Rocket Pharmaceuticals, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. Rocket is a clinical-stage gene-therapy biotechnology company with no approved products and no product revenue. The January 2018 reverse merger with Inotek makes year-over-year comparisons less directly comparable; Rocket Ltd is the accounting acquirer, and prior share information was adjusted for the exchange ratio.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $13.1 million | $4.9 million | $29.6 million | $10.0 million |
| General and administrative expense | $2.3 million | $1.8 million | $15.0 million | $3.1 million |
| Net loss | $16.1 million | $6.7 million | $47.2 million | $12.9 million |
| Basic and diluted loss per share | $0.40 | $0.99 | $1.22 | $1.90 |
Operating margins are not meaningful because the company has no revenue. Q3 operating expenses were $15.3 million. Interest expense was $1.2 million in Q3 and $4.0 million for the nine-month period, largely reflecting the convertible notes assumed in the merger; interest income was $0.5 million and $1.3 million, respectively.
At September 30, cash and cash equivalents were $38.1 million, investments were $121.4 million, and restricted cash was $1.6 million. Cash, cash equivalents and investments totaled $159.5 million; management expected available resources to fund operating and capital needs into 2020. Current assets were $128.8 million and current liabilities were $10.3 million. Accumulated deficit was $78.6 million.
Nine-month operating cash use was $33.0 million, versus $10.0 million in 2017. Investing activities used $24.3 million, including investment purchases, partly offset by merger-acquired cash and investment maturities. Financing activities provided $78.7 million, primarily from the January common-stock offering, which generated $78.5 million net proceeds. Cash, cash equivalents and restricted cash increased by $21.4 million during the period.
The company assumed $52.0 million principal amount of unsecured 5.75% convertible notes due August 2021. Their September 30 carrying value was $40.6 million after an unamortized discount; the effective interest rate was 15.3%. Notes are convertible into shares and include specified change-of-control repurchase and default provisions.
Changes, developments and outlook
- Compared with 2017, nine-month net loss increased $34.3 million. R&D expense rose $19.6 million, primarily from manufacturing and process development, higher R&D share-based compensation and increased headcount. G&A rose $11.9 million, including merger-related and transition costs, stock compensation, added personnel and public-company costs.
- Total share-based compensation was $10.8 million for the first nine months, compared with $1.0 million in 2017. The merger also accelerated vesting of Inotek equity awards and generated related compensation expense.
- Rocket reported clinical-stage lentiviral work in Fanconi anemia (RP-L102) and preclinical programs for LAD-I, pyruvate kinase deficiency, infantile malignant osteopetrosis and an AAV candidate. Its CRISPR/Cas9 program was in discovery. Management described plans to progress RP-L102 toward a potential global registrational study; the company reported FDA clearance of its U.S. IND in October 2018 and expected U.S. trials to begin in early 2019. These were development plans, not assured outcomes.
- RP-L102 received FDA Rare Pediatric Disease designation and EMA Advanced Therapy Medicinal Product classification. Management discussed encouraging but preliminary clinical observations; the filing emphasizes that early data may not predict later results.
- The May 2018 Stanford collaboration supports Fanconi anemia and PKD research and a laboratory expansion, with up to $3.5 million in funding. Rocket paid $1.4 million during Q3; remaining payments depend on milestones.
- A 15-year New Jersey lease for approximately 92,000 square feet carries an estimated $26.5 million commitment. The filing also reports $28.1 million in aggregate remaining lease commitments across leases as of September 30.
- No formal revenue or earnings guidance was provided. Management expects R&D and G&A spending to increase as programs advance, trials and manufacturing expand, and public-company operations continue. The company expects to need additional capital over the longer term; financing may dilute shareholders or require unfavorable terms or rights concessions.
Risks, contingencies and other items
Key risks include clinical and regulatory failure or delay, limited rare-disease patient populations, manufacturing and third-party dependence, uncertain gene-therapy safety and durability, intellectual-property and licensing exposure, competition, and the need for future financing. The company has never generated product revenue and may never become profitable. Its 2021 notes, long-term lease commitments and planned development spending are additional obligations to monitor.
A shareholder securities class action concerning legacy Inotek statements was dismissed with prejudice; the plaintiffs withdrew their appeal, and the First Circuit entered judgment dismissing the action in September 2018. The filing says it was not aware of other litigation expected to have a material adverse effect. Management reported disclosure controls and procedures were effective at the reasonable-assurance level and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether clinical progress, enrollment, safety and efficacy support RP-L102’s planned U.S. trial and potential registrational path.
- Whether the stated cash runway into 2020 remains achievable as R&D, manufacturing and facility spending rise.
- The terms, dilution potential and cash implications of the convertible notes, outstanding options and future financing needs.
- Whether the New Jersey facility and other lease obligations, manufacturing capacity and milestone commitments remain aligned with the pipeline plan.
- How much reported loss growth reflects recurring research and public-company costs versus merger-related and share-based compensation items.