Mereo BioPharma Group plc (MREO) stock intrinsic value fair value estimate & owner earnings analysis

Mereo BioPharma is a clinical-stage rare disease drug developer based in London with no product on the market and no recurring revenue. Its two lead programs are setrusumab, for the bone disease osteogenesis imperfecta (OI), whose global development is led by its partner Ultragenyx, and alvelestat, an oral drug for lung disease linked to alpha-1 antitrypsin deficiency, which has finished two Phase 2 studies and has not started Phase 3. Values below are per American Depositary Share (ADS), the listed security, where each ADS represents five ordinary shares. What changed: on December 29, 2025 the two Phase 3 studies of setrusumab (Orbit and Cosmic) did not meet their main goal of reducing fractures, although both showed clear gains in bone density. The company says it is still analyzing the data and has not yet set next steps. This was the main source of possible future value, and it is no longer something we can count on. Owner earnings, meaning operating cash flow less working-capital swings, stock compensation and capital spending, have been negative every year: about -$0.085 per ordinary share in 2022, -$0.037 in 2023, -$0.054 in 2024 and -$0.044 in 2025 (roughly -$35 million in 2025). Stock compensation of $7.6 million in 2025 is treated as a real cost. The 2023 figure benefited from $10 million of one-time milestone revenue, so it is not a recurring level. A cross-check of net loss plus non-cash charges against operating cash flow agreed within 1% for 2025. What we can and cannot credit: nothing in the filings today produces a stream of future earnings. The Ultragenyx agreement offers up to $245 million of additional milestones plus royalties, but these depend on approvals that the Phase 3 result has made uncertain, and alvelestat has no funded Phase 3. Under our approach, benefits that have not yet been secured are left out, so no future drug income is included in any case. The value that remains is the cash. At June 30, 2026 the company held $30.1 million, against about 803.6 million ordinary shares (160.7 million ADS) on a diluted weighted-average basis for the second quarter, and it has no remaining convertible debt. In the first half of 2026 operating cash outflow was $10.4 million, roughly $20.7 million a year at that pace. The company states its cash covers at least twelve months from the date of its annual report filing, and that it will need more funding in the longer term. Bear case, $0.00 per ADS: the remaining cash is spent on development without a program that succeeds, and it is exhausted or diluted away before any return to shareholders. Base case, $0.06 per ADS: cash is drawn down for another year at the current pace of about $20.7 million, leaving about $9.4 million (about $0.06 per ADS) as what remains for shareholders. Base growth in owner earnings is zero, since the last full year (2025) was still a loss of about $35 million and nothing dated in the filings reverses that. Bull case, $0.19 per ADS: management stops its own spending, and cash of $30.1 million is preserved, about $0.19 per ADS. This is the most that can be supported from what is on the balance sheet today. What would make this wrong: a positive regulatory path for setrusumab in Europe or the United Kingdom, where Mereo keeps commercial rights, or a partner funding alvelestat, could create value we have not counted. Conversely, further spending or share issuance would reduce the cash-based value. Because outcomes are binary and the small market value gives little protection, the margin-of-safety price sits at a very deep discount to the base case.