Rocket Pharmaceuticals, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless noted otherwise, financial amounts are in millions of dollars; the filing presents financial statements in thousands. Rocket is a clinical-stage gene-therapy company focused on rare pediatric diseases and has not generated revenue.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $10.8 | $2.8 | $16.5 | $5.1 |
| General and administrative expense | $4.1 | $0.7 | $12.8 | $1.3 |
| Total operating expenses | $14.9 | $3.5 | $29.3 | $6.4 |
| Net loss | $15.8 | $3.3 | $31.1 | $6.2 |
| Basic and diluted loss per share | $0.40 | $0.49 | $0.82 | $0.91 |
There is no meaningful revenue or profit margin to report because the company has no revenue. Q2 2018 operating expenses were $14.9 million, versus $3.5 million a year earlier. For the first half, expenses rose to $29.3 million from $6.4 million. Per-share loss narrowed despite the larger net loss, principally alongside a substantially higher weighted-average share count following the merger and financing.
- Cash and investments: $171.5 million at June 30, 2018, including $52.5 million cash and cash equivalents and $118.9 million investments. Restricted cash was an additional $1.6 million.
- Cash flows, first half: $21.3 million used in operating activities; $21.3 million used in investing activities; and $78.5 million provided by financing activities. Cash, cash equivalents and restricted cash increased $35.8 million to $54.2 million.
- Debt: $52.0 million principal of unsecured 5.75% convertible notes due August 2021, assumed in the merger. Carrying value was $39.8 million after an unamortized discount; effective interest rate was 15.3%. First-half interest expense was $2.8 million.
- Liquidity and equity: Current assets were $134.6 million and current liabilities $10.1 million. Shareholders’ equity was $157.1 million; accumulated deficit was $62.5 million.
Material changes and key developments
- The January 4, 2018 reverse merger is accounted for as a reverse acquisition, with Rocket Ltd as accounting acquirer and Inotek as the acquired company. Historical share amounts were adjusted for the exchange ratio; period-to-period comparisons also reflect the merger and related expenses.
- In January, Rocket raised $78.5 million net from a public offering of 6.325 million shares at $13.25 per share. Preferred shares converted into common stock in connection with the merger. The company reported 39.5 million common shares outstanding at June 30 and 39.7 million as of August 13.
- First-half R&D expense increased $11.4 million year over year, primarily due to $7.0 million more manufacturing and process-development spending, $1.4 million for Stanford collaboration activity, and higher share-based compensation.
- First-half G&A expense increased $11.5 million. The filing attributes $5.3 million to merger-related expenses, including share-based compensation and transition costs, with the remaining increase reflecting public-company and operating costs.
- Share-based compensation totaled $8.2 million in the first half, versus $0.3 million in 2017. The filing cites accelerated vesting and modification of certain Inotek awards in connection with the merger; $24.0 million of compensation cost remained unrecognized at June 30.
Outlook, risks and contingencies
- Management expects cash resources to fund operating expenses and capital needs into 2020. It expects expenses and operating losses to rise as clinical, preclinical, manufacturing and public-company activities expand; additional financing may ultimately be required.
- RP-L102 for Fanconi anemia was in Phase 1/2 testing. Interim data presented in May described five patients; the filing says no patient had yet received the intended combination of cell dose and vector-copy number. Rocket planned discussions with regulators toward a potential global registrational study in 2019 and expected additional data in 2019. RP-L101 was in a separate Phase 1 study. Other listed programs were preclinical or in discovery.
- RP-L102 received EMA Advanced Therapy Medicinal Product classification in June and FDA Rare Pediatric Disease designation in July 2018. These designations do not themselves establish approval or successful development.
- On May 16, Rocket agreed to fund up to $3.5 million for Stanford’s cell and gene therapy laboratory expansion; $1.4 million was accrued at quarter-end. Stanford was also identified as a planned research center for FA and PKD trials.
- Subsequent event: On August 14, 2018, Rocket entered a 15-year lease for approximately 92,000 square feet in Cranbury, New Jersey. The filing estimates total commitments of approximately $28.2 million, with base rent subject to annual increases.
- Lease changes included an amended New York lease, for which the company remained responsible for the vacated portion pending a replacement tenant, and abandonment of Inotek’s former Massachusetts office. A sublease for part of the Massachusetts space was signed in July.
- A securities class action relating to Inotek’s past statements about trabodenoson was dismissed with prejudice on June 27, 2018; plaintiffs appealed on July 27. Rocket said it would continue to defend the claim.
- Principal risks include clinical and regulatory uncertainty, manufacturing and third-party dependence, intellectual-property and licensing risks, competition, and the possibility that financing will not be available on acceptable terms. The filing reports effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether RP-L102 clinical data, patient dosing and enrollment support the stated regulatory and 2019 development plans.
- Whether operating cash burn and planned R&D/manufacturing investment remain consistent with management’s runway estimate into 2020.
- The terms and potential dilution or cash obligations associated with the convertible notes, options and other share-based awards.
- The final commitments, commencement timing and facility-related costs of the New Jersey lease, alongside obligations under existing leases.
- The status of the appealed securities litigation and any material updates to merger accounting or the provisional acquisition valuation.