Rocket Pharmaceuticals, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 8, 2019. Dollar figures below are in millions unless stated otherwise. Rocket is a clinical-stage gene-therapy company with no product revenue. The January 4, 2018 reverse merger is accounted for as a reverse acquisition, with Rocket Ltd as accounting acquirer; pre-merger historical results therefore reflect Rocket Ltd, making comparisons with the combined company imperfect.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $53.3 | $14.9 |
| General and administrative expense | $17.9 | $4.9 |
| Operating loss | $(71.2) | $(19.8) |
| Net loss | $(74.5) | $(19.6) |
| Basic and diluted loss per share | $(1.89) | $(2.88) |
| Cash used in operating activities | $(53.8) | $(16.0) |
Fourth quarter: Revenue was zero; operating expenses were $26.5 million, operating loss was $26.5 million, net loss was $27.3 million, and loss per share was $0.66. Fourth-quarter 2017 operating expenses and net loss were $6.7 million and $6.7 million, respectively. The filing does not give a clear quarter-specific explanation for the 2018 fourth-quarter increase.
Liquidity and debt: At year-end, cash and cash equivalents were $111.4 million and investments were $101.8 million, for combined cash, cash equivalents and investments of $213.1 million. Current assets were $209.1 million and current liabilities were $15.4 million. Management expected available resources to fund operations and capital expenditures into the second half of 2020. The company had $52.0 million principal amount of unsecured 5.75% convertible notes due August 2021, carried at $41.4 million after discount; effective interest rate was 15.3%. Operating lease obligations totaled $28.7 million, including substantial long-term commitments.
There were no meaningful revenue or profit margins to assess. The company reported an accumulated deficit of $105.9 million and expects continued losses and significant additional R&D spending. No cash dividends are anticipated.
Material changes and notable items
- Annual R&D expense increased $38.4 million year over year, driven principally by $22.3 million of higher manufacturing and process-development costs, $6.9 million of additional license fees, $6.9 million of higher R&D share-based compensation and $2.4 million of increased compensation.
- Annual G&A expense rose $13.0 million, including merger-related and transition costs and increased public-company, personnel, insurance and legal expenses. Total share-based compensation was $13.6 million, versus $1.3 million in 2017.
- Net loss increased by $54.9 million. In addition to higher operating costs, 2018 included $6.0 million of interest expense on the assumed convertible notes, partly offset by investment income and discount accretion.
- Operating cash use rose to $53.8 million from $16.0 million. Financing activities provided $153.5 million, primarily from common-stock offerings and a related-party private placement. The company also acquired $76.3 million cash in the reverse merger; year-end liquidity reflects both financing and acquisition effects.
- A $7.0 million upfront payment for the REGENXBIO AAV-9 license for Danon disease was expensed in R&D. The merger brought $30.8 million of goodwill; management reported no goodwill impairment in 2018. The merger also caused significant equity issuance and conversion of Rocket Ltd preferred shares into common stock.
Business outlook, commentary and risks
Rocket’s pipeline included clinical-stage lentiviral-vector programs for Fanconi anemia (FA) and LAD-I; preclinical programs for pyruvate kinase deficiency (PKD) and infantile malignant osteopetrosis; and a preclinical AAV program for Danon disease. In 2018, the FDA cleared U.S. INDs for FA and LAD-I; RP-L102 received Fast Track and Regenerative Medicine Advanced Therapy designations, and RP-L201 received Rare Pediatric Disease and Fast Track designations. Management planned to begin U.S. FA treatment in 2019, initiate LAD-I studies in 2019 and start a PKD Phase 1 trial in the second half of 2019. The Danon IND was cleared in January 2019, after year-end.
Management expects R&D and G&A spending to increase as programs advance and clinical, manufacturing and public-company activities expand. The runway estimate is not a guarantee: Rocket stated that it will need substantial additional capital over time and that failure to raise it could force delays, reductions or termination of development. Potential equity or convertible-debt financing could dilute shareholders.
Key risks include uncertain clinical safety and efficacy, regulatory review and trial enrollment; complex gene-therapy manufacturing and dependence on third-party suppliers; limited commercial-scale manufacturing experience; reliance on licensed intellectual property and associated milestones and royalties; competition, reimbursement and pricing uncertainty; and the need for future financing. A new 15-year New Jersey facility lease carried an estimated $26.5 million commitment. The previously disclosed Inotek securities class action was dismissed with prejudice, and the appeal was voluntarily dismissed; the filing reported no other litigation expected to have a material adverse effect.
Important facts for investors to verify
- Whether clinical results for RP-L102 and RP-L201 support the planned study timelines, and whether trial enrollment, safety or efficacy issues change those plans.
- Whether management’s second-half-2020 funding runway remains supportable given the higher operating cash use, development plans, lease commitments and additional funding needs.
- The carrying value, conversion terms and potential dilution associated with the $52.0 million convertible notes, alongside the impact of options and future equity issuance.
- How much of the 2018 expense increase reflects recurring program investment versus merger-related, licensing, manufacturing and share-based compensation items.
- Execution of the New Jersey facility build-out, manufacturing readiness and dependence on external vector and drug-product suppliers.