Focus shifts back to imminent data

Update | 8 May 2019

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Mereo BioPharma has successfully completed the merger with OncoMed, and now the focus shifts firmly back to the pipeline. Initial data from the Phase II study in osteogenesis imperfecta (OI) with its leading rare disease asset, BPS-804, are due in the coming weeks, and top-line data for the full trial in Q419. The Phase II study with MPH-966 in alpha-1 anti-trypsin deficiency (AATD) is due to report top-line data around the year-end. At the same time, Mereo has strengthened the out-licensing packages of non-rare disease assets; notably the outline for a Phase III programme with BCT-197 has been agreed with the FDA, thereby raising the likelihood of BCT-197 being partnered by year-end. We value Mereo at 506p/share or $25.59/ADS.

Year-end: December 31	2017	2018	2019E	2020E
Sales (£m)	0.0	0.0	0.0	0.0
Adj. PBT (£m)	(43.3)	(35.0)	(41.9)	(29.2
Net Income (£m)	(38.8)	(32.0)	(38.6)	(28.2
Adj. EPS (p)	(51.9)	(42.2)	(41.2)	(27.3)
Cash (£m)	52.5	27.5	23.2	6.1*
EBITDA (£m)	(45.3)	(35.2)	(42.4)	(29.6)

Source: Trinity Delta Note: Adjusted numbers exclude share-based payments and exceptionals. *The cash position in FY20 assumes £25m is raised from equity, debt or partnering of assets.

Important year for data Mereo is expected to report data from its two rare-disease assets, which it aims to self-commercialise, in the coming year. The first data from the Phase II study with BPS-804 (setrusumab) in OI should be reported in the coming weeks (results of open label arm) and data from the double-blinded arms with three doses due in Q419. Mereo initiated the Phase II study with MPH-966 in AATD in Q418 and top-line is expected to report around the end of the year.
Prospects of partnering improve Mereo has four assets in its non-rare disease portfolio that management aims to partner to support the funding of its rare disease products. BCT-197 (acumapimod) is Phase III ready after Mereo agreed in principle the outline of a pivotal study programme for the treatment of acute exacerbations of COPD with the FDA in March; this should enable Mereo to partner the compound in 2019, as Phase II data suggest BCT-197 can effectively reduce severe exacerbations in COPD.
Strengthened balance sheet and expanded opportunities The merger of Mereo with OncoMed has been completed. Mereo’s cash position has increased by $51m (c. £39m), and has the possibility of raising additional funds from two clinical oncology assets; this could enable Mereo to start the pivotal Phase III paediatric study with BPS-804 in 2019. The deal also provides Mereo with a NASDAQ listing, which has already increased share liquidity, enhances access to capital, and, with the US infrastructure and expertise, raises its profile in the key US market.
rNPV valuation of 506p/share We re-introduce our estimates and valuation of Mereo following the completion of the OncoMed transaction. We value Mereo using a rNPV methodology of its four leading assets at £541m ($704m), equivalent to 506p/share or $25.59/ADS (fully diluted). As indicated, there are multiple significant catalysts due in 2019, which could lead to major re-ratings of the shares.

Update

8 May 2019


Price (UK share) (US ADS)	80p $4.73
Market Cap	£76.8m $90.8m
Enterprise Value	£39.2m $41.9m
Shares in issue (shares) (ADS)	96.0m 19.2m
12 month range	77.5-325p $4.67-$8.48
Free float	68.9%
Exchanges	AIM London NASDAQ
Sector	Healthcare
Company Code	MPH.L MREO

Corporate client	Yes

Company description

Mereo BioPharma develops and commercialises innovative therapeutics addressing rare diseases. It also has specialty pharmaceutical products that it will partner. The assets are acquired or licensed in at clinical stages from large pharmaceutical companies. The portfolio consists of six compounds that are in clinical development.

Analysts

Mick Cooper PhD
mcooper@trinitydelta.org
+44 (0) 20 3637 5042

Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043

Valuation and financials

Pending the transaction, we suspended our valuation which was £510m, or 615p per share. Following the completion of the merger, we have updated our model, and now re-introduce our valuation and estimates. We value Mereo at £541m ($704m), equivalent to 506p/share or $25.59/ADS on a fully diluted basis.

We value the company using an rNPV model of the four late-stage clinical programmes, which are then netted out against the cost of running the business and net cash, as detailed in Exhibit 1. The rNPV of each individual clinical project is assessed and the success probabilities adjusted for the inherent clinical, commercial, and execution risks each carries. These are summed and netted against the costs of running the operation and net cash. We have not included the two oncology assets, navicixizumab and etigilimab, as they are early stage clinical assets and there are with CVRs associated with the potential partnering of the assets, although they could provide a useful source of funding.

Exhibit 1: Our rNPV-based valuation of Mereo BioPharma

Source: Trinity Delta; Note: *The rNPV of BGS-649 and BCT-197 includes a deal success factor of 50% and 70% respectively. For the purpose of the valuation, the launch year is the first year of material sales.

Our financial forecasts are summarised in Exhibit 2. We estimate investment in R&D will increase by 22.6% to £27.8m in FY19, with c. 80% of the spending on BPS-804 and MPH-966. Mereo’s cash position following the completion of the merger was £53.9m ($70.1m), which should allow the company to operate to mid‑2020, but could be extended significantly by the successful partnering of non-rare disease assets.

Exhibit 2: Summary of financials

Source: Company, Trinity Delta; Notes: Our estimates exclude the costs associated with the pivotal Phase III paediatric study with BPS-804, because the timing of the trial is yet to be decided. We include in FY20 long-term debt (other financing cash flow) of £25m, which is indicative of our estimate of the company’s capital requirement; this could be achieved through an equity raise, debt of proceeds from partnering non-rare disease assets.

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