Business context and reporting period
This is Inotek Pharmaceuticals Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017, not a standalone Rocket Pharmaceuticals filing. Inotek, a clinical-stage company, discontinued trabodenoson development after its Phase 3 monotherapy and Phase 2 combination trials failed to meet primary endpoints. It was pursuing a proposed merger with privately held Rocket Pharmaceuticals, Ltd.; completion remained subject to approvals and other conditions.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data. Inotek had no product revenue; margins are therefore not meaningful.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Research and development expense | 2.8 | 8.4 | 13.5 | 22.5 |
| General and administrative expense | 3.9 | 2.3 | 9.0 | 7.1 |
| Operating loss | 6.7 | 10.7 | 22.5 | 29.6 |
| Net loss | 7.4 | 11.1 | 24.6 | 29.9 |
| Net loss per share | $0.27 | $0.41 | $0.91 | $1.12 |
- At September 30, 2017, cash and cash equivalents were $49.1 million and short-term investments were $54.0 million, totaling $103.1 million, down from $126.5 million at year-end 2016. Current assets were $103.9 million; current liabilities were $3.8 million.
- Operating cash use for the nine months was $23.1 million, versus $26.1 million in 2016. Investing activities provided $42.5 million, principally from investment maturities; financing provided $0.02 million, versus $52.9 million in 2016, when notes and equity were issued.
- Convertible notes had $52.0 million principal due August 2021, a 5.75% coupon and a 7.3% effective rate; their net carrying value was $49.4 million. Total liabilities were $53.6 million. Lease and note principal-and-interest commitments totaled $66.3 million.
Material changes versus the prior comparable period
- R&D expense fell 67% in Q3 and 40% for the nine-month period, primarily reflecting reduced clinical and preclinical activity and discontinuation of trabodenoson.
- G&A rose 69% in Q3 and 26% for the nine-month period, largely due to merger-related professional fees, litigation and, year to date, stock-based compensation.
- Net loss narrowed year over year, but interest expense rose with the 2021 notes issued in 2016. Cash-flow comparisons also reflect the prior-year note and equity financing and investment purchases/maturities.
Outlook, risks and unusual items
- Management estimated available funding could sustain operations into 2019, based on current assumptions. It expected lower R&D expense and minimal future external R&D spending; it also expected continued merger costs and said 2017 aggregate operating expenses were not expected to exceed 2016, excluding strategic transaction-specific expenses.
- The merger was targeted for the first quarter of 2018. The stated illustrative ownership split was approximately 19% for Inotek holders and 81% for Rocket holders, based on specified valuation and net-cash assumptions; the exchange ratio could change with Inotek’s net cash at closing. The agreement contemplated a reverse split, a company name change to Rocket Pharmaceuticals, Inc. and Nasdaq listing approval.
- Risks include merger failure or delay, additional financing needs or liquidation if no alternative transaction is completed, dilution and net-cash adjustments, Nasdaq listing requirements, and potential cash repayment demands under the notes after certain change-of-control or delisting events. A $2.0 million termination fee may apply in specified circumstances; Inotek also agreed to reimburse up to $0.5 million of Rocket’s expenses if Inotek stockholders do not approve the agreement.
- Q3 charges included $0.8 million of severance for ten terminated employees, $0.2 million of incremental stock-award modification expense and a $0.4 million impairment of laboratory equipment. Inotek also disclosed a securities class action alleging misleading statements about trabodenoson trials; defendants moved to dismiss in October 2017. The claimed damages were unspecified.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing entity and transaction status: this 10-Q is Inotek’s, and the Rocket merger was proposed, not completed, as of the report.
- Review the merger proxy and agreement for closing conditions, the net-cash calculation, ownership adjustment, dilution, termination provisions and Nasdaq/reverse-split requirements.
- Assess cash burn, merger and litigation costs, severance and other obligations against the stated runway; the filing’s runway estimate depends on management assumptions.
- Review the $52 million note principal, interest obligations and provisions that could require repurchase, particularly if a change of control or delisting occurs.
- Track the securities litigation, its potential costs and outcome, and any effect of transaction expenses or other liabilities on merger net cash.