Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2025, included in our 2025 Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of our 2025 Annual Report, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

Overview

We are a biopharmaceutical company focused on the development of innovative therapeutics for rare diseases. We have developed a portfolio of late-stage clinical product candidates. Our late-stage rare disease product candidates are setrusumab for the treatment of OI and alvelestat for the treatment of severe AATD-LD. Setrusumab has received orphan designation for OI from the European Commission ("EC") and the U.S. Food and Drug Administration ("FDA"), PRIME designation from the European Medicines Agency ("EMA") and has Breakthrough Therapy designation and rare pediatric disease designation from the FDA. Alvelestat has received orphan designation for AATD from the EC and the FDA, and Fast Track designation for the treatment of AATD-LD from the FDA. We also have an early-stage rare disease program, vantictumab, for the treatment of a second bone disease, ADO2.

Our strategy is to selectively 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 all of our clinical-stage product candidates of which three were in rare diseases. We have successfully completed large, randomized Phase 2 clinical trials for four of our product candidates and the Phase 1b portion of a Phase 1b/2 for a fifth product candidate.

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 rare diseases involves close collaboration with key opinion leaders and investigators, and close coordination with patient organizations. Rare disease patients are typically 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.

Results of Operations

Comparison of three months ended September 30, 2026 and 2025

The following table sets forth Mereo's results of operations for the three months ended September 30, 2026 and 2025.

Revenue

Revenue of $0.8 million for the three months ended September 30, 2026 comprised the portion of the $1.0 million option fee pursuant to the Sentynl Agreement recognized based on an estimate of progress towards satisfaction of the performance obligation. No revenue was recognized for the three months ended September 30, 2025.

Research and development ("R&D") expenses

The following table sets forth our R&D expenses by product development program for the three months ended September 30, 2026 and 2025.

Total R&D expenses decreased by $2.2 million, from $4.3 million in the three months ended September 30, 2025 to $2.1 million in the three months ended September 30, 2026.

The decrease was primarily due to reductions of $1.6 million in R&D expenses for setrusumab and $0.4 million for alvelestat.

The decrease in program expenses for setrusumab was primarily driven by reductions of, and delays to, investment in manufacturing and ongoing activities, including medical affairs activities in Europe during the three months ended September 30, 2026.

The decrease in program expenses for alvelestat was primarily due to the completion of activities undertaken in 2025 in preparation for a potential Phase 3 study.

General and administrative expenses

General and administrative expenses decreased by $1.1 million, from $6.0 million in the three months ended September 30, 2025 to $4.9 million in the three months ended September 30, 2026. The decrease was primarily due to reductions in investment in pre-commercial activities to lay the foundation for the potential commercial launch of setrusumab in Europe, and other realized net cost savings.

Other income

Other income of $0.3 million for the three months ended September 30, 2025 comprised amounts received from āshibio, Inc. ("āshibio") in connection with the out-licensing of vantictumab.

Interest income

Interest income decreased by $0.3 million, from $0.5 million in the three months ended September 30, 2025 to $0.2 million in the three months ended September 30, 2026, principally due to a combination of lower interest rates earned and lower average cash and cash equivalents balances in the three months ended September 30, 2026 compared to the three months ended September 30, 2025.

Changes in the fair value of warrants

The total change in fair value of warrants in the three months ended September 30, 2026 was an unrealized loss of less than $0.1 million, compared to an unrealized gain of $0.2 million in the three months ended September 30, 2025. The unrealized loss in the three months ended September 30, 2026 was primarily due to the impact of a negligible increase in the price of the Company's ADSs on the value of the warrant liabilities while the unrealized gain in the three months ended September 30, 2025 was primarily due to the impact of a decrease in the price of the Company's ADSs on the value of the warrant liabilities.

Foreign currency transaction gain, net

The net foreign exchange gain for the three months ended September 30, 2026 was less than $0.1 million, compared to a gain of $1.9 million for the three months ended September 30, 2025. This change primarily reflects the impact of a negligible movement in the value of U.S. dollars when translating U.S. dollar balances into our functional currency of pound sterling in the three months ended September 30, 2026, compared to a strengthening of U.S. dollars in the three months ended September 30, 2025.

Benefit from research and development tax credit

The benefit from research and development tax credit decreased by $0.3 million, from $0.4 million in the three months ended September 30, 2025 to $0.1 million in the three months ended September 30, 2026. This decrease reflects a lower level of qualifying expenditure in the three months ended September 30, 2026 than in the three months ended September 30, 2025.

Other comprehensive income/(loss) - Foreign currency translation adjustments

The foreign currency translation adjustment for the three months ended September 30, 2026 was a gain of less than $0.1 million, compared to a loss of $2.3 million in the three months ended September 30, 2025. This change primarily reflects the impact of a negligible movement in the value of U.S. dollars when translating pound sterling functional currency balances into our presentational currency of U.S. dollars in the three months ended September 30, 2026, compared to a strengthening of U.S. dollars in the three months ended September 30, 2025.

Comparison of nine months ended September 30, 2026 and 2025

The following table sets forth Mereo's results of operations for the nine months ended September 30, 2026 and 2025.

Revenue

Revenue of $0.8 million for the nine months ended September 30, 2026 comprised the portion of the $1.0 million option fee pursuant to the Sentynl Agreement recognized based on an estimate of progress towards satisfaction of the performance obligation. Revenue of $0.5 million for the nine months ended September 30, 2025 comprised a one-time milestone payment of $0.5 million resulting from the achievement of a clinical milestone on leflutrozole by ReproNovo pursuant to the ReproNovo Licensing Agreement.

Cost of revenue

No cost of revenue was recognized for the nine months ended September 30, 2026. Cost of revenue for the nine months ended September 30, 2025 was $0.1 million and represents amounts payable pursuant to the 2015 asset purchase agreement with Novartis for leflutrozole, under which the Company pays a percentage of proceeds resulting from milestone revenue received, subject to certain deductions and other amounts.

R&D expenses

The following table sets forth our R&D expenses by product development program for the nine months ended September 30, 2026 and 2025.

Total R&D expenses decreased by $4.9 million, from $13.6 million in the nine months ended September 30, 2025 to $8.6 million in the nine months ended September 30, 2026.

The decrease was primarily due to reductions of $2.4 million in R&D expenses for setrusumab and $2.3 million for alvelestat.

The decrease in program expenses for setrusumab was primarily driven by reductions of, and delays to, investment in manufacturing and ongoing activities, including medical affairs activities in Europe during the nine months ended September 30, 2026, partially offset by an expense of $2.3 million for our share of certain costs related to the cancellation of manufacturing slots by Ultragenyx.

The decrease in program expenses for alvelestat was primarily due to the completion of activities undertaken in preparation for a potential Phase 3 study in the nine months ended September 30, 2025.

General and administrative expenses

General and administrative expenses decreased by $4.6 million, from $18.8 million in the nine months ended September 30, 2025 to $14.2 million in the nine months ended September 30, 2026. The decrease was primarily due to reductions in investment in pre-commercial activities to lay the foundation for the potential commercial launch of setrusumab in Europe, and other realized net cost savings.

Other income

Other income of $0.3 million for the nine months ended September 30, 2025 comprised amounts received from āshibio in connection with the out-licensing of vantictumab.

Interest income and expense

Interest income decreased by $0.9 million, from $1.8 million in the nine months ended September 30, 2025 to $0.8 million in the nine months ended September 30, 2026, principally due to a combination of lower interest rates earned and lower average cash and cash equivalents balances in the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025.

Interest expense decreased by $0.2 million, from $0.2 million in the nine months ended September 30, 2025 to less than $0.1 million in the nine months ended September 30, 2026. The decrease was principally due to the conversion of convertible loan notes in February 2025, following which the Company had no significant remaining interest-bearing liabilities.

Changes in the fair value of warrants

The total change in the fair value of warrants in the nine months ended September 30, 2026 was an unrealized gain of less than $0.1 million, compared to an unrealized gain of $0.5 million in the nine months ended September 30, 2025. The unrealized gain in both periods was primarily due to the impact of decreases in the price of the Company's ADSs on the value of the warrant liabilities.

Foreign currency transaction gain/(loss), net

The net foreign exchange gain for the nine months ended September 30, 2026 was $1.3 million, compared to a loss of $6.2 million for the nine months ended September 30, 2025. This change primarily reflects the impact of a strengthening in the value of

U.S. dollars when translating U.S. dollar balances into our functional currency of pound sterling in the nine months ended September 30, 2026, compared to a significant weakening of U.S. dollars in the nine months ended September 30, 2025.

Benefit from research and development tax credit

The benefit from research and development tax credit decreased by $1.1 million, from $1.4 million in the nine months ended September 30, 2025 to $0.3 million in the nine months ended September 30, 2026. This decrease reflects a significantly lower level of qualifying expenditure in the nine months ended September 30, 2026 than in the nine months ended September 30, 2025.

Other comprehensive (loss)/income - Foreign currency translation adjustments

The foreign currency translation adjustment for the nine months ended September 30, 2026 was a loss of $1.4 million, compared to a gain of $7.9 million in the nine months ended September 30, 2025. This change primarily reflects the impact of a strengthening in the value of U.S. dollars when translating pound sterling functional currency balances into our presentational currency of U.S. dollars in the nine months ended September 30, 2026, compared to a significant weakening of U.S. dollars in the nine months ended September 30, 2025.

Liquidity and Capital Resources

Overview

Under the current business plan and cash flow forecasts, and in consideration of our ongoing research and development efforts and our general corporate funding requirements, we anticipate that our current on-hand cash resources will extend into late 2027. However, we will need additional external funding or may need to implement measures to conserve cash resources to complete our development plans and potentially commercialize selected rare disease products. We plan to fund our operations through cash on hand and a combination of non-dilutive funding sources, including partnering income, public or private equity or debt financing, or other sources.

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, convertible debt and warrants. These offerings have raised approximately $259 million, including through the $50.0 million underwritten registered direct offering in June 2024 and the $12.0 million "at-the-market" offering pursuant to our Open Market Sale Agreement with Jefferies LLC in July 2023 (all amounts are gross proceeds before fees and discounts).

We have also received payments under various license and collaboration agreements, including payments of:

Contractual Obligations

As further described in our 2025 Annual Report, under "Item 1. Business-Material Agreements-Novartis Agreements" (as updated in Note 15 to the condensed consolidated financial statements included in this Quarterly Report) and "Item 1. Business-Material Agreements-Licensing Agreement with AstraZeneca," under various agreements with Novartis and AstraZeneca, we have agreed to make milestone payments and pay royalties on potential future commercial sales. The amount, timing, and likelihood of such payments are not known and will remain uncertain for the foreseeable future.

In addition, we enter into contracts in the ordinary course of business with CROs, CMOs, and other vendors, including Ultragenyx for the manufacture of setrusumab as described in our 2025 Annual Report in "Item 1. Business-Material Agreements-Agreements with Ultragenyx for Setrusumab", to assist in the performance of our 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 cancelable contracts. We have no manufacturing commitments with CMOs as of September 30, 2026 and December 31, 2025.

Cash Flows

Comparison of the nine months ended September 30, 2026 and 2025

The table below summarizes our cash flows (used in)/provided by operating, investing and financing activities for the nine months ended September 30, 2026 and 2025.

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2026 was $14.4 million, a decrease of $8.9 million from $23.3 million in the nine months ended September 30, 2025. This decrease is principally due to lower cash bonus payments of approximately $2.0 million, receipt of a $1.0 million option fee pursuant to the Sentynl Agreement and lower net operating cash flows of approximately $7.7 million, reflecting reduced R&D and General and administrative expenses in the period. These decreases were partially offset by receipt of $1.8 million in additional in R&D tax credits in the nine months ended September 30, 2025 compared to the nine months ended September 30, 2026.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2026 was $0.3 million, an increase of $0.3 million from less than $0.1 million in the nine months ended September 30, 2025. These cash flows primarily relate to payments to acquire intangible assets in both periods, net of the proceeds from the partial out-licensing of vantictumab in the nine months ended September 30, 2025.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2026 was less than $0.1 million, compared to net cash provided by financing activities of $0.3 million in the nine months ended September 30, 2025. The decrease primarily represents the $0.5 million received upon exercise of the 2020 Novartis Warrants in the nine months ended September 30, 2025, net of transaction costs.

Operating and Capital Expenditure Requirements

As of September 30, 2026, we had an accumulated deficit of $520.4 million. We expect to continue to report significant operating losses for the foreseeable future as we continue our research and development efforts and seek to obtain regulatory approval of our product candidates and any future product candidates we develop.

We expect to continue to incur expenses in connection with our ongoing development activities related to our product candidates, our outsourced manufacturing activities and other associated costs including the management of our intellectual property portfolio. We also expect to continue to incur costs associated with operating as a U.S. public company listed on Nasdaq and as a domestic registrant.

These costs will increase further if we:

We expect that our existing cash and cash equivalents will enable us to fund our currently committed clinical trials, operating expenses and capital expenditure requirements into late 2027. We have based these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our product candidates and any future product candidates and because the extent to which we may enter into collaborations with third parties for development of any of our product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements will depend on many factors, including:

Our revenues, if any, will be derived from milestones, royalties or direct commercial sales of any product candidates that we or our partners are able to successfully develop, receive regulatory approval for, and commercialize in future years. In the meantime, we will need to obtain substantial additional funds to achieve our business objective.

Adequate additional funds may not be available to us on acceptable terms, or at all. If we raised additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

Any future debt financing or preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute your ownership interests.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, shareholders' ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a shareholder. If we are unable to raise additional funds through partnerships, debt or equity financings when needed, we may be required to delay, limit, reduce, or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our accounting estimates based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The actual impact on our financial performance could differ from these estimates under different assumptions or conditions.

An accounting estimate is considered critical if both (i) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (ii) the impact within a reasonable range of outcomes of the estimates and assumptions is material to our unaudited condensed consolidated financial statements. We believe that there are no estimates and assumptions made in our unaudited condensed consolidated financial statements that rise to this level. Our significant accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates" in our 2025 Annual Report, which was filed with the SEC on March 19, 2026. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. There have been no significant changes to our critical accounting estimates from those described in our 2025 Annual Report.

Recent accounting pronouncements

There have been no recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance other than those previously included in the 2025 Annual Report that are of significance or potential significance to the Company. The Company is continuing to evaluate the impact of the recently issued pronouncements that are effective in future periods and were discussed in its 2025 Annual Report.

Safe Harbor

See the section titled "Information Regarding Forward-Looking Statements" at the beginning of this Quarterly Report.