Rocket Pharmaceuticals, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial amounts below are in U.S. dollars; unless noted, amounts are in millions. Rocket is a clinical-stage gene-therapy company developing treatments for rare pediatric diseases and has no approved products or product revenue.
Business context and reporting period
On January 4, 2018, Inotek Pharmaceuticals completed a reverse merger with Rocket Pharmaceuticals, Ltd. Rocket Ltd was the accounting acquirer, so its historical financial statements remain the basis for reported results; 2018 includes Inotek from the merger date, while the 2017 reported comparison is Rocket Ltd alone. The merger, related share conversions and public offering materially changed the company’s capital structure. The company’s shares began trading as RCKT on Nasdaq on January 5.
Rocket reported two Fanconi anemia lentiviral-vector programs in partner-sponsored Phase 1 and Phase 1/2 studies. Other lentiviral programs were preclinical; its AAV program was in preclinical, IND-enabling work, and its CRISPR/Cas9 program was in discovery.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $5.743 | $2.285 |
| General and administrative expense | $8.662 | $0.585 |
| Total operating expenses | $14.405 | $2.870 |
| Net loss | $(15.343) | $(2.678) |
| Net loss per share, basic and diluted | $(0.42) | $(0.39) |
| Net cash used in operating activities | $(11.601) | $(3.723) |
Gross and operating margins are not meaningful because the company had no revenue. At March 31, 2018, cash and cash equivalents were $171.136, short-term investments were $11.561, and combined cash, cash equivalents and short-term investments were $182.697. Total assets were $217.165; current liabilities were $7.337; total liabilities were $47.019; and shareholders’ equity was $170.146. Accumulated deficit was $46.698.
The company assumed convertible notes with $52.0 principal in the merger. At quarter-end, their carrying value was $39.084, net of an unamortized discount of $12.916. The notes mature August 1, 2021, bear 5.75% stated interest and had a 15.3% effective interest rate.
Material changes versus the prior comparable period
- Operating expenses increased $11.535 year over year; R&D rose $3.458, primarily due to manufacturing and process-development spending and higher share-based compensation.
- G&A increased $8.077. Management attributed approximately $5.3 to merger-related expense, including share-based compensation and post-merger transition costs; other increases included personnel, public-company, legal, rent and insurance costs.
- Net loss increased to $15.343, including $1.427 interest expense associated with the assumed notes, partly offset by $0.288 interest income.
- Operating cash use increased to $11.601. Cash and restricted cash increased by $152.995, reflecting merger-related cash acquired, equity proceeds and other investing activity—not operating cash generation.
- The January public offering sold 6.325 million shares at $13.25 per share and generated $78.518 net proceeds. Cash acquired in the merger was $76.348. Preferred shares converted into common shares in connection with the merger.
Comparability is limited: Q1 2017 reported results are Rocket Ltd historical results, not a combined-company comparison. The filing’s unaudited pro forma presentation, assuming the merger occurred January 1, 2017, shows net losses of $15.998 for Q1 2018 and $15.670 for Q1 2017.
Outlook, commentary, risks and unusual items
- Management expects R&D and G&A expenses to increase as programs advance, clinical and manufacturing activity expands, and public-company costs rise. The filing gives no revenue or earnings guidance.
- Liquidity runway is described inconsistently: the risk note says resources are expected to fund operations “into 2020,” while MD&A specifies “into May 2020.” Management’s estimate depends on plans and development costs.
- The business has no product revenue and expects continuing losses; future development and commercialization require substantial capital. Additional financing may be unavailable or dilutive, or may require restrictive terms or surrender of rights.
- Development risks include uncertain clinical outcomes and patient enrollment, evolving regulatory requirements, manufacturing and third-party execution, intellectual-property and licensing issues, competition, and potential gene-therapy safety concerns.
- Share-based compensation was $5.382, versus $0.099 in Q1 2017. The merger accelerated vesting of Inotek awards; the filing describes $2.997 of remaining option compensation and $0.462 related to an option-term modification. Merger-related pro forma adjustments also identify substantial transaction, compensation and severance items.
- A putative securities class action against Inotek and two individuals alleges misleading statements concerning trabodenoson trials. The company says it is vigorously defending the case; the requested damages are unspecified.
- RTW Investments beneficially owned approximately 39.15% of outstanding shares, giving it significant influence over matters submitted to stockholders.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of March 31, 2018; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Reconcile the stated cash runway (“into 2020” versus “into May 2020”) against planned spending and subsequent development commitments.
- Track operating cash burn, R&D and G&A growth, and the remaining $182.697 of cash, cash equivalents and short-term investments.
- Review clinical progress, safety and enrollment for the partner-sponsored Fanconi anemia trials, and the timing and costs of advancing preclinical programs.
- Assess the $52.0 million face-value notes, their conversion and repurchase provisions, and the effect of the 15.3% effective interest rate.
- Monitor merger accounting and final purchase-price allocation, the impact of one-time merger-related expenses, and dilution from equity awards and future financing.
- Follow the status and potential consequences of the securities litigation and the company’s reliance on licensed intellectual property and third-party research and manufacturing partners.