Merrion Pharmaceuticals plc

Preliminary Results for the year ended 31 December 2009

Dublin, Ireland 8 March 2010

Merrion Pharmaceuticals plc, ("Merrion" or the "Company") (IEX: MERR) an international pharmaceutical product development company, announced today its preliminary financial results for the year ended 31 December 2009.

Operating highlights

·      Positive final results on a key multicentre Phase II(b) cancer patient study on its Orazol™ drug (MER 101). These results show that weekly therapy with 20mg Orazol™ (tablet) is as therapeutically effective from the first treatment, as monthly treatment with the intravenous drug Zometa® (4mg), based on movements in observed levels of critical bone biomarkers. In addition, there were positive trends to improvements in bone pain and side effect profile. Based on the results obtained, Orazol™ has been shown to be effective, safe and has the potential to improve the quality of life for users. We believe that it can be a substantial improvement to the current 'standard of care' in cancer patients with bone metastases.

·      In March 2010, we were issued a US patent on our "Solid Oral Dosage from Containing an Enhancer", which covers our GIPET® enhancer system used with the bisphosphonate class of drugs. A patent covering the GIPET technology including its use with bisphosphonates has been previously granted in Europe.

·      In December 2009, Novo Nordisk A/S, a world leader in diabetes medicine, commenced a Phase I clinical trial with an oral insulin analogue using Merrion's absorption enhancing GIPET® technology. In line with the development and license agreement signed in December 2008, Merrion received a milestone payment of US$2.0 million. This is the first development milestone achieved by Merrion under this agreement.

·      The signing of a second development and license agreement to develop oral GLP1 products with Novo Nordisk A/S in January 2009, providing the Company with the potential to earn up to US$58.0 million in milestones for the first product as well as significant development fees and future royalties.

·      The acquisition of a new 29,000 sq.ft. purpose built facility in Citywest, Co. Dublin, with a view to significantly expanding our current Research and Development capabilities, developing more products and offering manufacturing capabilities. This facility was officially opened by the Minister for Health and Children, Mary Harney, T.D., in October 2009.

·      In February 2009, Mr. Patrick O'Sullivan was appointed Chairman of the Board of Directors.

Financial highlights

·      A 373% increase in revenues to €6,335,000 compared with €1,340,000 in the previous year.

·      Net loss of €1,629,000 compared with a net loss of €5,062,000 in the previous year.

·      Research and development expenses of €4,410,000 (2008: €3,898,000)

·      Administration expenses of €2,477,000 (2008: €2,420,000).

·      Net finance income of €178,000 compared to €363,000 in the prior year.

·      Loss per ordinary share of €0.10 (2008: €0.30)

·      Cash and cash equivalents of €7,218,000 compared to cash and cash equivalents of €8,140,000.

·      Trade and other receivables of €2,471,000 (2008: €753,000)

·      An 84% increase in deferred revenue to €4,450,000 from (2008: €2,416,000).

·      Growth in headcount by 74% to 40 (December 2008: 23).

Commenting on the results, John Lynch, Chief Executive Officer said:

'We are pleased with the strong operating results for 2009. The significant growth in revenue during the year is an indication of our commitment to meet necessary deadlines set out in our partner programs with Novo Nordisk and the realization of our first development milestone from this collaboration.'

Outlook

Commenting further on the outlook for 2010, John Lynch added:

'The future for Merrion is positive. Following the acquisition of the new facility in Citywest, Co. Dublin, and additions to the Merrion team, we now have much needed capacity to continue our partner programs and to avail of future market opportunities. We are committed to our internal R&D projects and to expanding our early stage pipeline. Work continues on the Citywest facility as we seek to obtain our Irish Medical Board GMP (Good Manufacturing Practice) license to manufacture.  We are very focused on building on the success of our recent Orazol™ Phase II(b) cancer patient study and we now work towards indentifying a partner to complete Phase III development and market the product.'

Company background

Merrion Pharmaceuticals plc (www.merrionpharma.com) is an Irish publicly listed specialty pharmaceutical company engaged in the development of oral forms (tablets/capsules) of drugs that have poor absorption and are generally given by injection. Merrion was established in 2004 to commercialise various technologies acquired from Elan Corporation, plc.  Merrion's patented drug delivery technologies increase bioavailability, by improving absorption in the gastrointestinal tract, of drugs that are otherwise poorly absorbed. This can provide substantial benefit in patient convenience and safety, and might also provide enhanced drug efficacy. Merrion utilises its technology to develop new oral drugs in two ways; it develops its own proprietary drugs using GIPET™ and partners with other pharmaceutical companies in developing oral GIPET™ formulations of their products.

Merrion currently has four internal product development programs based on its GIPET® technology, as follows:

·      Orazol™ (MER 101) is an oral bisphosphonate for oncology indications that has completed Phase II development. This product aims to allow cancer patients with bone metastases to take a weekly tablet, rather than an IV infusion, to get the gold standard treatment in this area,

·      Almerol™ (MER 103) which is also an oral bisphosphonate, for the treatment of osteoporosis, has completed Phase II clinical trials. Based on the market leading drug, this program aims to provide similar absorption, with just 8% of the current dose, with a simplified dosing regimen and an improved side effect profile,

·      Acyline™ (MER 104) is a second oral oncology product for the treatment of prostate cancer, which is in Phase I clinical testing.  This program aims to be the first oral product in the area of Gonadotropin-Releasing Hormone (GnRH) analogues. Products in this class also have several additional indications for male and female reproductive health, and

·      MER 102, an oral anticoagulant, is in preclinical testing. This program aims to be the first oral product in the Low Molecular Weight Heparin (LMWH) class of drugs, and to offer patients an alternative to daily injections.

Merrion has agreements with several pharmaceutical companies. In particular Merrion has partnered with:

·    Novo Nordisk A/S, to develop oral insulin analogues and to develop and commercialise oral formulations of a Novo Nordisk proprietary GLP-1 receptor agonist, using Merrion's proprietary (GIPET®) technology. Under these agreements, Merrion may receive up to US$116.0 million in license and milestone payments, as well as potential future development fees and royalties on sales, and

·    Ferring Pharmaceuticals, a Swiss based international pharmaceutical company, in the form of an oral drug delivery research collaborative program with on an undisclosed compound. The aim of this study is to evaluate Merrion's GIPET® technology to boost the compound's oral bioavailability.

Merrion has operations in Dublin, Ireland and Wilmington, NC, USA.

Enquiries

Merrion Pharmaceuticals

Jonathan O'Connell, Chief Financial Officer

+353 (0)1 6729272

Goodbody Corporate Finance

Finbarr Griffin

Diane Hodgson

+353 1 667 0400

Operating review

In 2009, we set out to strengthen the Merrion team and to progress with our internal projects while delivering high quality service to our program partners. By the end of the 2009 year, the Merrion team had grown to 40 compared to 23 at the end of the prior year. Significant progress was made during the year in both our internal and external programs.

Clinical trials and internal projects

Merrion has four internal product development programs based on its GIPET® technology, as follows:

Orazol (MER 101) is an oral bisphosphonate for oncology indications. Orazol is a once weekly tablet form of zoledronic acid, which is only available as an intravenous infusion (Zometa® and other trademarks, Novartis). Zoledronic acid is a very potent and thoroughly investigated bisphosphonate compound, which has been used to treat over 3 million patients worldwide. Orazol, as a weekly tablet formulation offers many new potential advantages to patients, physicians and healthcare providers.

During 2009, Merrion announced positive final results on a key multicentre Phase II study on its Orazol drug (MER 101). These results show that weekly therapy with 20mg Orazol (tablet) is as therapeutically effective from the first week, as monthly treatment with the intravenous drug Zometa® (4mg), based on movements in observed levels of critical bone biomarkers. Based on the results obtained, Orazol has proven to be effective, safe and has the potential to improve the quality of life for users. Changes in important bone biomarkers, like NTX, have been correlated with improvement in the key clinical outcomes such as skeletal related events (e.g. factures and death). Two oral (Orazol) dosing regimens were evaluated in this study and compared to the current standard Zometa® infusion treatment. The study, conducted in hormone refractory prostate cancer patients with proven bone metastases, enrolled 30 patients at oncology centres in the US and Europe. The purpose of the study was to show therapeutic equivalence between the Orazol weekly tablet and the Zometa® (4mg) monthly infusion. The conclusions were as follows:

•        Based on the biomarkers of bone resorption (breakdown) both the Orazol treatment regimens were therapeutically equivalent to the Zometa® regimen.

•        The Orazol tablet was well tolerated by the patients in the trial.

MER 102, an oral anticoagulant, is in preclinical testing. This program aims to be the first oral product in Low Molecular Weight Heparin (LMWH) class of drugs, and to offer patients the alternative to daily injections.

Almerol (MER 103) which is also an oral bisphosphonate, for the treatment of osteoporosis, has completed Phase II clinical trials. Based on the market leading drug, Fosamax®, this program aims to provide similar absorption, with just 8% of the current dose, and a simplified dosing regimen with an improved side effect profile.

Acyline (MER 104) is a second oral oncology product for the treatment of prostate cancer, which is in Phase I clinical testing.  This program aims to be the first oral product in the area of Gonadotropin-Releasing Hormone (GnRH) analogues. Products in this class also have several other male/female health indications.

In March 2010, we announced the issuance of United States Patent No. 7,658,938, "Solid Oral Dosage Form Containing an Enhancer".  The enhancers covered by the patent have the ability to enhance oral absorption many fold compared to standard formulations. This technology can therefore be used to enable oral (tablet) administration of compounds that are normally administered only as injectables, usually in hospital or clinic settings. Efficacy, safety and side effect profiles of drugs can be improved substantially using this delivery technology. In addition, the new products developed have potential for very significant quality of life improvements for patients and substantial economic improvements for hard pressed healthcare systems.

Partner programs

In January 2009, Merrion announced the signing of a development and license agreement with Novo Nordisk A/S, a world leader in diabetes medicine, to develop and commercialise oral formulations of a Novo Nordisk proprietary GLP-1 receptor agonist, using Merrion's proprietary (GIPET®) oral delivery technology. This is our second development and license agreement with Novo Nordisk; the first was signed in November 2008 and it focuses on the development of oral insulin analogues. Under these agreements, Merrion may receive up to US$116 million in license and milestone payments, for the first product which reaches the market based on the achievement of certain development, regulatory and sales milestones, as well as potential future development fees and royalties on sales.

In December 2009, Novo Nordisk initiated its first Phase I clinical trial with an oral insulin analogue, using Merrion's absorption enhancing GIPET® technology. Having met all agreed deadlines, Merrion received a development milestone of US$2.0 million on initiation of this Phase I clinical trial. This is the first development milestone payment under this agreement. Results of this trial are expected by Novo Nordisk in 2011.

In September 2009, we commenced a second oral drug delivery research collaborative program with Swiss based international pharmaceutical company Ferring Pharmaceuticals, on an undisclosed compound. The aim of this study is to evaluate Merrion's GIPET® technology to boost the compound's oral bioavailability.

Facility acquisition

On 22 July 2009, Merrion acquired a 28,891 sq. ft. pharmaceutical facility in Citywest, Co. Dublin. This facility was previously used for oral formulation development and manufacturing and its custom built design and high level specification makes it an ideal site for Merrion. The facility represents a fivefold increase in capacity compared to our current facility. Merrion paid a total of €3.75 million for the facility and its pharmaceutical equipment, all of which is relevant to Merrion's current activities. This purchase has provided much needed additional research and development space for our team to undertake our existing workload and to exploit further the expanding potential of Merrion's technologies.

Consideration for this Citywest facility amounted to €3.75 million. This was satisfied by €0.9 million in cash and €2.85 million in secured borrowings. €2.1 million of the €2.85 million secured borrowings is in the form of a 15 year mortgage with an additional €0.75 million in the form of a finance lease for the equipment component which is repayable over 4 years.

Personnel changes

In February 2009, Mr. Paddy O'Sullivan was appointed Chairman of the Merrion Board. He replaced Dr. Michael McKenna who remains as a non executive Director of the Company. Mr Harry Stratford was appointed Chairman of Merrion's Nomination and Governance Committee on 11 February 2009.

Financial review

Income statement

Revenues and Cost of Sales.  Revenues comprise development fees from partner agreements, milestone payments and the amortisation of up-front license payments.  Total revenues were €6.34 million for the year ended 31 December 2009 compared to approximately €1.34 million for the year ended 31 December 2008.

Our cost of sales consists of direct third-party expenditures, royalty expenses and allocated salaries related to our development fees recognised in the year. We had approximately €1.26 million of direct costs associated with our revenues generated for the year ended 31 December 2009 compared to approximately €0.45 million for the year ended 31 December 2008. This represents a significant improvement in gross margin which was 80% in 2009 compared to 67% in the previous year, due to a larger percentage of revenue being made-up of license revenue.

Research and Development Expenses.  Research and development ("R&D") expenses  comprise salaries, overhead and consumables, patent costs, share-based compensation expense, clinical trial costs reduced by R&D tax credits.  R&D expenses during the year ended 31 December 2009 increased by 13% to €4.41 million compared to €3.90 million for the comparative year. The increase was due primarily to clinical trials and salary costs offset by R&D tax credits of €0.84 million that the Company is entitled to claim back on R&D expenses incurred in 2009. Clinical trial costs increased principally as a result of the Orazol (MER 101) Phase II trial for which results were announced in May 2009. Salary costs increased as additional scientific staff were recruited for our formulation, analytical and quality departments.

General and Administrative Expenses.  General and administrative ("G&A") expenses comprise salaries, professional fees, office overhead, share-based compensation expense and other support costs.  G&A expenses increased by 2% to €2.48 million for the year ended 31 December 2009 compared to €2.42 million for the year ended 31 December 2008.  This increase was primarily due to increased salary costs and professional fees during the year.

Net Finance Income/Expense.  Net finance income was €0.18 million for the year ended 31 December 2009 compared to €0.36 million for the same period last year.  The change year on year was as a result of the finance expense arising on the mortgage and finance leases entered into during the year following the acquisition of the new Citywest facility.

Net Loss.  Our net loss was €1.63 million for the year ended 31 December 2009 compared to a net loss of €5.06 million for the year ended 31 December 2008. The reduction in our net loss was primarily due to the increase in revenue and the R&D tax credit during the year offset by increased directly attributable cost of sales and R&D costs from clinical trials and staff headcount.

Balance sheet

Cash and cash equivalents as at 31 December 2009 totalled €7.22 million, a decrease of 11% as compared to €8.14 million as at 31 December 2008. The decrease in cash and cash equivalents of €0.92 million was primarily attributable to operating cash outflows of €0.90 million and the acquisition of property, plant and equipment of €4.80 million, of which €3.37 million was financed through a secured loan and finance leases. The primary components of cash used in operating activities comprised the net loss for the period (adjusted to exclude non-cash items), an increase in working capital balances and a decrease in net interest income.  These cash outflows were offset by proceeds from the issue of share capital which amounted to €1.50 million, comprising an investment of €0.90 million by Novo Nordisk in January 2009 and an investment of €0.60 million by Enterprise Ireland in October 2009. 

Significant balance sheet movements year on year include an increase of 228% in current trade and other receivables to €2.47 million (2008: €0.75 million), a 100% increase in non-current other receivables of €0.56 million (2008: €Nil) and an 84% increase in deferred income (current and non-current) to €4.45 million (2008: €2.42 million).  The increases are primarily attributable to the increase in activity with Novo Nordisk and to a lesser extent, R&D tax credits receivable. Following the acquisition of the Citywest facility, the loans and borrowings balance (current and non-current) at the year end was €3.26 million, (2008: €Nil)

Overall, the management team is satisfied with the results from the 2009 financial year. With cash and cash equivalents of €7.22 million, Merrion remains in a strong financial position for the year ahead.

Principal risks and uncertainties

As with any drug development company, the Company has a number of business risks. Our operating performance is subject to certain risks and uncertainties including, but not limited to, the following principal items outlined below:

Development risks

The Company currently has four internal product candidates based on the GIPET® oral delivery-enabling technology. The business depends primarily on the Company's ability to develop commercially viable formulations utilising its technologies, successfully complete clinical trials, obtain required regulatory approvals and successfully commercialise the product candidates. If these clinical trials or any further clinical trials fail, if the Company  does not obtain required regulatory approvals, or if it fails to commercialise any of the product candidates, Merrion may be unable to generate sufficient revenues to attain profitability or to continue business operations and Merrion's reputation in the industry and in the investment community would likely be significantly damaged, each of which would cause the share price to decline and investors to lose all or part of their investment.

Commercialisation risks

A key element of the business strategy is to collaborate, particularly with leading pharmaceutical companies, to develop and commercialise product candidates. The Company currently has license and development agreements with Novo Nordisk and a collaboration agreement with Ferring Pharmaceuticals, but may not be able to negotiate acceptable arrangements with other collaborators. Moreover, such arrangements may involve sharing of profits from sales, requirements to relinquish certain of the rights to the Company's products or marketing territories and impositions of other limitations on operations. These arrangements may not be scientifically or commercially successful. The termination of any of these arrangements might adversely affect Merrion's ability to develop and commercialise its product candidates.

Intellectual property risks

Some of the Company's product candidates combine the Company's GIPET delivery system with certain drug compounds currently protected by patents held by others that are scheduled to expire in the coming years. The Company will not be able to commercialise the product candidates before such patents expire without obtaining a license, and such license may not be available on acceptable terms, if at all. In addition, the owners of the patents may be able to obtain extensions on the exclusivity period afforded by such patents, which would further delay the commercialisation of the product candidates unless the Company is able to obtain a license.

The Company's ability to commercialise its products will depend, in part, on its or its collaborators' ability to obtain patents, to enforce those patents and preserve trade secrets, and to operate without infringing on the proprietary rights of others. Any such inability to achieve meaningful protection could have a material adverse effect on the Company by, for example, making it easier for other pharmaceutical companies to enter target markets and compete with future products. The Company may also be challenged on its own patent filings which may further delay or prevent the commercialisation of our product candidates.  This would have a material adverse effect on Merrion's business, financial condition and prospects.

Financing risks

The Company is a development stage enterprise.  It is loss making and has negative operating cash flows.  This is common for development companies in the life sciences industry.  Up until December 2009, the Company has financed its operations and internal growth principally through an initial public offering, private placements of debt and equity and to a significantly lesser extent through revenues under service and license arrangements with pharmaceutical companies. As at 31 December 2009, the Company had cash and cash equivalents of €7.22 million and continues to manage and contain operating costs in order to ensure that sufficient medium term funding is available. In July 2009, the Company entered into new mortgage and finance lease arrangements in connection with its acquisition of the Citywest facility. Additional finance costs of €0.06 million arose in 2009 in connection with the mortgage and finance lease on the new Citywest facility.  Annual finance costs in this respect will be higher in future periods when a full year's interest charge will arise.  In addition, as floating interest rates apply in respect of the mortgage facility, the Company is exposed to financial risks related to changes in interest rates.  During the year proceeds from the issue of share capital amounted to €1.50 million.

Merrion Pharmaceuticals plc

Unaudited Condensed Consolidated Preliminary Income Statement for the year ended 31 December 2009

The accompanying notes are an integral part of these condensed consolidated financial statements.