Merus(MRUS) - 2022 Q4 - Annual Report

PART I Business Merus N.V. develops multispecific antibody therapeutics using proprietary Biclonics® and Triclonics® platforms for oncology applications Overview and Strategy Merus is a clinical-stage oncology company developing multispecific antibody therapeutics from its proprietary Biclonics® and Triclonics® platforms, focusing on advancing lead candidates and strategic collaborations - The company's core proprietary Biclonics® and Triclonics® platforms generate bispecific and trispecific antibodies to block tumor growth and mobilize the immune system[19] - Key strategic pillars include successful clinical development of four main candidates, pipeline expansion via technology platforms, and strategic collaborations for capital-efficient development[22][23] Technology Platforms Merus's Biclonics® and Triclonics® platforms use patented technologies like MeMo® mouse and Spleen to Screen® to generate stable, full-length human multispecific antibodies with predictable manufacturing and low immunogenicity - The Biclonics® platform utilizes a patented MeMo® mouse and dimerization technology to generate diverse, pure bispecific antibodies in a standard IgG format[33] - The Triclonics® platform creates trispecific antibodies binding to three targets, enhancing tumor specificity and immune cell engagement for increased potency and a wider therapeutic window[36][38] - A key advantage is the high-throughput functional screening of thousands of candidates to identify novel and potent therapeutic molecules[34] Clinical Pipeline Merus has four bispecific antibody candidates in clinical development: zenocutuzumab for NRG1+ cancers, petosemtamab for solid tumors, MCLA-129 for NSCLC, and MCLA-145 for T-cell activation - Zenocutuzumab (Zeno) demonstrated a 34% partial response rate and a median duration of response of 9.1 months in the eNRGy trial for NRG1+ cancers, with BLA filing discussions ongoing with the FDA[49][52] - Petosemtamab showed partial responses in 3 of 7 evaluable patients with advanced HNSCC in a Phase 1 trial, with tumor reduction observed in all seven, and a recommended Phase 2 dose of 1500 mg every two weeks[60] - MCLA-129 interim Phase 1/2 data showed antitumor activity, including 2 confirmed partial responses in advanced solid tumors, with good tolerability and an initial recommended Phase 2 dose of 1500 mg every two weeks[71][75] - MCLA-145 interim Phase 1 data showed preliminary antitumor activity at doses ≥25 mg biweekly and robust T-cell activation, with a Keytruda combination cohort ongoing[80][84] Collaboration Agreements Merus has strategic collaborations with Incyte, Eli Lilly, and Betta Pharmaceuticals to advance its pipeline and technology, securing funding and expanding market reach - Incyte collaboration for up to 10 programs included a $120 million upfront payment and an $80 million equity investment, with Merus eligible for milestones and 6-10% tiered royalties; Incyte opted out of MCLA-145 ex-U.S. rights[87][92][89] - Eli Lilly collaboration for up to three T-cell re-directing bispecific antibody programs involved a $40 million upfront fee and a $20 million equity investment, with Merus eligible for up to $1.6 billion in total potential milestones plus tiered royalties[96][99][101] - Betta Pharmaceuticals holds an exclusive license for MCLA-129 development and commercialization in China, while Merus retains all ex-China rights and shares manufacturing technology transfer costs[107][108] Intellectual Property Merus protects its proprietary technologies, platforms, and antibody candidates through patents, trademarks, and trade secrets, with patent expiries extending to 2041 for some applications - The zenocutuzumab patent portfolio includes composition of matter claims expiring no earlier than February 2035, with method of use applications extending to at least 2038[117] - Core technology platforms are protected by patents for the MeMo® common light chain transgenic animal (expiry no earlier than June 2029), heavy chain dimerization (expiry no earlier than April 2033), and the Triclonics® format (expiry no earlier than March 2039)[121] Government Regulation Merus is subject to extensive regulation by the FDA and comparable authorities, involving preclinical testing, multi-phase clinical trials, BLA submission, and ongoing post-approval compliance with healthcare and data privacy laws - U.S. development and approval requires an IND submission, followed by Phase 1, 2, and 3 clinical trials to demonstrate safety and efficacy, culminating in a BLA submission to the FDA[123][126][130] - Zenocutuzumab received Orphan Drug Designation for pancreatic cancer and Fast Track Designation for metastatic solid tumors with NRG1 fusions, potentially expediting FDA review[139][140] - EU clinical trials are governed by the new Clinical Trials Regulation (CTR), centralizing applications, with marketing authorization typically sought via the EMA's compulsory centralized procedure for biotechnology products[165][171] - The company is subject to healthcare laws like the U.S. Anti-Kickback Statute and False Claims Act, and data privacy laws such as HIPAA and GDPR, imposing stringent requirements on health and personal information handling[190][197][198] Human Capital and Corporate Responsibility Merus employed 221 people as of January 2023, emphasizing R&D, employee development, health and safety, and sustainability initiatives including a BREEAM Excellent certified headquarters - As of January 1, 2023, the company employed 164 full-time and 57 part-time individuals, with 157 primarily in R&D[214] - The company implemented leadership and development programs under the "Merus Academy" to train and retain employees[220] - In December 2022, Merus moved into its new "Accelerator" headquarters, achieving 'BREEAM Excellent' certification for high sustainability performance with solar panels, heat pumps, and a green lease[231][232] Risk Factors Merus faces substantial risks including historical losses, significant funding needs, unproven technology platforms, clinical trial failures, reliance on third parties, intellectual property disputes, and intense competition - The company has a history of significant net losses, including $131.2 million in 2022, and an accumulated deficit of $598.1 million as of December 31, 2022, with continued losses expected[245] - Substantial additional funding is required for antibody candidate development and commercialization; failure to raise capital could lead to program delays or elimination[250] - The company's technology platforms are novel and unproven, and antibody candidates could fail clinical trials, exhibit unacceptable side effects, or not receive regulatory approval, materially harming the business[256][279][292] - Merus heavily relies on third parties, including CROs for clinical trials, CMOs for manufacturing, and collaborations with Incyte and Eli Lilly; non-performance would adversely affect development and commercialization[379][384][397] - The company faces risks of intellectual property litigation, patent challenges, and inadequate IP protection against competitors[403][408] Unresolved Staff Comments There are no unresolved staff comments - None[473] Properties Merus leases its corporate headquarters and central laboratory in Utrecht, Netherlands, and additional office space in Cambridge, Massachusetts - The company's new corporate headquarters and lab in Utrecht, Netherlands, is a leased space of approximately 4,957 square meters with a ten-year term commencing April 2022[474] - Merus also leases 7,583 square feet of office space in Cambridge, Massachusetts, under a seven-year lease that commenced April 1, 2019[474] Legal Proceedings Merus is not a party to any material legal proceedings, but is contesting a European patent opposition filed by Kymab Limited in August 2022 - Kymab Limited (Sanofi) filed an opposition against Merus's European patent EP3456190, "Antibody Producing Transgenic Murine Animal," in August 2022, which the company is contesting[712][713] Mine Safety Disclosures Not applicable - Not applicable[476] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Merus common stock trades on Nasdaq under "MRUS"; the company has 152 holders of record, has never paid cash dividends, and did not repurchase equity securities in Q4 2022 - Common stock trades on The Nasdaq Global Market under the symbol "MRUS"[479] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future[480] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Merus reported a 15.3% revenue decrease to $41.6 million in 2022, while operating expenses increased 45.0% to $201.6 million, widening the net loss to $131.2 million, with $326.7 million cash expected to fund operations into H2 2025 Financial Performance Summary | Financial Metric | 2022 (in thousands) | 2021 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $41,586 | $49,107 | -15.3% | | Research and Development Expense | $149,424 | $98,187 | +52.2% | | General and Administrative Expense | $52,200 | $40,896 | +27.6% | | Total Operating Expenses | $201,624 | $139,083 | +45.0% | | Operating Loss | ($160,038) | ($89,976) | +77.9% | | Net Loss | ($131,194) | ($66,816) | +96.4% | | Net Loss Per Share | ($2.92) | ($1.73) | +68.8% | - The decrease in collaboration revenue was primarily due to a $3.4 million decrease from Lilly and a $3.2 million decrease from Incyte, driven by changes in upfront payment amortization and lower milestone revenue[510] - The $51.2 million increase in R&D expense was driven by $34.3 million higher external clinical services and drug manufacturing costs and $11.3 million increased personnel-related expenses[514] - As of December 31, 2022, the company held $326.7 million in cash, cash equivalents, and marketable securities, expected to fund operations into the second half of 2025[492][525] Quantitative and Qualitative Disclosures About Market Risk Merus faces market risks primarily from foreign currency exchange rates, with a hypothetical 15% USD weakening against EUR increasing 2022 net loss by $20.0 million, while interest rate risk is minimal - The main market risk is foreign currency exposure between the U.S. dollar (revenue) and the euro (operating costs)[552] - A hypothetical 15% weakening of the U.S. dollar versus the euro in 2022 would have increased the net loss by approximately $20.0 million[552] - Interest rate risk on the company's marketable securities portfolio is considered minimal due to its conservative and short-term nature[551] Financial Statements and Supplementary Data This section indicates that the company's audited consolidated financial statements and supplementary data are included in Item 15 of the Annual Report on Form 10-K - The required financial statements are included in Item 15 of the report[554] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - None[555] Controls and Procedures Management concluded that Merus's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes identified in Q4 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[557] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, an assessment audited by KPMG Accountants N.V[558][559] Other Information Effective February 24, 2023, Chief Business Officer Hui Liu's new employment agreement increased his annual base salary to $437,750 and updated severance terms - A new employment agreement for Chief Business Officer Hui Liu became effective on February 24, 2023, increasing his base salary to $437,750 and modifying severance terms[561][562][563] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable - Not applicable[566] PART III Directors, Executive Officers and Corporate Governance This section provides biographical information for Merus's directors and executive officers, highlighting their industry experience and confirming the adoption of a Code of Business Conduct and Ethics, with other details incorporated by reference from the 2023 Proxy Statement - The board and executive team comprise individuals with significant experience from companies including Sofinnova, Trevena, Genentech, CRISPR Therapeutics, Array BioPharma, and Novartis[569][570][573] - The company adopted a Code of Business Conduct and Ethics applicable to all directors, officers, and employees[581] - Most information for this item is incorporated by reference from the 2023 Proxy Statement[582] Executive Compensation Information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information is incorporated by reference from the 2023 Proxy Statement[583] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information is incorporated by reference from the 2023 Proxy Statement[584] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information is incorporated by reference from the 2023 Proxy Statement[585] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information is incorporated by reference from the 2023 Proxy Statement[586] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including the Independent Registered Public Accounting Firm's Report and consolidated financial statements - This item contains the index to the Consolidated Financial Statements and a list of all exhibits filed with the 10-K[588][589] Form 10-K Summary No summary is provided under this item - None[596]