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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-37773

 

MERUS N.V.

(Exact name of registrant as specified in its charter)

 

 

The Netherlands

Not Applicable

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

Yalelaan 62

3584 CM Utrecht

The Netherlands

Not Applicable

(Address of principal executive offices)

(Zip code)

 

+31 85 016 2500

(Registrant’s telephone number, including area code)

 

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common shares, nominal value €0.09 per share

MRUS

The Nasdaq Stock Market LLC

(Nasdaq Global Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

  

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act). 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 4, 2022, the registrant had 43,550,059 common shares, nominal value €0.09 per share, outstanding.

 

 

 

 


 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

2

 

 

Condensed Consolidated Balance Sheets
as of March 31, 2022 and December 31, 2021

2

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss
for the three months ended March 31, 2022 and 2021

3

 

 

Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2022 and 2021

4

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity
for the three months ended March 31, 2022 and 2021  

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

20

 

 

Item 4. Controls and Procedures

20

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

21

 

 

Item 1A. Risk Factors

21

 

 

Item 5. Other Information

64

 

 

Item 6. Exhibits

64

 

 

Signatures

65

 

 


 

 

Cautionary Note Regarding Forward-looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding our plans to develop and commercialize our product candidates, the timing of our ongoing or planned clinical trials, the timing of and our ability to obtain and maintain regulatory approvals, the anticipated impact of the COVID-19 pandemic on our business and operations, the clinical utility of our product candidates, our commercialization, marketing and manufacturing capabilities and strategy, our expectations surrounding our collaborations, our expectations about the willingness of healthcare professionals to use our product candidates, the sufficiency of our cash, cash equivalents and investments, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties, assumptions and other important factors, including those described under the sections in this Quarterly Report on Form 10-Q entitled “Summary Risk Factors,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common shares. The principal risks and uncertainties affecting our business include the following:

 

 

We have incurred significant net losses since our inception and we expect to continue to incur significant expenses and operating losses for the foreseeable future.

 

 

We have a limited operating history, have not completed any registrational clinical trials, and have no products approved for commercial sale, which may make it difficult for you to evaluate our current business and predict our future success and viability.

 

 

We will require substantial additional capital to finance our operations. If we are unable to raise such capital when needed, or on acceptable terms, we may be forced to delay, reduce or eliminate one or more of our research and drug development programs or future commercialization efforts.

 

 

The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and the results of our clinical trials may not satisfy the requirements of the FDA, EMA or other comparable foreign regulatory authorities.

 

 

The clinical trial and regulatory approval processes are lengthy, time consuming and inherently unpredictable, and we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

 

 

Our antibody candidates may have serious adverse, undesirable or unacceptable side effects which may delay or prevent marketing approval. If such side effects are identified during the development of our antibody candidates or following approval, if any, we may need to abandon our development of such antibody candidates, the commercial profile of any

 

 


 

 

approved label may be limited, or we may be subject to other significant negative consequences following marketing approval, if any.

 

 

We have never commercialized an antibody candidate before and may lack the necessary expertise, personnel and resources to successfully commercialize our products on our own or together with suitable collaborators.

 

 

We rely, and expect to continue to rely, on third parties, including independent clinical investigators and contract research organizations or CROs, to conduct our pre-clinical studies, clinical trials, chemistry, manufacturing and controls and potential development of a companion diagnostic. If these third parties 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 antibody candidates and our business could be substantially harmed.

 

 

Due to our limited resources and access to capital, we must, and have in the past decided to, prioritize development of certain antibody candidates over other potential candidates. These decisions may prove to have been wrong and may adversely affect our revenues.

 

 

The competition for qualified personnel is particularly intense in our industry. If we are unable to retain or hire key personnel, we may not be able to sustain or grow our business.

 

 

We operate in highly competitive and rapidly changing industries, and if our competitors develop and market technologies or products more rapidly than we do or that are more effective, safer or less expensive than the product candidates we develop, our commercial opportunities will be negatively impacted.

 

 

Our success depends on our ability to protect our intellectual property and our proprietary technologies. If we are unable to adequately protect our intellectual property and our proprietary technologies, or obtain and maintain issued patents which are sufficient to protect our product candidates and proprietary technologies, others could compete against us more directly, which would negatively impact our business.

 

 

Our existing collaborations are important to our business and future licenses may also be important to us, and if we are unable to maintain any of these collaborations, or if these arrangements are not successful, our business could be adversely affected.

 

 

The COVID-19 pandemic caused by the novel coronavirus has and may continue to adversely impact our business, including our pre-clinical studies and clinical trials, financial condition and results of operations.

 

 

 

 

 

 


 

 

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

MERUS N.V.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Amounts in thousands, except per share data)

 

 

 

March 31,

2022

 

 

December 31,

2021

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

194,575

 

 

$

241,435

 

Marketable securities

 

 

164,239

 

 

 

168,990

 

Accounts receivable

 

 

2,671

 

 

 

1,697

 

Accounts receivable (related party)

 

 

 

 

 

4,609

 

Prepaid expenses and other current assets

 

 

18,248

 

 

 

7,448

 

Total current assets

 

 

379,733

 

 

 

424,179

 

Marketable securities

 

 

25,466

 

 

 

20,297

 

Property and equipment, net

 

 

3,509

 

 

 

3,549

 

Operating lease right-of-use assets

 

 

3,334

 

 

 

3,733

 

Intangible assets, net

 

 

2,233

 

 

 

2,347

 

Deferred tax assets

 

 

80

 

 

 

417

 

Other assets

 

 

3,145

 

 

 

2,078

 

Total assets

 

$

417,500

 

 

$

456,600

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,388

 

 

$

13,237

 

Accrued expenses and other liabilities

 

 

20,948

 

 

 

22,506

 

Income taxes payable

 

 

 

 

 

 

Current portion of lease obligation

 

 

1,491

 

 

 

1,494

 

Current portion of deferred revenue

 

 

33,696

 

 

 

16,613

 

Current portion of deferred revenue (related party)

 

 

 

 

 

18,048

 

Total current liabilities

 

 

61,523

 

 

 

71,898

 

Lease obligation

 

 

1,874

 

 

 

2,257

 

Deferred revenue, net of current portion

 

 

56,630

 

 

 

10,962

 

Deferred revenue, net of current portion (related party)

 

 

 

 

 

55,282

 

Total liabilities

 

 

120,027

 

 

 

140,399

 

Commitments and contingencies - Note 6

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common shares, €0.09 par value; 67,500,000 shares authorized as at March 31, 2022 and December 31, 2021;

43,549,325 and 43,467,052 shares issued and outstanding as at

March 31, 2022 and December 31, 2021, respectively

 

$

4,489

 

 

$

4,481

 

Additional paid-in capital

 

 

794,074

 

 

 

787,869

 

Accumulated other comprehensive income

 

 

(15,269

)

 

 

(9,221

)

Accumulated deficit

 

 

(485,821

)

 

 

(466,928

)

Total stockholders’ equity

 

 

297,473

 

 

 

316,201

 

Total liabilities and stockholders’ equity

 

$

417,500

 

 

$

456,600

 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

2


 

MERUS N.V.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(Amounts in thousands, except per share data)

 

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

Collaboration revenue

 

$

11,655

 

 

$

1,599

 

Collaboration revenue (related party)

 

 

 

 

 

6,751

 

Total revenue

 

 

11,655

 

 

 

8,350

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

26,975

 

 

 

20,806

 

General and administrative

 

 

11,753

 

 

 

9,333

 

Total operating expenses

 

 

38,728

 

 

 

30,139

 

Operating loss

 

 

(27,073

)

 

 

(21,789

)

Other (loss) income, net:

 

 

 

 

 

 

 

 

Interest (expense) income, net

 

 

106

 

 

 

(82

)

Foreign exchange gains

 

 

7,730

 

 

 

12,203

 

Other (losses) gains , net

 

 

458

 

 

 

(437

)

Total other income, net

 

 

8,294

 

 

 

11,684

 

 

 

 

 

 

 

 

 

 

Net loss before income taxes

 

 

(18,779

)

 

 

(10,105

)

Income tax expense

 

 

114

 

 

 

49

 

Net loss

 

$

(18,893

)

 

$

(10,154

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

(6,048

)

 

 

(9,391

)

Comprehensive loss

 

$

(24,941

)

 

$

(19,545

)

Net loss per share attributable to common stockholders:

      Basic and diluted

 

$

(0.43

)

 

$

(0.28

)

Weighted-average common shares outstanding:

      Basic and diluted

 

 

43,490

 

 

 

36,210

 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

3


 

MERUS N.V.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Amounts in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(18,893

)

 

$

(10,154

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

283

 

 

 

324

 

Amortization of intangible assets

 

 

68

 

 

 

74

 

Foreign exchange gain

 

 

(7,790

)

 

 

(12,056

)

Stock-based compensation expense

 

 

5,334

 

 

 

3,400

 

Amortization of discount on investments

 

 

297

 

 

 

35

 

Deferred tax expense

 

 

337

 

 

 

369

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,549

 

 

 

(340

)

Operating lease right-of-use assets and lease obligations

 

 

14

 

 

 

(17

)

Prepaid expenses and other current assets

 

 

(12,152

)

 

 

(1,574

)

Accounts payable

 

 

(7,635

)

 

 

756

 

Accrued expenses and other liabilities

 

 

(1,146

)

 

 

1,130

 

Deferred revenue

 

 

(8,663

)

 

 

37,396

 

Net cash provided by (used in) operating activities

 

$

(46,397

)

 

$

19,343

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

$

(55,142

)

 

$

(20,645

)

Proceeds from maturities of marketable securities

 

 

54,517

 

 

 

18,128

 

Purchases of property and equipment

 

 

(342

)

 

 

(157

)

Net cash used in investing activities

 

$

(967

)

 

$

(2,674

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

$

 

 

$

129,568

 

Proceeds from issuance of common stock - Lilly

 

 

 

 

 

16,477

 

Proceeds from stock options exercised

 

 

879

 

 

 

4,697

 

Repurchase of restricted stock units

 

 

 

 

 

(285

)

Net cash provided by financing activities

 

$

879

 

 

$

150,457

 

Foreign exchange impact on cash, cash equivalents and restricted cash

 

 

(377

)

 

 

(3,070

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(46,862

)

 

 

164,056

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

241,749

 

 

 

163,282

 

Cash, cash equivalents, and restricted cash, end of period

 

$

194,887

 

 

$

327,338

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

 

 

$

66

 

Non-cash purchases of property, equipment and intangibles

 

$

 

 

$

25

 

Non-cash issuance of stock options

 

$

 

 

$

572

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

194,575

 

 

 

327,137

 

Restricted cash included in non-current other assets

 

 

312

 

 

 

201

 

 

 

$

194,887

 

 

$

327,338

 

 

See accompanying notes to the Condensed Consolidated Financial Statements.

4


 

MERUS N.V.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(Amounts in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance at January 1, 2021

 

 

31,602,953

 

 

$

3,211

 

 

$

490,093

 

 

$

(400,112

)

 

$

9,071

 

 

$

102,263

 

Issuance of common stock, net

 

 

5,575,757

 

 

 

610

 

 

 

128,793

 

 

 

 

 

 

 

 

 

129,403

 

Issuance of common stock - Lilly

 

 

706,834

 

 

 

77

 

 

 

16,400

 

 

 

 

 

 

 

 

 

16,477

 

Exercise of stock options and vesting of restricted stock units

 

 

386,097

 

 

 

42

 

 

 

4,782

 

 

 

 

 

 

 

 

 

4,824

 

Repurchase of restricted stock units

 

 

 

 

 

 

 

 

(285

)

 

 

 

 

 

 

 

 

(285

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,400

 

 

 

 

 

 

 

 

 

3,400

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,391

)

 

 

(9,391

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,154

)

 

 

 

 

 

(10,154

)

Balance at March 31, 2021

 

 

38,271,641

 

 

$

3,940

 

 

$

643,183

 

 

$

(410,266

)

 

$

(320

)

 

$

236,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

 

43,467,052

 

 

$

4,481

 

 

$

787,869

 

 

$

(466,928

)

 

$

(9,221

)

 

$

316,201

 

Exercise of stock options and vesting of restricted stock units

 

 

82,273

 

 

 

8

 

 

 

871

 

 

 

 

 

 

 

 

 

879

 

Stock-based compensation

 

 

 

 

 

 

 

 

5,334

 

 

 

 

 

 

 

 

 

5,334

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,048

)

 

 

(6,048

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(18,893

)

 

 

 

 

 

(18,893

)

Balance at March 31, 2022

 

 

43,549,325

 

 

$

4,489

 

 

$

794,074

 

 

$

(485,821

)

 

$

(15,269

)

 

$

297,473

 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

5


 

MERUS N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Overview

Merus N.V. is a clinical-stage oncology company developing innovative antibody therapeutics, headquartered in Utrecht, the Netherlands. Merus US, Inc. is a wholly-owned subsidiary of Merus N.V. located at 139 Main Street, Cambridge, Massachusetts, United States (collectively, the “Company”).

Since inception, the Company has generated an accumulated deficit of $485.8 million as of March 31, 2022. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future as its antibody candidates advance through discovery, pre-clinical development and clinical trials and as it seeks regulatory approval and pursues commercialization of any approved antibody candidate.

As a result, the Company may need additional financing to support its continuing operations. Until the Company can generate significant revenue from product sales, if ever, the Company expects to finance its operations through public equity offerings, debt financings, or other sources, which may include collaborations, business development and licensing opportunities with third parties. Adequate additional financing may not be available to the Company on acceptable terms, or at all. The Company’s inability to raise capital as and when needed would have a negative impact on its financial condition and ability to pursue its business strategy. The Company will need to generate significant revenues to achieve profitability and may never do so.

Based on the Company’s current operating plan, the Company expects that its existing cash and cash equivalents and marketable securities of $$384.3 million as of March 31, 2022, will fund the Company’s operations beyond 2024.

2. Summary of Significant Accounting Policies

The principal accounting policies applied in the preparation of these unaudited condensed consolidated financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2021, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022 (the “Annual Report on Form 10-K”). There have been no material changes in the Company’s significant accounting policies during the three months ended March 31, 2022.

Basis of Presentation

The Company prepared its unaudited consolidated condensed financial statements in compliance with generally accepted accounting principles in the U.S. ("U.S. GAAP"). Any reference in these notes to applicable guidance is meant to refer to authoritative U.S. GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").

The unaudited condensed consolidated financial statements include the accounts of Merus N.V. and its wholly owned, controlled subsidiary, Merus US, Inc. All intercompany transactions and balances of subsidiaries have been eliminated in consolidation. In the opinion of management, these financial statements reflect all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the unaudited condensed consolidated financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The three months ended March 31, 2022 and 2021 are referred to as the first quarter of 2022 and 2021, respectively. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

The unaudited condensed consolidated financial statements presented herein do not contain the required disclosures under U.S. GAAP for annual financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2021, included in the Annual Report on Form 10-K.

Going Concern

At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company is required to make certain additional disclosures if it concludes substantial doubt exists and it is not alleviated by the Company’s plans or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern.

6


 

The Company’s evaluation entails analyzing prospective operating budgets and forecasts for expectations of the Company’s cash needs, and comparing those needs to the current cash, cash equivalent and marketable securities balances. After considering the Company’s current research and development plans, the timing expectations related to the progress of its clinical-stage programs and its plans to pursue commercialization of any approved antibody candidate, and after considering its existing cash, cash equivalents and marketable securities as of March 31, 2022, the Company did not identify conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date these financial statements were issued. Additional details of the Company’s cash runway are described in Note 1 Overview.

 

3. Investments in Debt Securities

The following tables summarize the Company’s investments in debt securities and their presentation in the condensed consolidated balance sheet:

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

(in thousands)

 

Money market funds

 

$

5,232

 

 

$

5,684

 

Corporate paper and notes

 

 

135,469

 

 

 

155,039

 

U.S. government agency securities

 

 

6,082

 

 

 

2,093

 

U.S. treasuries

 

 

48,154

 

 

 

32,155

 

Total

 

$

194,937

 

 

$

194,971

 

 

 

 

 

 

 

 

 

 

Fair value of debt securities

 

$

194,165

 

 

$

194,773

 

 

 

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

(in thousands)

 

Cash equivalents

 

$

5,232

 

 

$

5,684

 

Current marketable securities

 

 

164,239

 

 

 

168,990

 

Non-current marketable securities

 

 

25,466

 

 

 

20,297

 

Total

 

$

194,937

 

 

$

194,971

 

 

The Company does not intend to sell and it is unlikely that the Company will be required to sell the above investments before recovery of their amortized cost bases, which may be at maturity. The Company determined that there was no material change in the credit risk of any of its investments.

 

The fair value of money market funds is determined based on publicly available market price for these funds (Level 1). The fair value of other debt securities is determined based on the publicly available inputs which includes a market price for the same or similar instruments adjusted for estimates in interest yield (Level 2).

4. Supplemental Balance Sheet Information

Prepaid expenses and other current assets consisted of the following:

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

(In thousands)

 

Prepaid research and development expenses

 

$

10,049

 

 

$

2,146

 

Prepaid general and administrative expenses

 

 

5,269

 

 

 

2,760

 

Interest receivable

 

 

496

 

 

 

367

 

Other

 

 

2,434

 

 

 

2,175

 

Total

 

$

18,248

 

 

$

7,448

 

 

7


 

 

Accrued expenses and other liabilities consisted of the following:

 

 

March 31,

2022

 

 

December 31,

2021

 

 

 

(In thousands)

 

Accrued research and development expenses

 

$

15,593

 

 

$

15,174

 

Accrued general and administrative expenses

 

 

1,994

 

 

 

4,861

 

Accrued personnel costs

 

 

2,695

 

 

 

1,362

 

Other

 

 

666

 

 

 

1,109

 

Total

 

$

20,948

 

 

$

22,506

 

 

5. Income Taxes

The Company files income tax returns in the U.S. federal and Massachusetts jurisdictions as well as in the Netherlands. The components of the income tax expense (benefit) from continuing operations are as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

U.S. federal

 

$

(171

)

 

$

(226

)

U.S. state

 

 

(52

)

 

 

(94

)

Total current income tax benefit

 

$

(223

)

 

$

(320

)

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

238

 

 

$

261

 

U.S. state

 

 

99

 

 

 

108

 

Total deferred income tax expense

 

$

337

 

 

$

369

 

 

 

 

 

 

 

 

 

 

Total income tax expense

 

$

114

 

 

$

49

 

 

After consideration of all positive and negative evidence, we believe that it is more-likely-than-not that the Netherlands deferred tax assets, that are not supported by reversing temporary differences, will not be realized. As a result, we established a full valuation allowance against deferred tax assets of the Netherlands.

 

Under Dutch tax law, net operating loss carryforwards may be used to offset future taxable income in full up to €1.0 million and 50% of taxable income that exceeds €1.0 million. Effective as of January 1, 2022, these losses can be carried forward indefinitely.

 

6. Commitments and Contingencies

Litigation

On April 5, 2018, an unnamed third party filed a notice of opposition against the Company’s EP 2604625 patent, entitled “Generation of Binding Molecules,” in the European Opposition Division of the European Patent Office (the “EPO”). The notice asserted, as applicable, added subject matter, lack of novelty, lack of inventive step, and insufficiency. On August 20, 2018, the Company timely responded to these submissions. An opposition hearing was held in June 2019, wherein the EPO revoked the EP 2604625 patent in its entirety under Art. 123(2) EPC. The Company timely appealed that decision in December 2019 before the Technical Board of Appeals for the EPO (the “TBA”) seeking reinstatement of the patent and proposing auxiliary requests for certain amended claims. The TBA issued a communication on April 20, 2022, issuing preliminary appreciation of matters concerning the appeal, but which are not binding on the board and are subject to an oral proceeding scheduled for May 10, 2022. As this opposition proceeding continues, the Company cannot be certain that it will ultimately prevail.

From time to time, the Company may be involved in various other claims and legal proceedings relating to claims arising out of the Company’s operations. The Company is not currently a party to any material legal proceedings.  

8


 

7. Leases

The Company has noncancelable operating leases for offices and lab spaces expiring at various dates through 2026. There have been no changes in the Company’s lease arrangements for the three months ended March 31, 2022.

The components of lease expense for the three months ended March 31, 2022 and 2021 are as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Lease cost

 

 

 

 

 

 

 

 

Operating lease cost

 

$

385

 

 

$

418

 

Variable lease cost

 

 

76

 

 

 

91

 

Total lease cost included in operating expenses

 

$

461

 

 

$

509

 

Other information

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows

 

$

399

 

 

$

435

 

 

8. Collaborations

Lilly

On January 18, 2021, Eli Lilly and Company, (“Lilly”) agreed to pay the Company a $40.0 million, non-refundable upfront payment, and purchased 706,834 common shares at a stated price per share of $28.295, for an aggregate purchase price of $20.0 million. The Company and Lilly agreed to collaborate with respect to the discovery and research of bispecific antibodies utilizing the Company’s proprietary Biclonics® bispecific technology platform. The collaboration encompasses up to three (3) independent programs directed to the generation of T-cell re-directing bispecific antibodies that bind CD3 and a tumor associated antigen target selected by Lilly to be the subject of each program.

The objective of each program would be to develop a lead compound that Lilly would be able to continue to develop through clinical trials. Lilly agreed to fund the research activities the Company conducts for each program under an agreed research plan and budget. Lilly receives an exclusive, worldwide, royalty-bearing, sublicensable license, under certain patent rights and know-how to exploit certain compounds and products directed to designated targets in combination with CD3, or directed to such designated target(s) alone as a monospecific antibody or monospecific antibody drug conjugate, subject to rights granted by Merus to third parties under one or more existing third party agreements. Merus retains all rights not granted to Lilly. Lilly has certain rights to replace selected targets, including the right to substitute a target selection after initial selection for a period of time. The Company may be entitled to further milestones and royalties in the future dependent on development and commercialization of any resulting product.

The initial term of the arrangement includes a three-year research term for the Company to perform research and development activities, subject to two extension terms of six months at Lilly’s discretion. While the arrangement may be terminated in its entirety or on a program-by-program basis at will by Lilly, there are no direct costs or penalties to Lilly to terminate the arrangement prior to the end of the initial term.

At inception of the arrangement, the Company identified a single performance obligation comprised of a combined delivery of a license and related activities, including research activities associated with the first target and the activities of the joint steering committee. The Company also identified two other combined performance obligations relating to options exercisable by Lilly to select a second and third target to advance selected targets through discovery and research.

The transaction price at inception was comprised of fixed consideration of $43.5 million that was derived from the $40.0 million upfront payment and $20.0 million share purchase proceeds, net of the fair value of shares of the shares delivered to Lilly of $16.5 million, and variable consideration associated with the funding of research services for the first target at inception. All other consideration under the arrangement was determined to be variable consideration and fully constrained at inception.  

The fixed consideration was allocated equally amongst the three performance obligations and the variable consideration associated with each target was allocated to the performance obligation of each respective target.  The equal allocation of the fixed consideration was based on the estimated standalone selling price of each performance obligation as each was materially the same.

On February 12, 2021, the Company and Lilly completed the initial exchange of fixed consideration and transfer of common shares. The Company initially deferred $43.5 million allocated to the performance obligations to be recognized as revenue over time using a cost-to-cost measure of progress toward the development of a lead compound for each respective target, anticipated to be recognized

9


 

as revenue within the initial research term, along with research funding. Development milestones, commercialization milestones and royalties are variable consideration, fully constrained, to be included in the transaction price for each performance obligation and recognized in future periods in accordance with the Company’s revenue recognition policy. The revenue recognized relating to each combined performance obligation is presented in the notes according to the source of consideration received (upfront, reimbursement revenue, milestone), reflective of their differing timing of receipt.

As of March 31, 2022, research activities are on-going. No milestones have been achieved to date.

Incyte

On January 23, 2017, the Company completed the sale of shares and exchange of a license with Incyte Corporation (“Incyte”). The Company initially deferred $152.6 million of the transaction price allocated to the license and related performance obligation as deferred revenue, to be recognized as revenue over time as the primary benefit of the license to Incyte is access to the Company’s intellectual property covering its Biclonics® technology platform for the generation of potential product candidates. Development milestones, commercialization milestones and royalties are variable consideration, fully constrained, to be recognized in future periods in accordance with the Company’s revenue recognition policy. Cost reimbursements for research services are recognized as they are performed over time as these are considered a separate performance obligation.

In January 2022, the Company announced that Incyte elected to opt-out of its ex-U.S. development of MCLA-145, from the parties joint collaboration agreement executed in 2017. At inception of the collaboration, for the designated product candidate (MCLA-145), the Company retained the exclusive right to develop and commercialize products and product candidates in the United States, while Incyte obtained the exclusive right to develop and commercialize products and product candidates arising from such program outside the United States. For MCLA-145, the parties conducted and shared equally the costs of mutually agreed global development activities. Incyte’s opt-out of ex-U.S. rights to MCLA-145 provides the Company the exclusive right to develop and commercialize potential MCLA-145 products globally. Under the collaboration, Incyte will continue to support the program for a limited time while ex-U.S. activities are transitioned to the Company, and Incyte will retain a right to a residual royalty of up to 4% on sales of future commercialization of MCLA-145, if approved.

There were no development or commercialization milestones achieved during the three months ended March 31, 2022.

ONO

On March 14, 2018, the Company granted ONO Pharmaceuticals Co. Ltd. (“ONO”) an exclusive, worldwide, royalty-bearing license, with the right to sublicense, research, test, make, use and market a limited number of bispecific antibody candidates based on the Company’s Biclonics® technology platform against two undisclosed targets directed to a particular undisclosed target combination. ONO agreed to pay the Company an upfront, non-refundable payment of €0.7 million. In addition, the Company was entitled to €0.3 million intended to compensate the Company for research services already completed upon entering into the agreement, and €0.2 million to be paid to the Company over time for full-time equivalent funding. The Company is entitled to research and development milestones in addition to royalties on future sales. The Company identified performance obligations for: (1) provision of a license for the target combination, and (2) research and development services. The Company concluded that ONO would be able to develop and benefit from the license, independent of the research and development services. Certain of the research and development services are capable of being performed by third parties with an appropriate sub-license, and are recognized over time as these services are delivered. Milestone payments are fully constrained as variable consideration to be recognized in future periods in accordance with the Company’s revenue recognition policy.

Amounts related to the provision of a license are amortized over the intended period of use.

Simcere

In January 2018, the Company granted Simcere Pharmaceuticals Group (“Simcere”) an exclusive license to develop and commercialize up to three bispecific antibodies in China to be produced by Merus utilizing the Company’s Biclonics® technology platform (the “Simcere Agreement”). The Company received an upfront, non-refundable payment of $2.75 million, relating to three separate research programs.

At inception of the arrangement, the Company identified three performance obligations comprised of the combined delivery of a license and performance of research and development activities with respect to each program. The Company performed research and development activities to achieve candidate nomination. The Company concluded that these activities were not distinct from the underlying license for each program as Simcere would not be able to benefit from the license apart from research and development activities at this phase of development.

The transaction price under the arrangement comprised fixed consideration of $2.75 million. The transaction price was allocated to each separate performance obligation on a relative standalone fair value basis. The Company deferred the portion of the upfront payment allocated to the three performance obligations as deferred revenue, to be recognized over time. Compensation for research

10


 

and development services prior to candidate nomination are allocated to each program performance obligation and also recognized over time. Development milestone payments allocated to each of the program performance obligations are constrained as variable consideration to be recognized in future periods in accordance with the Company’s revenue recognition policy.

The Company has achieved three milestones under this agreement and has received an aggregate of $1.8 million in milestone payments. In January 2022, the Company and Simcere terminated the Simcere Agreement, effective March 30, 2022.

Contract Assets and Liabilities

The following tables provide amounts by year indicated and by line item included in the Company's accompanying condensed consolidated financial statements attributable to transactions arising from its collaboration arrangements. The dollar amounts in the tables below are in thousands.

 

 

 

Incyte

 

 

Lilly

 

 

Other

 

 

Total

 

CONTRACT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

$

1,634

 

 

$

 

 

$

41

 

 

$

1,675

 

Billings

 

 

2,888

 

 

 

1,186