
rare disease product candidates, setrusumab and alvelestat, (ii) our general corporate funding requirements,
(iii) the upfront payment of $50 million received under the license and collaboration agreement with
Ultragenyx for setrusumab, and (iv) our public offering of ADSs in February 2021 which raised approximately
$108.2 million (£78.4 million) net cash proceeds, we anticipate that our current on-hand cash resources will
extend into 2024. However, we will need additional external funding to complete our development plans and
take selected products through to commercialization.
We do not currently have any approved product candidates and as a result, have not generated any revenue
from product sales. As a result, to date, we have financed our operations primarily through the issuances of
our equity securities and convertible debt and our credit facility, which we entered into in August 2017 and
subsequently repaid in full in December 2020. We raised $183 million (£137.9 million) in private placements
of ordinary shares and convertible loan notes in 2020 and in a public offering of ADSs in February 2021.
In September 2018, we entered into a revised loan agreement which enabled us to extend the interest only
period of the credit facility from September 30, 2018 to April 30, 2019. On April 23, 2019, we agreed a revision
to the loan agreement which extended the interest only period of the credit facility through December 31, 2020.
On December 15, 2020, we repaid the outstanding principal and accrued interest in full. In connection with the
credit facility, we have issued warrants for (i) 1,243,908 ordinary shares at an exercise price of £2.95 per share,
and (ii). 1,243,908 ordinary shares at a price of $0.4144 per share.
On October 8, 2018, we entered into a funding agreement with The Alpha-1 Project, Inc. (“TAP”), which
provided for funding of up to $0.4 million as a contribution towards the development of our product candidate
alvelestat. On November 1, 2018, the first tranche of $0.1 million was received and as a result we issued
41,286 warrants to subscribe for our ordinary shares at an exercise price of £0.003 per share.
February 2021 Public Offering
On February 12, 2021, we announced the completion of an underwritten public offering of 39,675,000 ADSs,
at a public offering price of $2.90 per ADS, which includes 5,175,000 additional ADSs issued upon the exercise
in full of the underwriters’ option to purchase additional ADSs. The aggregate gross proceeds to us from the
offering, before deducting underwriting discounts and commissions and offering expenses were
$115.1 million. The net proceeds, after transaction costs, were £78.4 million ($108.2 million).
Partnership with Cancer Focus Fund and The University of Texas MD Anderson Cancer Center
On April 30, 2021, we entered into partnership with Cancer Focus Fund for a Phase 1b/2 study of etigilimab in
Clear Cell Ovarian Cancer to be conducted at The University of Texas MD Anderson Cancer Center. The study
will be financed by Cancer Focus Fund, in exchange for upfront consideration of $1.5 million (£1.09 million) of
the Company’s ordinary shares and additional payments based on the achievement of certain milestones.
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STRATEGIC REPORT
Cash Flows
Comparison of Years Ended December 31, 2021 and 2020
The table below summarizes our cash flows from (used in) operating, investing and financing activities for
the years ended December 31, 2021 and 2020.
Net cash used in operating activities
Net cash (used in)/from investing activities
Net cash from financing activities
Net increase in cash and cash equivalents
2021
£’000s
2020
£’000s
(5,239)
(421)
77,652
––––––––––
71,992
––––––––––
(28,341)
1,495
34,737
––––––––––
7,891
––––––––––
Operating Activities
Net cash used in operating activities for the year ended December 31, 2021 was £5.2 million, a decrease of
£23.1 million from £28.3 million in 2020. The decrease was primarily driven by the receipt of upfront payments
from Ultragenyx of £36.5 million, offset by associated payments to Novartis of £7.2 million. In 2021, we
received R&D tax credits from the U.K. tax authorities of £2.8 million compared to £10.4 million in 2020.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2021 was £0.4 million, a decrease from
a cash inflow of £1.5 million in 2020. In 2020, we received net proceeds of £1.8 million following the global
licensing arrangement for navicixizumab to OncXerna.
Financing Activities
Net cash from financing activities for the year ended December 31, 2021 was £77.7 million, an increase of
£42.9 million from £34.7 million in 2020. The increase is primarily attributable to: £78.4 million net proceeds
from the Public Offering in February 2021 compared to £59.6 million net proceeds from the issuance of
ordinary shares and convertible loan notes in 2020; partially offset by repayment of £22.7 million of capital
and interest on our bank loan and £2.1 million of lease liabilities in 2020.
Financial outlook
We expect that our existing cash and short-term deposits will enable us to fund our currently committed
clinical trials and operating expenses and capital expenditure requirements into 2024.
Principle risks and uncertainties
The risks described below are those that we currently believe may materially affect us. We may face
additional risks and uncertainties not currently known to us or that we currently deem to be immaterial.
We have a limited operating history and have never generated any revenue from product sales.
We will need additional funding to complete the development of our current product candidates; to
license, acquire, and develop future product candidates; and to commercialize our product candidates,
if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce, or
eliminate research and development programs, any future commercialization efforts or acquisitions of
potential product candidates.
We depend heavily on the success of etigilimab, alvelestat and setrusumab. We cannot give any
assurance that any of these product candidates or therapeutic candidates will receive regulatory
approval, which is necessary before they can be commercialized. If we are unable to commercialize
etigilimab, alvelestat and setrusumab, whether on our own or through agreements with third parties, or
experience significant delays in doing so, our ability to generate revenue and our financial condition
will be adversely affected.
•
•
•
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STRATEGIC REPORT
•
•
•
•
•
•
•
•
•
•
•
•
•
The COVID-19 pandemic may continue to impact our business or any other similar pandemic may
materially impact our business, including, delays to enrollment of patients in clinical trials for our
product candidates, delays in engagement with or responses from regulatory authorities, delays to
clinical trial supplies, planned clinical developments and our ongoing or future clinical studies.
We depend on enrollment of patients in our clinical trials for our product candidates. If we are unable
to enroll patients in our clinical trials, or enrollment is slower than anticipated, in particular for our
product candidates with rare disease indications, our research and development efforts could be
adversely affected.
We may become exposed to costly and damaging liability claims, either when testing our product
candidates in the clinic or at the commercial stage, and our product liability insurance may not cover
all damages from such claims.
Enacted and future healthcare legislation may increase the difficulty and cost for us to obtain marketing
approval of and commercialize our product candidates and may affect the prices we may set.
We operate in a highly competitive and rapidly changing industry, which may result in others acquiring,
developing, or commercializing competing product candidates before or more successfully than we do.
We intend to directly commercialize or co-commercialize our product candidates for rare diseases and
potentially rare tumor types and to out-license or sell our other product candidates for further
development and/or commercialization. If we are unable to develop our own sales, marketing, and
distribution capabilities or enter into business arrangements, we may not be successful in
commercializing our product candidates.
The successful commercialization of our product candidates will depend in part on the extent to which
governmental authorities and health insurers establish adequate coverage, reimbursement levels, and
pricing policies. Failure to obtain or maintain coverage and adequate reimbursement for our product
candidates, if approved, could limit our ability to market those product candidates and decrease our
ability to generate revenue.
Our existing and future product candidates may not gain market acceptance, in which case our ability
to generate revenues from product sales will be compromised.
We rely, and expect to continue to rely, on third parties, including independent investigators and CROs,
to conduct our clinical trials. If these CROs do not successfully carry out their contractual duties or
meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our
product candidates, or such approval or commercialization may be delayed, and our business could be
substantially harmed.
We currently rely on third-party CMOs for the production of clinical supply of our product candidates
and intend to rely on CMOs for the production of commercial supply of our product candidates,
if approved. Our dependence on CMOs may impair the development of our product candidates and may
impair the commercialization of our product candidates, which would adversely impact our business
and financial position.
We rely on patents and other intellectual property rights to protect our product candidates, the
obtainment, enforcement, defense and maintenance of which may be challenging and costly. Failure to
enforce or protect these rights adequately could harm our ability to compete and impair our business.
We may become subject to third parties’ claims alleging infringement of third-party patents and
proprietary rights, or we may be involved in lawsuits to protect or enforce our patents and other
proprietary rights, which could be costly and time consuming, delay or prevent the development and
commercialization of our product candidates, or put our patents and other proprietary rights at risk.
Our future growth and ability to compete depends on retaining our key personnel and recruiting
additional qualified personnel.
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STRATEGIC REPORT
•
•
Failure to establish and maintain effective internal controls could have a material adverse effect on our
business and stock price.
If our partners do not satisfy their obligations under our agreements with them, or if they terminate our
licenses, partnerships or collaborations with them, we may not be able to develop or commercialize
our licensed or partnered product candidates as planned.
Risk Mitigations
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 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. We set out below the key risk mitigations by area:
Clinical development and manufacturing: Our highly experienced in-house team manages the control over
our external vendors 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. The Group also has an
experienced in-house team that is working with a number of specialist manufacturers in respect of its drug
manufacturing capabilities.
Commercialization: For our rare disease programs, we engage with regulators, health technology assessment
(“HTA”) bodies, treating physicians and patient representative organizations at all stages of our development.
We are also in regular dialogue with the European payers through the Mechanism of Coordinated Access to
Orphan Medicinal Products (“MoCA”). Treating physicians, notably those in the lead centers of expertise are
part of our development work on an ongoing basis; and we also consult regularly with the patient
representative organizations from the therapeutic areas we intend to address. Market research work,
including pricing, has been initiated for our two rare disease candidate products. We constantly monitor
development programs from other companies in our target indications, to allow us to effectively understand
and evaluate the competitive landscape for etigilimab, alvelestat and setrusumab on an ongoing basis.
Regulatory: We have an experienced in-house team who works with several specialized regulatory advisors
to give guidance on regulatory strategy for each of our candidate products. As our programs continue
through their respective development plans, the relative risk that we fail 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.
Compliance with laws and regulations: 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 Nasdaq listed company. This has included updates to the Terms of Reference for the
Board Committees which are available for inspection on our website. We cancelled admission of the
Company’s ordinary shares to trading on the AIM market of the London Stock Exchange in December 2020.
Following the cancellation of AIM admission, many of our corporate governance policies and procedures as
well as the terms of reference for the Board Committees were updated to reflect the Company’s sole listing
on the Nasdaq Global Market. As a data controller, we are accountable for any third-party data service
providers we engage to process personal data on our behalf. We attempt to address the associated risks by
performing security assessments, detailed due diligence and regularly performing privacy and security
reviews of our vendors and requiring all such third-party providers with data access to sign agreements,
including business associate agreements, and where required under EU or UK law, obligating them to only
process data according to our instructions and to take sufficient security measures to protect such data.
The Group’s General Counsel and Company Secretary, who serves as an Executive Officer, is responsible for
ensuring compliance with laws and regulations. For certain matters, the Company will engage external
counsel or regulatory advisors. We continued to make progress during the year in refining our internal
financial processes and controls to support our attestation under Section 404(a) of the Sarbanes- Oxley Act
of 2002 and involved our Audit and Risk Committee (“ARC”) throughout the process.
Intellectual Property: We have an experienced Head of IP employed by the Company since 2015 and, in
addition, we utilize expert external counsel in the prosecution and maintenance of our IP portfolio.
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STRATEGIC REPORT
Funding: As at December 31, 2021 the Group had total cash resources (being cash and short-term deposits)
of £94.3 million. In January 2021, the Group received an upfront payment of £36.5 million under the terms
of our license and collaboration agreement with Ultragenyx for setrusumab. Taken together with the public
offering which completed on February 12, 2021 and which raised net proceeds of approximately £78.4 million,
the Group has sufficient cash resources. The Directors have prepared detailed quarterly cashflow forecasts
through December 31, 2024. These forecasts indicate that the Group has a total cash runway into 2024 and
will have sufficient funds to meet its liabilities as they fall due for at least the next 12 months.
Key Performance Indicators
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 in the “Financial review” section of the Strategic Report.
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;
Business development including partnering, out-licensing and in-licensing activities; and
The development and prosecution of our patent portfolio.
These activities are discussed in the “Business overview and strategy” section of the Strategic Report.
Information about the Company’s employees
The Group’s future success depends on the ability to recruit and retain key 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 specialty products. We
have been fortunate to attract and retain highly experienced individuals in clinical development, clinical
operations, regulatory, finance, legal, manufacturing, intellectual property and quality assurance, supporting
them with strong leadership at the executive and Board level.
Our internal expertise is leveraged with external organizations, including contract research organizations
(“CROs”) and contract manufacturing organizations (“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 have 52 employees as of the date of this annual report. 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 of Directors (“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, human
resources 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 endeavors to not discriminate
because of age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity,
race (which includes color, 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 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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STRATEGIC REPORT
A breakdown of employment statistics by gender as at December 31, 2021 is as follows:
Position
Directors of the Company (CEO and Non-Executive)
Executive officers
Employees
Total
Male
Female
Total
6
4
20
30
2
4
20
26
8
8
40
56
Executive officers consist of senior managers who have responsibility for planning, director or controlling
the activities of the Group. As at December 31, 2021, this includes the Chief Financial Officer, Chief Portfolio
Management and Pipeline Strategy, General Counsel and Company Secretary, Chief Business Officer, Chief
Patient Access and Commercial Planning, Chief Scientific Officer, Senior Vice President and Therapeutic
Head and Senior Vice President Clinical Development.
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 R&D strategy, corporate and financing strategies. On March 1, 2022, Anne
Hyland was appointed as a Non-Executive Director.
Diversity and human rights
The Company recognizes the value in promoting a culture of diversity and inclusion and aims to both reflect
the global communities in which we operate and have a positive impact upon them. At present the Company
does not have a specific policy on human rights, however we have several policies that promote the principles
of human rights. We partner with our suppliers and external organizations to ensure long-term mutually
beneficial relationships, and respect for human rights is embedded throughout our global network.
Social and 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.
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.
Quantification and reporting methodology
The 2019 UK Government Environmental Reporting Guidelines and the GHG Protocol Corporate Accounting
and Reporting Standard (revised edition) were followed to ensure the Streamlined Energy and Carbon
Reporting (“SECR”) requirements were met. The SECR disclosures include the U.K. group companies only.
The energy data was collated using existing reporting mechanisms. These methodologies provided
continuous record of electricity use.
The energy data was converted to carbon emissions using the 2021 UK Government GHG Conversion Factors
for Company Reporting. The associated emissions are divided into the combustion of fuels and the operation
of facilities (scope 1), purchased electricity, heating and cooling (scope 2) and in-direct emissions that occur
as a consequence of company activities (scope 3). During the year the Group only had emissions relating to
scope 2.
Estimations
The electricity use was compiled from invoices and meter readings.
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Energy used by the company (in KWH)
Emissions associated with the reported energy use (tCO2e)
2021
68,626
15
2020
95,507
22
Intensity Ratio
The chosen primary intensity ratio is total gross emissions in metric tonnes CO2e (mandatory emissions)
per employee.
Tonnes of CO2e per employee
2021
0.49
2020
0.73
Energy efficiency action during current financial year
The management of resources and the need to embed sustainability is an important issue for the Group and
the following actions related to reducing energy use were implemented within the current reporting period.
Energy consumption in 2021 continued to be low resulting from the “work from home” guidance by the U.K.
government in the first half of 2021.
In addition, during the office refurbishment in 2021, we prioritized energy saving choices such as insulating
floors, motion-activated lighting, and operational changes to the heating system. As a company, we are also
committed to sourcing our electricity from fully renewable sources. We continue to invest in energy efficiency
and are currently in the process of migrating to more energy efficient IT storage solutions.
Section 172(1) Companies Act 2006
The Directors in line with their duties under section 172 of the Companies Act 2006, act in a way they
consider, in good faith to promote the success of the Group for the benefit of its members as a whole. 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;
The interests of the Group’s employees;
The need to foster the Group’s business relationships with suppliers, customers and others;
The impact of the Group’s operations on the community and the environment;
The desirability of the Group maintaining a reputation for high standards of business conduct; and
The need to act fairly between shareholders of the Group.
The Board of Directors meets regularly to discuss developments of the Group’s existing portfolio of product
candidates, strategic business development, ongoing operations and other relevant matters. The Board takes
care to have considered the likely consequences on all stakeholders of the decisions and actions which they
take, and these are discussed regularly in the Board meetings. The Group’s long-term strategy and the
principal risks and uncertainties in the view of the Board are set out in pages 12 to 15.
As set out in greater detail above, the Board considers the Group’s future success to depend on our ability
to recruit and retain key employees. The Board maintains constructive dialogue with employees through the
Chief Executive Officer (“CEO”). The Company also holds 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. We implemented a revised long-term incentive plan in April 2019, which allows us to
incentivize and retain employees across the Group and aligns employees’ objectives with those of the Group.
We granted share options under these schemes to all employees and Non-Executive Directors in 2021 and
2020.
The Group endeavors 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
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STRATEGIC REPORT
our significant suppliers regularly, using the meetings to ensure that our research programs are planned and
delivered effectively and in a timely and cost-efficient manner. This ensures that the Group’s and our
significant suppliers’ interests are aligned. The Group also maintains excellent working relationships with
our partners in collaboration agreements, with regular meetings and updates.
The Board understands the importance of environmental, social and governance matters and it endeavors
to consider the impact on the community when operating its business. Our greenhouse gas emissions report
which is in compliance with streamlined energy and carbon reporting requirements is included on page 16.
In 2021, as a result of continuing COVID-19 restrictions, there has been continued use of video conferencing
for internal and external meetings and board meetings, reducing the need for travel. The emissions saving
resulting from these activities has not been quantified, but this practice has resulted in some behavior
changes that are expected to continue for the foreseeable future. In 2021, while we refurbished our office
space, we also took the opportunity to ensure we utilize energy efficient and sustainable solutions wherever
possible.
The Board recognizes the importance of maintaining 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 that employees are required to read and acknowledge on
at least an annual basis and which also includes details of the whistleblowing policy that allows all
employees to raise concerns to senior management in strict confidence about any unethical business
practices, fraud, misconduct or wrongdoing. The Group also works with business management consultants
at a Company and Executive Team level to assess our culture and to embed any agreed modifications.
In maintaining good corporate governance structures, the Board considers the need to act fairly to all
shareholders of the Group. The Group maintains a regular dialogue with our institutional investors. The
Group’s website has a dedicated investor section which provides useful information for our shareholders,
including the latest announcements, press releases, published financial information, details of our product
candidates and our current development pipeline and other information about the Company.
This strategic report, which has been prepared in accordance with Companies Act 2006, has been approved
by the Board and signed on behalf of the Board:
Dr. Peter Fellner Dr. Denise Scots-Knight
Chairman Chief Executive Officer
March 31, 2022 March 31, 2022
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REMUNERATION REPORT
Annual Statement by Chair of Remuneration Committee
Introduction
Dear Shareholder,
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 Directors’ Remuneration Report for the year
ended December 31, 2021 (the “Report”). We are required to prepare this Report due to the Company’s listing
in the U.S. on the Nasdaq Global Market and our UK incorporation.
This Report includes this Annual Statement and the Annual Report on Remuneration for the financial year
ended December 31, 2021. The Directors’ Remuneration Report will be subject to an advisory shareholder
vote at the 2022 Annual General Meeting (“AGM”). The current Directors’ Remuneration Policy (“Policy”) was
approved by shareholders at the AGM on May 27, 2021. The Policy took formal effect from the date of
approval and is intended to apply until the 2024 AGM, unless a new version is presented to shareholders in
the interim. The full shareholder approved Policy can be found in the Annual Report and Accounts for the
year ended December 31, 2020.
The Remuneration Committee has concluded that the current overarching remuneration framework
continues to be effective and that no significant changes to the Policy and its implementation are currently
required.
As a reminder, we operate a simple and transparent structure comprising salary, benefits and pension and,
subject to stretch performance conditions, an annual bonus. In addition, we regularly make awards of equity
incentives to encourage longer-term commitment and sustainable performance. 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, and making the enhancement of shareholder value a critical success factor, both in the short and the
long-term.
In 2022 one change to how we implement the current Policy has been made with the creation of a Deferred
Compensation Plan under the Company’s existing 2019 Non-Employee Equity Incentive Plan. Under the new
Deferred Compensation Plan, Non-Employee Directors may voluntarily elect, on an annual basis, to receive
Deferred Restricted Share Units (“RSUs”) over ADSs in lieu of their cash fees, which are then held until
settlement following separation of service.
In the year ended December 31, 2021, all decisions taken on remuneration were in accordance with the terms
of reference of the Remuneration Committee and involved the exercise of appropriate commercial judgment.
No discretions were exercised in relation to directors’ remuneration in the year beyond the exercise of the
commercial judgment of the Remuneration Committee.
Yours sincerely,
Dr. Deepa Pakianathan
Chair of the Remuneration Committee,
March 31, 2022
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REMUNERATION REPORT
Annual Report on Remuneration
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, 2021 and 2020. 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). Further information
about share option grants can be found on page 25.
Year Ended
December 31, 2021 (a) (b)
(in £) Salary/fees Benefits (i)
(d) Fixed
Variable
(c) Share (e) Other 2021 Remuneration remuneration
Bonus options (iv) Pensions (ii/iii) Total (a, b and e) (c, d and other)
Executive
Dr. Denise
Scots-Knight(1) 398,808 9,050
239,284 – 58,155 940,000 1,645,297 466,013 1,179,284
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Non-Executive
56,942
Dr. Peter Fellner 100,000 –
Peter Bains(2) 37,218 –
56,942
105,444
Dr. Jeremy Bender 40,375 –
56,942
Dr. Anders Ekblom 47,175 –
Kunal Kashyap(3) 43,750 –
56,942
56,942
Dr. Deepa Pakianathan 44,150 –
105,444
Dr. Brian Schwartz 39,550 –
56,942
Michael Wyzga 49,500 –
Pierre Jacquet(4) 9,962 –
–
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
(1) Pension figure included in the table above for Dr. Denise Scots-Knight includes payments in lieu of pension of £54,155.
(2) Peter Bains resigned on September 20, 2021. Refer to Payments for loss of office on page 23.
(3) Kunal Kashyap resigned on October 26, 2021. Refer to Payments for loss of office on page 23.
(4) Pierre Jacquet was appointed on September 20, 2021. The figure included in the table represents the amount accrued and unpaid as of December 31,
2021. On February 1, 2022, Mr. Jacquet was granted 33,393 market value options under the 2019 NED EIP plan which vested on grant in lieu of this
amount.
– – – 56,942 156,942 100,000
– – – 56,942 94,160 37,218
– – – 105,444 145,819 40,375
– – – 56,942 104,117 47,175
– – – 56,942 100,692 43,750
– – – 56,942 101,092 44,150
– – – 105,444 144,994 39,550
– – – 56,942 106,442 49,500
– – – – 9,962 9,962
Year Ended
December 31, 2020 (a) (b)
(in £) Salary/fees Benefits (i)
(d) Fixed
Variable
(c) Share (e) Other 2020 Remuneration remuneration
Bonus options (iv) Pensions (ii/iii) Total (a, b and e) (c, d and other)
398,808 – 61,488 175,596 1,043,484 469,080
– – – 147,790 383,142 235,352
76,929 – – – 190,353 113,424
Executive
Dr. Denise
Scots-Knight(1) 398,808 8,784
574,404
Richard Jones(2) 230,513 4,839
147,790
Michael Wyzga(3) 113,424 –
76,929
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Non-Executive
11,037
Dr. Peter Fellner 100,000 –
11,037
Peter Bains 48,000 –
Dr. Jeremy Bender(4) 10,000 –
–
11,037
Dr. Anders Ekblom 48,000 –
11,037
Kunal Kashyap 40,000 –
11,037
Dr. Deepa Pakianathan 44,000 –
Dr. Brian Schwartz(4) 10,000 –
–
Michael Wyzga(3) 23,333 –
11,037
Paul Blackburn(5) 48,000 –
11,037
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
(1)
(2)
– – – 11,037 111,037 100,000
– – – 11,037 59,037 48,000
– – – – 10,000 10,000
– – – 11,037 59,037 48,000
– – – 11,037 51,037 40,000
– – – 11,037 55,037 44,000
– – – – 10,000 10,000
– – – 11,037 34,370 23,333
– – – 11,037 59,037 48,000
Pension figure included in the table above for Dr. Denise Scots-Knight includes payments in lieu of pension of £55,988.
Richard Jones resigned on June 29, 2020. Per the Settlement Agreement, £37,500 representing the first instalment of the bonus is included within
“Salary/fees” and remaining £62,500 representing the second and third instalments of the bonus is included within “Other”.
Michael Wyzga was appointed interim Chief Financial Officer on August 1, 2020. Remuneration shown above is for the period August 1, 2020 to
December 31, 2020 in his Executive capacity, and for the period January 1, 2020 to July 31, 2020 in his Non-Executive capacity.
Dr. Jeremy Bender and Dr. Brian Schwartz were appointed on October 1, 2020
Paul Blackburn resigned on October 1, 2020.
(3)
(4)
(5)
(i) Benefits represent private medical insurance during the years ended December 31, 2021 and 2020.
(ii) During the years ended December 31, 2021 and 2020, market value options were granted as an equity incentive award to the CEO. 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 the Executive Director 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, 2021.
(iii) During the years ended December 31, 2021 and 2020, 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 years ended December 31, 2021 and 2020, no equity incentive awards with performance conditions or measures were granted or vested.
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DIRECTORS’ REMUNERATION REPORT
Annual performance bonus
The Company has a discretionary bonus scheme for all employees and the Executive Director (CEO). 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 CEO are a percentage of base salary,
based on performance-based measures against Company-wide target objectives.
For the 2021 performance period, the CEO was entitled to an annual performance bonus of 60% of base
salary for a target level of performance, which could be increased with stretch performance up to a maximum
of 74.25% of base salary. The agreed Company-wide target objectives were met at 100% of target, meaning
the bonus pay-out for the 2021 performance period is 60% of base salary for the CEO.
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 Chief
Executive Officer for 2021 included the following:
•
•
•
•
•
•
•
Successful public offering of ADSs with aggregate gross proceeds of $115.1 million, securing cash
runway into Q1 2024
Successful partnership with Cancer Focus Fund, in collaboration with The University of Texas MD
Anderson Cancer Centre, to support a Phase 1b/2 study of etigilimab in clear cell ovarian cancer
On etigilimab, promising interim efficacy, safety and biomarker data from the ongoing Phase 1b/2 study
in a range of tumor types
On alvelestat, enrollment of 99 patients in the ongoing Phase 2 study in AATD with top-line data
expected in early Q2 2022, successful application of orphan drug designation in the US, data from the
investigator-sponsored Phase 1b/2 in BOS that supports further evaluation for this indication, and
encouraging top-line results from the investigator-led Phase 1b/2 study in COVID-19 infected patients
On setrusumab, successful completion of the knowledge transfer to Ultragenyx Pharmaceutical Inc.
under the license and collaboration agreement
In manufacturing, successful production of sufficient drug product for the Phase 1b/2 study for etigilimab
Successful achievement of milestones on intellectual property
In addition, the Committee took into account the following achievements which were not specifically
incorporated into the corporate objectives:
•
•
Development of assays for additional primary endpoints in the ongoing Phase 2 study in AATD and a
FDA Type C meeting granted to discuss clinical endpoints for potential Phase 3 study in AATD ahead
of top-line data expected in early Q2 2022
Appointment of new board members
Long-term incentive awards granted 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, 2021:
–
–
The CEO was 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 share-based awards over a one-year vesting period.
The awards vest monthly over an annual period from the grant date. The 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, 2021, 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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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REMUNERATION REPORT
Director
Grant date
Grant per ADS ($) Face value ($)
ADSs
Underlying
Exercise
Price
Expiration
Date
Dr. Denise
Scots-Knight
Dr. Peter Fellner
Peter Bains
Dr. Jeremy Bender
Dr. Jeremy Bender
Dr. Anders Ekblom
Kunal Kashyap
Dr. Deepa Pakianathan
Dr. Brian Schwartz
Dr. Brian Schwartz
Michael Wyzga
February 1, 2021
520,000
February 1, 2021
February 1, 2021
January 19, 2021
February 1, 2021
February 1, 2021
February 1, 2021
February 1, 2021
January 19, 2021
February 1, 2021
February 1, 2021
31,500
31,500
22,000
31,500
31,500
31,500
31,500
22,000
31,500
31,500
2.72
2.72
2.72
3.32
2.72
2.72
2.72
2.72
3.32
2.72
2.72
1,414,400
February 1, 2031
85,600
85,600
73,040
85,600
85,600
85,600
85,600
73,040
85,600
85,600
February 1, 2031
February 1, 2031
January 19, 2031
February 1, 2031
February 1, 2031
February 1, 2031
February 1, 2031
January 19, 2031
February 1, 2031
February 1, 2031
The exercise price of all options granted during the year under the 2019 EIP and 2019 NED EIP was the market
value of the ADSs upon closing on the last business day before the grant.
Awards lapsed during the year to December 31, 2021 (audited)
During the year to December 31, 2021, certain awards previously made to Dr. Denise Scots-Knight under a
long-term incentive plan (“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,
2020)
Options
lapsed
Options
outstanding
(December 31,
2021)
Dr. Denise Scots-Knight
LTIP
June 9, 2016
230,770
(230,770)
–
There were no LTIP awards granted during the year to December 31, 2021.
No other awards lapsed during the year to December 31, 2021.
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REMUNERATION REPORT
2.2 Payments to past Directors (audited)
There were no payments to past Directors made during the financial year ending December 31, 2021.
2.3 Payments for loss of office (audited)
Peter Bains resigned from the Board and ceased to be a Director on September 20, 2021. In accordance with
his letter of appointment and the terms agreed for his departure, Peter received the following in 2021:
•
•
Fees up to the termination date, including payment in lieu of notice (total of £37,218);
For the purposes of his outstanding Share Option Plan and 2019 EIP awards Mr. Bains will be treated
as a ‘good leaver’ within the meaning of the scheme rules. As a result, he was allowed to retain 142,116
outstanding Share Option Plan awards and 40,375 outstanding vested 2019 NED EIP awards. He will
be entitled to exercise these options for a period up to the tenth anniversary of the grant date for
each award.
Kunal Kashyap resigned from the Board and ceased to be a Director on October 26, 2021. In accordance with
his letter of appointment and the terms agreed for his departure, Mr. Kashyap received the following in 2021:
•
•
Fees up to the termination date, including payment in lieu of notice (total of £43,750);
For the purposes of his outstanding Share Option Plan and 2019 EIP awards Kunal will be treated as a
‘good leaver’ within the meaning of the scheme rules. As a result, he was allowed to retain 43,252
outstanding Share Option Plan awards and 43,000 outstanding vested 2019 NED EIP awards. He will
be entitled to exercise these options for a period up to the tenth anniversary of the grant date for
each award.
2.4 Directors’ service contracts and letters of appointment
Dr. Denise Scots-Knight joined the Company as an employee on July 29, 2015 and her current service
contract is dated September 3, 2021. She has a rolling service agreement with a notice period of twelve
months from either party.
The dates of appointment of each of the Non-Executive Directors serving at December 31, 2021, are
summarized in the table below:
Non-Executive Director
Dr. Peter Fellner
Dr. Anders Ekblom
Michael Wyzga
Dr. Deepa Pakianathan
Dr. Brian Schwartz
Dr. Jeremy Bender
Dr. Pierre Jacquet
Date of appointment
July 29, 2015
July 29, 2015
April 23, 2019
April 23, 2019
October 1, 2020
October 1, 2020
September 20, 2021
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REMUNERATION REPORT
2.5 Statement of Directors’ Shareholding and Share Interests (audited)
The table below sets out, as at December 31, 2021, 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. The table below is presented in ADS equivalent when the underlying interest is in ordinary shares.
Shares
Vested
Shares
Vested
Awards
Vested
Awards
Vested
Awards
Unvested
DBSP
(vested, without
performance
conditions)
(ADS
equivalent)
6,441
–
–
–
–
–
–
–
–
Beneficially
owned1
209,213
13,100
41,359
–
37,940
299,547
256,734
20,000
–
2015 Plan/
Share
Option Plan
(equivalent
ADS
vested
but not yet
exercised)
308,949
338,534
142,116
–
43,252
43,252
–
–
–
2019
EIP/NED EIP
(ADSs vested,
not yet
exercised)
2019
EIP/NED EIP
(ADSs,
unvested)
189,582
48,250
40,375
46,416
48,250
43,000
48,250
46,416
48,250
680,418
5,250
–
7,084
5,250
–
5,250
7,084
5,250
Director
Dr. Denise Scots-Knight
Dr. Peter Fellner
Peter Bains2
Dr. Jeremy Bender
Dr. Anders Ekblom
Kunal Kashyap2
Dr. Deepa Pakianathan3
Dr. Brian Schwartz
Michael Wyzga
(1) Each ADS represents five ordinary shares; ordinary shares held have been converted into equivalent ADSs.
(2) Figures for Peter Bains and Kunal Kashyap are as of the date they resigned from the Board, September 20, 2021 and October 26, 2021, respectively.
(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 Deepa 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.
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REMUNERATION REPORT
The Company does not have a formal policy on Executive or Non-Executive Director shareholdings in the
Company.
As at December 31, 2021, no unvested equity incentive awards are subject to performance conditions. The
table below shows the interests of the Directors in the Company’s share options as at December 31, 2021.
The underlying grants for the 2015 Plan, LTIP and Deferred Bonus Share Plan (“DBSP”) are in ordinary shares
and have been presented here in equivalent ADS, which represents five ordinary shares.
Ordinary
Shares
(equivalent Exercise Exercise
ADS) Price ADSs Price
Equity Underlying Per ADS Underlying Per ADS
Director Award Plan Grant ($) Grant ($)
Grant Date
Expiration Date
Executive
Dr. Denise 2015 Plan 308,948 8.63 – – September 25, 2015
April 26, 2018
Scots-Knight DBSP 6,441 nil – –
May 20, 2019
2019 EIP – – 87,500 5.40
July 23, 2019
2019 EIP – – 87,500 3.00
February 20, 2020
2019 EIP – – 175,000 1.84
2019 EIP – – 520,000 2.72
February 1, 2021
Non-Executive
Dr. Peter Fellner 2015 Plan 338,534 8.63 – – September 29, 2015
May 20, 2019
2019 NED EIP – – 5,500 5.40
July 23, 2019
2019 NED EIP – – 5,500 3.00
February 20, 2020
2019 NED EIP – – 11,000 1.84
2019 NED EIP – – 31,500 2.72
February 1, 2021
Peter Bains1 2015 Plan 142,116 8.63 – – September 29, 2015
May 20, 2019
2019 NED EIP – – 5,500 5.40
July 23, 2019
2019 NED EIP – – 5,500 3.00
February 20, 2020
2019 NED EIP – – 11,000 1.84
February 1, 2021
2019 NED EIP – – 18,375 2.72
January 19, 2021
Dr. Jeremy 2019 NED EIP – – 22,500 3.32
Bender 2019 NED EIP – – 31,500 2.72
February 1, 2021
Dr. Anders 2015 Plan 43,252 8.63 – – September 29, 2015
May 20, 2019
Ekblom 2019 NED EIP – – 5,500 5.40
July 23, 2019
2019 NED EIP – – 5,500 3.00
February 20, 2020
2019 NED EIP – – 11,000 1.84
February 1, 2021
2019 NED EIP – – 31,500 2.72
January 19, 2021
Dr. Brian 2019 NED EIP – – 22,500 3.32
Schwartz 2019 NED EIP – – 31,500 2.72
February 1, 2021
Kunal Kashyap1 2015 Plan 43,252 8.63 – – September 29, 2015
May 20, 2019
2019 NED EIP – – 5,500 5.40
July 23, 2019
2019 NED EIP – – 5,500 3.00
February 20, 2020
2019 NED EIP – – 11,000 1.84
February 1, 2021
2019 NED EIP – – 21,000 2.72
May 20, 2019
Dr. Deepa 2019 NED EIP – – 5,500 5.40
July 23, 2019
Pakianathan 2019 NED EIP – – 5,500 3.00
February 20, 2020
2019 NED EIP – – 11,000 1.84
February 1, 2021
2019 NED EIP – – 31,500 2.72
May 20, 2019
Michael Wyzga 2019 NED EIP – – 5,500 5.40
July 23, 2019
2019 NED EIP – – 5,500 3.00
February 20, 2020
2019 NED EIP – – 11,000 1.84
February 1, 2021
2019 NED EIP – – 31,500 2.72
September 25, 2025
January 31, 2022
May 20, 2029
July 23, 2029
February 20, 2030
February 1, 2031
September 29, 2025
May 20, 2029
July 23, 2029
February 20, 2030
February 1, 2031
September 29, 2025
May 20, 2029
July 23, 2029
February 20, 2030
February 1, 2031
January 19, 2031
February 1, 2031
September 29, 2025
May 20, 2029
July 23, 2029
February 20, 2030
February 1, 2031
January 19, 2031
February 1, 2031
September 29, 2025
May 20, 2029
July 23, 2029
February 20, 2030
February 1, 2031
May 20, 2029
July 23, 2029
February 20, 2030
February 1, 2031
May 20, 2029
July 23, 2029
February 20, 2030
February 1, 2031
(1) Figures for Peter Bains and Kunal Kashyap are as of the date they resigned from the Board, September 20, 2021 and October 26, 2021 respectively.
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DIRECTORS’ REMUNERATION REPORT
Executive Director (CEO)
–
Under the 2019 EIP, we have granted market value options to our CEO, Dr. Denise Scots-Knight. 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 our
Executive Director since 2019 were in respect of ADSs.
–
–
Under the 2015 Plan, we have granted market value options to our CEO. 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 DBSP, we have granted share awards to our CEO. 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 awards granted under the DBSP.
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 since 2019 were in respect of ADSs.
2.6 Performance Graph and Table
The graph below shows the Company’s performance, measured by total shareholder return, relative to the
Nasdaq US Small Cap Biotechnology Index, which has been selected for this comparison because the
Company has been trading on the Nasdaq exchange since the date it became a quoted company for the
purposes of the U.K. remuneration reporting regulations (in April 2019) and is therefore considered to be the
most suitable comparator index.
200
180
160
140
120
100
80
60
40
20
0
24/04/2019
31/12/2019
31/12/2020
31/12/2021
Mereo BioPharma
NASDAQ US Small Cap Biotechnology Index
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DIRECTORS’ REMUNERATION REPORT
Chief Executive Officer Total Remuneration History
The Chief Executive Officer’s remuneration over the period since the Company’s listing on Nasdaq in April
2019 is set out below. This will eventually build up to cover a rolling ten-year remuneration history.
2021
2020
2019
Total CEO remuneration
CEO bonus (as a % of maximum available)
CEO LTIP(1) vesting (as a % of maximum available)
£1,645,297
81%
100%
£1,043,484
100%
100%
£1,176,187
75%
100%
(1) Awards of market value options were granted under the 2019 EIP Plan as an equity incentive to the CEO in 2021, 2020 and 2019. As the options
granted in 2021, 2020 and 2019 are not subject to performance conditions the vesting percentage has been recorded as 100%.
2.7 Percentage Change in Remuneration of Directors and Employees
The following table shows the percentage change in each Executive and Non-Executive Directors’
remuneration compared with the average change for all employees of the Company for the year ended
December 31, 2021. Going forward, this disclosure will build up over time to cover a rolling five-year period.
Dr. Denise Scots-Knight
Dr. Peter Fellner
Peter Bains1
Dr. Jeremy Bender
Dr. Anders Ekblom
Dr. Pierre Jacquet2
Kunal Kashyap1
Dr.Deepa Pakianathan
Dr. Brian Schwartz
Michael Wyzga
Average of all employees
(other than Directors)
Salary/
fee (%)
2021
Benefits
(%)
Salary/
fee (%)
2020
Benefits
(%)
Annual
bonus
(%)
0
0
3
1
(2)
N/A
9
0
(1)
24
1
3
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
30
(40)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
8
2.0
0
2.9
0
0
N/A
0
0
0
0
2.0
3.4
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
6.0
Annual
bonus
(%)
36
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(19.7)
(1) Resigned from the Board during the year – figures have been annualized.
(2) Joined the Board during the year – no prior year comparison available.
2.8 Relative Importance of Spend on Pay
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
2021
£’000s
£12,183
23,559
2020
£’000s
10,669
16,347
% change
14%
44%
2.9 External appointments
Dr. Denise Scots-Knight (CEO) is currently a Non-Executive Director of Elanco Animal Health Incorporated
(“Elanco”) (NYSE: ELAN).
2.10 Membership of the Remuneration Committee and its Advisors
The Remuneration Committee currently comprises of three independent Non-Executive Directors: Dr. Deepa
Pakianathan (Chair), Dr. Anders Ekblom and Dr. Brian Schwartz (from April 1, 2021). Peter Bains was also a
member of the Remuneration Committee until April 1, 2021. The Chief Executive Officer, Chief Financial Officer
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REMUNERATION REPORT
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 Committee was assisted in its work by FIT Remuneration Consultants LLP (“FIT”) and
Compensia, Inc. (“Compensia”). FIT was appointed in 2020 and has provided advice in relation to general
remuneration matters. Fees paid to FIT in relation to advice provided to the Committee during the year to
December 31, 2021 were £41,445 (excluding VAT) (2020: £23,668), charged on a time/cost basis. FIT did not
provide any other services to the Company. FIT is a member of the Remuneration Consultants Group and, as
such, voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the
U.K. Compensia was appointed in 2021 and has provided advice in relation general remuneration matters
and did not provide any other services to the Company. Fees paid to Compensia in relation to the advice
provided to the Committee during the year were $76,891. The Committee is satisfied that the advice they
received from FIT and Compensia was objective and independent.
The Committee met 6 times during the year and addressed the following main topics:
–
–
–
–
Reviewed and approved the remuneration package of our CEO;
Approved the annual bonus payments to the CEO in 2021 and the annual bonus plan for the 2021
financial year;
Reviewed and approved the increase in the number of shares available for grant under the 2019 EIP
plans.
Reviewed and confirmed the vesting of equity incentive awards and reviewed and approved the terms
of the 2021 equity incentive awards.
2.11 Statement of Voting at a general meeting of the Company
The shareholder votes on the non-binding approval of the Directors’ Remuneration Report and the binding
approval of the Directors’ Remuneration Policy at the Annual General Meeting which took place on May 27,
2021 was as follows:
Votes
against
(excluding
Resolution Votes for % for withheld) % against
Total
(excluding
withheld) Withheld
Approval of the Directors’
Remuneration Report 211,349,035 82.34% 45,322,225 17.66% 256,671,260
Approval of the Directors’
Remuneration Policy 210,914,645 82.31% 45,338,865 17.69% 256,253,510
209,055
626,805
2.12 Statement of Implementation of Remuneration Policy for the Year Ending December 31, 2022
Annual salary
For 2022, the CEO was granted a 5% increase in annual salary.
Benefits and pension
The CEO will continue to receive pension contributions (or cash payments in lieu) to the value of 15% of basic
salary. No changes will be made to the provision of other benefits.
Bonus
The CEO will be eligible for an annual bonus of 60% of basic salary for achievement of target level or 72% of
basic salary for achievement of stretch goals for the 2022 financial year.
The bonus will be subject to the achievement of short-term performance targets which have been set by the
Committee with respect to the FY2022 performance period. The performance targets cover key objectives
that relate to the achievement of the Group’s wider strategic goals including, for 2022, measures relating to
clinical development, corporate development, commercial planning, finance, manufacturing and intellectual
property/legal.
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REMUNERATION REPORT
The amount of bonus payable is at the discretion of the Committee subject to review of performance against
the short-term performance targets at the end of the performance period (which is aligned with the financial
year).
The Committee has chosen not to disclose, in advance, the detailed performance targets for the forthcoming
year as these include matters which the Committee considers commercially sensitive. Retrospective
disclosure of the performance against the corporate objectives will be made in next year’s Annual Report on
Remuneration to the extent any such disclosure is considered not to be commercially sensitive at that time.
Long-term incentive plan
In line with the Policy, the Committee has issued market value options to the CEO during 2022.
On January 14, 2022, equity incentive awards were granted to the Chief Executive Officer 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.
ADS options
granted
Exercise
Price
per ADS
($)
Face value
($)
Dr. Denise Scots-Knight
1,100,000
1.40
1,540,000
Non-Executive Directors’ fees
Non-Executive Directors may now, voluntarily, elect to convert their annual cash fees into Deferred RSUs
(over ADSs) that are then held until settlement following separation of service. This new Deferred
Compensation Plan is delivered under the terms of the existing 2019 Non-Executive Equity Incentive Plan.
In addition to fees paid, market value options have been issued to Non-Executive Directors during 2022.
In February 2022 and March 2022, equity incentive awards were granted to Non-Executive Directors in line
with the 2019 EIP. These equity incentive awards were market value options over ADSs, and the vesting period
is one year; vesting in equal monthly installments over the one-year period following grant date. No
performance conditions were attached to the awards.
Granted on February 1, 2022
Dr. Peter Fellner
Dr. Jeremy Bender
Dr. Anders Ekblom
Dr. Pierre Jacquet
Dr. Deepa Pakianathan
Dr. Brian Schwartz
Michael Wyzga
Granted on March 1, 2022
Anne Hyland
ADS options
granted
Exercise
Price
per ADS
($)
Face value
($)
55,000
55,000
55,000
55,000
55,000
55,000
55,000
1.31
1.31
1.31
1.31
1.31
1.31
1.31
72,050
72,050
72,050
72,050
72,050
72,050
72,050
50,416
1.24
62,516
This directors’ remuneration report has been approved by the Board and signed on behalf of the Board,
Dr. Deepa Pakianathan
Director
March 31, 2022
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REPORT
The Directors present their report together with the audited financial statements for the year ended
December 31, 2021.
Principal activities
The Strategic Report on pages 3 to 18 describes the Group’s principal development activities, strategy and
future developments.
Results and dividends
The Group recorded a total comprehensive loss for the year attributable to equity holders of the parent of
£12.5 million (2020: £163.3 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, 2021, we spent £23.6 million (2020: £16.3 million) on research
and development activity.
Research and development spend primarily reflects the underlying activity on clinical trials for our product
candidates as well as the manufacturing of drug products together with the internal costs, including payroll
directly attributable to these activities. Further details of our product programs and research and
development spend can be found within the Strategic Report.
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)
Non-executive directors
Dr. Peter Fellner (Chairman)
Dr. Jeremy Bender
Peter Bains (resigned September 20, 2021)
Dr. Anders Ekblom
Anne Hyland (appointed March 1, 2022)
Dr. Pierre Jacquet (appointed September 20, 2021)
Kunal Kashyap (resigned October 26, 2021)
Dr. Deepa Pakianathan
Dr. Brian Schwartz
Michael Wyzga
As at the date of this report, the Directors held shares representing 0.46% 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 19 to 29.
Information on environmental matters
The Company is required to measure and report its greenhouse gas emissions. This information is outlined
in the “Social and environmental matters” section of the Strategic Report on page 16.
Future developments
Details of future developments can be found in the Strategic Report on pages 4 to 7 and form part of this
report by cross-reference.
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REPORT
Post-balance sheet events
Further information on post-balance sheet events is provided in Note 28 within the consolidated financial
statements contained within this report.
Going concern
The going concern basis has been applied in these consolidated financial statements as the Company has
adequate resources to meet its liabilities as they fall due for the foreseeable future and at least 12 months
from the date of these consolidated financial statements.
The Company expects to incur significant operating losses for the foreseeable future as it continues its
research and development efforts, seeks to obtain regulatory approval of its product candidates and pursues
any future product candidates the Company may develop.
Until such time as the Company can generate significant revenue from product sales, or other commercial
revenues, if ever, or through licensing and/or collaboration agreements for its oncology or rare disease
product candidates, the Company will seek to finance its operations through a combination of public or
private equity or debt financings or other sources.
As of December 31, 2021, the Company has cash and short term deposits available of £94.3 million.
The Directors have prepared detailed cash flow forecasts for the period from approval of these accounts to
June 30, 2023. The Directors have considered the impact of COVID-19, the continuing economic uncertainty,
as well as unprecedented burden on health systems in impacted countries around the world on these
forecasts. Clinical centers have diverted resources away from the performance of clinical trials and,
accordingly, the Company’s clinical activities may face some delays, including enrollment in its Phase 1b/2
study with etigilimab in a range of tumor types.
The Company’s existing funds provide the Company with sufficient cash resources to meet its liabilities as
they fall due and for the period through June 30, 2023. Therefore, although the Company continues to
generate losses, the Directors consider that there is sufficient headroom between the forecast expenditure
and cash resources such that the likelihood of the headroom being exhausted is remote. Therefore, the
Directors determined that it is appropriate to adopt the going concern basis of accounting in preparing these
consolidated financial statements.
Financial risk management objectives and policies (including information on exposure to price risk, credit
risk, liquidity risk and cash flow risk)
Refer to Note 24 of the financial statements for further details on our financial risk management objectives
and policies.
Health and safety
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.
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, 2021 and December 31, 2020.
Share capital
As at the date of this report, the Company had total issued and fully paid up share capital of £1,754,725
representing 584,908,239 ordinary shares of £0.003, all of which rank pari passu. Since December 18, 2020
the Company’s ordinary shares are no longer admitted to trading on the AIM Market of the London Stock
Exchange. 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.
The Company's ADSs are traded on the Nasdaq Global Market under the symbol “MREO”. Each ADS
represents five ordinary shares.
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MEREO BIOPHARMA GROUP PLC
DIRECTORS’ REPORT
Purchases of own shares during the year
The Company’s Employee Benefit Trust (“EBT”) was established for the purpose of holding ordinary shares
(subsequently ADSs) to satisfy the exercise of options for employees under the Company’s share-based
incentive schemes. There were no loans made to the EBT by the Company during the year ended
December 31, 2021 (2020: nil). During the year ended December 31, 2021, no ordinary shares were purchased
by the EBT (2020: 7). A total of 31,205 ADSs (2020: nil) held by the EBT were used in the year-ended December
31, 2021 to satisfy the exercise of options under the Company’s share-based incentive schemes. As of
December 31, 2021, the EBT holds 216,251 ADSs (2020: 247,456) along with £17,866 in cash (2020: £21,762).
Branches outside the U.K.
As at December 31, 2021, the Group consists of certain subsidiaries which are incorporated outside the
United Kingdom. Further information can be found in Note 5 of the financial statements. There are no
branches of the Company outside the United Kingdom.
Annual general meeting (“AGM”)
The AGM of the Company is planned to be held on May 16, 2022. The notice of the meeting, together with an
explanation of the business to be dealt with including proposed resolutions, will be prepared as a separate
document and distributed to shareholders and posted on 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.
Independent auditors
The auditors, BDO LLP, have indicated their willingness to continue in office and a resolution concerning
their re-appointment will be proposed at the forthcoming AGM.
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 as permitted by the Companies Act 2006 and with each of our executive officers.
Effective date
This report was approved by the Board of Directors on March 25, 2022 and signed on its behalf by:
Dr. Peter Fellner Charles Sermon
Chairman General Counsel and Company Secretary
March 31, 2022 March 31, 2022
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MEREO BIOPHARMA GROUP PLC
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. For the financial
year ended December 31, 2021, we have chosen to prepare our Group and Company accounts in accordance
with international accounting standards in conformity with the requirements of the Companies Act 2006 and
our Company accounts in conformity with applicable law and United Kingdom Accounting Standards.
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, for the Group, in accordance with international accounting
standards in conformity with the requirements of the Companies Act 2006, and, for the Company,
in accordance with applicable law and United Kingdom Accounting Standards; 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.
Prepare a directors’ report, a strategic report and directors’ remuneration report which comply with the
requirements of the Companies Act 2006.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain
the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring
that the annual report and accounts, taken as a whole, are fair, balanced, and understandable and provides
the information necessary for shareholders to assess the group’s performance, business model and strategy.
Website publication
The directors are responsible for ensuring the annual report and the financial statements are made available
on a website. Financial statements are published on the Company’s website in accordance with legislation
in the United Kingdom governing the preparation and dissemination of financial statements, which may vary
from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the
responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the
financial statements contained therein.
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
March 31, 2022
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Opinion on the financial statements
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s
affairs as at December 31, 2021 and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with UK adopted
International Accounting Standards;
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 (the ‘Parent Company’) and its
subsidiaries (the ‘Group’) for the year ended December 31, 2021 which comprise the consolidated statements
of comprehensive income/(loss), the consolidated and Parent Company balance sheet, the consolidated
statement of cash flows, the consolidated and Parent Company statements of changes in equity and notes
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 UK adopted International Accounting Standards. The financial reporting framework
that has been applied in the preparation of the Parent Company financial statements is applicable law and
United Kingdom Accounting Standards, including Financial Reporting Standard 101 Reduced Disclosure
Framework (United Kingdom Generally Accepted Accounting Practice).
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. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remain independent of the Group and the 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.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis
of accounting in the preparation of the financial statements is appropriate. Our evaluation of the Directors’
assessment of the Group and the Parent Company’s ability to continue to adopt the going concern basis of
accounting included:
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
We obtained the Directors going concern assessment, including the detailed cash flow forecast for the period
endingJune 30, 2023 and:
•
•
•
•
•
•
•
•
•
•
Evaluated the Directors’ method of assessment, including the relevance and reliability of underlying
data used to make the assessment, and whether assumptions and changes to assumptions from prior
years are appropriate and consistent with each other.
Tested the assumptions used by management, including the level of forecast research and development
(R&D) costs and general and administrative expenditure by corroborating a sample of costs to
supporting evidence, including third party cost estimates for development projects.
Tested that the cash flow model accurately reflects the impact of the fundraising and the partnering
deal by agreeing proceeds to bank statements and reviewing the terms of related executed agreements.
Determined through inspection and testing of the methodology and calculations that the methods
utilised were appropriate to be able to make an assessment for the entity taking into consideration the
nature of the Group’s cost base and cash inflows.
Reviewed the accuracy of historical forecasting against actual results.
We reviewed the Directors’ sensitivity analysis for reasonably possible changes in the cost base, tested
the arithmetic accuracy of this analysis and challenged the assumptions applied.
We performed our own sensitivity analysis removing all future cash inflows from the model and at
considered the impact of that on the projected cash balance as June 30, 2023.
We reviewed the period assessed by the Directors to determine that they had considered a period of at
least 12 months from the date of approval of the financial statements. We also enquired whether the
Directors had considered and identified any events or conditions that may exist beyond that period;
reviewed board meeting minutes and press releases for any such events or conditions.
Comparing the level of available financial resources with the Group’s financial forecasts, including taking
account of reasonably possible (but not unrealistic) adverse effects that could arise from risks, both
individually and collectively.
We reviewed the adequacy and appropriateness of disclosures in the financial statements regarding
the going concern assessment.
Based on the work we have performed, we have not identified any material uncertainties relating to events
or conditions that, individually or collectively, may cast significant doubt on the Group and the Parent
Company’s ability to continue as a going concern for a period of at least twelve months from when the
financial statements are authorised for issue.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in
the relevant sections of this report.
Overview
Coverage1
89% of Group profit before tax
100% of Group revenue
86% of Group total assets
Key audit matters
Assessment of carrying value of intangible assets
Impairment of carrying value of investments in subsidiaries (Parent Company
balance sheet)
Ultragenyx transaction accounting
Materiality
Group financial statements as a whole
£1,100,000 based on 2.6% of adjusted losses before tax
1 These are areas which have been subject to a full scope audit by the group engagement team
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the
Group’s system of internal control, and assessing the risks of material misstatement in the financial statements.
We also addressed the risk of management override of internal controls, including assessing whether there was
evidence of bias by the Directors that may have represented a risk of material misstatement.
On December 31, 2021, the Group comprised of the Parent Company; four trading UK companies (Mereo
BioPharma 1 Limited, Mereo BioPharma 2 Limited, Mereo BioPharma 3 Limited and Mereo BioPharma
4 Limited; one trading US company (Mereo BioPharma 5, Inc.) and 3 other entities.
The Parent Company and the US company (Mereo BioPharma 5, Inc.) were deemed to be the significant
components for the Group and full scope audit procedures were performed by the group audit team. For the
four UK trading companies, specific procedures were performed over material balances. The audit of all
these entities was carried out by the group audit team for the purposes of this opinion.
The remaining entities were deemed insignificant to the Group due to the size of operations and balances
within each company. The financial information of these entities were subject to analytical review procedures
carried out by the group audit team.
Key audit matters
Key audit matters are those matters that, in our professional judgement, 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, including 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 forming our opinion thereon, and we do not provide a separate opinion on these matters.
How the scope of our
audit addressed
Key audit matter the key audit matter
Assessment of carrying value
of intangible assets
Refer to the accounting policies
(pages 49 to 56) and Note 13 of
the Consolidated Financial
Statements (pages 66 to 67)
£24.6
£31.6 million)
million
(2020-
The Group has significant
intangible assets arising from
the acquisition of products in
development.
Management’s determination
of fair values of the identifiable
intangible assets is complex
and includes management’s
judgments over significant
inputs and
unobservable
assumptions
utilised,
including development costs,
launch dates of products,
successful
probability of
development, sales price and
projections, expense and cash
flow projections and discount
rates.
assumptions
These
are
subjective in nature and are
affected by
expectations
about future market, economic
or industry conditions.
As there are highly judgmental
areas within the assessment
of the carrying values, a
significant risk was identified.
Our audit procedures included:
•
•
•
We assessed whether management’s
approach for assessing the impairment
of its intangible assets was appropriate,
and if the assessment complied with
the requirements of the applicable
accounting standards.
We obtained an understanding of the
research and development activities for
each intangible asset to assess and
evaluate the existence of any internal or
external indicators of impairment, by
inspecting minutes of meetings,
investor information, analyst notes and
R&D investor presentation information,
including launch dates;
With the assistance of our internal
valuation experts, we tested the
arithmetic accuracy and integrity of the
models used
in the valuation by
sample-checking formulae, assessed
the reasonableness of the discount
rates and reviewed the methodology
applied versus our expectations;
36
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
How the scope of our
audit addressed
Key audit matter the key audit matter
•
•
•
•
•
assessed
We compared assumptions used in the
current periods’ models to prior
periods. We
the
appropriateness of changes made by
inquiry of R&D staff, review of clinical
trial progress and corroboration to
information. We also
supporting
evaluated if there should be further
changes to the assumptions based on
our understanding of the intangible
assets.
We performed a sensitivity analysis on
the impairment models to identify
which assumptions the impairment
assessment was most sensitive to. For
as
these
probability of successful development,
market for therapeutic treatment and
expected sales price, we assessed the
the
reasonability by performing
following procedures;
assumptions,
such
agreed
We
management’s
assumptions to their supporting
evidence such scientific research
studies and pricing analysis.
We challenged management’s
assumptions through comparison
to our own identified scientific
industry
research studies, and
research
expected
therapeutic market and pricing
points for each product candidate.
Using our sensitivity analysis and
market
the
assumptions, we further assessed
the level at which an impairment
the
would be
likelihood of this being reached.
required and
research
the
on
of
• We assessed the reliability of the
forecasts by comparing prior year
forecasts to actual results in the current
year. We read analysts forecasts to
identify whether there were any contrary
views to be considered.
assessed
challenged
management’s cash flow assumptions
regarding future development costs
necessary to be
incurred for the
intangible assets to reach a point of
commercialisation.
• We
and
Key observations
Based on the procedures performed we
consider that the assumptions made by
impairment
their
management
assessment are reasonable.
in
37
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
How the scope of our
audit addressed
Key audit matter the key audit matter
Our audit procedures included:
•
•
•
the
We obtained management’s analysis
of the recoverable amounts for each
subsidiary and tested the calculation
of
amounts,
recoverable
leveraging the testing that was
completed over the related intangible
asset value in use calculation, where
appropriate. For the investment not
covered by intangible asset testing,
we corroborated management’s
analysis of comparable product
candidate sale or out
licensing
transactions, to third party sources,
to assess estimated fair value.
We assessed whether the director’s
approach for assessing impairment
of its investments was appropriate,
and if the assessment complied with
the applicable accounting standards.
We assessed whether the disclosure
in the Parent Company financial
the
met
statements
requirements of
financial
reporting framework and our own
understanding.
with
the
Key observations
Based on the procedures performed, we
consider that the assumptions made by
impairment
their
management
assessment are reasonable.
in
Our audit procedures included:
•
to
the
We obtained an understanding of
management’s key
judgements,
critical assumptions and estimates
transaction by
applied
management’s
reviewing
accounting paper and supporting
calculations, addressing the initial
subsequent
recognition
and
accounting
the
treatment of
Revenue,
of
Revenue,
derecognition of the
intangible
asset and related Other Liability
arising from the transaction;
Cost
Impairment of carrying value
of investments in subsidiaries
(Parent Company)
to
Refer
the accounting
policies (page 91) and Note 4
of the Company Financial
Statements (page 93)
of
Cost
investment
£213.1 million (2020: £205.3
million)
Impairment
£20.8
£20.8 million)
million:
Net
£192.3
£184.5 million)
carrying
million
provision
(2020:
value
(2020:
The Parent Company is a
biopharmaceutical company
focused on the development
and commercialization of
innovative therapeutics that
aim to improve outcomes for
oncology and rare diseases.
Its existing portfolio consists
of six clinical stage product
candidates which are owned
by its subsidiaries.
The impairment assessment
of the carrying value of
investments in subsidiaries
significant
requires
judgement to determine an
appropriate
recoverable
amount for each investment.
Judgement is required, as the
recoverable
is
determined by taking into
account future cash flows in
relation to the development
commercialization
and
activities of each subsidiary.
There
is a risk that the
investments may be impaired
below their carrying value
and not properly accounted
for.
amount
for
the Group
Revenue
includes
from
licencing and collaboration
agreements.
income
During the year the Group
entered into a licence and
collaboration agreement with
Ultragenyx for setrusumab.
The licence and collaboration
agreement has led to the
recognition of revenue for the
upfront proceeds received;
cost of revenue for the partial
de-recognition
the
intangible asset and a
contractual payment made to
Novartis as part of
the
original
purchase
agreement.
asset
of
Ultragenyx
transaction
to
the accounting
Refer
policies, Note 3, Note 6 and
Note 13 of the Consolidated
Statements
Financial
38
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
How the scope of our
audit addressed
Key audit matter the key audit matter
is
There is judgment required in
determining the appropriate
accounting treatment for the
proceeds arising from these
arrangements and therefore
that
there
a
might
management
incorrectly
the
principles of IFRS15 Revenue
from
with
contracts
customers in determining the
accounting treatment for the
transaction.
apply
risk
Management is also required
to determine an accounting
policy for future variable
consideration,
including
royalties, and assess whether
variable
such
any
consideration
to be
recognised at each period-
end.
is
Judgement is also required in
respect of:
intangible
(a) determining the portion
of the carrying amount of
asset
the
derecognised, relating to the
Ultragenyx territory rights out
licensed, relative to the value
retained, and the related
accounting treatment within
cost of sales (the “partial
derecognition of intangible
asset of £9.5m”); and
(b) calculating the “Novartis
payment”, in particular the
estimate of the deferral for
future costs to be offset, and
accounting
the
treatment, recognised within
cost of sales.
related
As there are judgmental areas
within the determination of
accounting policies for the
the
above elements of
transaction,
the
assessment of amounts to be
recorded, a significant risk
was identified.
and
•
•
reviewed
We
agreements and other
documents with Ultragenyx;
the
contractual
relevant
With the assistance of our technical
accounting team, we challenged
management’s judgements in regard
to the transaction, most notably
towards the revenue recognition
accounting policy initially adopted
and accounting treatment of the
carrying value of the intangible asset
derecognised. We assessed whether
the accounting treatment adopted by
management conforms
the
to
the applicable
requirements of
the
accounting standards and
substance of
contractual
agreement;
the
Revenue:
•
•
We agreed the proceeds received to
bank statements;
release
information
We performed procedures such as,
inspecting minutes of meetings,
press
from
Ultragenyx’s website and bank
receipts to identify indicators that
could lead to the recognition of future
milestones as variable consideration
for the current year.
Partial derecognition of intangible asset of
£9.5m
•
•
We tested the Group’s right to retain
a portion of the intangible asset by
inspecting that the agreement with
Ultragenyx stipulated the Group’s
right to retain a portion of the
commercialisation rights;
We tested management’s calculation,
which was based on the portion of
the carrying amount of the intangible
asset relating to the Ultragenyx
Territory rights that were disposed of.
We inspected the calculations and
agreed the calculations for rights
disposed of and retained to the
contractual arrangement.
39
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
How the scope of our
audit addressed
Key audit matter the key audit matter
•
•
We vouched key assumptions, which
would affect the value of rights
to supporting external
retained,
evidence. This included the market
for therapeutic treatment, estimated
development costs and sales prices.
the
assumptions
We performed a sensitivity analysis
over
in
management’s calculation to assess
the
level of sensitivity and the
resulting impact on the value of the
intellectual property de-recognised;
Novartis payment
•
•
•
We obtained and read the 2015 asset
purchase
terms with Novartis
supporting the contractual obligation
for the payment;
We agreed the payment made to
Novartis to the bank statements;
tested
forecasts. We
We tested the initial deferred cost
liability by agreeing the amounts
recorded to supporting schedules
and
the
subsequent costs
incurred by
selecting a sample of the incurred
costs and agreeing the amounts
recorded to supplier invoices. We
tested whether
initial and
subsequent costs were eligible for
deduction by considering the terms
of the asset purchase agreement with
Novartis;
the
Key observations
We consider the Group’s accounting policy
and journal entries recorded in relation to
the various elements of the transaction to
be appropriate and in line with the relevant
accounting standards and the substance
of the contractual arrangement with
Ultragenyx.
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect
of misstatements. We consider materiality to be the magnitude by which misstatements, including
omissions, could influence the economic decisions of reasonable users that are taken on the basis of the
financial statements.
In order to reduce to an appropriately low level the probability that any misstatements exceed materiality,
we use a lower materiality level, performance materiality, to determine the extent of testing needed.
Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also
take account of the nature of identified misstatements, and the particular circumstances of their occurrence,
when evaluating their effect on the financial statements as a whole.
40
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Based on our professional judgement, we determined materiality for the financial statements as a whole and
performance materiality as follows:
Group financial Parent company
statements financial statements
Materiality
Basis
materiality
for
2021
£1,100,000
2021
£990,000
determining
2.6% Adjusted losses before tax (to
exclude warrant liability revaluation
gains)
90% of Group Materiality
Rationale for the benchmark
applied
in
Adjusted losses before taxes is
considered the most appropriate
measure
the
performance of the Group given
that the focus of the users are
research &
to
solely
development costs.
assessing
relating
Materiality was capped at 90% Group
materiality given the assessment of
the components aggregation risk.
Performance materiality
£550,000
£495,000
Basis
for
performance materiality
determining
the
50% of materiality based on our
expectations of
level of
misstatement and due to multiple
account balances having
a
judgment
significant
involved in their estimation.
level of
the
50% of materiality based on our
expectations of
level of
misstatement and due to certain
account
a
significant level of judgment involved
in their estimation.
balances
having
Component materiality
We set materiality for each component of the Group based on a percentage of between 80% and 90% of
Group materiality dependent on the size and our assessment of the risk of material misstatement of that
component. Component materiality ranged from £880,000 to £990,000. In the audit of each component, we
further applied performance materiality levels of 50% of the component materiality to our testing to ensure
that the risk of errors exceeding component materiality was appropriately mitigated.
Reporting threshold
We agreed with the Audit and Risk Committee that we would report to them all individual audit differences
in excess of £22,000. We also agreed to report differences below this threshold that, in our view, warranted
reporting on qualitative grounds.
Other information
The directors are responsible for the other information. The other information comprises the information
included in the Annual Report and Accounts other than the financial statements and our auditor’s report
thereon. Our opinion on the financial statements does not cover the other information and, except to the
extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
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 course of 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 this gives rise to a material misstatement in
the financial statements themselves. If, based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
41
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work performed during the course of the audit, we are
required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described
below.
Strategic
and
report
report
Directors’
Matters on which
we are required to
report
by
exception
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 the Directors’ report have been prepared in accordance
with applicable legal requirements.
In the light of the knowledge and understanding of the Group and 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 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 Statement of Directors’ Responsibilities, 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’s and the 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.
Extent to which the audit was capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design
procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of
irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities,
including fraud is detailed below:
42
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: INDEPENDENT AUDITORS’ REPORT
•
•
•
•
•
We obtained an understanding of the legal and regulatory framework in which the Group operates,
focussing on those laws and regulations that had a significant effect on the financial statements or
that had a fundamental effect on the operations of the Group, namely: the accounting framework (UK-
adopted International Accounting Standards and FRS101); the Companies Act 2006; relevant tax
legislation; and the requirements for regulated products.
We enquired of management, those charged with governance and in-house legal counsel, obtained and
reviewed meeting minutes and other supporting documentation, concerning the Group’s policies and
procedures in relation to:
o
o
o
Identifying, evaluating and complying with laws and regulations and whether they were aware of
any instances of non-compliance;
Detecting and responding to the risks of fraud and whether they have knowledge of any actual,
suspected or alleged fraud; and
The internal controls established to mitigate risks related to fraud and non-compliance with laws
and regulations.
We discussed among the engagement team regarding how and where fraud might occur in the financial
statements and any potential indicators of fraud. As part of this discussion, we identified potential fraud
in management override of controls, specifically in relation to management bias and the judgements
involved in accounting estimates.
We have considered the risk of fraud through management override of controls by:
o
o
Sample testing the appropriateness of journal entries and other adjustments by inquiry and
corroboration to supporting evidence; and
Assessing whether the judgements made in accounting estimates are indicative of potential bias,
in particular the estimates regarding accounting for the Ultragenyx out licensing and intangible
asset and investments impairment reviews (refer to the key audit matters section above).
We communicated relevant identified laws and regulations and potential fraud risks to all engagement
team members and discussed how and where these might occur and remained alert to any indications
of fraud and non-compliance with laws and regulations throughout the audit.
The engagement partner has assessed that the engagement team collectively had the appropriate
competence and capabilities to identify or recognize non-compliance with laws and regulations.
Our audit procedures were designed to respond to risks of material misstatement in the financial statements,
recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not
detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery,
misrepresentations or through collusion. There are inherent limitations in the audit procedures performed
and the further removed non-compliance with laws and regulations is from the events and transactions
reflected in the financial statements, the less likely we are to become aware of it.
A further description of our responsibilities is available on the Financial Reporting Council’s website at:
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 Parent 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 Parent
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 Parent Company and the Parent Company’s members as a body, for our audit work, for this report,
or for the opinions we have formed.
Ian Oliver (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
Reading, UK
March 31, 2022
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
43
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MEREO BIOPHARMA GROUP PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Year ended December 31,
Notes
2021
£’000s
2020
£’000s
2019
£’000s
Revenue
Cost of revenue
Research and development expenses
Administrative expenses
Operating loss
Net income recognized on acquisition of subsidiary
Finance income
Finance costs
Changes in the fair value of financial instruments
Gain/(loss) on disposal of intangible assets
Net foreign exchange loss
Profit/(loss) before tax
Taxation
Profit/(loss) for the year, attributable to equity
holders of the parent
Items that may be reclassified subsequently
to profit or loss:
Currency translation of foreign operations
Total comprehensive income/(loss) for the year,
attributable to equity holders of the parent
Basic profit/(loss) per share for the year (in £)
Diluted loss per share for the year (in £)
6
6
9
9
9
7
10
11
11
36,464
(17,908)
(23,559)
(15,933)
––––––––––
(20,936)
–
1
(4,022)
40,039
113
(954)
––––––––––
14,241
(1,516)
––––––––––
–
–
(16,347)
(21,222)
––––––––––
(37,569)
–
44
(6,383)
(109,849)
(10,872)
(1,821)
––––––––––
(166,450)
2,822
––––––––––
–
–
(23,608)
(15,909)
––––––––––
(39,517)
1,035
377
(4,371)
875
–
483
––––––––––
(41,118)
6,274
––––––––––
12,725
(163,628)
(34,844)
(191)
––––––––––
349
––––––––––
(499)
––––––––––
12,534
––––––––––
0.02
––––––––––
(0.05)
––––––––––
––––––––––
(163,279)
––––––––––
(0.48)
––––––––––
(0.48)
––––––––––
––––––––––
(35,343)
––––––––––
(0.39)
––––––––––
(0.39)
––––––––––
––––––––––
The accompanying notes form an integral part of these consolidated financial statements.
44
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MEREO BIOPHARMA GROUP PLC
CONSOLIDATED BALANCE SHEET
As at December 31,
Notes
2021
£’000s
2020
£’000s
Assets
Non-current assets
Property, plant and equipment
Intangible assets
Current assets
Prepayments
R&D tax credits
Other taxes receivable
Other receivables
Cash and short-term deposits
Total assets
Equity and liabilities
Non-current liabilities
Provisions
Convertible loan notes
Warrant liability
Lease liability
Other liabilities
Current liabilities
Trade and other payables
Accruals
Current tax liabilities
Provisions
Lease liability
Other liabilities
Total liabilities
Net assets/(liabilities)
Equity
Issued capital
Share premium
Other capital reserves
Employee Benefit Trust shares
Other reserves
Accumulated losses
Translation reserve
1,755
247,460
129,835
(1,140)
7,401
(296,968)
(341)
––––––––––
88,002
––––––––––
––––––––––
The accompanying notes form an integral part of these consolidated financial statements.
Total equity
22
22
22
22
22
Approved by the Board on March 25, 2022 and signed on its behalf by:
Dr. Denise Scots-Knight
Director and Chief Executive Officer
March 31, 2022
Company number: 09481161 (England and Wales)
12
13
10
15
16
18
21
20
12
17
18
12
6
2,530
24,564
––––––––––
27,094
2,799
–
809
1,419
94,296
––––––––––
99,323
––––––––––
126,417
––––––––––
––––––––––
1,320
14,384
8,336
1,754
80
––––––––––
25,874
2,499
3,826
1,522
2,803
622
1,269
––––––––––
12,541
––––––––––
38,415
––––––––––
88,002
––––––––––
––––––––––
1,573
31,648
––––––––––
33,221
1,619
2,818
804
1,016
23,469
––––––––––
29,726
––––––––––
62,947
––––––––––
––––––––––
1,216
16,142
50,775
1,158
62
––––––––––
69,353
3,333
4,178
–
418
636
–
––––––––––
8,565
––––––––––
77,918
––––––––––
(14,971)
––––––––––
––––––––––
1,017
161,785
128,374
(1,305)
5,001
(309,693)
(150)
––––––––––
(14,971)
––––––––––
––––––––––
45
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MEREO BIOPHARMA GROUP PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
Notes
2021
£’000s
14,241
2020
£’000s
2019
£’000s
(166,450)
(41,118)
Operating activities
Profit/(loss) before tax
Adjustments to reconcile profit/(loss) before
tax to net cash flows:
Depreciation of property, plant and equipment
Share based payments expense
Net foreign exchange loss/(gain)
Increase/(decrease) in provisions and other
liabilities
Finance income
Finance costs
Other non-cash movements
Modification gain on bank loan
Gain on bargain purchase
Gain on lease modification
Fair value remeasurement on contingent
consideration
Fair value remeasurement on warrants
(Gain)/loss on disposal of intangible assets
Out-license of intangible asset
Working capital adjustments:
(Increase)/decrease in receivables and prepayments
Decrease in trade and other payables and accruals
Tax credits received
Net cash flows used in operating activities
Investing activities
Acquisition of subsidiary
Purchase of property, plant and equipment
Disposal of intangible assets
(net of transaction costs)
Proceeds from sale of short-term investments
Interest earned
Net cash flows (used in)/from investing activities
Financing activities
Proceeds from issuance of ordinary shares
Transaction costs on issuance of shares
Proceeds from exercise of employee share options
Proceeds from issuance of convertible loan notes
Transaction costs issuance of convertible loan notes
Repayment of bank loans
Transaction costs related to loans and borrowings
Interest paid on bank loan
Purchase of treasury shares
Payment of lease liabilities
Net cash flows from/(used in) financing activities
Net increase/(decrease) in cash and cash
equivalents
Cash and cash equivalents at January 1
Effect of exchange rate changes
12
26
9
9
9
13
12
9
22
22
12
642
3,302
954
1,385
(1)
3,797
156
–
–
–
1,599
1,558
1,821
162
(44)
6,226
–
–
–
(957)
–
(40,039)
(113)
9,457
–
109,849
10,872
–
1,577
1,636
(483)
(517)
(377)
4,606
–
(456)
(3,681)
–
354
(875)
–
–
(589)
(1,256)
2,825
––––––––––
(5,239)
141
(3,551)
10,433
––––––––––
(28,341)
(936)
(6,730)
1,069
––––––––––
(45,931)
–
(535)
(354)
(16)
10,074
(21)
113
–
1
––––––––––
(421)
––––––––––
78,532
(234)
46
–
–
–
–
–
–
(692)
––––––––––
77,652
––––––––––
71,992
23,469
(1,165)
––––––––––
94,296
––––––––––
––––––––––
1,821
–
44
––––––––––
1,495
––––––––––
20,136
(1,307)
–
44,375
(3,598)
(19,802)
(81)
(2,900)
–
(2,086)
––––––––––
34,737
––––––––––
7,891
16,347
(769)
––––––––––
23,469
––––––––––
––––––––––
–
32,865
377
––––––––––
43,295
––––––––––
–
(761)
–
–
–
–
–
(1,739)
(998)
(2,212)
––––––––––
(5,710)
––––––––––
(8,346)
25,042
(349)
––––––––––
16,347
––––––––––
––––––––––
Cash and cash equivalents at December 31
16
The accompanying notes form an integral part of these consolidated financial statements.
46
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MEREO BIOPHARMA GROUP PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Employee
Other Benefit Accum-
Issued Share capital Trust Other ulated Translation Total
Notes capital premium reserves Shares reserves losses reserve equity
£’000s £’000s £’000s £’000s £’000s £’000s £’000s £’000s
At December 31, 2018 214 118,492 18,593 (307) 7,000 (111,221) – 32,771
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Loss for the year – – – – – (34,844) – (34,844)
Other comprehensive loss – – – – – – (499) (499)
Total – – – – – (34,844) (499) (35,343)
Share-based payments –
share options 26 – – 1,543 – – – – 1,543
Share-based payments – LTIPs 26 – – 93 – – – – 93
Issuance of share capital
on April 23, 2019 22 74 – 40,818 – – – – 40,892
Transaction costs related to
issuance of share capital on
April 23, 2019 22 – (761) – – – – – (761)
Issuance of share capital on
conversion of loan note 22 3 2,366 – – – – – 2,369
Issuance of share capital on
Novartis bonus shares 22 3 1,587 (1,590) – – – – –
Equity element of convertible
loan note – – (310) – – – – (310)
Purchase of treasury shares 22 – – – (998) – – – (998)
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2019 294 121,684 59,147 (1,305) 7,000 (146,065) (499) 40,256
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Loss for the year – – – – – (163,628) – (163,628)
Other comprehensive income – – – – – – 349 349
Total – – – – – (163,628) 349 (163,279)
Share-based payments 26 – – 1,558 – – – – 1,558
Issuance of share capital, net 22 347 18,715 – – (2,125) – – 16,937
Conversion of loan notes
and warrants 22 375 21,386 34,188 – – – – 55,949
Reclassification of loan notes
embedded derivative 19 – – 33,481 – – – – 33,481
Conversion of warrants 1 – – – 126 – – 127
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2020 1,017 161,785 128,374 (1,305) 5,001 (309,693) (150) (14,971)
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Profit for the year – – – – – 12,725 – 12,725
Other comprehensive income – – – – – – (191) (191)
Total – – – – – 12,725 (191) 12,534
Share-based payments 26 – – 3,302 – – – – 3,302
Issuance of share capital, net 22 601 78,609 – – – – – 79,210
Exercise of share options – – (119) 165 – – – 46
Conversion of loan notes
and warrants 22 137 7,066 (1,722) – 2,400 – – 7,881
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2021 1,755 247,460 129,835 (1,140) 7,401 (296,968) (341) 88,002
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
The accompanying notes form an integral part of these consolidated financial statements.
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate information
Mereo BioPharma Group plc (the “Company” or “Mereo”) is a clinical-stage, United Kingdom (“UK”) based
biopharmaceutical company focused on oncology and rare diseases.
The Company is a public limited company incorporated and domiciled in the UK, and registered in England,
with shares publicly traded on the Nasdaq Global Market via American Depositary Shares (“ADSs”) under
the ticker symbol “MREO”. The Company’s ordinary shares were previously admitted to trading on the AIM
market of London Stock Exchange plc with admission cancelled with effect on December 18, 2020. 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 for the year ended
December 31, 2021 were authorized for issue in accordance with a resolution of the Directors on March 25,
2022. The principal activities of the Company are the development and commercialization of innovative
therapeutic pharmaceutical products.
2. Significant accounting policies
Basis of preparation
The Company’s consolidated financial statements have been prepared in accordance with UK adopted
International Accounting Standards in conformity with the requirements of the Companies Act 2006.
The consolidated financial statements are presented in pound sterling (“£”), which is the presentational
currency of the Company. The functional currencies of consolidated subsidiaries are pound sterling and US
dollars (“$”). All amounts disclosed in the consolidated financial statements and notes have been rounded
to the nearest thousand, unless otherwise stated. The financial statements have been prepared on the
historical cost basis, except for the revaluation of certain financial instruments that are measured at fair
values at the end of each reporting period, as explained in the accounting policies below.
Basis of consolidation
The consolidated financial information comprises the financial statements of Mereo BioPharma Group plc
and its subsidiaries as at December 31, 2021. Subsidiaries are all entities over which the Company has
control. The Company controls an entity when the Company 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 Company. They are
deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealized gains
on transactions between subsidiaries are eliminated in preparing the consolidated financial statements.
Accounting policies of subsidiaries are consistent with the policies adopted by the Company.
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 Company, it is consolidated into the
Company’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 Company
provides.
Segmental information
The Company has one operating segment. The Chief Operating Decision Maker (“CODM”) is the Chief
Executive Officer. The Company has a single portfolio of product candidates, with only direct research and
development expenses monitored at a product candidate level. The CODM makes decisions over resource
allocation at an overall portfolio level and the Company’s financing is managed and monitored on a
consolidated basis.
Following the acquisition of Mereo BioPharma 5, Inc. (formerly OncoMed Pharmaceuticals, Inc. or
“OncoMed”) in 2019, non-current assets held by the Company are located in the United Kingdom and United
States. As at December 31, 2021, approximately £0.1 million (2020: £0.5 million) of non-current assets are
located in the United States.
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Going concern
The going concern basis has been applied in these consolidated financial statements as the Company has
adequate resources to meet its liabilities as they fall due for the foreseeable future and at least 12 months
from the date of these consolidated financial statements.
The Company expects to incur significant operating losses for the foreseeable future as it continues its
research and development efforts, seeks to obtain regulatory approval of its product candidates and pursues
any future product candidates the Company may develop.
Until such time as the Company can generate significant revenue from product sales, or other commercial
revenues, if ever, or through licensing and/or collaboration agreements for its oncology or rare disease
product candidates, the Company will seek to finance its operations through a combination of public or
private equity or debt financings or other sources.
As of December 31, 2021, the Company has cash and short term deposits available of £94.3 million.
The Directors have prepared detailed cash flow forecasts for the period from approval of these accounts to
June 30, 2023. The Directors have considered the impact of COVID-19, the continuing economic uncertainty,
as well as unprecedented burden on health systems in impacted countries around the world on these
forecasts. Clinical centers have diverted resources away from the performance of clinical trials and,
accordingly, the Company’s clinical activities may face some delays, including enrolment in its Phase 1b/2
study with etigilimab in a range of tumor types.
The Company’s existing funds provide the Company with sufficient cash resources to meet its liabilities as
they fall due and for the period to June 30, 2023. Therefore, although the Company continues to generate
losses, the Directors consider that there is sufficient headroom between the forecast expenditure and cash
resources such that the likelihood of the headroom being exhausted is remote. Therefore, the Directors
determined that it is appropriate to adopt the going concern basis of accounting in preparing these
consolidated financial statements.
Revenue
Summary of significant accounting policies
a)
The Company’s ordinary business activities are the development of product candidates to key clinical
milestones and either strategically partnering them or further developing such product candidates through
regulatory approval and potentially commercialization. The Company may enter into a range of different
agreements with third parties, including, but not limited to: (i) licensing agreements where the global rights
to a product candidate are licensed to a partner; and (ii) collaboration agreements where rights to a product
candidate are licensed to a partner but the Company retains certain rights, for example to further develop or
commercialize the product candidate in specified geographical territories. Under both licensing and
collaboration agreements, rights to product candidates are provided to a partner typically in exchange for
consideration in the form of upfront payments and/or development, regulatory, commercial or other similar
milestones, and royalties on commercial sales, should regulatory approval be obtained for the product
candidates.
Revenue includes income from licensing and collaboration agreements. Consideration received up front is
recognized at the point in time in which the right to use an intangible asset is transferred and further
payments received are recognized upon the achievement of specified development, regulatory, commercial
or other similar milestones. For agreements with a right to access an intangible asset, revenue is recognized
over time, typically on a straight-line basis over the life of the license or collaboration agreement. When there
are other performance obligations in such agreements, the consideration is allocated using the residual
approach and recognized when the performance obligations are satisfied.
Income from development, regulatory, commercial or similar milestones is recognized when considered
highly probable that a significant reversal will not occur. Timing of the recognition of such milestones are
considered to be a key judgment, as they are often dependent on third parties. In general, for milestones
which are subject to the decisions of third parties (e.g. the acceptance or approval of a filing by a regulatory
authority), the Company recognizes milestone income when the decision occurs.
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We do not currently have any approved product candidates. Accordingly, we have not generated any
commercial sales revenue during the year.
Intangible assets out-licensed under a license or collaboration agreement are recorded within “Cost of
revenue” in the Company’s consolidated statement of comprehensive income/(loss) based on an allocation
of cost or value of the rights that have been out-licensed. Payments to third parties arising as a direct
consequence of the income recognized are also recorded within “Cost of revenue” in the Company’s
consolidated statement of comprehensive income/(loss).
Research and development (R&D) expenses
b)
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 Company
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 criteria for capitalization, including ongoing costs
associated with acquired intellectual property rights and intellectual property rights generated internally by
the Company, is recognized in the consolidated statement of comprehensive income as incurred. Intellectual
property and in-process R&D from asset acquisitions are recognized as intangible assets at cost.
c) Taxation
Tax expense recognized in the consolidated statement of comprehensive income/(loss) 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 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 consolidated 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 in
the jurisdictions in which the Company operates.
Amounts receivable in respect of research and development tax credits are recognized in the consolidated
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 income/(loss).
A provision is recognized for matters in which the tax determination is uncertain but it is considered probable
that there will be a future outflow of funds to a tax authority. The provisions are measured at the best estimate
of the amount expected to become payable.
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 assets to be recovered.
Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected
to apply in the year when the asset or liability is realized, based on tax rates (and tax laws) enacted or
substantively enacted at the end of the reporting period.
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax
assets against current tax liabilities and when they relate to income taxes levied by the same taxation
authority and the Company intends to settle its current tax assets and liabilities on a net basis.
Foreign currencies
d)
Items included in the consolidated 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 presentational currency of the Company. The
functional currencies of consolidated subsidiaries are pound sterling and US dollars (“$”).
Transactions in foreign currencies are initially recorded by the Company at the rate prevailing on the date
the transaction first qualifies for recognition. Differences arising on settlement or translation of monetary
items as well as gains or losses on the retranslation of foreign currency balances at the period-end are
recognized in the consolidated statement of comprehensive income/(loss).
The results and financial position of subsidiaries that have a functional currency different from the
presentational currency of the Company 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 prevailing
at the balance sheet date. Income and expenses are translated at the average rate for the period. Fair value
adjustments arising on acquisition of such entities are treated as assets and liabilities of the relevant entity
and translated into pound sterling at the closing rate. The exchange differences arising on translation for
consolidation are recognized in other comprehensive income/(loss).
e) 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 computed using the straight-line method over the estimated useful lives of the related assets.
Useful lives of various property, plant and equipment are as follows:
•
•
•
Leasehold improvements shorter of lease term or ten years
Office equipment five years
IT equipment three years
Property, plant and equipment 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
consolidated statement of comprehensive income/(loss) when the asset is derecognized.
The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed
annually and adjusted prospectively, if appropriate.
Business combinations
f)
Business combinations are accounted for using the acquisition method of accounting. At the date of
acquisition, the Company 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 of 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 income/(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.
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 income/(loss) as an administrative
expense.
Directly attributable acquisition-related costs are expensed as incurred within the consolidated statement
of comprehensive income/(loss).
Leases
g)
Effective January 1, 2019, the Company adopted IFRS 16 (Leases) using the modified retrospective approach.
The Company assesses whether a contract is, or contains, a lease at inception of the contract. The Company
recognizes a right-of-use asset and a corresponding liability with respect to all lease arrangements in which
it is a lessee.
The lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted using the rate implicit in the lease. If this rate cannot be readily determined,
the Company uses its incremental borrowing rate.
Lease payments included in the measurement of the lease liability comprise of fixed lease payments, less
any lease incentives receivable.
The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the
lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease
payments made. The Company remeasures the lease liability (and makes a corresponding adjustment to
the related right-of-use asset) whenever there is a significant change in lease term, lease payments or if the
lease contract is modified and the lease modification is not accounted for as a separate lease.
The right-of-use assets comprise the initial measurement of the corresponding lease liability and lease
payments made at or before the commencement date, less any lease incentives received and any initial
direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.
The right-of-use assets are presented within 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
When the Company is an intermediate lessor, it accounts for the head lease and the sub-lease as two
separate contracts. The sub-lease is classified as a finance or operating lease by reference to the right-of-
use asset arising from the head lease. Rental income from operating leases is recognized on a straight-line
basis over the term of the relevant lease.
Intangible assets
h)
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. Refer to policy on provision for deferred cash consideration below.
Where the consideration paid or payable is in shares, the cost is measured in accordance with IFRS 2 (Share
Based Payments).
Intangible assets that are not yet available for use 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
at least annually.
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets are amortized from the date they are available for commercial use. No amortization has
been recognized to date.
An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use
or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference
between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss
when the asset is derecognized.
Financial instruments
i)
Financial assets and liabilities are recognized in the consolidated balance sheet only when the Company
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 other comprehensive income (“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 short-term investments, interest income and impairment gains or losses are recognized directly in the
consolidated statement of comprehensive income. The difference between cumulative fair value gains or
losses and the cumulative amounts recognized in the consolidated statement of comprehensive
income/(loss) is recognized in other comprehensive income until derecognition, when the amounts in other
comprehensive income are reclassified to the consolidated statement of comprehensive income/(loss).
Classification as debt or equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the
substance of the contractual arrangements and the definitions of a financial liability and an equity
instrument.
Embedded derivatives
An embedded derivative is a component of a hybrid contract that also includes a non-derivative host with
the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone
derivative. Derivatives embedded in hybrid contracts with hosts that are not financial assets within the scope
of IFRS 9 (e.g. financial liabilities) are treated as separate derivatives when they meet the definition of a
derivative, their risks and characteristics are not closely related to those of the host contracts and the host
contracts are not measured at FVTPL.
Convertible loan notes
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. This amount is recorded as a liability on an
amortized cost basis using the effective interest method until extinguished upon conversion or at the
instrument’s maturity date. The difference between the proceeds from the issue of the convertible loan note
and the fair value assigned to the liability component is included in equity and not subsequently remeasured.
Upon conversion, the amount initially recognized in “Other capital reserves” will be transferred to "Share
premium”.
Financial liabilities
All financial liabilities are measured subsequently at amortized cost using the effective interest method or
at FVTPL.
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
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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 cost in the consolidated statement of comprehensive income/(loss).
Non-substantial modifications to financial liabilities are measured at amortized cost with the associated
gain or loss recognized in the consolidated statement of comprehensive income/(loss). The gain or loss is
computed 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 existing financial liability
is derecognized and a new financial liability is established.
Borrowings are derecognized from the balance sheet when the obligation specified in the contract is
discharged, cancelled or expired.
The warrant instruments are recorded at fair value, with changes in the fair value recognized in the
consolidated statement of comprehensive income/(loss), where the terms of the warrant instruments allow
for cashless exercise.
Fair value measurement
j)
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is based on
the presumption that the transaction to sell the asset or transfer the liability takes place either:
•
•
In the principal market for the asset or liability; or
In the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Company.
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 Company 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 consolidated 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 consolidated financial statements on a recurring basis,
the Company 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.
Impairment of non-financial assets
k)
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
At each reporting date, the Company assesses whether there is any indication that an asset may be impaired.
If any such indication exists, or when annual impairment testing for an asset is required, the Company
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated statement of comprehensive income/(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 Company
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 consolidated statement of comprehensive income/(loss) unless the asset is
carried at a revalued amount, in which case the reversal is treated as a revaluation increase.
Cash and short-term deposits
l)
Cash and short-term deposits in the balance sheet comprise cash at banks and on hand along with short-
term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes
in value.
m) Provisions
Provisions are recognized when the Company 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 Company
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 consolidated statement of comprehensive income/(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.
Where contingent payments relate to future use of the in-licensed IP, no liability or provision is recognized
for variable amounts to be paid to the vendors based on future events unless such arrangements are onerous.
The liability (and corresponding expense in the income statement) to the vendors is recognized as an
obligation arises.
n) 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.
55
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
o) Share-based payments
Employees (including executives) and non-executive directors of the Company receive remuneration in the
form of share-based payments, whereby employees and non-executive directors render services as
consideration for equity instruments (equity settled transactions).
Incentives in the form of shares are provided to employees and non-executive directors under various plans
(Note 26). Executive officers also 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 Payments (“IFRS 2”), charges for these incentives are expensed
through the consolidated statement of comprehensive income/(loss) on a straight-line basis over their
vesting period, based on the Company’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, which
are 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.
Equity-settled share-based payment transactions with parties other than employees are measured at the
fair value of the goods or services received, except where that fair value cannot be estimated reliably, in
which case they are measured at the fair value of the equity instruments granted, measured at the date the
entity obtains the goods or the counterparty renders the service.
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.
p) Costs of issuing capital
Incremental costs incurred and directly attributable to the offering of equity securities are deducted from
the related proceeds of the offering. The net amount is recorded as share premium in the period when such
shares are issued. Where such expenses are incurred prior to the offering they are recorded in prepayments
until the offering completes. Other costs incurred in such offerings are expensed as incurred and included
in general and administrative expenses.
Employee Benefit Trust
q)
The Company operates an Employee Benefit Trust (“EBT”), the Mereo BioPharma Group plc Employee Benefit
Trust.
The EBT holds ADS’s to satisfy the exercise of options under the Company’s share-based incentive schemes
(Note 26). The EBT is a Jersey-based trust which was initially funded by a loan from the Company, which it
utilized to purchase shares in sufficient quantity to fulfill the envisaged awards. The Company will issue
ordinary shares to a custodian for conversion by a depositary bank to ADS’s and delivery to the EBT. These
ordinary shares will be deducted from the shareholders’ funds on the consolidated balance sheet at their
nominal value.
Shares held by the EBT are included in the consolidated balance sheet as a reduction in equity.
Pension contribution costs
r)
Payments to defined contribution retirement benefit plans are recognized as an expense when employees
have rendered service entitling them to the contributions.
56
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. Significant judgments, estimates and assumptions
The preparation of these consolidated financial statements 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.
Revenue
Judgments
a)
Judgment is required to determine the appropriate accounting policy for the license and collaboration
agreement with Ultragenyx Pharmaceutical, Inc. (“Ultragenyx”). Management has determined that the upfront
proceeds from the license and collaboration agreement represent proceeds from the Company’s ordinary
business activities and, therefore, represent revenue within the scope of IFRS 15, Revenue from Contracts
with Customers. Judgment is also required to determine the portion of the carrying amount of the intangible
asset to derecognize, relative to the value retained, as a result of the license and collaboration agreement
with Ultragenyx.
Impairment of intangible assets and property, plant and equipment
b)
An assessment was made in respect of indicators of impairment in the carrying value of the Company’s
intangible assets (see Note 14), right-of-use assets, leasehold improvements, office equipment and IT
equipment as at December 31, 2021.
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 recognized as an impairment in the consolidated statement of
comprehensive income/(loss). The assessment of intangible assets involves a number of significant
judgments regarding the likelihood of successful product approval, the costs of attaining approval, the
estimated useful life of intangible assets following commercialization and the subsequent commercial
profitability of the product once approved.
Incremental borrowing rate and lease modification
c)
Future lease payments are discounted 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, 2020, the determination of an appropriate discount rate has a significant
effect on the lease liabilities recognized. For the current lease portfolio, the incremental borrowing rate was
determined 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 Company 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 Company, the contract includes an extension option beyond the non-cancellable
period for which the Company has the right to use the underlying asset. In applying this judgment, the
Company considered the period over which it was reasonably certain to make use of the extension option.
In August 2020, a lease for office space was modified to reduce the size of the office space leased. At the
time of this lease modification, judgment was applied in determining the new lease term and remeasuring
the lease liability by discounting the revised lease payments using a revised incremental borrowing rate.
Identification and classification of financial instruments
d)
On June 3, 2020, the Company completed a private placement transaction (Note 19) which comprised the
issue of ordinary shares, Loan Notes and Warrants. Judgment is applied under IAS 32 (Financial instruments:
Presentation) in determining the features of the identified financial instruments on both the transaction date
and the date of the general meeting at which Resolutions relating to the private placement were voted on by
the Shareholders, to determine the appropriate recognition in accordance with IAS 32. In applying this
57
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
judgment, management considered the probability of passing the Resolutions at the general meeting and
the likelihood of a change of control prior to the passing of the Resolutions, which impact the settlement
terms of the financial instruments, and the classification of the financial instruments as liabilities or equity.
Management concluded that a change of control event was uncertain and outside of the Company’s control,
and therefore the conversion feature on the Loan Notes at the transaction date represented a financial liability
with an embedded derivative for the conversion option. On the passing of the Resolutions, judgment was
applied to determine that the effective terms of the Loans Notes changed and the embedded derivative
financial liability representing the conversion option was reclassified to equity at its fair value, with no
associated gain or loss recognized in profit or loss.
Business combination
e)
On April 23, 2019, the Company obtained a 100% controlling interest in Mereo BioPharma 5, Inc. (formerly
OncoMed), a company based in the United States (“US”). The value of the net identifiable assets acquired
was £44.6 million. Total consideration paid, being the fair value of 24.8 million ordinary shares of the
Company, was £40.9 million. As the Company acquired Mereo BioPharma 5, Inc. for an amount less than
the fair market value of the net assets acquired, a gain on bargain purchase of £3.7 million was recognized.
Judgment was 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 Mereo BioPharma 5, Inc. meets the definition of
a ‘business’ and the transaction has therefore been accounted for as a business combination.
Estimates and assumptions
a) Deferred consideration
Deferred consideration represents contingent cash consideration and 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
18). The amount provided is based on estimates regarding the timing and progress of the related research
and development activities (see Note 24).
Deferred consideration in the form of shares is recognized as a share-based payment when it is probable
that shares will be transferred.
Fair value of financial instruments
b)
As part of the private placement transaction (Note 19), the Company performed a valuation of the fair value
of the identified financial instruments including the embedded derivative and the warrants on the transaction
date and the general meeting date. For qualifying financial instruments, the fair value is reassessed at each
balance sheet date. Specific consideration was applied to the estimation of implied share price on the
transaction date, the volatility, credit spread and discount rate (see Note 24).
c) Contingent consideration
The Company makes a provision for the estimated fair value of amounts payable to the former shareholders
of Mereo BioPharma 5, Inc. under the Contingent Value Rights Agreement (“CVR”), which is accounted for
as a contingent consideration liability.
At December 31, 2021, the Company estimates the fair value of the contingent consideration liability to be
£nil (2020: nil). Total potential payments under the CVR on a gross, undiscounted basis, are approximately
£58.6 million ($80.0 million).
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 Mereo
BioPharma 5, Inc. under the CVR is considered. The estimate could materially change over time in line with
the development plan and potential subsequent commercialization of the product.
58
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. Changes in accounting policies
a) New standards, interpretations and amendments adopted from January 1, 2021
In the current year, the Company has applied the below amendments to IFRS issued by the IASB that are
effective for an annual period that begins on or after January 1, 2021. Their adoption has not had any material
impact on the disclosures or on the amounts reported in these consolidated financial statements:
•
•
•
Amendments to IFRS 4 Insurance Contracts
Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest Rate Benchmark Reform – Phase 2
Amendments to IFRS 16 Covid-19 related rent concessions
b) New standards, interpretations and amendments not yet effective
At the date of authorization of these consolidated financial statements, the Company has not applied the
following new and revised IFRS that have been issued but are not yet effective:
Effective January 1, 2022
•
•
•
•
Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and
IAS 41)
Amendments to IAS 16 – Proceeds before Intended Use
Amendments to IAS 37 – Onerous Contracts – Cost of Fulfilling a Contract
Amendments to IFRS 3
Effective January 1, 2023
•
•
•
•
•
Amendments to IAS 1 – Classification of Liabilities as Current or Non-current
Amendments to IFRS 17 – Insurance Contracts
Amendments to IAS 12 – Deferred tax related to assets and liabilities arising from a single transaction
Amendments to IAS 8 – Definition of accounting estimates
Amendments to IAS 1 and IFRS Practice Statement 2 – Disclosure of accounting policies
The Company does not expect the adoption of these IFRS amendments will have a material impact on the
Company in the current or future reporting periods and on foreseeable future transactions.
5. Group information
Information about subsidiaries
The consolidated financial statements of the Company include:
% Equity
% Equity
interest
interest
Country of December 31, December 31,
2020
Name Principal activities incorporation 2021
Mereo BioPharma 1 Limited Pharmaceutical R&D UK 100
Mereo BioPharma 2 Limited Pharmaceutical R&D UK 100
Mereo BioPharma 3 Limited Pharmaceutical R&D UK 100
Mereo BioPharma 4 Limited Pharmaceutical R&D UK 100
Mereo BioPharma Ireland Limited Pharmaceutical R&D Ireland 100
Mereo BioPharma 5, 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 BioPharma Group plc
Employee Benefit Trust Employee share scheme Jersey –
100
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
59
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
registered office of Mereo BioPharma Ireland Limited is Rocktwist House, Block 1, Western Business Park,
Shannon, County Clare, V14 FW97, Republic of Ireland.
Mereo US Holdings Inc. was incorporated on December 3, 2018 for the sole purpose of effecting the business
combination with Mereo BioPharma 5, Inc. (formerly OncoMed Pharmaceuticals, Inc.) on April 23, 2019. The
registered office of Mereo US Holdings Inc., Mereo BioPharma 5, Inc. and its wholly owned subsidiary, Navi
Subsidiary, Inc., is 251 Little Falls Drive, City of Wilmington, County of New Castle, Delaware 19808, US.
6. Revenue
The Company recognized upfront proceeds of £36.5 million ($50.0 million) from the license and collaboration
agreement with Ultragenyx for setrusumab as revenue in the year ended December 31, 2021. The variable
consideration relating to future milestones and sales royalties will be recognized in the statement of
comprehensive income/(loss) when the milestones are achieved or the underlying commercial sales are
made, in the event regulatory approval is achieved.
As a consequence of the license and collaboration agreement with Ultragenyx and in accordance with terms
of the 2015 asset purchase with Novartis, the Company made a payment to Novartis of £7.2 million
($10.0 million). The payment included a deduction for costs of £2.4 million which was deferred and will be
recognized in the statement of comprehensive income/(loss) when the associated costs are incurred. In the
year ended December 31, 2021, £1.1 million of these deductions were recognized within “Cost of revenue”
in the consolidated statement of comprehensive income/(loss). As of December 31, 2021 the remaining
balance to be recognized of £1.3 million is included within “Other liabilities” in the consolidated balance
sheet. See Note 13 for additional details.
7. Profit/(loss) before tax
Profit/(loss) before tax is stated after charging:
Year ended December 31,
Fees payable to the Company’s Auditor for the audit
of the consolidated accounts
Fees payable to the Company’s Auditor for other services:
Audit of subsidiary accounts
Audit-related assurance services
Gain on modification of lease
Income from sub-lease
Depreciation of right-of-use assets
Depreciation (excluding right-of-use assets)
2021
£’000s
2020
£’000s
2019
£’000s
358
46
57
–
–
570
72
449
49
318
(957)
(646)
1,531
68
514
45
311
–
(855)
1,505
52
Gain on modification of lease, sub-lease income and transaction costs associated with lease modification
are included within administrative expenses within the consolidated statement of comprehensive
income/(loss).
8. Employees
The average monthly number of persons employed by the Company during the year was:
Year ended December 31,
By activity:
Administrative
Research and development
Total
60
2021
2020
2019
26
19
–––––––––
45
–––––––––
–––––––––
22
17
–––––––––
39
–––––––––
–––––––––
28
18
–––––––––
46
–––––––––
–––––––––
263039 Mereo Biopharma pp048-pp088 (Con FS).qxp 31/03/2022 13:24 Page 61
MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Total compensation costs for persons employed by the Company (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
2021
£’000s
4,126
402
73
1,210
3,763
418
99
2,092
–––––––––
12,183
–––––––––
–––––––––
2020
£’000s
3,046
397
66
446
4,832
681
89
1,112
–––––––––
10,669
–––––––––
–––––––––
2019
£’000s
2,824
110
62
152
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
2021
£’000s
2020
£’000s
2019
£’000s
810
9
58
239
–––––––––
1,116
–––––––––
–––––––––
1,114
14
61
538
–––––––––
1,727
–––––––––
–––––––––
1,106
17
25
294
–––––––––
1,442
–––––––––
–––––––––
During 2021, one Director was a member of a defined contribution pension scheme (2020: one, 2019: two).
Further details concerning the remuneration of key management personnel can be found in Note 27.
9. Other income/expenses and adjustments
Finance income
Year ended December 31,
Bank interest earned
Interest earned on short-term investments
Gain on short-term investments
Total
2021
£’000s
2020
£’000s
2019
£’000s
1
–
–
–––––––––
1
–––––––––
–––––––––
5
–
39
–––––––––
44
–––––––––
–––––––––
42
141
194
–––––––––
377
–––––––––
–––––––––
61
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Finance costs
Year ended December 31,
Interest on convertible loan notes
Interest on bank loan
Interest on lease liabilities
Accreted interest on bank loan
Modification gain on bank loan
Discounting of provision for deferred cash consideration
Other
Total
2021
£’000s
2020
£’000s
2019
£’000s
(3,549)
–
(227)
–
–
(225)
(21)
–––––––––
(4,022)
–––––––––
–––––––––
(2,241)
(2,900)
(1,085)
–
–
(157)
–
–––––––––
(6,383)
–––––––––
–––––––––
(20)
(1,739)
(1,314)
(1,523)
456
(221)
(10)
–––––––––
(4,371)
–––––––––
–––––––––
Changes in the fair value of financial instruments
Year ended December 31,
Changes in the fair value of warrants – private placement
Changes in the fair value of warrants – bank loan
Changes in the fair value of embedded derivative
Total
2021
£’000s
2020
£’000s
2019
£’000s
39,535
504
–
–––––––––
40,039
–––––––––
–––––––––
(45,977)
(714)
(63,158)
–––––––––
(109,849)
–––––––––
–––––––––
–
875
–
–––––––––
875
–––––––––
–––––––––
10. Taxation
Year ended December 31,
Tax charge
UK corporation tax R&D credit
Other tax income
Total
2021
£’000s
2020
£’000s
2019
£’000s
(1,516)
–
–
–––––––––
(1,516)
–––––––––
–––––––––
–
2,822
–
–––––––––
2,822
–––––––––
–––––––––
–
5,149
1,125
–––––––––
6,274
–––––––––
–––––––––
U.K. income tax
The Company is entitled to claim tax credits in the United Kingdom 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 claims in respect of the year ended
December 31, 2020 have been received by the Company.
U.S. income tax
As at December 31, 2021, £0.8 million is receivable related to Alternative Minimum Tax (“AMT”) credits,
recognized as other taxes recoverable within the consolidated balance sheet. The Company generates R&D
tax credits for U.S. federal and state purposes. In respect of these R&D tax credits, no deferred tax assets
have been recognized in any periods presented. As of December 31, 2021, the Company had an uncertain
tax position of £2.6 million, representing approximately 20% of these historic R&D tax losses claimed.
62
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of effective tax rate
Year ended December 31,
Profit/(loss) on ordinary activities before income tax
Tax on profit at standard U.K. rate of 19%
Expenses not deductible for income tax purposes
(permanent differences)
Income not taxable
Temporary timing differences
R&D relief uplift
Losses (unrecognized)
Deferred income from MBG loan guarantee costs
Foreign tax
Differences in overseas tax rates
Derecognition of deferred tax
Gain on bargain purchase
Other
Tax (charge)/credit for the year
2021
£’000s
14,241
(2,706)
(708)
78
(65)
1,435
(345)
–
505
286
–
–
4
–––––––––
(1,516)
–––––––––
–––––––––
2020
£’000s
(166,450)
31,626
(13,270)
4
–
1,214
(14,479)
–
184
261
(2,686)
–
(32)
–––––––––
2,822
–––––––––
–––––––––
2019
£’000s
(41,118)
7,812
(317)
–
(343)
2,540
(4,380)
(54)
–
340
–
699
(23)
–––––––––
6,274
–––––––––
–––––––––
Deferred tax
The analysis of unrecognized deferred tax is set out below:
Year ended December 31,
Losses
Loan relationships
U.S. tax credits
Accruals
Fixed assets
Share options
Other US deferred tax
Other
Temporary differences
Net deferred tax asset (unrecognized)
The analysis of recognized deferred tax is set out below:
Deferred tax liabilities
Intangible asset and right-of-use asset
Deferred tax asset
Net operating losses and lease liability
Net deferred tax asset/(liability)
2021
£’000s
2020
£’000s
2019
£’000s
44,683
73
10,557
–
–
151
31
–
56
–––––––––
55,551
–––––––––
–––––––––
37,021
421
9,880
–
414
55
86
137
18
–––––––––
48,032
–––––––––
–––––––––
At January
1, 2021
£’000s
Recognized
in income
£’000s
(96)
96
–––––––––
–
–––––––––
–––––––––
76
(76)
–––––––––
–
–––––––––
–––––––––
19,443
–
10,032
947
400
–
–
202
4
–––––––––
31,028
–––––––––
–––––––––
At
December
31, 2021
£’000s
(20)
20
–––––––––
–
–––––––––
–––––––––
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.
63
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
The deferred tax assets have not been recognized as there is uncertainty regarding when suitable future
profits against which to offset the accumulated tax losses will arise. There is no expiration date for the
accumulated tax losses.
The standard rate of corporation tax applied to the reported profit/(loss) before tax is 19% (2020: 19%). The
Finance Act 2021, which was substantively enacted on May 24, 2021, included provisions to increase the
standard rate of tax from 19% to 25%, effective from April 1, 2023. As a result, U.K. deferred tax assets and
liabilities have been measured at a rate of 25%.
At December 31, 2021, the Company had UK tax losses to be carried forward of approximately £122.6 million.
U.S. deferred tax
U.S. deferred tax assets and liabilities are calculated at a blended rate of approximately 21%.
For Mereo BioPharma 5, Inc, with respect to accumulated tax losses carried forward prior to its acquisition
by the Company, there is a change of control restriction which will limit the amount available in any one year.
At December 31, 2021, the Company had U.S. federal tax losses to be carried forward of approximately
£65.6 million, of which £59.4 million can be carried forward indefinitely and £6.2 million which will begin to
expire in 2022. At December 31, 2021, the Company had U.S. state tax losses to be carried forward of
approximately £3.5 million which begin to expire in 2027.
11. Earnings per share
Basic profit/(loss) per share is calculated by dividing the profit/(loss) attributable for the year to ordinary
equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.
Diluted loss per share is based on dividing the profit attributable for the year, adjusted for the effect of diluted
ordinary shares, by ordinary share equivalents, which includes the weighted average number of ordinary
shares outstanding and the effect of dilutive ordinary share equivalents.
Year ended December 31,
Numerator – Basic earnings per share (£’000s):
Profit/(loss) attributable to equity holders of the parent
Denominator – Basic earnings per share:
Weighted average number of ordinary shares
Profit/(loss) per share – basic (£)
Numerator – Diluted earnings per share (£’000s):
Profit/(loss) attributable to equity holders of the parent
Effect of dilutive ordinary shares
Numerator – Diluted earnings per share
Denominator – Diluted earnings per share:
Number of ordinary shares used for basic earnings
per share
Weighted average effect of dilutive ordinary shares
Weighted average number of diluted ordinary shares
outstanding
Loss per share – diluted (£)
2021
2020
2019
12,725
–––––––––
(163,628)
–––––––––
(34,844)
–––––––––
527,818,648
0.02
–––––––––
338,953,141
(0.48)
–––––––––
89,424,476
(0.39)
–––––––––
12,725
(38,523)
(25,798)
–––––––––
(163,628)
–
(163,628)
–––––––––
(34,844)
–
(34,844)
–––––––––
527,818,648
27,457,163
338,953,141
–
89,424,476
–
555,275,811
(0.05)
–––––––––
338,953,141
(0.48)
–––––––––
89,424,476
(0.39)
–––––––––
64
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2021, the effect of dilutive ordinary shares, net of current year tax charge,
is related to Company's outstanding warrants. For the years ended December 31, 2020 and 2019, share
options, convertible loan notes and warrants 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.
Therefore, the weighted average shares outstanding used to calculate both the basic and diluted per share
was the same.
12. Property, plant and equipment
Right-of-use Right-of-use
asset
(equipment)
£’000s
asset
(building)
£’000s
Leasehold
improve-
ments
£’000s
Office
equipment
£’000s
IT
equipment
£’000s
Cost or valuation
At January 1, 2021
Additions
Lease modification
Disposals
Currency translation
effects
At December 31, 2021
Depreciation
At January 1, 2021
Disposals
Depreciation for the year
At December 31, 2021
Net book value
At January 1, 2021
At December 31, 2021
1,848
923
133
–
(1)
–––––––––
2,903
–––––––––
–––––––––
(531)
–––––––––
–––––––––
–
(494)
–––––––––
(1,025)
–––––––––
–––––––––
1,318
–––––––––
1,878
–––––––––
–––––––––
1,169
–
30
(868)
(36)
–––––––––
295
–––––––––
–––––––––
(1,023)
–––––––––
–––––––––
868
(76)
–––––––––
(231)
–––––––––
–––––––––
146
–––––––––
64
–––––––––
–––––––––
164
393
–
–
–
–––––––––
557
–––––––––
–––––––––
(85)
–––––––––
–––––––––
–
(39)
–––––––––
(124)
–––––––––
–––––––––
79
–––––––––
433
–––––––––
–––––––––
71
109
–
(7)
–
–––––––––
173
–––––––––
–––––––––
(65)
–––––––––
–––––––––
7
(11)
–––––––––
(69)
–––––––––
–––––––––
6
–––––––––
104
–––––––––
–––––––––
132
48
–
–
–
–––––––––
180
–––––––––
–––––––––
(107)
–––––––––
–––––––––
–
(22)
–––––––––
(129)
–––––––––
–––––––––
25
–––––––––
51
–––––––––
–––––––––
Total
£’000s
3,384
1,473
163
(875)
(37)
–––––––––
4,108
–––––––––
–––––––––
(1,811)
–––––––––
–––––––––
874
(642)
–––––––––
(1,578)
–––––––––
–––––––––
1,573
–––––––––
2,530
–––––––––
–––––––––
Right-of-use Right-of-use
asset
(equipment)
£’000s
asset
(building)
£’000s
Leasehold
improve-
ments
£’000s
Office
equipment
£’000s
IT
equipment
£’000s
Total
£’000s
Cost or valuation
At January 1, 2020
Additions
Lease modification
Currency translation
effects
At December 31, 2020
Depreciation
At January 1, 2020
Lease modifications
Depreciation for the year
At December 31, 2020
Net book value
At January 1, 2020
At December 31, 2020
11,877
–
(10,220)
191
–––––––––
1,848
–––––––––
–––––––––
(996)
–––––––––
–––––––––
1,482
(1,017)
–––––––––
(531)
–––––––––
–––––––––
10,881
–––––––––
1,318
–––––––––
–––––––––
1,024
–
149
(4)
–––––––––
1,169
–––––––––
–––––––––
(509)
–––––––––
–––––––––
–
(514)
–––––––––
(1,023)
–––––––––
–––––––––
515
–––––––––
146
–––––––––
–––––––––
164
–
–
–
–––––––––
164
–––––––––
–––––––––
(69)
–––––––––
–––––––––
–
(16)
–––––––––
(85)
–––––––––
–––––––––
95
–––––––––
79
–––––––––
–––––––––
71
–
–
116
16
–
–
–––––––––
71
–––––––––
–––––––––
(30)
–––––––––
–––––––––
–
(35)
–––––––––
(65)
–––––––––
–––––––––
41
–––––––––
6
–––––––––
–––––––––
–
–––––––––
132
–––––––––
–––––––––
(90)
–––––––––
–––––––––
–
(17)
–––––––––
(107)
–––––––––
–––––––––
26
–––––––––
25
–––––––––
–––––––––
13,252
16
(10,071)
187
–––––––––
3,384
–––––––––
–––––––––
(1,694)
–––––––––
–––––––––
1,482
(1,599)
–––––––––
(1,811)
–––––––––
–––––––––
11,558
–––––––––
1,573
–––––––––
–––––––––
In June 2021, the Company entered into a new lease agreement for additional office space in London, UK.
The Company also extended the lease term of the existing office space, which resulted in the modification
of the right-of-use asset.
65
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In August 2020, the Company modified the scope of the leased office space in the US included in the right-
of-use asset (building). The revised lease payments were allocated between lease and non-lease
components, determining a new lease term, and remeasuring the lease liability using a revised discount rate.
This resulted in a reduction in the right-of-use asset of £8.7 million and a reduction in lease liability of
£9.5 million, with the associated gain on modification of £0.7 million recognized in the consolidated
statement of comprehensive income/(loss). Related transaction costs of £2.5 million were also recognized
in the consolidated statement of comprehensive income/(loss).
The Company leases office space and equipment for use in research and development activities. In the year-
ended December 31, 2021, the Company made lease payments of £0.7 million (2020: £2.1 million). The
maturity of lease liabilities as of December 31, 2021 are as follows:
Within 1
year
£’000s
Between
1 and 3
years
£’000s
Between
3 and 5
years
£’000s
Over
5 years
£’000s
Total
£’000s
Maturity of lease liabilities
622
972
782
–
2,376
Further details on the movements within lease liability are included in Note 23.
13. Intangible assets
Cost
At January 1, 2020
Disposals
Currency translation effects
At December 31, 2020
At December 31, 2021
Revisions to estimated value
At January 1, 2020
Revisions to estimated value
At December 31, 2020
Revisions to estimated value
Out-license of intangible asset
At December 31, 2021
Net book value
At January 1, 2020
At December 31, 2020
At December 31, 2021
Acquired development
programs
£’000s
45,527
(13,386)
864
33,005
–––––––––
33,005
–––––––––
(1,071)
–––––––––
(286)
–––––––––
(1,357)
–––––––––
2,373
(9,457)
–––––––––
(8,441)
–––––––––
44,456
31,648
–––––––––
24,564
–––––––––
The Company’s strategy is to acquire and develop clinical-stage development programs for the treatment
of oncology and rare diseases.
On January 25, 2021, the Company’s license and collaboration agreement with Ultragenyx for the
development and commercialization of setrusumab for OI became effective. Under the terms of the
agreement, the Company received an upfront payment of £36.5 million ($50 million). Additionally, the
Company will be eligible to receive up to $254 million in future milestones and royalties. The license and
collaboration agreement grants Ultragenyx an exclusive license to develop and commercialize setrusumab
in the US and rest of the world, excluding Europe where the Company retains commercial rights. As a result,
intangible assets with a carrying value of £9.5 million were derecognized and recorded within “Cost of
revenue” in the Company’s consolidated statement of comprehensive income/(loss).
66
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In October 2017, the Company acquired the exclusive license for alvelestat and included the option to acquire
certain assets from AstraZeneca AB (“AstraZeneca”). On that date the fair value of alvelestat 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 is re-measured to fair value at each balance
sheet date and recognized as an increase to, or reduction of, the intangible asset. During the year, the
provision for deferred cash consideration has increased by £2.4 million (2020: decrease of £0.3 million) due
to changes in timelines and the probability of contractual milestones being achieved. Refer to Note 18 and
Note 24 for additional information.
During the year the Company did not revise the value of any other intangible assets. As the intangible assets
remain under development, no amortization charge has been recognized (2020: £nil).
On April 23, 2019, the Company acquired an intangible asset of £12.7 million following the acquisition of
Mereo BioPharma 5, Inc. The intangible asset represented the intellectual property associated with etigilimab
and navicixizumab, among others, for which the fair value at acquisition was fully attributed to navicixizumab.
On January 13, 2020, the Company entered into a license agreement with OncXerna under which an exclusive
worldwide license was granted in respect of intellectual property rights for the development and
commercialization of navicixizumab. Under the terms of the license agreement, the Company received an
upfront gross payment of £3.1 million ($4 million), and derecognized the associated intangible asset,
recording a loss on disposal of £10.9 million.
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:
BPS-804 (setrusumab)
MPH-966 (alvelestat)
BSG-649 (leflutrozole)
BCT-197 (acumapimod)
Total
December 31,
2021
£’000s
2020
£’000s
2,159
8,208
9,886
4,311
–––––––––
24,564
–––––––––
–––––––––
11,616
5,835
9,886
4,311
–––––––––
31,648
–––––––––
–––––––––
The Company 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 for the year ended December 31, 2021. Management believes that the likelihood
of a materially different outcome using different assumptions is remote.
The acquired development programs are assets which are not used in commercialized 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
Company receives upfront payments, milestone receipts and royalties on commercial sales; therefore, the
Company does not incur any costs of commercialization after out-licensing except when such terms are
agreed.
67
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
Discount rates – the discount rate is estimated on a pre-tax basis reflecting the estimated cost of
capital of the Company and is applied consistently across each of the acquired development programs.
The cost of capital was calculated at 12.0% (2020: 12.0%).
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 necessary for commercial sales.
Therefore, full impairment of a development program is expected should such clinical trials be unsuccessful.
15. Other receivables
Lease deposits
VAT recoverable
Other
Total
16. Cash and short-term deposits
Cash
Short-term deposits
Total
December 31,
2021
£’000s
2020
£’000s
408
387
624
–––––––––
1,419
–––––––––
–––––––––
407
370
239
–––––––––
1,016
–––––––––
–––––––––
December 31,
2021
£’000s
2020
£’000s
93,727
569
–––––––––
94,296
–––––––––
–––––––––
22,922
547
–––––––––
23,469
–––––––––
–––––––––
Short-term deposits are available immediately and earn fixed interest at the respective short-term deposit
rates and are held in various certificates of deposit.
68
263039 Mereo Biopharma pp048-pp088 (Con FS).qxp 31/03/2022 13:24 Page 69
MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. Trade and other payables
Trade payables
Social security and other taxes
Other payables
Total
December 31,
2021
£’000s
2020
£’000s
2,285
190
24
–––––––––
2,499
–––––––––
–––––––––
3,165
146
22
–––––––––
3,333
–––––––––
–––––––––
Trade and other payables are non-interest bearing and have an average term of one month.
18. Provisions
Social security contribution on vested share options
Provision for deferred cash consideration
Total
Current
Non-current
At January 1, 2020
Arising/(released) during the year, net
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 (revision to
intangible asset, see Note 13)
At December 31, 2020
Arising/(released) during the year, net
Increase in provision due to the unwinding of the time value of money
Increase in provision due to a change in estimates relating to timelines and
probabilities of contractual milestones being achieved (revision to intangible
asset, see Note 13)
At December 31, 2021
December 31,
2021
£’000s
2020
£’000s
–
4,123
4,123
2,803
–––––––––
1,320
–––––––––
–––––––––
109
1,525
1,634
418
–––––––––
1,216
–––––––––
–––––––––
Social security
contribution
on vested Deferred cash
share options consideration
£’000s
£’000s
104
5
–
1,654
–
157
–
–––––––––
109
–––––––––
(109)
–
(286)
–––––––––
1,525
–––––––––
–
225
–
–––––––––
–
–––––––––
2,373
–––––––––
4,123
–––––––––
The provision for social security contributions on share options is calculated based on the number of vested
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.
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 provision is calculated
as the risk-adjusted net present value of future cash payments to be made by the Company. 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.
69
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
19. Private placement
On June 3, 2020, the Company completed a £56 million private placement transaction which comprised of
the issuance of 89,144,630 ordinary shares of £0.003 each at a price of £0.174 per share for total proceeds
of £15.5 million, and the issue of Tranche 1 convertible loan notes (the “Loan Notes”) for total proceeds of
£40.5 million. The investors also received conditional warrants to subscribe for an additional 161,048,366
ordinary shares (the “Warrants”).
The terms of the Loan Notes and Warrants, and, in particular, their ability to be converted into ordinary shares
was conditional on the passing of certain resolutions (the “Resolutions”) at a subsequent general meeting
of shareholders held on June 30, 2020. At that date, the Resolutions were passed, and the Loan Notes
became convertible into ordinary shares.
Loan Notes
The Loan Notes bear interest at a rate of 6% per annum and have an initial maturity date of June 2023. The
Loan Notes are convertible into ordinary shares at the discretion of the holder and, if not converted by the
initial maturity date, may be extended for an additional seven years, but will cease to bear interest from any
extension date. The Loan Notes were initially recognized at their fair value of £38.6 million (debt host
instrument in the amount of £26.7 million and the embedded derivative in the amount of £11.9 million, before
transaction costs).
Loan Notes in an aggregate principal amount of £40.5 million were issued on June 3, 2020 and became
convertible upon the passing of the Resolutions. As a result, on June 30, 2020, Loan Notes in an aggregate
principal amount of £21.8 million, together with accrued interest, were automatically converted into
125,061,475 ordinary shares, and Loan Notes in an aggregate principal amount of £18.9 million remained
outstanding as of December 31, 2020. See Note 21.
During the year ended December 31, 2021, the Company issued and allotted 40,397,976 ordinary shares at
a price of £0.174 per share on conversion of Loan Notes. As of December 31, 2021, Loan Notes in an
aggregate principal amount of £12.4 million remain outstanding.
Warrants
Participants in the private placement transaction received conditional warrants to subscribe for further
ordinary shares in an aggregate number equal to 50 percent of both the ordinary shares purchased and the
ordinary shares issuable upon conversion of the Loan Notes. A total of 161,048,366 Warrants were issued.
The fair value of the warrants at inception was £4.1 million.
The Warrants have an exercise price of £0.348 per share and are exercisable at any time until their expiry in
June 2023. The Warrants can be exercised for cash or on a cashless basis at the discretion of the warrant
holder. Certain Warrants outstanding at the expiry date may be converted into Tranche 2 Notes, with an
expiry date of up to seven years from conversion, and do not bear interest. See Note 20.
The Loan Notes and the Warrants were recognized as separate financial instruments. Transaction costs
directly attributable to the private placement transaction were apportioned across the ordinary shares, Loan
Notes and Warrants.
20. Warrant liability
December 31,
January 1
Issued during the year
Settled during the year
Fair value changes during the year
At December 31
2021
£’000s
2020
£’000s
50,775
–
(2,400)
(40,039)
–––––––––
8,336
–––––––––
–––––––––
131
4,080
(127)
46,691
–––––––––
50,775
–––––––––
–––––––––
The change in fair value of the warrant liability represents an unrealized gain in the year ended December
31, 2021.
70
263039 Mereo Biopharma pp048-pp088 (Con FS).qxp 31/03/2022 13:24 Page 71
MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Warrants – private placement
As a part of the private placement transaction on June 3, 2020, the participating investors received
conditional warrants entitling them to subscribe for an aggregate of 161,048,366 ordinary shares in the
Company. The warrants were conditional on certain Resolutions being passed at the Company’s general
meeting on June 30, 2020. On the passing of the Resolutions, the warrants entitled the investors to subscribe
for ordinary shares at an exercise price of £0.348 per warrant and are exercisable until June 2023. The
warrants are classified as liabilities as the Company does not have an unconditional right to avoid redeeming
the instruments for cash. The fair value of the warrant liability was £8.0 million as of December 31, 2021
(£49.9 million as of December 31, 2020). The change in the fair value of £39.5 million was recognized as a
gain in the consolidated statement of comprehensive income/(loss). During the year-ended December 31,
2021, 15,414,626 warrants were exercised (2020: 690,205). Refer to Note 22 for details of the warrant
exercises.
Warrants – bank loan
As of December 31, 2021 and 2020, the former lenders of the Company have warrants outstanding to
purchase a total of 1,243,908 ordinary shares at an exercise price of £2.95 per share and a total of 1,243,908
ordinary shares at an exercise price of $0.4144 per share.
At December 31, 2021, the fair value of these warrants were £0.3 million (2020: £0.8 million). There were no
warrants exercised during the year ended December 31, 2021.
Total outstanding warrants
At December 31, 2021, a total of 147,431,351 warrants are outstanding (2020: 162,845,977). The warrants
outstanding are equivalent to 25% of the issued ordinary share capital of the Company (2020: 48%).
The following table lists the weighted average inputs to the models used for the fair value of warrants:
December 31,
Expected volatility (%)
Risk-free interest rate (%)
Expected life of warrants (years)
Market price of ADS ($)
Model used
2021
2020
84-85
0.25-(0.05)
3
$3.58
Black-Scholes Black-Scholes
75
0.9
1.5
$1.60
21. Convertible loan notes
December 31,
Novartis Loan Note
Loan Notes – private placement
Total
Current
Non-current
2021
£’000s
2020
£’000s
3,771
10,613
–––––––––
14,384
–––––––––
–––––––––
–
14,384
3,196
12,946
–––––––––
16,142
–––––––––
–––––––––
–
16,142
Convertible loan notes
On February 10, 2020, the Company entered into a convertible equity financing with Novartis Pharma (AG)
(“Novartis”) under which Novartis purchased a £3.8 million convertible loan note (the “Novartis Loan Note”).
The Novartis Loan Note is convertible at the discretion of the holder, at a fixed price of £0.265 per ordinary
share and bears an interest rate of 6% per annum with a maturity date of February 2025. In connection with
the Novartis Loan Note, the Company issued 1,449,614 warrants which are exercisable until February 2025
at an exercise price of £0.265.
71
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Loan Notes – private placement
The initial issuance of Loan Notes in an aggregate principal amount of £40.5 million were issued on June 3,
2020 and formed part of the private placement transaction (Note 19) were classified as a financial liability
on initial recognition. Non-closely related embedded derivatives relating to the conversion feature, term-
extension and change of control features were bifurcated and accounted for at FVTPL, with the debt host
contract being measured at amortized cost.
The fair value of the embedded derivative liability was £11.9 million on initial recognition and the fair value
of the liability component was £24.4 million (net of transaction costs). In 2020, between initial recognition
and the passing of the Resolutions (Note 19), changes in the fair value of the embedded derivative totaling
£63.2 million were recognized as an expense in the consolidated statement of comprehensive income/(loss).
The Loan Notes were not convertible until certain Resolutions were passed at the Company’s general meeting
on June 30, 2020, following which Loan Notes in an aggregate principal amount of £21.7 million (together
with accrued interest) were automatically converted into 125,061,475 ordinary shares. Accordingly, a
reduction in interest bearing loans of £13.3 million together with the derecognition of the embedded
derivative relating to the conversion feature of £41.6 million was recognized; no gain or loss was recognized
on conversion. The remaining portion of the embedded derivative relating to the conversion feature
attributable to the Loan Notes outstanding of £33.5 million was reclassified to equity to reflect the effective
change in the terms of the feature following the passing of the Resolutions.
The movements in the carrying value of the liability component of the Loan Notes is included in the table
below. Refer to Note 22 for details of Loan Notes converted to equity.
Year ended
December 31,
January 1
Issued
Interest charge
Converted to equity
December 31
2021
£’000s
2020
£’000s
12,946
–
2,974
(5,307)
–––––––––
10,613
–––––––––
–––––––––
–
24,417
1,803
(13,274)
–––––––––
12,946
–––––––––
–––––––––
The movements in the carrying value of the embedded derivative relating to the conversion feature in the
year-ended 2020 is included in the table below. There were no movements in the carrying value of the
embedded derivative in the year-ended December 31, 2021 following the reclassification to equity on June
30, 2020.
January 1
Arising during the year
Change in fair value
Reclassified to equity
December 31
Year ended
December 31,
2020
£’000s
–
11,913
63,158
(75,071)
–––––––––
–
–––––––––
–––––––––
The change in fair value of the embedded derivative liability represented an unrealized loss (recognized
within fair value changes on derivative financial instruments held at FVTPL) in the consolidated statement
of comprehensive income/(loss) in the year ended December 31, 2020.
The fair value of the embedded derivative was determined by comparing the fair value of the hybrid
instrument and the fair value of the host debt, which excludes the conversion features, using a discounted
72
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
cash flow model as well as Black-Scholes model for the hybrid contract. Inputs into the models used to fair
value the embedded derivative at inception (June 3, 2020), at conversion (June 30, 2020) and at the balance
sheet date are as follows:
Expected volatility (%)
Risk-free interest rate (%)
Credit spread %
Expected life of share options (years)
Market price of ordinary shares (£)
Probability of resolutions passing (%)
Models used
December 31,
2020
June 30,
2020
June 3,
2020
–
–
–
–
–
–
–
–
61
0.19
1.86
3
0.46
100
Discounted
cash flow/
Black-
Scholes
model
61
0.27
2.01
3
0.19
90
Discounted
cash flow/
Black-
Scholes
model
Volatility was estimated by reference to the one-month historical volatility of the share price of the Company.
The credit spread was determined based on the estimate of an implied credit rating of the Company between
B and C. The volatility and credit spread are key unobservable inputs that require significant judgment and,
therefore, the embedded derivatives were categorized within level 3 of the fair value hierarchy.
22. Issued capital and reserves
As at January 1, 2019
Issued on April 23, 2019
Issued on June 21, 2019
Transaction costs for issued share capital
As at December 31, 2019
Issued on February 11, 2020
Issued on February 20, 2020
Issued on June 4, 2020
Issued on June 30, 2020
Issued on December 23, 2020
Transaction costs for issued share capital
As at December 31, 2020
Issued during the year
Transaction costs for issued share capital
As at December 31, 2021
Ordinary
Shares
Number
71,240,272
––––––––––––
––––––––––––
24,783,320
1,936,030
–
––––––––––––
97,959,622
––––––––––––
––––––––––––
14,295,520
12,252,715
89,144,630
125,061,475
239,179
–
––––––––––––
338,953,141
––––––––––––
––––––––––––
245,955,098
–
––––––––––––
584,908,239
––––––––––––
––––––––––––
Ordinary
Share
capital
£’000s
214
–––––––––
–––––––––
74
6
–
–––––––––
294
–––––––––
–––––––––
43
37
267
375
1
–
–––––––––
1,017
–––––––––
–––––––––
738
–
–––––––––
1,755
–––––––––
–––––––––
Share
premium
£’000s
118,492
–––––––––
–––––––––
–
3,953
(761)
–––––––––
121,684
–––––––––
–––––––––
2,511
2,267
15,244
21,386
–
(1,307)
–––––––––
161,785
–––––––––
–––––––––
85,909
(234)
–––––––––
247,460
–––––––––
–––––––––
Since January 1, 2019, the following alterations to the Company’s share capital have been made. For each
share issuance, ordinary shares of £0.003 in nominal value in the capital of the Company were issued.
•
On April 23, 2019, the Company issued and allotted 24,783,320 ordinary shares as consideration for
the acquisition of Mereo BioPharma 5, Inc. The fair value of the ordinary shares, measured on the date
of acquisition, was £1.65;
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On June 21, 2019, Novartis converted £2.4 million of loan notes dated June 3, 2016 into 1,071,042
ordinary shares at a fixed conversion price of £2.21 per share. Under the terms of the notes, Novartis
also received 864,988 bonus shares.
On February 11, 2020, the Company issued and allotted 11,432,925 ordinary shares at a price of £0.20
per share to Aspire Capital Fund, LLC (“Aspire Capital”). Gross cash received was £2.3 million. Aspire
Capital has also committed to subscribe for up to an additional $25 million of ordinary shares
exchangeable for ADSs from time to time during a 30-month period at the Company’s request. In
consideration for this, the Company paid Aspire Capital a commission satisfied through a non-cash
transaction wholly by the issue of a further 2,862,595 of the Company’s ordinary shares (equivalent to
572,519 ADSs) at a price of £0.08.
On February 20, 2020, the Company issued and allotted 12,252,715 ordinary shares at a price of
£0.19 per share. Gross cash received was £2.3 million;
On June 4, 2020, the Company issued and allotted 89,144,630 ordinary shares at a price of £0.174 per
share to investors. Gross cash received was £15.5 million. The ordinary shares were in substance issued
at a discount to the gross cash received. The fair value of the consideration of the ordinary shares was
determined to be £13.4 million and therefore the ordinary shares were in substance issued at a discount
of £2.1 million, which was recorded as a reduction to other reserves (other reserves represent amounts
that relate to changes to the Company’s paid up equity and which are not capital reserves) in the
consolidated statement of changes in equity. The incremental directly attributable transaction costs in
relation to the issue of the ordinary shares were included within share premium;
On June 30, 2020, the Company issued and allotted 125,061,475 ordinary shares at a price of
£0.174 per share to investors on conversion of the Loan Notes. The legal proceeds were £21.8 million;
On December 23, 2020, 690,205 Warrants (equivalent to 138,041 ADSs) were exercised. This transaction
was completed by way of a cashless exercise resulting in 47,835 ADSs being issued at the aggregate
nominal value of the ordinary shares underlying the ADSs issued, in place of the exercise price of
£0.348 per ordinary share.
On February 12, 2021, the Company issued and allotted 198,375,000 ordinary shares of the Company
with a nominal value of £0.003 at a price of £0.395 per share, equivalent to 39,675,000 ADS at a price
of $2.726 per ADS, after underwriting discounts and commissions, resulting in proceeds of
£78.4 million. Transaction costs incurred for the issuance of share capital was £0.2 million.
During the year ended December 31, 2021, 14,954,491 warrants (equivalent to 2,990,898 ADSs) were
exercised by way of a cashless exercise resulting in 4,621,147 ordinary shares (924,229 ADSs) being
issued at the aggregate nominal value of the ordinary shares underlying the ADSs issued, in place of
the exercise price of £0.348 per ordinary share. A further 460,135 warrants (equivalent to 92,027 ADSs)
were exercised on a cash basis at the exercise price of £0.348, which resulted in aggregate proceeds
of £0.2 million.
On May 4, 2021, the Company issued and allotted 2,100,840 ordinary shares of £0.003 in nominal value
in the capital of the Company at a price of £0.517 per share to Cancer Focus Fund, as part of a non-
cash, equity-settled transaction where the Company entered into partnership with Cancer Focus Fund
for a Phase 1b/2 study of etigilimab in Clear Cell Ovarian Cancer to be conducted at The University of
Texas MD Anderson Cancer Center. The study will be financed by Cancer Focus Fund, in exchange for
upfront consideration of $1.5 million (£1.09 million) of the Company’s ordinary shares and additional
payments based on the achievement of certain milestones. The Company initially recognized a
prepayment of £1.09 million with reference to fair value of the ordinary shares granted, of which
£0.2 million was subsequently recorded in the consolidated statement of comprehensive income/(loss)
during the year ended December 31, 2021.
During the year ended December 31, 2021, the Company issued and allotted 40,397,976 ordinary shares
of £0.003 in nominal value in the capital of the Company at an exercise price of £0.174 per share on
non-cash conversion of Loan Notes.
•
•
•
•
•
•
•
•
•
•
74
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other capital reserves
Equity
component
of
Share- convertible Other
Shares to based loan warrants Merger Other
be issued payments notes issued reserve reserve
£’000s £’000s £’000s £’000s £’000s £’000s
Total
£’000s
(310)
40,818
(1,590)
At January 1, 2019 1,590 16,649 310 44 – –
18,593
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
Acquisition of Mereo
BioPharma 5, Inc. – – – – 40,818 –
Shares issued during
the year (1,590) – – – – –
Convertible loan
conversion – – (310) – – –
Share based payments
expense during the
1,636
year – 1,636 – – – –
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
At December 31, 2019 – 18,285 – 44 40,818 –
59,147
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
Share based payments
expense during the
year – 1,558 – – – –
Novartis convertible
loan note instrument
and warrants – – 1,084 – – –
Conversion of Loan
Notes – – – – – 33,104
Reclassification of
the embedded
derivative – – 33,481 – – –
33,481
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
At December 31, 2020 – 19,843 34,565 44 40,818 33,104
128,374
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
Share based payments
expense during the
3,302
year – 3,302 – – – –
(119)
Share options exercised – (119) – – – –
(1,722)
Conversion of Loan Notes – – (1,722) – – –
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
At December 31, 2021 – 23,026 32,843 44 40,818 33,104
129,835
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––
33,104
1,084
1,558
Shares 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. There were no movements in this reserve in 2020 and 2021 and the balance as at
December 31, 2019, 2020 and 2021 was £nil.
Share-based payments
The Company has various share option schemes under which options to subscribe for the Company’s shares
have been granted to certain executives, non-executive directors (“NEDs”) and employees.
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The share-based payment reserve is used to recognize (i) the value of equity settled share-based payments
provided to employees, including key management personnel, as part of their remuneration and (ii) deferred
equity consideration. Refer to Note 26 for further details.
Equity component of convertible loan instrument
The convertible loan notes issued to Novartis are a compound instrument consisting of a liability and an
equity component. The value of the equity component (cost of the conversion option) as at December 31,
2021 is £1.08 million (December 31, 2020: £1.08 million).
On June 30, 2020, the Loan Notes in an aggregate principal amount of £21.8 million (together with accrued
interest) were automatically converted into 125,061,475 ordinary shares. This resulted in £33.5 million
recognized in other reserves in equity as a difference between the share capital and share premium
recognized on conversion and the carrying value of the embedded derivative financial liability extinguished.
See Note 19.
Other warrants issued
The funding arrangements with The Alpha-1 Project are a compound instrument consisting of a liability and
an equity component. The value of the equity component (consideration received for the warrants) as at
December 31, 2021, 2020 and 2019 is less than £ 0.1 million.
Merger reserve
The consideration paid to acquire Mereo BioPharma 5, Inc. was 24,783,320 ordinary shares with an
acquisition date fair value of £40.9 million, based on the Company’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’.
Other reserves
On June 30, 2020, the Company issued and allotted 125,061,475 ordinary shares of £0.003 in nominal value
in the capital of the Company at a price of £0.174 per share to investors following the partial conversion of
the Loan Notes. The legal proceeds were £21.8 million. This resulted in £33.1 million recognized in other
reserves as a difference between the carrying value of the financial liability extinguished and the legal
proceeds.
Accumulated loss
Year ended December 31,
Other reserves
Accumulated losses
2021
£’000s
2020
£’000s
2019
£’000s
7,401
(296,968)
5,001
(309,693)
7,000
(146,065)
Other reserves represent a capital reduction undertaken in 2016 which created a reserve of £7.0 million. On
June 3, 2020, the Company issued and allotted 89,144,630 ordinary shares to investors. The difference
between the gross proceeds, £15.5 million, and the fair value of the consideration of the ordinary shares,
£13.4 million, of £2.1 million, was recognized as a reduction to other reserves. During the year ended
December 31, 2021, 15,414,626 private placement warrants were exercised, resulting in a £2.4 million
reduction in the warrant liability which was recognized as an addition to “Other reserves.”
76
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Total
£’000s
23. Changes in liabilities arising from financing activities
Loan
Novartis Deferred notes –
Contingent Lease Bank Loan Warrant cash con- private
consideration liability loan Note liability sideration placement Other
£’000s £’000s £’000s £’000s £’000s £’000s £’000s £’000s
Carrying value at
January 1, 2020 354 11,904 20,512 – 131 1,654 – 44
34,599
Settled during the year (354) – (23,412) – (127) – – – (23,893)
37,020
Financing cash flows – (2,086) – 2,758 – – 36,330 18
4,080
Issuance of warrants – – – – 4,080 – – –
6,226
Interest expense – 1,085 2,900 438 – – 1,803 –
Lease modification – (9,547) – – – – – –
(9,547)
Changes in fair values – – – – 46,691 (129) 63,158 – 109,720
Changes in foreign
438
exchange – 438 – – – – – –
Reclassified to equity – – – – – – (88,345) – (88,345)
–––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
––––––
Carrying value at
December 31, 2020 – 1,794 – 3,196 50,775 1,525 12,946 62
–––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
Financing cash flows – (692) – – – – – –
Non-cash changes
(7,707)
Settled during the year – – – – (2,400) – (5,307) –
4,003
Interest expense – 230 – 575 – 206 2,974 18
910
Lease addition – 910 – – – – – –
Lease modification – 163 – – – – – –
163
Changes in fair values – – – – (40,039) 2,373 – – (37,666)
Changes in foreign
exchange – (29) – – – 19 – –
–––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
Carrying value at
December 31, 2021 – 2,376 – 3,771 8,336 4,123 10,613 80
–––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
–––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
70,298
––––––
(692)
29,299
––––––
––––––
(10)
––––––
24. Financial and capital risk management and fair value measurement
Capital risk management
The Company’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 Company’s R&D activities and operations. The
Company’s principal methods of adjusting the capital available are through issuing new shares, licensing
and/or collaboration agreements or arranging suitable debt financing. The Company’s share capital and
share premium are disclosed in Note 22. The Company’s convertible loans are disclosed in Note 21. The
Company monitors the availability of capital with regards to its committed and forecasted future expenditure
on an ongoing basis.
The Company has an Employee Benefit Trust which holds ADSs to satisfy exercises of options under the
Company’s share option schemes (see Note 26).
Financial risk management objectives and policies
The Company seeks to maintain a balance between equity capital and convertible debt to provide sufficient
cash resources to execute the business plan. In addition, the Company maintains a balance between cash
held on deposit and short-term investments in pound sterling and other currencies to reduce its exposure
to foreign exchange fluctuations in respect of its planned expenditure.
Company’s principal financial instruments comprise warrants, convertible loan notes and trade payables
which arise directly from its operations. The Company has various financial assets, including receivables
and cash and short-term deposits.
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Interest rate risk
The Company’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 the cost of is operating activities and future research and development activities.
The Company’s interest payable on convertible loan notes is fixed. Consequently, there is no material
exposure to interest rate risk in respect of interest payable.
Credit risk
The Company is dependent on a number of third parties for the delivery of its programs and, where required,
pays upfront deposits and fees in advance of the delivery of services. The Company considers all of its
material counterparties to be creditworthy and the credit risk for each of its major counterparties to be low,
but continues to assess credit risk as part of its management of these third-party relationships. The
Company’s maximum exposure to credit risk for the components of the balance sheet at December 31, 2021
are the carrying amounts.
Liquidity risk
The Company’s policy is to maintain adequate cash reserves at highly rated banks and financial institutions
and also seeks to invest in short-term deposits to achieve a competitive rate of return. The Company’s liquid
resources are invested with regard to the timing of payments to be made in the ordinary course of business,
while monitoring its funding requirements through preparation of short-term, mid-term and long-term
forecasts.
The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual
undiscounted payments at December 31, 2021:
Up to 1 year
£’000s
1–3 years
£’000s
3–5 years
£’000s
Over 5 years
£’000s
Leases
Trade and other payables
Accruals
781
2,499
3,826
1,222
–
–
835
–
–
–
–
–
The Company does not face a significant liquidity risk with regards to its lease liabilities.
Total
£’000s
2,838
2,499
3,826
The Company 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 Company entered into with various entities pursuant to which the Company 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 and no such amounts are included herein.
Foreign currency and market risk
Foreign currency risk arises from R&D activities, commercial transactions and recognized assets and
liabilities in foreign currencies, with the principal currency exposure being fluctuations in pound sterling, U.S.
dollars and Euros.
The functional currency of the Company and all subsidiaries is pound sterling, except for Mereo BioPharma
5, Inc. whose functional currency is U.S. dollars. The Company 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 income/(loss).
Funding secured in 2021 and 2020 was principally in U.S dollars and, although the Company currently has
no revenue from product sales, proceeds received from upfront milestones under its licensing and
collaboration agreements are denominated in U.S. dollars, while the majority of operating costs are
denominated in pound sterling, U.S. dollars and Euros.
78
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company seeks to minimize this exposure by passively maintaining foreign currency cash balances at
levels appropriate to meet foreseeable foreign currency expenditures. The Company does not hedge potential
future cash flows or income.
The table below shows analysis of the pound sterling equivalent of period-end cash and short-term deposits
balances by currency:
December 31,
Pound sterling
U.S. dollars
Swiss francs
Euro
Total
2021
£’000s
2020
£’000s
92,104
2,018
9
165
–––––––––
94,296
–––––––––
–––––––––
17,809
5,586
9
65
–––––––––
23,469
–––––––––
–––––––––
The table below shows those transactional exposures that give rise to net currency gains and losses
recognized in the consolidated statement of comprehensive income/(loss). Such exposures comprise the
net monetary assets and monetary liabilities of the Company that are not denominated in the functional
currency of the relevant subsidiary. As at December 31, these exposures were as follows:
December 31,
Net foreign currency assets/(liabilities):
U.S. dollars
Swiss francs
Euro
Total
2021
£’000s
2020
£’000s
920
9
(142)
–––––––––
787
–––––––––
–––––––––
4,088
9
(513)
–––––––––
3,584
–––––––––
–––––––––
The most significant currencies in which the Company transacts, other than pound sterling, are the U.S.
dollar and the Euro. The Company also transacts in other currencies as necessary.
The following table illustrates the sensitivity to a 10% weakening or strengthening in the period-end rate in
the U.S. dollar and the Euro against pound sterling:
December 31, 2021
Profit before tax
Equity
December 31, 2020
Profit before tax
Equity
US dollar
£’000s
Euro
£’000s
(84)
(84)
–––––––––
13
13
–––––––––
US dollar
£’000s
Euro
£’000s
(372)
(372)
–––––––––
47
47
–––––––––
79
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments by category
Financial assets
Cash and short-term deposits
Other receivables
Total financial assets
Financial liabilities
Provisions
Convertible loan notes
Warrant liability
Trade and other payables
Accruals
Lease liability
Total financial liabilities
Fair value through
profit or loss
December 31,
2021
£’000s
2020
£’000s
Amortized cost
December 31,
2021
£’000s
2020
£’000s
–
–
–––––––––
–
–––––––––
–––––––––
4,123
–
8,336
–
–
–
–––––––––
12,459
–––––––––
–––––––––
–
–
–––––––––
–
–––––––––
–––––––––
1,634
–
50,775
–
–
–
–––––––––
52,409
–––––––––
–––––––––
94,296
1,032
–––––––––
95,328
–––––––––
–––––––––
–
14,384
–
2,309
3,826
2,376
–––––––––
22,895
–––––––––
–––––––––
23,469
646
–––––––––
24,919
–––––––––
–––––––––
–
16,142
–
3,187
4,178
1,794
–––––––––
25,301
–––––––––
–––––––––
The carrying values of financial assets and financial liabilities recorded at amortized cost in the consolidated
financial statements are approximately equal to their fair values.
Fair value hierarchy
Fair value measurement using
Liabilities measured
at fair value
Date of valuation
Provision for deferred
consideration
(Note 18)
Warrant liability
(Note 20)
December 31, 2021
December 31, 2021
Total
£’000s
4,123
8,336
Quoted prices
in active
markets
(Level 1)
£’000s
Significant
Significant
observable unobservable
inputs
(Level 3)
£’000s
inputs
(Level 2)
£’000s
–
–
–
341
4,123
7,995
Fair value measurement using
Liabilities measured
at fair value
Date of valuation
Total
£’000s
Quoted prices
in active
markets
(Level 1)
£’000s
Significant
Significant
observable unobservable
inputs
(Level 3)
£’000s
inputs
(Level 2)
£’000s
Provision for deferred
consideration
(Note 18)
Warrant liability
(Note 20)
December 31, 2020
1,525
December 31, 2020
50,775
–
–
–
845
1,525
49,930
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2021 and 2020.
80
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in Level 3 items for the periods ended December 31, 2021 and
December 31, 2020:
January 1, 2020
Issued during the year
Settled during the year
Unwinding of the time value of money (recognized
as a finance cost)
Change in estimate relating to probabilities (revision
to intangible asset, see Note 13)
Change in fair value
December 31, 2020
Settled during the year
Unwinding of the time value of money (recognized
as a finance cost)
Change in estimate relating to probabilities (revision
to intangible asset, see Note 13)
Change in fair value
December 31, 2021
Provision for
Provision for
deferred cash
contingent
consideration consideration
£’000s
£’000s
1,654
–
–
157
354
–
(354)
–
(286)
–
–––––––––
1,525
–––––––––
–––––––––
–
–
–
–––––––––
–
–––––––––
–––––––––
–
Warrant
liability
£’000s
–
4,080
(127)
–
–
45,977
–––––––––
49,930
–––––––––
–––––––––
(2,400)
225
–
–
2,373
–
–––––––––
4,123
–––––––––
–––––––––
–
–
–––––––––
–
–––––––––
–––––––––
–
(39,535)
–––––––––
7,995
–––––––––
–––––––––
The following methods and assumptions were used to estimate the fair values:
•
•
•
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, 2021, the Company estimates the fair value of the contingent consideration liability to
be £nil. An amount of £0.4 million was paid in 2020 relating to the Navi milestone received. 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 Mereo
BioPharma 5, Inc. 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.
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 and rates of
interest at each reporting date.
81
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MEREO BIOPHARMA GROUP PLC
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, 2021 and 2020 are
as follows:
Significant Input range
Valuation unobservable (weighted
technique inputs average) Sensitivity of the input to fair value
Provision for Dis-
deferred cash counted
consideration cash flow
WACC 2021: 12% 1% increase/decrease would result in a
decrease/increase in fair value by £31,000
WACC 2020: 12% 1% increase/decrease would result in a
decrease/increase in fair value by £25,000
Probability of 2021:40.6%– 10% increase/decrease would result in an
success 81.2% increase/decrease in fair value by
Probability of 2020: 13.8%– 10% increase/decrease would result in an
success 95% increase/decrease in fair value by
£0.4 million
£0.5 million
Contingent Dis-
consideration counted
liability cash flow clinical liability on a gross, undiscounted basis
Ongoing Total potential payments future payments
uncertainty in the relating to the contingent consideration
development of are approximately $80 million
the Navi product
Regulatory Sensitivity of the input to fair value is
approval and primarily driven by uncertainty in the
commercial- clinical development of the Navi product.
ization risks Future potential payments under the CVR
arrangement are contingent on i) future
development milestones and ii) future
sales of the Navi product, following
regulatory approval and commercialization.
In January 2020, the Company entered into
the license agreement as detailed in Note
13. Although pursuant to the license
agreement the Company is entitled to
additional payments of up to $302 million,
there continues to be significant
uncertainty in respect of any milestone
and royalty payments under the license
agreement.
Warrant Black-
liability Scholes
related to the model
private
placement
Expected 2021:75.1% Volatility was estimated by reference to
volatility the 1.4 years historical volatility of the
historical share price of the Company,
matching the maturity of the instrument. If
the volatility is decreased to 67.4% based
on 1-year historical volatility, the carrying
value of the warrants as of December 31,
2021 would decrease to £6.7 million.
Expected 2020: 85.1% Volatility was estimated by reference to
volatility the six-month historical volatility of the
If the volatility is increased to 93.8% based
historical share price of the Company.
on three-month historical volatility, the
carrying value of the warrants as of
December 31, 2020 would have increased
to £52.9 million.
82
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25. Commitments and contingencies
Each of Mereo BioPharma 1 Limited, Mereo BioPharma 2 Limited and Mereo BioPharma 3 Limited (together,
the “Subsidiaries”) issued to Novartis loan notes (which were assigned by Novartis to the Company in
exchange for ordinary shares pursuant to the Subscription Agreement) and each of the Subsidiaries 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 Subsidiary under the respective Purchase Agreements.
Each Subsidiary further agreed that in the event it transfers, licenses, assigns or leases all or substantially
all of its assets, it will pay Novartis a percentage of the proceeds of such transaction. The Company will
retain the majority of the proceeds from such a transaction. Such percentage is the same for each Subsidiary
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 Company’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 alvelestat, 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 Company 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 Company 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 alvelestat. In addition, the Company has agreed to make payments to AstraZeneca based on
specified commercial milestones of the product. The Company 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 Company 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. The Company 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 Company for such product in such country will become fully paid and irrevocable. Prior to exercise of
the Option, if at all, the Company 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.
The Company enters into contracts in the normal course of business with contract research organizations
(“CROs”), contract manufacturing organizations (“CMOs”) and other third parties to assist in the performance
of research and development activities and other services and products for operating purposes. The
contracts with CROs generally provide for termination on notice, and therefore, are cancellable contracts
and not included herein. The Company has manufacturing commitments with CMOs of £1.4 million as of
December 31, 2021.
83
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. Share-based payments
The charge for share-based payments 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
Total
2021
£’000s
2020
£’000s
2019
£’000s
2,860
499
–
68
(125)
–––––––––
3,302
–––––––––
–––––––––
922
167
3
376
90
–––––––––
1,558
–––––––––
–––––––––
635
160
63
685
93
–––––––––
1,636
–––––––––
–––––––––
2019 Equity Incentive Plan (“EIP”) and 2019 Non-Executive Director Equity Incentive Plan (“NED EIP”)
The 2019 EIP and 2019 NED EIP were adopted on April 4, 2019, and subsequently amended on February 3,
2020 and January 15, 2021. The 2019 EIP provides for the grant of market value options over ADSs (each
ADS is represented by 5 ordinary shares) to executive directors and employees. The 2019 NED EIP provides
for the grant of market value options over ADSs to non-executive directors.
During the years ended December 31, 2021, 2020 and 2019, market value options were granted to executive
directors and employees under the 2019 EIP. 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 installments over the three-year period following
the first anniversary. No performance conditions apply to such market value options.
During the years ended December 31, 2021, 2020 and 2019, market value options were granted to non-
executive directors (“NEDs”) under the 2019 NED EIP. Subject to the NEDs holding their current office (or
being otherwise employed) through each applicable vesting date, such awards shall vest in equal monthly
installments 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 were 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.
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, options for the 2019 EIP and 2019 NED EIP during the year-ended December 31, 2021:
2019 EIP
2019 NED EIP
Options over
ADS Number
WAEP
$
Options over
ADS Number
WAEP
$
1,567,873
2,696,960
(253,277)
(28,521)
(39,333)
–––––––––
3,943,702
–––––––––
–––––––––
727,698
2.94
2.83
2.66
5.37
2.11
–––––––––
2.88
–––––––––
–––––––––
3.16
149,416
296,000
(23,625)
–
–
–––––––––
421,791
–––––––––
–––––––––
386,623
3.06
2.81
2.72
–
–
–––––––––
2.90
–––––––––
–––––––––
2.91
Outstanding at January 1, 2021
Granted during the year
Cancelled during the year
Forfeited during the year
Exercised during the year
Outstanding at December 31, 2021
Exercisable at December 31, 2021
84
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, options for the 2019 EIP and 2019 NED EIP during the year-ended December 31, 2020:
Outstanding at January 1, 2020
Granted during the year
Cancelled during the year
Forfeited during the year
Exercised during the year
Outstanding at December 31, 2020
Exercisable at December 31, 2020
2019 EIP
2019 NED EIP
Options over
ADS Number
WAEP
$
Options over
ADS Number
WAEP
$
798,050
1,167,836
(406)
(397,607)
–
–––––––––
1,567,873
–––––––––
–––––––––
259,829
4.29
2.00
5.40
2.87
–
–––––––––
2.94
–––––––––
–––––––––
4.42
77,000
77,000
–
(4,584)
–
–––––––––
149,416
–––––––––
–––––––––
138,412
4.20
1.84
–
1.84
–
–––––––––
3.06
–––––––––
–––––––––
3.15
The weighted average remaining contractual life for the share options outstanding as at December 31, 2021
for the 2019 EIP was 8.7 years (2020: 8.9 years) and for the 2019 NED EIP was 8.6 years (2020: 8.9 years).
The weighted average fair value of options granted during the year was $2.50 per ADS (2020: $2.23 per ADS).
Options outstanding at the end of the year had an exercise price of between $1.76 and $5.40.
The 2015 Plan
Under the Mereo BioPharma Group Limited Share Option Plan (the “2015 Plan”), the Company, 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 share
options were granted during the year under the 2015 Plan and no further share option grants are envisaged.
Outstanding at January 1, 2021
Forfeited during the year
Outstanding at December 31, 2021
Exercisable at December 31, 2021
2021
WAEP
£
1.32
1.29
–––––––––
1.31
–––––––––
–––––––––
1.31
Number
8,923,600
(625,906)
–––––––––
8,297,694
–––––––––
–––––––––
8,297,694
Number
8,923,600
–
–––––––––
8,923,600
–––––––––
–––––––––
8,923,600
2020
WAEP
£
1.32
–
–––––––––
1.32
–––––––––
–––––––––
1.32
The weighted average remaining contractual life for the share options outstanding as at December 31, 2021
was 3.6 years (2020: 4.6 years). Options outstanding at the end of the year had an exercise price of between
£1.28 and £2.19.
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 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, the 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.
85
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, options for the Option Plan during the year:
Outstanding at January 1, 2021
Forfeited during the year
Outstanding at December 31, 2021
Exercisable at December 31, 2021
2021
WAEP
£
3.14
3.11
–––––––––
3.04
–––––––––
–––––––––
3.04
Number
1,411,395
(87,430)
–––––––––
1,323,965
–––––––––
–––––––––
1,323,965
Number
1,524,065
(112,670)
–––––––––
1,411,395
–––––––––
–––––––––
1,210,410
2020
WAEP
£
3.07
3.03
–––––––––
3.14
–––––––––
–––––––––
3.01
The weighted average remaining contractual life for the share options outstanding as at December 31, 2021
was 5.6 years (2020: 6.6 years). Options outstanding at the end of the year had an exercise price of between
£2.73 and £3.22.
Long Term Incentive Plan
Under the Company’s Long Term Incentive Plan (LTIP), initiated in 2016, the Company, 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-market based performance measures
(strategic targets).
The fair value calculations do not include any allowance for dividends as the Company has no available
profits for distribution. The contractual term of the LTIP options is five years.
Outstanding at January 1
Lapsed during the year
Outstanding at December 31
Exercisable at December 31
2021
Number
2020
Number
482,748
(482,748)
–––––––––
–
–––––––––
–––––––––
–
910,072
(427,324)
–––––––––
482,748
–––––––––
–––––––––
–
All LTIP options lapsed during the year ended December 31, 2021. The weighted average remaining
contractual life for the LTIP options outstanding as at December 31, 2020 was 0.5 years.
No LTIP options were granted during the years ended December 31, 2020 and 2021 and no further grants
are envisaged.
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 was 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.
86
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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).
Since the awards are issued at nil cost, they will be satisfied by the issue of ADSs from the Employee Benefit
Trust.
62,183 options lapsed during the year ended December 31, 2021. The outstanding number of options as at
December 31, 2021 is 100,817 all of which were exercisable. The outstanding number of options as at
December 31, 2020 was 163,000, of which 62,170 were exercisable.
The weighted average remaining contractual life for the DBSP options outstanding as at December 31, 2021
was 0.1 years (2020: 0.6 years).
For the 2018 and 2019 financial years, under the Deferred Bonus Plan (“2019 DBP”), 100% of the annual
bonus was paid in cash, of which 30% of amounts granted to the senior management team (after deduction
of income tax and the relevant employee’s national insurance contributions) was 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.
Deferred equity consideration
In October 2017, the Company’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.
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 Company has accounted for, but not yet issued, 429,448
ordinary shares with a grant date fair value of £3.10, representing a value of £1.3 million.
Weighted average inputs
The following table includes the weighted average inputs to the models used for the fair value of share
options granted during the year ended December 31, 2021:
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ADS’s ($)
Model used
2019 EIP 2019 NED EIP
98
1.09
10
2.81
Black-Scholes Black-Scholes
97
1.15
10
2.83
During the year ended December 31, 2021, no grants were issued under any other scheme.
The following table includes the weighted average inputs to the models used for the fair value of share
options granted during the year ended December 31, 2020:
Expected volatility (%)
Risk-free interest rate (%)
Expected life of share options (years)
Market price of ADS’s ($)
Model used
2019 EIP 2019 NED EIP
68
0.64
10
1.84
Black-Scholes Black-Scholes
67
0.59
10
1.99
During the year ended December 31, 2020, no grants were issued under any other scheme.
87
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MEREO BIOPHARMA GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27. Related party disclosures
Compensation of key management personnel of the Company
The remuneration of key management personnel of the Company is set out below in aggregate:
Year ended December 31,
Short-term benefits
Post-employment benefits
Share-based payment charge
Total
2021
£’000s
2020
£’000s
2019
£’000s
4,018
173
2,559
–––––––––
6,750
–––––––––
–––––––––
4,479
144
875
–––––––––
5,498
–––––––––
–––––––––
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. In 2021, key management personnel of the Company consisted
of the executive director (the Chief Executive Officer), non-executive directors, and other members of senior
executive management (the Chief Financial Officer, the General Counsel, the Chief Portfolio Management
and Pipeline Strategy, Chief Business Officer, Chief Scientific Officer and the Chief Patient Access and
Commercial Planning).
Employee Benefit Trust
In 2016 the Company set up an Employee Benefit Trust (“EBT”). The EBT holds ADS’s to satisfy the exercise
of options under the Company’s share-based incentive schemes (Note 26).
No funding was loaned to the EBT by the Company during the year ended December 31, 2021 (2020: nil).
During the year ended December 31, 2021, no ordinary shares were purchased by the EBT (2020: 7). A total
of 31,205 ADSs (2020: nil) held by the EBT were used in the year-ended December 31, 2021 to satisfy the
exercise of options under the Company’s share-based incentive schemes. As of December 31, 2021, the EBT
holds 216,251 ADSs (2020: 247,456) along with £17,866 in cash (2020: £21,762).
28. Events after the reporting period
In February 2022, the Company received a milestone payment of $2.0 million under the Navi License
Agreement with OncXerna which resulted in a payment to CVR holders of a total of approximately $0.9 million,
after deductions of costs, charges and expenditures.
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: COMPANY BALANCE SHEET
As at December 31,
Assets
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Current assets
Prepayments
Other receivables
Cash and short-term deposits
Current liabilities
Trade and other payables
Current tax liabilities
Intercompany payable
Accruals
Lease liability
Net current assets/(liabilities)
Total assets less current liabilities
Non-current liabilities
Provisions
Convertible loan notes
Warrant liability
Lease liability
Other liabilities
Net assets
Equity shareholders’ funds
Share capital
Share premium
Other capital reserves
Other reserves
Employee Benefit Trust shares
Accumulated losses
Total equity shareholders’ funds
Notes
2021
£’000s
2020
£’000s
6
4
5
8
7
9
10
10
10
10
12
2,397
191,710
––––––––––
194,107
––––––––––
1,249
1,019
93,815
––––––––––
96,083
––––––––––
2,074
484
34,694
2,420
362
––––––––––
40,034
––––––––––
56,048
––––––––––
250,156
––––––––––
–
14,384
8,336
1,753
80
––––––––––
24,553
––––––––––
225,603
––––––––––
1,755
247,460
129,835
7,401
(1,140)
(159,708)
––––––––––
225,603
––––––––––
––––––––––
1,112
184,469
––––––––––
185,581
––––––––––
1,490
720
22,623
––––––––––
24,833
––––––––––
2,726
–
23,377
3,624
240
––––––––––
29,968
––––––––––
(5,134)
––––––––––
180,447
––––––––––
109
16,142
50,775
902
62
––––––––––
67,990
––––––––––
112,457
––––––––––
1,017
161,785
128,374
5,001
(1,305)
(182,415)
––––––––––
112,457
––––––––––
––––––––––
The accompanying notes form an integral part of these 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. The Company's profit for the financial year ended
December 31, 2021 was £22.7 million (2020: loss of £128.9 million).
Approved by the Board on March 25, 2022 and signed on its behalf by:
Dr. Denise Scots-Knight
Director
March 31, 2022
Company number: 09481161 (England and Wales)
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MEREO BIOPHARMA GROUP PLC
FINANCIAL STATEMENTS: COMPANY STATEMENT OF CHANGES IN EQUITY
Other Employee Accum-
Issued Share capital Benefit Other ulated Total
capital premium reserves Trust reserves losses equity
£’000s £’000s £’000s £’000s £’000s £’000s £’000s
At January 1, 2020 294 121,684 59,147 (1,305) 7,000 (53,482) 133,338
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Loss for the year – – – – – (128,933) (128,933)
Share-based payments – – 1,558 – – – 1,558
Issuance of share capital, net 347 18,715 – – (2,125) – 16,937
Issuance of share capital on
conversion of loan notes 375 21,386 33,104 – – – 54,865
Issuance of share capital on
conversion of loan notes – – 1,084 – – – 1,084
Reclassification of loan notes
embedded derivative – – 33,481 – – – 33,481
Issuance of share capital on
exercise of warrants 1 – – – 126 – 127
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2020 1,017 161,785 128,374 (1,305) 5,001 (182,415) 112,457
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
Profit for the year – – – – – 22,707 22,707
Share-based payments – – 3,302 – – – 3,302
Issuance of share capital, net 601 78,609 – – – – 79,210
Exercise of share options – – (119) 165 – – 46
Conversion of loan notes
and warrants 137 7,066 (1,722) – 2,400 – 7,881
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
At December 31, 2021 1,755 247,460 129,835 (1,140) 7,401 (159,708) 225,603
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––
90
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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, Mereo BioPharma Group plc (the “Company”) applies the recognition,
measurement and disclosure requirements of International Financial Reporting Standards 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
New standards, interpretations and amendments effective from January 1, 2021.
There were a number of narrow scope amendments to existing standards which were effective from
January 1, 2021. None of these 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) Investment in subsidiaries
Investments in subsidiary undertakings are stated at cost less any provision for impairment. Amounts
capitalized as investments in subsidiary undertaking are reviewed for impairment at each period end in
accordance with IAS 36 (Impairment of Assets).
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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, 2021. 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’s profit for the year was £22.7 million (2020: loss of £128.9 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 executive Directors) in the year was
34 (2020: 30). Their aggregate remuneration comprised wages and salaries of £6.4 million (2020:
£7.1 million), social security costs of £0.7 million (2020: £1.0 million) and pension contributions of
£0.2 million (2020: £0.2 million). Further information about share-based payment transactions is provided
in Note 11.
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FINANCIAL STATEMENTS: NOTES TO THE COMPANY FINANCIAL STATEMENTS
4. Company information
4.1 Investments in subsidiaries
Cost
At January 1, 2020
Additions in the year
Share-based payments to Group employees
At December 31, 2020
Additions in the year
Share-based payments to Group employees
At December 31, 2021
Provision for impairment
At January 1, 2020
Charge during the year
At December 31, 2020
At December 31, 2021
Net book value
At December 31, 2021
At December 31, 2020
£’000s
192,060
12,790
454
–––––––––
205,304
5,659
1,582
–––––––––
212,545
–––––––––
19,246
–––––––––
1,589
–––––––––
20,835
–––––––––
20,835
–––––––––
191,710
–––––––––
184,469
–––––––––
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.
No impairment loss was recorded during the year ended December 31, 2021. In the year-ended December
31, 2020, an impairment loss of £1.6 million was recorded. 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 the
value in use and the discount rate used in the calculation of value in use was 12% (2020: 12%). Any change
in assumptions could result in further impairment loss in the future.
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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:
Name
Principal activities
Mereo BioPharma 1 Limited
Mereo BioPharma 2 Limited
Mereo BioPharma 3 Limited
Mereo BioPharma 4 Limited
Mereo BioPharma Ireland Limited
Mereo BioPharma 5, Inc
Navi Subsidiary, Inc.
Mereo US Holdings Inc.
Employee Benefit Trust
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Pharmaceutical R&D
Holding company
Employee share scheme
*Indirect holdings
% equity
interest
Country of December 31, December 31,
2020
% equity
interest
2021
incorporation
U.K.
U.K.
U.K.
U.K.
Ireland
U.S.
U.S.
U.S.
Jersey
100
100
100
100
100
100*
100*
100
–
100
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 Rocktwist House, Block 1, Western Business Park,
Shannon, County Clare, V14 FW97, Republic of Ireland.
Mereo US Holdings Inc. was incorporated on December 3, 2018 for the sole purpose of effecting the business
combination with Mereo BioPharma 5, Inc. (formerly OncoMed Pharmaceuticals, Inc.) on April 23, 2019. The
registered office of Mereo US Holdings Inc., Mereo BioPharma 5, Inc. and its wholly owned subsidiary, Navi
Subsidiary, Inc., is 251 Little Falls Drive, City of Wilmington, County of New Castle, Delaware 19808, U.S.
A capital contribution of £7.2 million (2020: £13.2 million) by Mereo BioPharma Group plc to its subsidiaries
was recorded in the year ended December 31, 2021. £1.6 million (2020: £0.5 million) has been recorded for
the granting of employees’ share options for services rendered by the employees to the subsidiaries.
£5.7 million (2020: £12.8 million) has been recorded for the conversion of intercompany balances at
original cost.
As at December 31, 2021, a total capital contribution of £6.0 million (2020: £4.5 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, 2021, a total capital contribution of £165.6 million (2020: £160.0 million) by Mereo
BioPharma Group plc to its subsidiaries has been recorded for the conversion of intercompany balances at
original cost.
5. Amounts owed to Group undertakings
As at December 31, 2021, amounts owed by the Company to Group undertakings is £34.7 million (2020:
£23.4 million). These amounts are repayable on demand and bear an interest rate between 0% and 2.4%.
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FINANCIAL STATEMENTS: NOTES TO THE COMPANY FINANCIAL STATEMENTS
6. Property, plant and equipment
Cost
At January 1, 2021
Additions
Lease modification
Disposals
Currency translation effects
At December 31, 2021
Depreciation
At January 1, 2021
Disposals
Depreciation for the year
At December 31, 2021
Net book value
At January 1, 2021
At December 31, 2021
Right of
Right-of-
use asset
use asset
(building) (equipment)
£'000s
£'000s
1,269
923
272
–
–
–––––––––
2,464
–––––––––
(410)
–
(292)
–––––––––
(702)
–––––––––
1,169
–
30
(868)
(36)
–––––––––
295
–––––––––
(1,023)
868
(76)
–––––––––
(231)
–––––––––
859
–––––––––
1,762
–––––––––
146
–––––––––
64
–––––––––
Leasehold
IT
improvements equipment equipment
£'000s
£'000s
£'000s
Office
Total
£'000s
164
393
–
–
–
2,743
31
1,449
109
302
–
(868)
–
(36)
–
––––––––––––– ––––––––– ––––––––– –––––––––
3,590
140
––––––––––––– ––––––––– ––––––––– –––––––––
110
24
–
–
–
134
557
(85)
–
(39)
(1,627)
(28)
868
–
(433)
(8)
––––––––––––– ––––––––– ––––––––– –––––––––
(1,192)
(36)
––––––––––––– ––––––––– ––––––––– –––––––––
(81)
–
(18)
(124)
(99)
79
1,116
3
––––––––––––– ––––––––– ––––––––– –––––––––
2,398
104
––––––––––––– ––––––––– ––––––––– –––––––––
433
35
29
7. Convertible loan notes
The Group’s interest-bearing loans and borrowings all reside in the Company. Details on the convertible loan
notes of the Company are provided in Note 21 of the consolidated financial statements.
8. Provisions
At beginning of year
Arising during the year
Released
At December 31,
Current
Non-current
Year ended
December 31,
2021
£’000s
2020
£’000s
109
–
(109)
–––––––––
–
–––––––––
–
–
–––––––––
104
5
–
–––––––––
109
–––––––––
–
109
–––––––––
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.
9. Warrant liability
The Group’s warrant liability resides in the Company. Details on the warrant liability of the Company are
provided in Note 20 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 22 of the consolidated financial statements.
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11. Share-based payments
The charge for share-based payments 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,
2021
£’000s
2020
£’000s
–
35
(125)
1,310
499
–––––––––
1,719
–––––––––
2
237
77
625
163
–––––––––
1,104
–––––––––
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 27 of the consolidated financial statements.
13. Events after the reporting period
Details on events after the reporting period are provided in Note 28 of the consolidated financial statements.
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