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A year ago Mereo BioPharma didn’t exist. Today, it’s an Aim-listed pharmaceuticals business with three promising therapies under its belt, an office in central London and 18 full-time staff.

This might seem improbable, and a decade ago it would have been, but the changing nature of the drugs industry has made it possible for scientist-turned-venture capitalist-turned-chief executive Denise Scots-Knight to build a pharma company from scratch using a model that is certainly the first of its kind in Europe – and one that could become increasingly prevalent as the industry comes under pressure.

Mereo isn’t in the business of drug discovery. Instead, its strategy is to purchase assets from big pharmaceutical companies that have passed phase two clinical trials but, for one reason or another, the parent company doesn’t have the resources to develop further. Mereo then takes the assets through to commercialisation.

So far, it has attracted significant investment from a number of institutional investors, including star fund manager Neil Woodford, who owns 42.3pc of the company, and Invesco, which has a 29.5pc stake.

“Big pharma is facing huge pressure,” Scots-Knight explains. “The patent cliff is here and companies are looking for ways and models for doing off-P&L financing. The cost of drug development is huge and pricing pressures have increased, so they are getting squeezed from lots of different angles.”

The pressures are indeed mounting. AstraZeneca is facing a major sales hole as its top selling cholesterol-busting drug Crestor loses out to an onslaught of generic rivals in the US market this year. GlaxoSmithKline is in the same boat with its asthma treatment Advair, while Novartis’ blockbuster cancer drug, Glivec, has lost its patent exclusivity, leaving the Swiss drugmaker in for serious pain.

In response, pharma companies are slashing costs and focusing their resources on core areas of expertise, allowing many potential treatments to fall by the wayside. That has led to a string of partnering deals, asset-swapping and hiving off of non-medicines in recent years.

That’s a trend that 57-year-old Scots-Knight, a former Fulbright scholar with a PhD in biochemistry, and three of her colleagues at venture capital (VC) firm Phase4 Partners picked up on when they were looking at their next big project.

Rather than focusing on another VC fund, they decided to do something different.

“We looked at our experience, we looked at the pharma spinouts we had done from the investment side and also we looked at what was going on in pharma world with P&L pressures,” she says.

“So we put these thoughts together and said, well instead of doing an early stage biotech fund, why don’t we look at doing something in an off-P&L financing model with pharma. It fit with what we wanted to do strategically and also with our experience base. We literally took a piece of paper around with a structure of a possible off-P&L financing model and went to talk to pharmaceutical executives. And the interesting thing was we had no problem getting the meetings. It was like pushing on an open door.”

Eventually, Scots-Knight and her team of scientists and researchers started working closely with Novartis and ended up taking on three products, all of which have passed phase II clinical trials. They are a treatment for brittle bone syndrome, which is an orphan genetic disorder, meaning it is very rare. A therapy for obese men whose testosterone levels are too low, known as hypogonadism, and a medicine for acute bouts of chronic obstructive pulmonary disorder (COPD), a respiratory illness.

“It was interesting because, it wasn’t just a case of Novartis saying: ‘Here is a group of products see what you think, choose a few’. It was: ‘Here are a group of products, oh yes, we like that, that, that and that’, and then: ‘Yes ok, oh actually we have decided we are going to take that one back from the pot, here is another one instead’. So there was some toing and froing during the whole process.”

Unusually, Mereo took on the assets along with the intellectual property rights and with no buyback rights for Novartis. That means the company doesn’t have first dibs on the products, should they be successful or go up for sale.

No cash changed hand either. This was a pure asset-for-equity swap, giving Novartis a 19.5pc stake in Mereo in exchange for the three therapies.

“It was actually Novartis’ preference,” says Scots-Knight. “The fact that there was no buyback right on the products was the most tricky thing to handle. The way that Novartis got comfortable with that arrangement was knowing that it has an equity stake in Mereo, so if we commercialise a product, Novartis gets royalties. And, if it does want to buy it back, it can effectively pay more for it, but always at a discounted rate.

“But that structure is something not all pharma companies will get comfortable with,” she adds. “Some might rather have the asset sitting on the shelf than be successful in somebody else’s hands.”

Less than a year after closing its last financing round, Mereo already has two clinical trials up and running for the COPD and hypogonadism medications, with data expected in the second half of 2017. The company is in discussion with regulators to launch a study for the brittle bone treatment in the second half of this year, to hopefully report in the second half of 2018.

Eventually, Mereo hopes to have five to seven products under its belt. It is in discussions with Novartis, as well as a number of other pharmaceutical companies, about taking on further assets, with a strong focus on orphan and rare diseases.

Mereo is one of the first companies to do what it is doing, and certainly the first in Europe to put together a portfolio like this and get the thing financed.

Scots-Knight, who wanted to be an airline pilot when she was younger, puts the company’s success so far down to her background in being a “very very hands on venture capitalist”, and getting all of the financial costings and feasibility plans in order before going to investors.

“When I worked in VC, we were usually a lead investor and headed up all the diligence and then brought other investors in,” she says. “We were known for very detailed diligence and being hands on.

“In the case of setting up Mereo, we knew exactly what the costs would be, so investors could look at the model with quarterly cash flows. That was really helpful.”

The company won’t be getting its assets commercialised any time soon, but that’s not a problem, given that Mereo has enough cash to finance itself through to late 2018. It also plans to partner with other pharma companies for some of the assets for later stage trials and commercialisation.

Manchester-born Scots-Knight said the second half of 2017 will yield “plenty of newsflow”, as various clinical trials read out, providing a potential catalyst for further fundraising.

“At some point we will do more financing rounds, whether driven by data or new products. But we are in no rush, we don’t need to,” she says.

As for now, Mereo’s focus is on getting through its trials and plucking further assets from the libraries of big pharma. Asked what advice first-time chief executive Scots-Knight has for other newcomers to the hot seat, she says: “You need lots and lots of energy, perseverance and determination. And I would say build a really good management team around you, that’s critical.”

By Julia Bradshaw

Source: The Telegraph