Mereo BioPharma (MREO): Risky Proposition Despite Strides In Rare Disease Treatment

Introduction

Mereo BioPharma (NASDAQ:MREO) is a biopharmaceutical firm specializing in novel treatments for rare diseases. Boasting a solid portfolio of clinical stage product candidates, it focuses on setrusumab for osteogenesis imperfecta [OI] and alvelestat for severe alpha-1-antitrypsin deficiency-associated lung disease and Bronchiolitis Obliterans Syndrome. The firm has partnered with Ultragenyx Pharmaceutical on a pivotal study for setrusumab, with potential milestone payments up to $254 million. Mereo retains EU and UK rights for setrusumab and alvelestat, which has received U.S. Orphan Drug and FDA Fast Track designations. The company also develops oncology candidates, including etigilimab and navicixizumab.

In my previous analysis of Mereo, I expressed skepticism about the effectiveness of setrusumab, a drug developed for treating OI. Despite the data from the ASTEROID trial showing significant improvements in bone mineral density, the drug did not reduce fractures or improve patient-reported outcomes when compared to placebo. I raised concerns about setrusumab’s possible failure to enhance the bone’s microarchitecture, as indicated by HR-pQCT, which might explain why it didn’t reduce fractures.

Additionally, I highlighted the possible limitations on the drug’s use, which might not exceed 12 consecutive months, a factor that could complicate treatment due to the nature of OI. I also pointed out the potential for diminishing effectiveness and a rebound effect that could undermine its long-term effectiveness.

Despite these reservations, I acknowledged the continued development of setrusumab given the severity of OI and the dearth of effective treatments. I noted that while the likelihood of success seemed slim, the urgent demand for effective treatments and the potential benefits for patients justified the continued exploration of setrusumab as a risk/reward proposition for Ultragenyx (RARE), their partner. However, for Mereo, which is significantly more reliant on setrusumab’s success, I recommended that investors exercise caution pending critical data. Subsequent, my rating for Mereo was “Sell”. Since my initial analysis in February, Mereo’s stock is up 7% and is, essentially, trading with the overall biotechnology sector (XBI).

The following article aims to update investors regarding Mereo’s most recent financials and pipeline progress.

Q1 2023 Financials

Mereo BioPharma reported an increase in its 2022 R&D expenses to $30.3 million from $28.6 million in 2021, mainly due to higher costs associated with etigilimab and alvelestat. Administrative expenses also rose by $4.4 million to $23.6 million due to additional costs associated with the Cooperation Agreement with Rubric Capital and share-based payment expenses. The company reported a net loss of $41.5 million in 2022, compared to a profit of $15.4 million in 2021, primarily due to an operating loss of $52.8 million and a gain of $9.5 million from unrealized gains on warrants. As of December 31, 2022, the company had cash and short-term deposits of $68.2 million and expects this will fund committed clinical trials and operational expenses until 2026.

Clinical Updates

In 2022, Mereo BioPharma made notable progress, achieving key milestones and outlining future goals. Their drug alvelestat, for the treatment of Alpha-1 antitrypsin deficiency (Alpha-1), received FDA Fast Track Designation, with promising results from the Phase 2 ASTRAEUS study. Alpha-1 is an inherited disease that may lead to lung and liver disease. Mereo’s data revealed statistically significant reductions in biomarkers related to the condition. The correlation between reductions in these biomarkers and actual disease-modifying activity, however, in my view, remains uncertain. Nonetheless, given that Alpha-1 is a rare disease, the FDA and EMA have provided clear guidelines for a 12-18 month placebo-controlled Phase 3 study, which, if successful, would support full marketing approval in the U.S and EU. More data from this study, and the ongoing Phase 2 ATALANTA study, is expected later in 2023.

Ultragenyx has completed patient enrollment for the Phase 2/3 Orbit study of setrusumab, a drug for OI. They expect to share data from this study in mid-2023. Additionally, a comparative study between setrusumab and bisphosphonates in younger patients is set to commence in the first half of 2023. For more information on setrusumab’s prospects in OI, I have written in detail about it within my last analysis on Mereo.

The Phase 1b/2 ACTIVATE trial for etigilimab has concluded its enrollment with a total of 76 patients. More data from this trial, focusing on a specific subtype of platinum-resistant recurrent ovarian cancer, is expected later in the year.

Lastly, OncXerna, another partner of Mereo, plans to start a Phase 3 trial for navicixizumab, intended for late-stage ovarian cancer, after necessary regulatory interactions. OncXerna is also conducting a Phase 2 study evaluating navicixizumab in patients with select advanced solid tumors.

My Analysis & Recommendation

In conclusion, Mereo BioPharma finds itself in a fascinating yet precarious position. On the one hand, it boasts an intriguing pipeline, notably setrusumab and alvelestat, and collaborations with partners like Ultragenyx and OncXerna. The firm is taking meaningful strides in the pursuit of novel treatments for rare diseases, often overlooked in the global healthcare landscape, yet having critical demand.

However, it is important to note that these strides come with significant hurdles. Setrusumab’s uncertain long-term efficacy and potential usage limitations continue to cast a shadow over Mereo’s prospects, while the financial status of the firm is marked by increased R&D and administrative expenses leading to a substantial net loss in 2022.

Although the firm’s partnership strategy and focused development of drugs for rare conditions are laudable, the firm’s financial health and future profitability remain uncertain, given the high-risk nature of drug development and the specific challenges around setrusumab. Additionally, the firm’s dependence on partners to take its promising drugs through the challenging clinical trial phase and into potential profitability could further compound its vulnerability.

Regarding alvelestat and etigilimab, the encouraging developments are somewhat overshadowed by the complexities associated with setrusumab. Nevertheless, they offer hope for future potential and underline the firm’s resilience and capability in the face of adversity.

The upcoming year, 2023, stands as a potential turning point for Mereo, given the anticipation of data from several critical studies. However, the inherent risks of biotech, combined with the ongoing concerns about setrusumab’s effectiveness and Mereo’s financial instability, lead me to retain my previous “Sell” recommendation. Despite its current market capitalization of around $100 million not suggesting overvaluation, the clinical prospects of setrusumab in treating OI don’t inspire confidence in me. Mereo may yet find long-term success, but it’s a narrative that’s still unfolding. As such, a significant degree of patience from investors is required at this juncture.

In biotech investment, diversification is crucial to balance risk and reward. With its substantial potential but significant hurdles, Mereo represents one part of the broad investment landscape and, despite current recommendations, should not be disregarded completely in the long-term strategy of a well-diversified biotech investment portfolio.

Note: Investing in microcap stocks like Mereo BioPharma carries risks due to their small market capitalization. These risks include market volatility, limited liquidity, lack of analyst coverage, higher potential for fraud and manipulation, and financial instability. Investors should conduct thorough research, evaluate the company’s financials, management team, and competitive landscape, and consider diversification to mitigate these risks. It’s important to stay updated and seek professional advice before making any investment decisions.

Risks to Thesis

When the facts change, I change my mind.

Several key risks could potentially challenge my “Sell” recommendation for Mereo BioPharma. These factors might positively impact the company’s stock value, thereby contradicting my recommendation. Here are some key risks:

1. Clinical Trials Success: The most significant risk to my sell recommendation is the success of the ongoing and upcoming clinical trials. Should setrusumab, alvelestat, etigilimab, and navicixizumab demonstrate positive results in their respective trials, leading to regulatory approval and commercial success, this could substantially increase Mereo’s value.

2. Strategic Partnerships: Mereo’s strategic partnerships, especially with Ultragenyx and OncXerna, have the potential to yield significant returns. These could come in the form of milestone payments, royalties, or both, depending on the success of the partnered products.

3. Positive Financial Developments: The company’s financial stability is underpinned by a sufficient amount of cash and short-term deposits to cover its committed clinical trials and operational expenses until 2026. Any further positive financial developments, like additional funding, partnerships, or profitable licensing agreements, could enhance its financial position.

4. Regulatory Approvals and Fast Track Designations: A significant increase in Mereo’s stock value could occur if alvelestat or any other drug in Mereo’s pipeline receives approval from the FDA and EMA. Furthermore, the Orphan Drug and FDA Fast Track designations that alvelestat has already received enhance its chances of regulatory success and potential market exclusivity.

5. Rare Disease Market Potential: The market for rare diseases is one of the most rapidly growing segments in the pharmaceutical industry, marked by high unmet needs and often, high pricing potential. If Mereo’s drugs prove successful, they could tap into a very profitable market.

6. Mitigation of Concerns about Setrusumab: If further studies show that setrusumab has a more profound impact on OI than initially perceived, or if it demonstrates effectiveness in treating younger patients, this could dramatically alter the drug’s and Mereo’s outlook.