UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20152017

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission File Number: 001-36829

 

InotekRocket Pharmaceuticals, CorporationInc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

Delaware

04-3475813

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

 

430 East 29th Street, Suite 1040

New York, NY

10016

91 Hartwell Avenue

Lexington, MA

02421
(Address of Principal Executive Offices)

(Zip Code)

(781) 676-2100(646) 440-9100

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Common Stock, $0.01 par value

NASDAQ

Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No   x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

The aggregate market value of the registrant’s voting and non-voting common stockequity held by non-affiliates of the registrant (without admitting that any person whose shares are not included inas of June 30, 2017 was approximately $45.4 million, based upon the closing price on the Nasdaq Global Market reported for such calculation is an affiliate) computed by reference todate. Shares of the price at which theregistrant’s common stock was last sold on June 30, 2015 was $21.5 million.held by each officer and director and by each person who is known to own 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 22, 2016,1, 2018, there were 26,423,39439,402,023 shares of common stock, $0.01 par value per share, outstanding.

Documents Incorporated by Reference

Part III of this annual report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, in any case, to be filed within 120 days of the end of the period covered by this Annual Report.

 

 


Table of Contents

 

Page

PART I.

Item 1.

Business

Business

1

Item 1A.

Risk Factors

41

26

Item 1B.2.

Properties

Unresolved Staff Comments79

49

Item 2.3.

Legal Proceedings

Properties79

49

Item 3.4.

Legal Proceedings79

Item 4.

Mine Safety Disclosures

79

49

PART II.

PART II.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

80

50

Item 6.

Selected Financial Data

81

51

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

82

53

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

95

61

Item 8.

Financial Statements and Supplementary Data

96

62

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

96

62

Item 9A.

Controls and Procedures

96

62

Item 9B.

Other Information

97

63

PART III

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

98

64

Item 11.

Executive Compensation

105

64

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

110

64

Item 13.

Certain Relationships and Related Transactions, and Director Independence

113

64

Item 14.

Principal Accountant Fees and Services

116

64

PART IV

PART IV

Item 15.

Exhibits, Financial Statements and Schedules

117

65

SignaturesItem 16.

Form 10-K Summary

118

67

Signatures

68

PRESENTATION NOTE: We implemented a 1-for-4 reverse stock split of our common stock on January 4, 2018. All share numbers and prices have been adjusted to reflect the reverse stock split.


FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

our anticipated cash needsthe possibility that the businesses of Inotek Pharmaceuticals Corporation and our estimates regarding our capital requirements and our needs for additional financing;Rocket Pharmaceuticals, Ltd. may not be integrated successfully or such integration may take longer to accomplish than expected;

federal, state, and non-U.S. regulatory requirements, including regulation of our current or any other future product candidates by the U.S. Food and Drug Administration (the “FDA”(“FDA”);

the success, timing and cost of our current Phase 3 program fortrabodenoson as a monotherapy and planned Phase 3 and other clinical trials and anticipated Phase 2 program for our fixed-dose combination product candidate, including statements regarding the timing of initiation and completion of the trials;

the timing of and our ability to submit regulatory filings with the FDA and to obtain and maintain FDA or other regulatory authority approval of, or other action with respect to, our product candidates;

our commercialization, marketingcompetitors’ activities, including decisions as to the timing of competing product launches, generic entrants, pricing and manufacturing capabilities and strategy, including with respect to our potential sales force in the United States and our partnering and collaboration efforts outside the United States;discounting;

third-party payor reimbursement for our current product candidates or any other potential products;

our expectations regarding the clinicalwhether safety tolerability and efficacy results of our clinical trials and other required tests for approval of our product candidates and resultsprovide data to warrant progression of our clinical trials;

the glaucoma patient market size and the rate and degreetrials, potential regulatory approval or further development of market adoptionany of our product candidates;

our ability to develop, acquire and advance product candidates by ophthalmologists, optometristsinto, and patients;

the timing, costsuccessfully complete, clinical studies, and our ability to apply for and obtain regulatory approval for such product candidates, within currently anticipated timeframes, or other aspects of a potential commercial launch ofat all;

our ability to establish key collaborations and vendor relationships for our product candidates and potential future sales of our current product candidates or any other potential products if any are approved for marketing;

our expectations regarding licensing, acquisitions and strategic operations;

the potential advantages of ourfuture product candidates;

our competitors and their product candidates, including our expectations regarding those competing product candidates;

our ability to protectsuccessfully develop and enforce commercialize any technology that we may in-license or products we may acquire;

unanticipated delays due to manufacturing difficulties, supply constraints or changes in the regulatory environment;

our intellectual property rights,ability to successfully operate in non-U.S. jurisdictions in which we currently or in the future do business, including our patentedcompliance with applicable regulatory requirements and trade secret protected proprietary rights inlaws;

uncertainties associated with obtaining and enforcing patents to protect our product candidates;candidates, and our ability to successfully defend ourselves against unforeseen third-party infringement claims;

anticipated trends and challenges in our business and the markets in which we operate.operate;

our estimates regarding our capital requirements; and

our ability to obtain additional financing and raise capital as necessary to fund operations or pursue business opportunities.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Form 10-K.

Any forward-looking statements in this Annual Report on Form 10-K reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and


other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part I, Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 


PARTPART I

Item 1.

Business

Item 1. BusinessMerger of Inotek Pharmaceuticals Corporation and Rocket Pharmaceuticals, Ltd.

On January 4, 2018, Inotek Pharmaceuticals Corporation (“Inotek”) and privately held Rocket Pharmaceuticals, Ltd. (“Private Rocket”) completed a business combination in accordance with the terms of the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated as of September 12, 2017, by and among Inotek, Rome Merger Sub, a wholly owned subsidiary of Inotek (“Merger Sub”), and Private Rocket, pursuant to which Merger Sub merged with and into Private Rocket, with Private Rocket surviving as a wholly owned subsidiary of Inotek. This transaction is referred to as the “Reverse Merger.” Immediately following the Reverse Merger, Inotek changed its name to “Rocket Pharmaceuticals, Inc.” In connection with the closing of the Reverse Merger, our common stock began trading on The Nasdaq Global Market under the ticker symbol “RCKT” on January 5, 2018.

The Reverse Merger will be accounted for as a reverse merger under the acquisition method of accounting. After reviewing the relative voting rights, the composition of the board of directors and the composition of senior management of the combined company after the Reverse Merger, it was determined that Private Rocket will be treated as the accounting acquirer and Inotek will be treated as the “acquired” company for financial reporting purposes under the acquisition method of accounting.

Overview

We arePrior to the Reverse Merger, Inotek was a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of therapies for glaucoma and otherocular diseases, of the eye. Glaucoma is a disease of the eye that is typically characterized by structural evidence of optic nerve damage, vision loss and consistently elevated intraocular pressure, or IOP. Our lead product candidate,trabodenoson, is a first-in-class selective adenosine mimetic that we rationally designedincluding glaucoma. After failing to lower IOP by restoring the eye’s natural pressure control mechanism. We developed this molecule to selectively stimulate a particular adenosine subreceptor in the eye with the effect of augmenting the intrinsic function of the eye’s trabecular meshwork, or TM. The TM regulates the pressure inside the eye and is also the main outflow path for the fluid inside of the eye that often builds up pressure in patients with glaucoma. We believe that by restoring the natural function of the TM and this outflow path, rather than changing the fundamental dynamics of pressure regulation in the eye,trabodenoson’s mechanism of action should result in a lower risk of unintended side effects and long term safety issues than other mechanisms of action. Additionally,trabodenoson’s unique mechanism of action in the TM should complement the activity of existing glaucoma therapies that exert their IOP-lowering effects on different parts of the in-flow and out-flow system of the eye.

Our product pipeline includestrabodenoson monotherapy delivered in an eye drop formulation, as well as a fixed-dose combination, or FDC, oftrabodenoson withlatanoprost given once-daily, or QD. We are also evaluating the potential oftrabodenoson to slow the loss of vision associated with glaucoma and degenerative retinal diseases. Statistically significant results formeet the primary endpointendpoints in its first pivotal Phase 3 trial of our completed Phase 2 clinical trial indicate thattrabodenoson monotherapy has IOP-lowering effects in line with existing therapies, with a favorable safety(“MATrX-1”) and tolerability profile at all doses tested. Our completedits Phase 2 trial oftrabodenoson co-administered in a fixed-dose combination therapy withlatanoprost (“FDC”), Inotek voluntarily discontinued its development of trabodenoson in 2017.

Rocket Pharmaceuticals, Inc., together with its subsidiaries (collectively, “Rocket”), is a multi-platform biotechnology company focused on the development of first-in-class gene therapies for rare and devastating pediatric diseases. Rocket has two lentiviral vector (“LVV”) programs currently undergoing clinical testing targeting Fanconi Anemia (“FA”), a prostaglandin analogue,genetic defect in the bone marrow that reduces production of blood cells or PGA, demonstrated IOP-loweringpromotes the production of faulty blood cells, and three additional LVV programs targeting other rare genetic diseases. In addition, Rocket has an adeno-associated viral vector (“AAV”) program for which it expects to file an investigational new drug (“IND”) application in the next 12 months, which will permit the commencement of human clinical studies thereafter. Rocket has full global commercialization and development rights to all of its product candidates under royalty-bearing license agreements, with the exception of the CRISPR/Cas9 development program (described below) for which Rocket currently has only development rights.

Rocket’s two leading LVV and AAV technology platforms are each being designed in collaboration with leading academic and industry partners. Through its gene therapy platforms, Rocket aims to restore normal cellular function by modifying the defective genes that cause each of the targeted disorders.

Gene Therapy Overview

Genes are composed of sequences of deoxyribonucleic acid (“DNA”), which code for proteins that perform a broad range of physiologic functions in all living organisms. Although genes are passed on from generation to generation, genetic changes, also known as mutations, can occur in this process. These changes can result in the lack of production of proteins or the production of altered proteins with reduced or abnormal function, which can in turn result in disease.

Gene therapy is a therapeutic approach in which an isolated gene sequence or segment of DNA is administered to a patient, most commonly for the purpose of treating a genetic disease that is caused by genetic mutations. Currently available therapies for many genetic diseases focus on administration of large proteins or enzymes and typically address only the symptoms of the disease. Gene therapy aims to address the disease-causing effects of absent or dysfunctional genes by delivering functional copies of the gene sequence directly into the patient’s cells, offering the potential for curing the genetic disease, rather than simply addressing symptoms.

For the development of Rocket’s gene therapy treatments, Rocket is using a modified non-pathogenic virus. Viruses are particularly well suited as delivery vehicles, because they are adept at penetrating cells and delivering genetic material inside a cell. In creating Rocket’s viral delivery vehicles, the viral (pathogenic) genes are removed and are replaced with a functional form of the missing or mutant gene that is the cause of the patient’s genetic disease. The functional form of a missing or mutant gene is called a therapeutic gene, or the “transgene.” The process of inserting the transgene is called “transduction.” Once a virus is modified by replacement of the viral genes with a transgene, the modified virus is called a “viral vector.” The viral vector delivers the transgene into the targeted tissue or organ (such as the cells inside a patient’s bone marrow). Rocket has two types of viral vectors in

1


development, LVV and AAV. Rocket believes that its LVV and AAV-based programs have the potential to offer a significant therapeutic benefit to patients that is durable (long-lasting).

The gene therapies can be delivered either (1) ex vivo (outside the body), in which case the patient’s cells are extracted and the vector is delivered to these cells in a controlled, safe laboratory setting, with the modified cells then being reinserted into the patient, or (2) in vivo (inside the body), in which case the vector is injected directly into the patient, either intravenously (IV) or directly into a specific tissue at a targeted site, with the aim of the vector delivering the transgene to the targeted cells.

Rocket believes that scientific advances, clinical progress, and the greater regulatory acceptance of gene therapy have created a promising environment to advance gene therapy products as these products are being designed to restore cell function and improve clinical outcomes, which in many cases include prevention of death at an early age. The recent FDA approval of Novartis’s treatment for pediatric acute lymphoblastic leukemia (“ALL”) indicates that there is a regulatory pathway forward for gene therapy products.

Pipeline Overview

LVV Programs. Rocket’s LVV-based programs utilize third-generation, self-inactivating lentiviral vectors to target selected rare diseases. Currently, Rocket is developing LVV programs to treat FA, Leukocyte Adhesion Deficiency-I (“LAD-I”), Pyruvate Kinase Deficiency (“PKD”), and Infantile Malignant Osteopetrosis (“IMO”). Brief descriptions of these conditions and the Rocket programs for each is set forth below.

Fanconi Anemia (FA)

Rocket’s LVV-based programs utilize third-generation, self-inactivating lentiviral vectors to correct defects in patients’ hematopoietic stem cells (“HSCs”), which are the cells found in bone marrow that are capable of generating blood cells over a patient’s lifetime. Defects in the genetic coding of hematopoietic stem cells can result in severe, and potentially life-threatening anemia, which is when a patient’s blood lacks enough properly functioning red blood cells to carry oxygen throughout the body. Stem cell defects can also result in severe and potentially life-threatening decreases in white blood cells resulting in susceptibility to infections, and in platelets responsible for blood clotting, which may result in severe and potentially life-threatening bleeding episodes. Patients with FA have a genetic defect that prevents the normal repair of genes and chromosomes within blood cells in the bone marrow, which frequently results in the development of AML (acute myeloid leukemia, a type of blood cancer), as well as bone marrow failure and congenital defects. The average lifespan of an FA patient is estimated to be 30 to 40 years. The prevalence of FA in the US/EU is estimated to be about 2,000.

Rocket currently has the following two LVV-based programs targeting FA:

RP-L101. RP-L101 is a program that Rocket in-licensed from Fred Hutchinson Cancer Center in Seattle, Washington (“Hutch”). RP-L101 is currently being studied in a Phase 1 clinical trial that is treating FA patients at Hutch under an IND sponsored by Hutch. Rocket is entitled to the data from this clinical study and has the commercial rights to the drug being studied under this IND.

RP-L102. RP-L102 is a program that Rocket in-licensed from CIEMAT (Centro de Investigaciones Energéticas, Medioambientales y Tecnológicas), which is a leading research institute in Madrid, Spain. RP-L102 is currently being studied in a Phase 1/2 clinical trial treating FA patients with a modified process under an Investigational Medicinal Product Dossier (“IMPD”) sponsored by CIEMAT. Rocket is entitled to the data from this clinical study and has the commercial rights to the drug being studied under this IMPD.

Rocket expects to announce clinical data from its LVV-based programs targeting FA during the next 12 to 18 months, with the next update expected in the second quarter of 2018.  Rocket expects to advance an LVV-based program targeting FA to the pivotal trial stage in 2019.

Leukocyte Adhesion Deficiency-I (“LAD-I”)

LAD-I is a genetic disorder that causes the immune system to malfunction, resulting in a form of immunodeficiency. Immunodeficiencies are conditions in which the immune system is unable to protect the body effectively from foreign invaders such as viruses, bacteria, and fungi. Starting from birth, people with LAD-I frequently develop serious bacterial and fungal infections. Life expectancy in individuals with LAD-I is often severely shortened. Due to repeat infections, affected individuals may not survive past infancy.

2


Rocket currently has one LVV-based program targeting LAD-I, RP-L201. RP-L201 is a preclinical program that Rocket in-licensed from CIEMAT. This program is currently being developed through an ongoing collaboration with CIEMAT, with a rolling IMPD expected to be filed in the fourth quarter of 2018.

Pyruvate Kinase Deficiency (“PKD”)

PKD is an inherited lack of the enzyme “pyruvate kinase,” which is used by red blood cells. Without this enzyme, red blood cells break down too easily, resulting in a low level of these cells, which in turn causes a form of anemia that can range in severity from mild (asymptomatic) to severe (resulting in childhood mortality or the requirement for frequent, lifelong blood transfusions). The pediatric population is the most commonly and severely affected subgroup of patients with PKD, and pediatric patients often undergo splenectomy (removal of the spleen) and experience jaundice and chronic iron overload.

Rocket currently has one LVV-based program targeting PKD, RP-L301. RP-L301 is a preclinical program that Rocket in-licensed from CIEMAT. This program is currently being developed through an ongoing collaboration with CIEMAT, with a rolling IMPD expected to be filed in the next 12 months.

Infantile Malignant Osteopetrosis (“IMO”)

IMO is a genetic disorder characterized by increased bone density and bone mass secondary to impaired bone resorption. Osteopetrosis is a disorder of bone development in which the bones become thickened. Normally, small areas of bone are constantly being broken down by special cells called osteoclasts, then made again by cells called osteoblasts. In osteopetrosis, the cells that break down bone (osteoclasts) do not work properly, which leads to the bones becoming thicker and not as healthy. IMO is a severe form of osteopetrosis that typically presents in the first year of life and is associated with severe manifestations leading to death within the first decade of life without allogeneic hematopoietic stem cell transplantation (“HSCT”), a procedure in which a person receives blood-forming stem cells from a genetically similar, but not identical donor. For patients who do receive a bone marrow transplant, results have been limited, with frequent graft failure or rejection (graft-versus-host-disease (“GVHD”)) and other severe complications. Untreated, IMO patients may suffer from a compression of the bone-marrow space, which results in bone marrow failure, anemia and increased infection risk due to the lack of production of white blood cells. Untreated IMO patients may also suffer from a compression of cranial nerves, which transmit signals between vital organs and the brain, resulting in blindness, hearing loss and other neurologic deficits.

Rocket currently has one LVV-based program targeting IMO, RP-L401. RP-L401 is a preclinical program that Rocket in-licensed from Lund University, Sweden. This program is currently being developed through an ongoing collaboration with Lund University, with an IMPD expected to be filed upon completion of IND/IMPD-enabling studies.

AAV-based Program

Rocket’s AAV-based program involves the direct injection of the viral vector into the patient, rather than modifying the patient’s cells ex-vivo. In Rocket’s preclinical studies of its AAV-based program to date, this method of therapy has displayed substantial tropism, which is the ability to hone in on the organs most afflicted by the underlying disorder, with the aim of modifying cellular function to enable the production of sufficient quantities of a missing protein to restore proper function to the afflicted cells.

Rocket is currently developing RP-A501, which is an AAV-based program for an undisclosed rare disease. This program is currently in preclinical development, with IND-enabling studies ongoing. Rocket expects to announce preclinical data and the indication for this program in the second half of 2018 and to file an IND for this program in the next 12 months.

CRISPR/Cas9-based program

In addition to its LVV and AAV programs, Rocket also has a program evaluating CRISPR/Cas9-based gene editing for FA. This program is currently in the discovery phase. CRISPR/Cas9-based gene editing is a different method of correcting the defective genes in a patient, where the editing is very specific and targeted to a particular gene sequence. “CRISPR/Cas9” stands for Clustered, Regularly Interspaced Short Palindromic Repeats (“CRISPR”) Associated protein-9. The CRISPR/Cas9 technology can be used to make “cuts” in DNA at specific sites of targeted genes, making it potentially more precise in delivering gene therapies than traditional vector-based delivery approaches. CRISPR/Cas9 can also be adapted to regulate the activity of an existing gene without modifying the actual DNA sequence, which is referred to as gene regulation.

The chart below shows the current phases of development of Rocket’s programs and product candidates:

3


Strategy

Rocket seeks to bring hope and relief to patients with devastating, undertreated, rare pediatric diseases through the development and commercialization of potentially curative first-in-class gene therapies. To achieve these objectives, Rocket intends to develop into a fully-integrated biotechnology company. In the near- and medium-term, Rocket intends to develop its first-in-class product candidates, which are targeting devastating diseases with substantial unmet need. In the medium- and long-term, Rocket expects to develop proprietary in-house analytics and manufacturing capabilities, commence registration trials for its currently planned programs and submit its first biologics license applications (“BLAs”), and establish its gene therapy platform and expand its pipeline to target additional indications that Rocket believes to be potentially compatible with its gene therapy technologies. In addition, during that time, Rocket believes that its currently planned programs will become eligible for priority review vouchers from the FDA that provide for expedited review. Rocket has assembled a leadership and research team with expertise in cell and gene therapy, rare disease drug development and commercialization.

Rocket believes that its competitive advantage lies in its disease-based selection approach, a rigorous process with defined criteria to identify target diseases. Rocket believes that this approach to asset development differentiates it as a gene therapy company and potentially provides Rocket with a first-mover advantage.

Gene Therapy Background

Genes are the individual protein-encoding units that are located in the chromosomes within the majority of cells that comprise living things. Genes are composed of sequences of DNA and encode for the proteins that perform a broad range of physiologic functions within living organisms. Gene mutations are abnormalities—alterations in the correct sequence of DNA molecules.

Some diseases are known to result directly from gene mutations. Diseases that are caused by mutations in a single gene are known as monogenic diseases. Monogenic diseases are those genetic abnormalities that are the most amenable to gene therapy, since correction of the mutated gene in a sufficient cell population may result in correction of the disorder.

Gene therapy is the use of genetic material (most frequently DNA) to treat a disorder by delivering a correct copy of a gene into a patient’s cells. The healthy, functional copy of this gene can enable the cell to function correctly. If a sufficient number of cells within the affected organ or tissue are able to function properly as a result of this therapy, then the disorder may be reversed.

In gene therapy, DNA that encodes for a corrected gene and its associated protein is packaged within a “vector”, which is often a virus that has been modified so that it can insert its DNA into specific cells but cannot replicate or cause infections. This vector is used to transfer the DNA to the affected cells within the body. Treatment of blood-based disorders frequently relies on introduction of the vector to blood stem and progenitor cells (hematopoietic stem and progenitor cells (“HSPCs”)) after they have been removed from the body and separated from other blood or bone marrow cells. This is known as ex vivo transduction. Following ex vivo transduction, the corrected HSPCs must then be reinfused into a patient in a way that allows them to grow inside the bone marrow, so that they can replenish a patient’s hematopoietic (blood) system with cells that express a corrected (healthy) version of the protein that caused the disease. For Rocket’s current gene therapy programs, hematopoietic stem cells are transduced with LVV containing the gene of interest.

When therapeutic vectors are directly injected into the body (either intravenously (IV) or directly into a specific tissue in the body), this is known as in vivo gene therapy. As is the case with ex vivo gene therapy, in vivo gene therapy is effective if the vector is able to enter the appropriate cell population in sufficient number, and is able to insert the corrected gene into these cells’ DNA. If the

4


corrected gene is transferred and subsequently expressed by the cell machinery, the missing or defective protein can be produced and the underlying disorder may be corrected. Gene therapy of monogenic diseases is considered an approach by which the underlying cause of a disease may be treated.

Essential Terminology.

Set forth below is an abbreviated index of certain key terms and optimal ranges of values used in the discussion of LVV and AAV gene therapies.

Term

Definition

Optimal Ranges

LVV Therapy (hematopoietic disorders)

  CD34+ cell(s)

Hematopoietic Stem Cell (most CD34+ cells are not true stem cells, but this continues to be the most clinically useful measure)

Will depend on underlying disorder, generally > 1 million CD34+ cells/kg.

  Vector copy number
  (VCN)
  [product]

The average number of gene copies per infused stem cell (as determined by DNA analysis; this is an average ratio, not a precise value)

2.0 (“normal” value)
0.5 to 2 has been target in some LVV clinical studies
(5.0 considered maximum)

  Vector copy number
  (VCN)
  [
in vivo, post-treatment]

The average number of gene copies per peripheral blood or bone marrow cell (as determined by DNA analysis; this is an average ratio, not a precise value)

Will depend on underlying disorder, but many disorders may be correctable with

in vivo VCNs << 1.0

AAV Therapy

  Vector copy number
  (VCN)
  [
in vivo, post-treatment]

The average number of gene copies per cell in the organ of interest (as determined by DNA analysis; this is an average ratio, not

a precise value)

Will depend on underlying disorder, but many disorders may be correctable with

in vivo VCNs << 1.0

Development Programs

Fanconi Anemia Complementation Group A (FANCA):

Fanconi Anemia Overview

FA, a rare and life-threatening DNA-repair disorder, generally arises from a mutation in a single FA gene. An estimated 60-70% of cases arise from mutations in the Fanconi-A (“FANCA”) gene, which is the focus of the current Rocket programs.

FA results in bone marrow failure, developmental abnormalities, myeloid leukemia and other malignancies, often during the early years and decades of life. Bone marrow aplasia, which is bone marrow that no longer produces any or very few red and white blood cells and platelets leading to infections and bleeding, is the most frequent cause of early morbidity and mortality in FA, with a median onset before 10 years of age. Leukemia is the next most common cause of mortality, ultimately occurring in about 20% of patients later in life. Solid organ malignancies, such as head and neck cancers, can also occur, although at lower rates during the first two to three decades of life.

Although improvements in allogeneic (donor-mediated) HSCT, currently the most frequently utilized therapy for FA, have resulted in more frequent hematologic correction of the disorder, HSCT is associated with both acute and long-term risks, including transplant-related mortality, GVHD, a sometimes fatal side effect of allogeneic transplant characterized by painful ulcers in the GI tract, liver toxicity and skin rashes, as well as increased risk of subsequent cancers. Rocket’s gene therapy programs in FA are designed to enable a minimally toxic hematologic correction using a patient’s own stem cells during the early years of life. Rocket believes that the development of a broadly applicable autologous gene therapy can be transformative for these patients.

Current Therapy

Allogeneic HSCT may be curative for the hematologic manifestations of FA and is currently considered a standard-of-care in FA. However, HSCT is limited in that not all patients have a suitable donor and there is associated short term mortality and potential for acute and chronic GVHD with HSCT, especially in patients who do not receive an allograft from a sibling-human leukocyte antigen (HLA)-matched donor. 100-day mortality following allogeneic HSCT continues to be in the 10-15% range due to infection,

5


graft failure and other complications. In a European Group for Blood and Marrow Transplant 2013 publication, a retrospective analysis detailed results from 795 FA patients receiving HSCT from 1972 to 2010 in which Grade 2-4 Acute GVHD was reported in 19-36% of patients and Chronic GVHD was identified in 16-20% of patients.

HSCT likely increases the already high risk of subsequent solid tumor malignancies for patients with FA, most notably squamous carcinoma of the head and neck (“SCCHN”). Based on the findings in one series of data, HSCT was associated with a 4-fold increase in SCCHN risk relative to FA patients who did not receive a transplant, with cancers developing at an earlier age.

Other therapies utilized for FA include androgens, corticosteroids and hematopoietic growth factors, although the benefits of these therapies are considered modest and transient for the majority of patients. Side effects may also be considerable. For androgens, for example, these include masculinization, short stature, hepatitis, liver adenomas and hepatocellular carcinoma.

Because of the severity of the disease and limitations with existing standards-of-care, additional, minimally-toxic therapies are urgently needed in FA, especially if these can be administered with reduced short- and long-term toxicity relative to allogeneic HSCT.

Rationale for Gene Therapy in FA

Gene therapy has been considered a compelling investigative therapeutic option in FA since the genetic basis of the disorder was characterized, and has been the subject of studies in both preclinical models and in several clinical studies. In addition to the monogenic nature of each patient’s disease, Rocket believes there are two critical factors that will lead Rocket’s gene therapy programs into the next generation of promising therapy:

1.

The ability of HSCT to cure the hematologic component of FA is proof-of-principle that gene therapy will work in FA. If a sufficient number of hematopoietic stem cells with a correct (non-FA) gene are able to engraft in the bone marrow of an FA patient, the blood component of FA can be eradicated, including both the risk of bone marrow failure and of leukemia. Rocket believes that gene therapy with a patient’s own gene-corrected blood stem cells will work in a similar manner, but likely with fewer side effects than those resulting from an allogeneic transplant and with reduced long-term treatment cost burden.

2.

Somatic mosaicism in up to 15% of FA patients leads to stabilization and correct blood counts, in some cases for decades. We believe this demonstrates that a modest number of gene corrected HSCs can repopulate a patient’s blood and bone marrow with corrected (non-FA) cells.

3.

Improved vector design, stem cell selection methods, cell harvest and transduction procedures have the potential to substantially improved the quality of autologous gene therapy cell products; many of these improvements have been included in Rocket’s Hutch and CIEMAT programs. As a result, Rocket believes that there is reliable potential to confer disease correction at levels comparable to allogeneic transplant. For example, stem cell selection methods at both Hutch and CIEMAT have increased both CD34+ cell yield and purity, while retaining select non-CD34+ populations that may be essential for successful engraftment of gene-corrected cells in the bone marrow.

Clinical Development Programs RP-L101 and RP-L102

Efforts underway at Rocket partners Hutch (developing RP-L101) and CIEMAT (developing RP-L102) have previously had inadequate responsesincorporated the recommendations of an international working group that convened November 2010 with the intent of consolidating medical and scientific findings and optimization of future gene therapy clinical study design, with programs designed to treatmentovercome FA-specific gene therapy challenges. Rocket partners have demonstrated the ability to successfully mobilize and harvest target numbers of hematopoietic stem and progenitor cells (“HSPCs”) generally acknowledged to be required for successful therapy. This has been accomplished through the selection of younger patients, and mobilization withlatanoprost both granulocyte-colony stimulating factor (G-CSF) and plerixafor drug products, which are both FDA-approved drugs that increase the number of bone marrow-derived stem cells circulating in the blood. Improvements to cell processing, such as reduced transduction time requirements, optimized transduction conditions, and modified HSPC selection processes, have also led to substantive improvements in cell recovery and in vivo VCN.

As of March 1, 2018, three patients have received infusion of gene-corrected stem cells with RP-L101 (Hutch) and five patients have received gene-corrected stem cells with RP-L102��(CIEMAT). No cytotoxic conditioning has been used to date. No serious, unexpected side effects have been seen to date in all eight patients.

As of March 1, 2018, Rocket has data for four of the five patients who have received gene-corrected stem cells with RP-L102 (CIEMAT). These four patients represent PGA poor-responders,have had stable blood counts during the months subsequent to investigational therapy, despite decreases noted during the months and years preceding gene therapy. Additionally, in vivo VCN (gene markings) in these four patients have been evident in peripheral blood cells during the months subsequent to therapy, with progressive increases noted over time in each patient.

6


After the first patient was treated at Hutch, modifications to transduction conditions have yielded improved product VCN data, with transduction products from patients 2 and 3 achieving product VCN levels of 1.83 and at least 0.67, respectively.

Improvements in the clinical and cell-processing components of Rocket’s FA trials are expected to yield more robust and readily-identifiable disease-reversal, both for the RP-L101 and RP-L102 programs. These improvements include selection of younger patients and identification of blood count profiles that are indicative of adequate stem cell populations capable of mobilization and engraftment in numbers sufficient for reversal of the disorder.

In contrast to the high doses of cytotoxic conditioning required for allogeneic transplant in most bone marrow disorders, Rocket’s expectation is that the selective growth advantage of gene-corrected HSPCs in FA will enable the use of non-cytotoxic conditioning agents, low-dose cytotoxic agents, or quite possibly no conditioning agents to facilitate engraftment.

The engraftment of gene-corrected cells is likely to reduce the incidence of bone marrow failure. In addition, gene-corrected cells are likely to diminish the replicative stress in FA bone marrow, which has been increasingly implicated as evidenced by persistently elevated IOP at levels that typically requirea likely driver of the development or bone marrow failure or leukemia.

Low dose non-myeloablative cytotoxic conditioning agents (using lower than standard chemotherapy doses in order to help decrease cell death and prevent the number of normal blood-forming cells from decreasing in the bone marrow) or non-genotoxic antibody-based conditioning agents to facilitate engraftment of corrected stem cells will also be explored. In addition of a second drug to transduction enhancers, these modifications will be further lower IOP.evaluated in preclinical and/or clinical programs.

We hadRegulatory Status

In the United States, the FA program is in the clinical-stage with an End-of-Phase 2 meetingIND in place with the FDA since 2011. Three patients have been treated to date, and enrollment continues. The FA program in 2015the European Union is in the clinical-stage with an IMPD in place with the Spanish Agency for Medicines and Health Products. Five patients have been treated to discuss our Phase 3 program fortrabodenoson monotherapy,date, and to confirmenrollment continues. Both the designFDA and endpointsthe European Medicines Agency (“EMA”) have granted orphan drug designation (“ODD”) for the Phase 3 pivotal trials. At“Lentiviral vector carrying the meeting, we reached agreement on the design of our initial Phase 3 study, as well as the overall regulatory path fortrabodenoson. We started our Phase 3 program fortrabodenoson monotherapy in October 2015, and, based on our estimate of the rate of patient enrollment, we expect to report top-line data from the first pivotal trial in the program by late 2016. If the primary objectives of all of the trials in our Phase 3 program are met, we plan to submit a New Drug Application, or NDA, to the FDA for marketing approval oftrabodenosonFanconi anemia-A (FANCA) gene for the treatment of glaucomaFanconi anemia type A.”

Leukocyte Adhesion Deficiency-I (LAD-I):

Overview of LAD-I

LAD-I is a rare autosomal recessive disorder of white blood cell adhesion and migration, resulting from mutations in the United States. We planITGB2 gene encoding for the Beta-2 Integrin component CD18. Deficiencies in CD18 result in an impaired ability for neutrophils (a subset of infection-fighting white blood cells) to submit a marketing authorization application, or MAA,leave blood vessels and enter into tissues where these cells are needed to combat infections. As is the case with many rare diseases, true estimates of incidence are difficult; however, several hundred cases (both living and deceased) have been reported to date.

Most LAD-I patients are believed to have the severe form of the disease. Severe LAD-I is notable for recurrent, life-threatening infections and substantial infant mortality in Europe after filing our NDApatients who do not receive an allogeneic HSCT. Mortality for approval oftrabodenosonsevere LAD-I has been reported as 60-75% by age two in the United States.absence of allogeneic HCST.

AccordingCurrent Therapy

Allogeneic HSCT is the only known curative therapy, with survival rates of approximately 75% in recent studies. Allogeneic HSCT in LAD-I has been associated with frequent severe GVHD, including chronic GVHD and high rates of subsequent non-bacterial infections (most notably cytomegalovirus (CMV) and other viral and systemic fungal infections).

Because LAD-I is the result of mutations in a single gene (ITGB2), Rocket is developing RP-L201 to IMS Health salesenable a potentially curative therapy utilizing patients’ own HSPCs, without the dependency on the rapid identification of glaucoma drugsan appropriate donor required in 2013 were approximately $2.0 billionallogeneic HSCT therapy. It is anticipated that autologous therapy with RP-L201 will also enable definitive correction of this life-threatening disorder with reduced short- and long-term toxicity relative to allogeneic HSCT.

Rationale for Gene Therapy in LAD-I

Rocket believes there are two key reasons why gene therapy could have a transformative role in the United Statestreatment of LAD-I: (1) the existence evidence that even modest correction of the expression of the genetic mutation will increase patient survival in severe form of the disease, and $5.6 billion worldwide. According to the British Journal(2) consistent and robust improvements in transduction and cell processing. Of note, proprietary transduction protocols currently yield product VCNs  1 and transduction efficiencies of  Ophthalmology, there were an estimated 2.8 million Americans with glaucoma in 2010. Once glaucoma develops, it is a chronic condition that requires life-long treatment. PGAs are the most widely prescribed drug class for glaucoma and include the most widely prescribed glaucoma drug,latanoprost.When PGA monotherapy is insufficient to control IOP or is poorly tolerated, non-PGA products, such as beta blockers, alpha agonists and carbonic anhydrase inhibitors, are generally used either as an add-on therapy to the PGA or as an alternative monotherapy. Both PGAs and non-PGAs can cause adverse effects in the eye.> 50%. In addition, non-PGA drugswith the addition of either of two

7


transduction enhancing agents, at least a doubling of product VCN has been demonstrated in preliminary experiments. Studies evaluating combinations of transduction enhancers are underway.

Rocket believes that combined with a relatively straightforward cell harvest procedure in LAD-I and the likely modest CD18 expression required for clinical impact, RP-L201 can yield a gene therapy product that confers disease resolution comparable to allogeneic HSCT, and without the severe HSCT-associated acute and chronic toxicities.

Preclinical Proof of Concept

Preclinical results have adverse effectsindicated correction of LAD-I in the restmouse models, including restoration of the bodyneutrophils’ ability to adhere to endothelial surfaces and havemigrate from blood vessels towards inflammatory sources. Specifically, gene correction has been shown to restore functional CD18 expression in a CD18 hypomorphic mouse (CD18HYP) model, in which a mouse is conferred a CD18 gene mutation resulting in impaired inflammatory responses, leukocytosis (high white blood cell count), and hepatosplenomegaly (swelling of the liver and spleen).

Regulatory Status

In the EU, the LAD-I program has been discussed with the Spanish Agency for Medicines and Health in a pre-IMPD submission meeting in 2017. This program has been granted ODD by the EMA and by the FDA.

The program is in preclinical stage of development, with a rolling IMPD expected to be filed in the fourth quarter of 2018.

Pyruvate Kinase Deficiency (PKD):

Overview of PKD

Red blood cell PKD is a rare autosomal recessive disorder resulting from mutations in the pyruvate kinase L/R (“PKLR”) gene encoding for a component of the red blood cell glycolytic pathway. PKD is characterized by chronic non-spherocytic hemolytic anemia, a disorder in which red blood cells do not assume a normal spherical shape and are broken down, leading to decreased ability to carry oxygen to cells, with anemia severity that can range from mild (asymptomatic) to severe forms that may result in childhood mortality or requirement for frequent, lifelong red blood cell (“RBC”) transfusions. The pediatric population is the most commonly and severely affected subgroup of patients with PKD, and PKD often results in splenomegaly (abnormal enlargement of the spleen), jaundice and chronic iron overload which is likely the result of both chronic hemolysis and RBC transfusions. The variability in anemia severity is believed to arise in part from the large number of diverse mutations that may affect the PKLR gene. Estimates of disease incidence have poor tolerability profiles.ranged between 3.2 and 51 cases per million in the white U.S. and EU population. Industry estimates suggest at least 2,500 cases in the U.S. and EU have already been diagnosed despite the lack of FDA-approved molecularly targeted therapies.

Current Therapy

Therapy for PKD is largely supportive, comprised of RBC transfusions and splenectomy for patients who require frequent transfusions. Chronic RBC transfusions alleviate anemia symptoms, but are associated with increased morbidity, predominantly from iron overload which may result in cirrhosis, which is a loss of liver cells and irreversible scarring of the liver, and cardiomyopathy, a chronic disease of the heart muscle that leads to a larger and bulky but inefficient heart, if not diligently managed. Iron chelation, is often considered essential to offset the iron overload associated with chronic hemolysis and RBC transfusions. Iron chelation entails continuous oral or injected therapy, often for the duration of a patient’s lifetime and has been associated with diminished quality of life.

Splenectomy may confer a benefit in PKD, frequently yielding increased hemoglobin (Hb) levels of 1-3g/dL and a reduction in transfusion requirements. However, some patients do not benefit from this procedure, and it is estimated that a substantial proportion of PKD patients remain transfusion-dependent despite splenectomy. Splenectomy does not eliminate hemolysis, iron overload or the need for iron chelation. It also confers an increased susceptibility to serious bacterial infections, and potentially increases the risk of other PKD-associated or other complications such as venous thromboembolism and aplastic or hemolytic crises.

Allogeneic HSCT has been performed successfully for a small number of PKD patients, with reported correction of the clinical and laboratory features of the disorder. Although reports of HSCT in PKD suggest that correction of the genetic defect in hematopoietic stem cells may be curative of the disorder, HSCT requires identification of an appropriate HLA-matched donor, is associated with considerable short- and long-term complications including transplant-related mortality and is not considered a standard-of-care in PKD.

8


Rationale for Gene Therapy in PKD

Patients with heterozygous PKLR mutations have 50% of normal enzyme activity and are phenotypically normal. This suggests that it is not necessary for a therapy to achieve normal enzyme levels to have a clinically meaningful effect. In PKD-affected mice transplanted with normal marrow, the presence of 10% normal marrow was sufficient to restore normal red blood cells. Rocket has conducted experiments in which bone marrow cells from healthy mice are transplanted into PKD affected mice and these results suggest that significant improvement in PKD may be achieved with 20% correction of bone marrow, and complete clinical resolution is likely achieved when the percentage of bone marrow gene-corrected cells is in the 20-40% range. An additional study showed that a PKD-affected dog treated with an ex vivo gene therapy was rendered transfusion independent with a normalization of lactate dehydrogenase (“LDH”), despite only partial gene correction.

Of note, proprietary transduction protocols in PKD now yield product VCNs of 2, with VCNs increasing to 4 with the addition of transduction enhancers. Rocket expects that mobilization and harvesting procedures will be relatively straightforward for PKD patients.

Preclinical Proof-of-Concept

Rocket expects that mobilization and harvesting procedures will be relatively straightforward for PKD patients. Preclinical results have demonstrated that RP-L301 corrects multiple components of the disorder in a PKD mouse model, including increases in hemoglobin (in both primary and secondary transplant recipients), reduction in reticulocytosis, which is an increase in immature red blood cell production, correction of splenomegaly and reduction in hepatic erythroid clusters and iron deposits.

Regulatory status

In the EU, the PKD program has been discussed with the EMA via a Scientific Advisory meeting in 2016. This program has been granted EMA orphan drug disease designation and FDA orphan drug disease designation. The program is in the preclinical stage of development, with a rolling IMPD expected to be filed in the next 12 months.

Infantile Malignant Osteopetrosis (IMO):

Overview of Infantile Malignant Osteopetrosis

IMO represents the autosomal recessive, severe variants of a group of disorders characterized by increased bone density and bone mass secondary to impaired bone resorption. IMO typically presents in the first year of life and is associated with severe manifestations leading to death within the first decade of life in the absence of allogeneic HSCT, although HSCT results have been limited to-date and notable for frequent graft failure, GVHD and other severe complications.

Approximately 50% of IMO results from mutations in the TCIRG1 gene, resulting in cellular defects that prevent osteoclast bone resorption. As a result we believe thereof this defect, bone growth is markedly abnormal. It is estimated that IMO occurs in 1 out of 250,000-300,000 within the general global population, although incidence is higher in specific geographic regions including Costa Rica, parts of the Middle East, the Chuvash Republic of Russia, and the Vasterbotten Province of Northern Sweden.

IMO is characterized by increased bone mass and density, multiple deformities and a propensity for fractures in patients surviving infancy. Skull deformities include macrocephaly and frontal bossing. Thoracic size may be decreased. Bone sclerosis impinges cranial nerve and spinal foramina with resulting neurologic abnormalities, including hydrocephalus, progressive blindness and auditory impairment. Compression of bone marrow space results in bone marrow failure with compensatory hepatosplenomegaly and increased infection risk secondary to neutropenia.

Current Therapy

Allogeneic HSCT is potentially curative, but notable for considerable rates of engraftment failure, GVHD, pulmonary and hepatic complications. In a recent multicenter retrospective series, long-term survival rates for HSCT recipients with IMO were approximately 60% for matched-sibling recipients, and 40% for those with mismatched or unrelated allografts.

Preclinical Proof-of-Concept

Because osteoclasts are derived from the monocyte/macrophage lineage, correction of the TCIRG1 gene in hematopoietic stem cells will enable development of functional, bone-resorbing osteoclasts, as has been demonstrated in preclinical models. Preclinical results demonstrate that gene correction of HSPCs from IMO patients is feasible, and that these HSPCs can engraft in

9


immunocompromised mice. Osteoclasts from these mice demonstrate increased bone resorption in vitro, as measured by increased calcium and collagen fragment CTX-I.

Additional preclinical experiments have demonstrated correction of an osteopetrotic (IMO) phenotype displayed by the oc/oc mouse model, in which even limited engraftment of wild-type murine bone marrow cells (including 4-5% wild-type engraftment) has been associated with reversal of the osteopetrosis phenotype.

Regulatory status

This program is currently in preclinical stages of development and additional preclinical studies are planned.

AAV-Targeted Program:

RP-A101 is in preclinical development as an in vivo therapy of an undisclosed neuromuscular and cardiovascular disorder that is estimated to have a prevalence of 15,000 to 30,000 in the US/EU. This is a significant unmet need formonogenic disorder that presents with severe clinical manifestations in childhood, adolescence and young adulthood, and is frequently fatal within several years of presentation in the absence of a treatmentcurative organ transplant procedures.

Preliminary preclinical studies have indicated that effectively lowers IOP by restoring outflow and the natural pressure control by the TM, that has a favorable safety and tolerability profile,clinically feasible AAV doses can restore functional levels of protein in knockout mouse models, and that works effectivelygene/protein restoration are associated with marked histologic improvement in combination with other treatments.

Additionally, no existing treatments offer the potential to directly treatorgans in which the underlying cause of glaucoma associated vision loss: the death of retinal ganglion cells, or RGCs, the nervedisorder causes extensive morbidity and mortality. The figure below shows abnormal tissue in a diseased knockout mouse in the retina that relaysmiddle (placebo treated), with the visual signalAAV gene therapy-treated knockout mouse on the right having tissue comparable to the brain. We believewild type (i.e. normal) mouse on the left.

FIGURE: Representative electron microscopy tissue images from animal model of undisclosed AAV program. Left panels indicate wild-type (normal) animals; middle panels indicate diseased animals treated with control (EGFP) vector; and right panels indicate RP-A101 mediated restoration of architecture and resolution of additional abnormalities.

Rocket’s AAV program is designed to enable a single-injection definitive therapy for this devastating disease, in which there exists no reliably curative treatment option.

Regulatory Status

RP-A101 is currently in preclinical development. A FDA pre-pre-IND meeting occurred in January 2018, and Rocket anticipates filing an IND in the next 12 months.

CRISPR/Cas9 gene editing in Fanconi Anemia:

Gene editing by means of CRISPR/Cas9 nucleases continues to be a promising investigational mechanism involving direct correction of a specified gene mutation. Gene editing has been feasible with increasing efficiency in cultured FA lymphoblast cell lines and in CD34+ hematopoietic stem cells from FA patients. Editing in FANCA HSPCs has conferred a proliferation advantage versus uncorrected in-vitro stem cells, conferred resistance to mitomycin-C, which is a chemotherapeutic medicine that afights cancer by interrupting DNA function in rapidly dividing cells, and enabled assembly of FA DNA repair cellular elements.

Regulatory Status

10


This program is currently in the discovery stage of drug withdevelopment.

Intellectual property

Rocket strives to protect and enhance the potential to make these cells more resilientproprietary technology, inventions, and improvements that are commercially important to the stress causeddevelopment of its business, including seeking, maintaining, and defending patent rights, whether developed internally or licensed from third parties. Rocket also relies on trade secrets relating to its proprietary technology platform and on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain its proprietary position in the field of gene therapy that may be important for the development of Rocket’s business. Rocket additionally intends to rely on regulatory protection afforded through orphan drug designations, data exclusivity, market exclusivity, and patent term extensions where available.

Rocket’s commercial success may depend in part on its ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to its business; defend and enforce its patents; preserve the confidentiality of its trade secrets; and operate without infringing the valid enforceable patents and proprietary rights of third parties. Rocket’s ability to stop third parties from making, using, selling, offering to sell or importing its future products may depend on the extent to which Rocket has rights under valid and enforceable patents or trade secrets that cover these activities. With respect to both licensed and company-owned intellectual property, Rocket cannot be sure that patents will be granted with respect to any of its pending patent applications or with respect to any patent applications filed by glaucoma would achieve broad market acceptance asRocket in the treatment preferred among patientsfuture, nor can Rocket be sure that any of its existing patents or any patents that may be granted to us in the future will be commercially useful in protecting its commercial products and physicians.methods of manufacturing the same.

We own worldwide rightsRocket has in-licensed numerous patent applications and possesses substantial know-how and trade secrets relating to all indicationsthe development and commercialization of gene therapy products. Rocket’s proprietary intellectual property, including patent and non-patent intellectual property, is generally directed to gene expression vectors and methods of using the same for our currentgene therapy. As of March 1, 2018, Rocket’s patent portfolio includes four in-licensed patent families relating to its product candidates and have patentsrelated technologies, discussed more fully below. Specifically, Rocket has in-licensed two pending international patent applications, filed under the Patent Cooperation Treaty (PCT), relating to Rocket’s disclosed product candidates, one pending PCT application relating to an undisclosed product candidate, and pending patent applications in the U.S., Europe and Japan relating to devices, methods, and kits for harvesting and genetically-modifying target cells.

Fanconi Anemia

Rocket’s Fanconi Anemia program includes two in-licensed patent families. The first family includes a pending PCT application with claims directed to polynucleotide cassettes and expression vector compositions containing Fanconi Anemia complementation group genes and methods for using such vectors to provide gene therapy in mammalian cells for treating Fanconi Anemia. This application was exclusively in-licensed from CIEMAT, Centro de Investigacion Biomedica En Red, (“CIBER”), Fundacion Instituto de investigacion Sanitaria Fundacion Jimenez Diaz, (“FIISFJD”), and Fundacion Para la Investigacion Biomedica del Hospital Del Nino Jesus, (“FIBHNJS”). Rocket expects any patents in this family, if issued, and if the appropriate maintenance, renewal, annuity, or other governmental fees are paid, to expire in 2037, absent any patent term adjustments or extensions.

The second family includes pending U.S., Japanese, and European patent applications related to a portable platform for use in hematopoietic stem/progenitor cell-based gene therapy. This patent family was exclusively in-licensed from the Fred Hutchinson Cancer Research Center. Rocket expects any patents in this portfolio, if issued, and if the appropriate maintenance, renewal, annuity, or other governmental fees are paid, to expire in 2036, absent any patent term adjustments or extensions.

Pyruvate Kinase Deficiency (PKD)

Rocket’s PKD patent portfolio includes a pending PCT application with claims directed to polynucleotide cassettes and expression vector compositions containing pyruvate kinase genes and methods for using such vectors to provide gene therapy in mammalian cells for treating pyruvate kinase deficiency. This application was exclusively in-licensed from CIEMAT, CIBER, and FIISFJD. Rocket expects any patents in this portfolio, if issued, and if the appropriate maintenance, renewal, annuity, or other governmental fees are paid, to expire in 2037, absent any patent term adjustments or extensions.

Rocket’s objective is to continue to expand its portfolio of patents and patent applications in order to protect Rocket’s gene therapy product candidates and manufacturing processes. From time to time, Rocket may also evaluate opportunities to sublicense its portfolio of patents and patent applications that it owns or exclusively licenses, and Rocket may enter into such licenses from time to time. The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which Rocket files, the patent term is 20 years from the date of filing the non-provisional application. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier-filed patent.

11


The term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration of a U.S. patent as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related to the compositionlength of matter, pharmaceutical compositionstime the drug is under regulatory review. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. Moreover, a patent can only be extended once, and thus, if a single patent is applicable to multiple products, it can only be extended based on one product. Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. When possible, depending upon the length of clinical trials and other factors involved in the filing of a BLA, Rocket expects to apply for patent term extensions for patents covering Rocket’s product candidates and their methods of use.

Rocket may rely, in some circumstances, on trade secrets to protect its technology. However, trade secrets can be difficult to protect. Rocket seeks to protect its proprietary technology and processes, in part, by entering into confidentiality agreements with its employees, consultants, scientific advisors and third parties. Rocket also seeks to preserve the integrity and confidentiality of its data and trade secrets by maintaining physical security of its premises and physical and electronic security of its information technology systems. While Rocket has confidence in these individuals, organizations and systems, agreements or security measures may be breached, and Rocket may not have adequate remedies for any breach. In addition, Rocket’s trade secrets may otherwise become known or be independently discovered by competitors. To the extent that Rocket’s consultants or collaborators use intellectual property owned by others in their work fortrabodenoson Rocket, disputes may arise as to the rights in related or resulting know-how and inventions.

Material Contracts

License Agreements with Fred Hutchinson Cancer Research Center (“Hutch”)

In November 2015, Rocket entered into an exclusive license agreement with Hutch granting Rocket worldwide, sublicensable, exclusive rights to certain patents, materials and other intellectual property relating to lentiviral vector-based technology for patient stem cell transduction useful for, among other things, treating Fanconi Anemia. Under the terms of the agreement, Rocket is obligated to use commercially reasonable efforts (a) to research, develop, obtain regulatory approval for and commercialize products based on the licensed intellectual property, generally, and (b) to follow an agreed development plan and to achieve specific development, regulatory and commercial milestones for such products, in particular. In exchange for the license, Rocket is obligated to pay Hutch an up-front payment (in the form of Rocket equity), certainan annual license maintenance fee, royalty payments based on net sales of products covered by a valid claim within the licensed patents, developmental and commercial milestone payments, and sublicense revenue payments. Hutch is responsible for prosecuting and maintaining the licensed patents (the cost of which extendis to 2031be reimbursed by Rocket), but Hutch will follow any reasonable comments of Rocket with respect to oursuch prosecution. Rocket has first right to enforce the licensed patents against infringement unless the parties agree otherwise.

As consideration for the licensed rights, in November 2015, Rocket issued to Hutch ordinary shares valued at $0.3 million as an upfront license fee that was expensed as research and development costs. Rocket is obligated to make aggregate cash milestone payments of up to $1.6 million to Hutch upon the achievement of specified development and regulatory milestones. With respect to any commercialized products covered by the license, Rocket is obligated to pay a low to mid-single digit percentage royalty on net sales, subject to specified adjustments, by Rocket or its sublicensees or affiliates. In the event that Rocket enters into a sublicense agreement with a sublicensee, Rocket will be obligated to pay a portion of any consideration received from such sublicenses in specified circumstances.

Rocket may terminate this agreement at any time by providing Hutch with 180 days advance notice. The license agreement is in effect until the earlier of (a) the expiration date of the last-to-expire patent, on a country-by-country basis, in which a valid claim covers a product in the country in which the product is sold, or (b) 15 years following regulatory approval of the first product. The license was amended on January 16, 2016 to include additional patents. No additional consideration was provided by Rocket in connection with the amendment and no other changes were made to the terms of the license.

In December 2015, Rocket entered into an exclusive license agreement with Hutch granting Rocket worldwide, sublicensable, exclusive rights to certain patents covering Hutch’s “Prodigy” platform, a portable platform for hematopoietic stem/progenitor cell gene therapy. Under the terms of the agreement, Rocket is obligated to use commercially reasonable efforts (a) to research, develop, obtain regulatory approval for and 2034commercialize products based on the licensed patents, generally, and (b) to follow an agreed development plan and to achieve specific development milestones for such products, in particular. In exchange for the license, Rocket is obligated to pay Hutch an up-front payment (in the form of Rocket equity), developmental milestone payments, and sublicense revenue payments. Hutch is responsible for prosecuting and maintaining the licensed patents (the cost of which is to be reimbursed by Rocket), but Hutch will follow any reasonable comments of Rocket with respect to our pending patent applications. Iftrabodenoson receives marketing approvalsuch prosecution. Rocket has first right to enforce the licensed patents against infringement unless the parties agree otherwise.

12


As consideration for the licensed rights, in January 2016 Rocket issued to Hutch ordinary shares valued at $0.1 million as an upfront license that was expensed as research and development costs.

Rocket is obligated to make aggregate milestone payments of up to $0.2 million, which may include amounts already paid, to Hutch upon the United States, we plan to commercialize it by establishing our own specialty sales force in the United States.

Our Strategy

Our goal is to become a leading biopharmaceutical company focused on the discovery,achievement of specified development and commercializationregulatory milestones. In the event that Rocket enters into a sublicense agreement with a sublicensee, Rocket will be obligated to pay a portion of novel therapiesany consideration received from such sublicenses in specified circumstances.

Rocket may terminate this agreement at any time by providing Hutch with 180 days advance notice. The agreement will expire upon the expiration, lapse, abandonment or invalidation of the last claim of the licensed patent rights to expire, lapse or become abandoned or unenforceable in all countries worldwide.

License Agreements with CIEMAT

In March 2016, Rocket entered into a license agreement with CIEMAT, CIBER, and FIISFJD, (collectively, “CIEMAT”), granting Rocket worldwide, exclusive rights to certain patents, know-how and other intellectual property relating to lentiviral vectors containing the human PKLR gene solely within the field of treating pyruvate kinase deficiency (PKD). Under the terms of the agreement, Rocket is obligated to use commercially reasonable efforts to (a) develop and obtain regulatory approval for one or more products or processes covered by the licensed intellectual property, introduce such products or processes into the commercial market and then make them reasonably available to the public (b) develop or commercialize at least one product or process covered by the licensed intellectual property in at least one country for at least two uninterrupted years following regulatory approval, and (c) use the licensed intellectual property in an adequate, ethical and legitimate manner. In exchange for the license, Rocket is obligated to pay CIEMAT an up-front payment, royalty payments based on net sales of products or processes involving any of the licensed intellectual property, developmental and regulatory milestone payments, and sublicense revenue payments. Rocket is responsible for prosecuting and maintaining the licensed patents at Rocket’s expense, in cooperation with CIEMAT. Rocket also has the first responsibility to enforce and defend the licensed patents against infringement and/or challenge, in cooperation with CIEMAT. For five years following the effective date of the license agreement, Rocket has a right of first refusal to license any improvements to the licensed intellectual property obtained by CIEMAT at market value. Rocket is obligated to license (without charge) to CIEMAT for non-commercial use any improvements to the licensed intellectual property that Rocket creates.

As consideration for the licensed rights, Rocket paid CIEMAT an initial upfront license fee of €0.03 million (approximately $0.03 million) which was expensed as research and development costs. Rocket is obligated to make aggregate milestone payments of up to €1.4 million (approximately $1.5 million) to CIEMAT upon the achievement of specified development and regulatory milestones. With respect to any commercialized products covered by the PKD license, Rocket is obligated to pay a low to mid-single digit percentage royalty on net sales, subject to specified adjustments, by Rocket or its sublicensees or affiliates. In the event that Rocket enters into a sublicense agreement with a sublicensee, Rocket will be obligated to pay a portion of any consideration received from such sublicensees in specified circumstances.

Rocket may terminate this agreement at any time by providing CIEMAT with 90 days advance notice. The license is in effect for a duration for each of the countries defined in this agreement for as long as a license right exists that covers the licensed product or process in such country, or until the end of any additional legal protection that should be obtained for the license rights in each country.

In July 2016, Rocket entered into a license agreement with CIEMAT granting Rocket worldwide, exclusive rights to certain patents, know-how, data and other intellectual property relating to lentiviral vectors containing the Fanconi Anemia-A gene solely within the field of human therapeutic uses of VSV-G packaged integration component lentiviral vectors for Fanconi Anemia type-A gene therapy. This license is only sublicensable with the prior consent of CIEMAT, not to be unreasonably withheld. Under the terms of the agreement, Rocket is obligated to use commercially reasonable efforts to (a) develop and obtain regulatory approval for one or more products or processes covered by the licensed intellectual property, introduce such products or processes into the commercial market and then make them reasonably available to the public (b) develop or commercialize at least one product or process covered by the licensed intellectual property in at least one country for at least two uninterrupted years following regulatory approval, and (c) use the licensed intellectual property in an adequate, ethical and legitimate manner. In exchange for the license, Rocket is obligated to pay CIEMAT an up-front payment, royalty payments based on net sales of products or processes involving any of the licensed intellectual property, regulatory and financing milestone payments, and sublicense revenue payments. Rocket is responsible for prosecuting and maintaining the licensed patents at Rocket’s expense, in cooperation with CIEMAT. Rocket also has the first responsibility to enforce and defend the licensed patents against infringement and/or challenge, in cooperation with CIEMAT. For five years following the effective date of the license agreement, Rocket has a right of first refusal to license any improvements to the licensed intellectual property obtained by CIEMAT at market value. Rocket is obligated to license (without charge) to CIEMAT for non-commercial use any improvements to the licensed intellectual property that Rocket creates.

13


As consideration for the licensed rights, Rocket paid CIEMAT an initial upfront license fee of €0.1 million (approximately $0.1 million), which was expensed as research and development costs. Rocket is obligated to make aggregate milestone payments of up to €5.0 million (approximately $6.0 million) to CIEMAT upon the achievement of specified development and regulatory milestones. With respect to any commercialized products covered by the license, Rocket is obligated to pay a mid-single digit percentage royalty on net sales, subject to specified adjustments, by Rocket or its sublicensees or affiliates. In the event that Rocket enters into a sublicense agreement with a sublicensee, Rocket will be obligated to pay a portion of any consideration received from such sublicensees in specified circumstances.

Rocket may terminate this agreement at any time by providing CIEMAT with 90 days’ advance notice. The license is in effect for a duration for each of the countries defined in this agreement for as long as a license right exists that covers the licensed product or process in such country, or until the end of any additional legal protection that should be obtained for the license rights in each country.

Contract Research and Collaboration Agreement with Lund University and J. Richter

In August 2016, Rocket entered into a research and collaboration agreement with Lund University and Johan Richter, M.D., Ph.D. under which Dr. Richter grants to Rocket an exclusive, perpetual, sublicensable, worldwide license to certain intellectual property rights of Dr. Richter relating to lentiviral-mediated gene transfer to treat glaucoma. The key elementsOsteopetrosis. In exchange for the license, Rocket is obligated to make an up-front payment, certain clinical and commercial milestone payments, royalty payments (on net sales of our strategy are as follows:

Complete clinical development and seek marketing approval for our lead product candidate, trabodenoson monotherapy. In 2012, we completed a Phase 2 trial oftrabodenosonmonotherapy, which demonstrated statistically significant IOP-lowering and a favorable safety profile. We had an End-of-Phase 2 meeting with the FDA in 2015 to discuss our Phase 3 program fortrabodenoson monotherapy and to confirm the design and endpoints for the Phase 3 pivotal trials. At the meeting, we reached agreement on the design of our initial Phase 3 study, as well as the overall regulatory path fortrabodenoson. Based on our estimates of the rate of patient enrollment we expect to have top-line data from the initial Phase 3 trialproducts covered by late 2016. If the primary objectives of our Phase 3 program are met, we plan to submit an NDA to the FDA for marketing approval oftrabodenoson monotherapy for the treatment of glaucoma in the United States. We plan to submit an MAA in Europe after filing our NDA for approval oftrabodenoson monotherapy in the United States.

Complete clinical development and seek marketing approval of a fixed-dose combination product that includes both trabodenoson and latanoprost. As many as half of glaucoma patients, typically those with more severe disease, need to use two or more glaucoma drugs to sufficiently reduce their IOP. The initial treatment for glaucoma patients is usually the use of a prescription eye drop from the PGA drug class. However, as PGAs are often unable to lower IOP sufficiently to reach the patient’s medically targeted level, non-PGA products are used either as an add-on therapy to the PGA or as an alternative monotherapy in place of PGAs. There are currently no FDC products approved for use in the United States that include a PGA. We intend to formulate and conduct clinical development in order to seek marketing approval for an FDC product that includes bothtrabodenoson andlatanoprost, the best-selling PGA. We believe that the favorable safety and tolerability profile and complementary mechanism of action oftrabodenoson could, if approved, make an FDC withlatanoprost a highly effective, well-tolerated and more convenient QD regimen for treating glaucoma in patients who have a less functional TM and therefore need additional help lowering their IOP. Our completed Phase 2 trial oftrabodenoson co-administered with the PGA,latanoprost, demonstrated IOP-lowering in patients who have previously had inadequate responses to the PGA,latanoprost. These patients represent PGA poor-responders, as evidenced by persistently elevated IOP at levels that typically require the addition of a second drug to further lower IOP.

Establish a specialty sales force to maximize the commercial potential of trabodenoson in the United States. We have retained worldwide commercial rights totrabodenoson. Iftrabodenoson receives marketing approval in the United States, we plan to commercialize it by establishing a glaucoma-focused specialty sales force of approximately 150 people targeting ophthalmologists and optometrists throughout the United States. For markets outside the United States, we intend to explore partnership opportunities through collaboration and licensing arrangements.

Evaluate the potential of trabodenoson to slow the loss of vision associated with glaucoma and degenerative retinal diseases or for additional ophthalmic indications. Based on an animal model that indicatedtrabodenoson’s potential to directly protect RGCs, the nerve tissue in the retina that relays the visual signal to the brain, we plan to conduct clinical trials to measure the rate of vision loss over time, rather than IOP control, in patients treated with trabodenoson. Should the results of these trials be positive, we plan to seek labeling indicative oftrabodenoson’s potential to change the course of glaucoma-related vision loss, beyond that of IOP-lowering effect alone. In addition, this effect, if proven, could address the subset of glaucoma patients that do not have high IOPs, but still suffer from vision loss over time. We are also evaluating other potential indications where therapy withtrabodenoson may be beneficial. To begin this process, we are conducting pre-clinical trials for optic neuropathies and degenerative retinal diseases.

Glaucoma Overview

Glaucoma is a diseasevalid claim within the licensed intellectual property) and sublicense revenue payments to Dr. Richter. Under the terms of the eye in which damageagreement, Lund University and Dr. Richter are obligated to the optic nerve leads to progressive, irreversible vision loss. Its characteristics can include structural evidence of optic nerve damage, vision loss and consistently elevated IOP.

Physiology of the Eye

The eye is a fibrous sack which must stay “inflated” with a fluid that maintains the eye’s form, known as aqueous humor, at the proper pressure in order to maintain its shape and effectively focus light to the retina where the light stimulus is then relayed to the brain and converted into a visual image. To maintain the eye’s pressure—and therefore its shape—and as a means to provide nutrients to eye tissue, aqueous humor is constantly produced inside the eye by a tissue known as the ciliary body. The ciliary body sits just behind the iris, which is the colored part of the eye. Aqueous humor flows forward through a hole in the center of the iris, called the pupil, and down into the angle defined by the front of the iris and the back of the cornea, which is the clear covering on the front of the eye. This angle is the same angle referred to in Primary Open Angle Glaucoma, or POAG, the most common form of glaucoma. Below is a diagram depicting certain parts of the eye, including the ciliary body, iris and the angle defined by the front of the iris and the back of the cornea:

In this angle, in front of the outer rim of the iris, is the TM, a natural, pressure-regulating drain. It is here that in a healthy, well-functioning eye, approximately 70% of the aqueous humor exits and flows into a drainage canal known as Schlemm’s canal, which empties back into the venous drainage system. The remaining approximately 30% of the aqueous humor leaves the eye through a secondary pathway called the uveoscleral pathway. The diagram below reflects the TM and the uveoscleral pathway, the two pathwaysperform contract research for the aqueous humor to leave the eye.

Development of High IOP and its Effects on Glaucoma

In a typical glaucoma patient, there is resistance to drainage of the aqueous fluid (i.e., not enough aqueous humor exits the eye), creating excess pressure and compressing the retina, the layer of tissue covering the inside of the back half of the eye that actually converts light into nerve impulses. For people to “see,” these impulses—the visual signal—must be relayed through the optic nerve back to the brain for processing. The cells in the retina require nutrients and oxygen that are delivered via blood vessels entering and exiting the eye through the same opening as the nerve fibers carrying the visual signal. However, when IOP is too high, it is more difficult to pump blood enriched in oxygen and nutrients into the retina. The diagram below reflects the anatomy of the eye and how elevated IOP can impair the nerve tissue in the retina and the optic nerve head.

The deprivation of blood supply to the retina may damage RGCs, the nerve tissue in the retina that relays the visual signal to the brain. These RGCs have long tails called axons that extend back to the brain to carry the visual image. In fact, the optic nerve is nothing more than a bundle of these axons extending to the vision processing center of the brain. When an RGC dies, one of the connections between the retina and the brain is lost, and like most cases when a nerve is damaged or cut—like in a spinal cord injury—there is no known way to repair the damage and, as a result, some portion of vision is permanently lost. Therefore, the root cause of vision loss in glaucoma is not high IOP per se, but the impact of high IOP on the retina, and specifically the RGCs.

Clinical Definition of Glaucoma

There are two key elements to the clinical definition of glaucoma: structural evidence of optic nerve damage and vision loss. Common risk factors include age, family history, corneal thickness and high IOP, commonly measured in millimeters of mercury, or mmHg. Currently, the only known way to treat glaucoma and slow the progression of vision loss is to reduce IOP. While treatment approaches are based on an assessment of the patient’s risk factors for vision loss, elevated IOP is by far the best understood contributor to development of glaucoma. We believe that the general treatment patterns in the figure below, relative to a patient’s IOP, are typical.

The Ocular Hypertension Treatment Study, or the OHTS, was a large, randomized academic trial published in 2002 that followed a total of 1,636 participants who initially had no evidence of glaucoma-related damage. The OHTS found that higher IOPs generally indicate a higher risk for progression to glaucoma. An IOP of 10 to 21 mmHg is generally considered in the normal range. Individuals with IOPs greater than 21 and up to 25 mmHg will often not be prescribed drug therapy unless they have evidence of both structural changes and some vision loss, or some combination of these and other risk factors for future vision loss. In fact, the United Kingdom’s National Institute of Health and Care Excellence Guidelines, or NICE Guidelines, for the treatment of suspected glaucoma (structural changes but without vision loss) plus elevated IOP, does not recommend treatment of eyes with corneal thickness of 555-590 nm and IOP of 25 mmHg or below. Drug treatment is much more common when patients have IOPs greater than 25 mmHg.

Glaucoma Market

According to the British Journal of Ophthalmology, there were an estimated 2.8 million Americans with glaucoma in 2010. According to the Archives of Ophthalmology, that number will reach approximately 3.4 million by 2020. Approximately 120,000 of these patients are suffering from blindness as a result of destruction to their optic nerve. Glaucoma can affect patients of all ages and ethnicities. However, according to the Archives of Ophthalmology, the prevalence rate (the proportion of people in the population that have glaucoma) increases with age. The most significant increases in prevalence rates occur above 55 years of age. The prevalence in the population aged 65 years and younger is approximately twice that of the population

55 years or younger. Glaucoma is a chronic condition with no known cure and as a result patients are typically treated for the rest of their lives. Patients with glaucoma report decreased quality-of-life, difficulties with daily functioning, including driving, and are more likely to report falls and motor vehicle collisions.

According to IMS Health, in 2013, 31.2 million prescriptions were written for glaucoma medications in the United States. According to IMS Health, approximately two-thirds of these prescriptions were for generic drugs, includinglatanoprost andtimolol, which are the top two selling drugs for the treatment of glaucoma. Due to the lack of innovation in medications for glaucoma, most of the drugs used to treat glaucoma are generic drugs. Sales of glaucoma drugs in 2012 were approximately $1.9 billion in the United States and $5.5 billion worldwide. In 2013, sales of glaucoma drugs were approximately $2.0 billion in the United States and $5.6 billion worldwide, and IMS Health projects U.S. sales to be $3.1 billion in 2018, an increase of approximately 54% over 2013 sales.

Existing Glaucoma Treatments

The initial treatment for glaucoma patients is typicallyRocket regarding the use of a prescription eye droplentiviral-mediated gene transfer to treat Osteopetrosis. Intellectual property resulting from a class of drugs called PGAs. According to IMS Health, prescriptions for PGAs make up more than half of all prescriptions for glaucoma medications. The PGAs’ primary mechanism of action for treating glaucomathe contract research created by Dr. Richter is thought to be increasing fluid outflow through the uveoscleral pathway. A number of adverse effects are known to occur in all drugsincluded in the PGA classlicense described above and also subject to an option for Rocket to purchase ownership of such rights. Intellectual property created by Lund University in conducting such research is non-exclusively licensed to Rocket for non-commercial use and also subject to an option for Rocket to purchase or license such intellectual property under commercially reasonable terms. Rocket is obligated to pay for the contract research according to an agreed budget in quarterly installments in advance.

As consideration for an option to acquire rights from Lund University on commercially reasonable terms and conditions, Rocket paid Lund University an upfront license fee of €.02 million (approximately $.02 million), which was expensed as research and development costs. Rocket is obligated to make aggregate milestone payments of up to €0.1 million (approximately $0.1 million) to Lund University and Dr. Richter upon the achievement of specified development and regulatory milestones. With respect to any commercialized products covered by the Lund University agreement, Rocket is obligated to pay a result, these side effects are assumedlow single digit percentage royalty on net sales, subject to specified adjustments, by Rocket or its sublicensees or affiliates. In the event that Rocket enters into a sublicense agreement with a sublicensee, Rocket will be associatedobligated to pay a portion of any consideration received from such sublicensees in specified circumstances.

Rocket may terminate this agreement at any time by providing Lund University and Dr. Richter with 90 days’ advance notice. The research agreement has a term of 24 months.

License Agreement for LAD-I with CIEMAT and UCLB

Rocket entered into a license agreement in November 2017, effective September 2017, with CIEMAT, CIBER, and FIISFJD (collectively, “CIEMAT”) and UCL Business PLC (“UCLB”), collectively referred to as Licensors, granting Rocket worldwide, exclusive rights to certain patents, know-how and other intellectual property relating to lentiviral vectors containing the mechanismhuman LAD-I gene solely within the field of action. Most notabletreating LAD-I. Under the terms of these side effectsthe agreement, Rocket is eye redness,obligated to use commercially reasonable efforts to (a) develop and obtain regulatory approval for one or conjunctival hyperemia.

When PGAs are insufficient to control IOPmore products or are poorly tolerated, non-PGAprocesses covered by the licensed intellectual property, introduce such products are used either as an add-on therapyor processes into the commercial market and then make them reasonably available to the PGApublic, (b) develop or ascommercialize at least one product or process covered by the licensed intellectual property in at least one country for at least two uninterrupted years following regulatory approval, and (c) use the licensed intellectual property in an alternative monotherapy in place of a PGA. Non-PGAs can include a beta-blocker,adequate, ethical and legitimate manner. In exchange for the license, Rocket is obligated to pay Licensors an alpha (adrenergic) agonist or a carbonic anhydrase inhibitor alone. FDC products containing these non-PGAs are dominated by beta-blocker combinations, which can take the form of a beta-blocker combined with an alpha agonist (Combigan®), or a beta-blocker combined with a carbonic anhydrase inhibitor (Cosopt® or generic equivalent). Finally, there is a non-PGA combination (Simbrinza®) which consist solely of an alpha agonist and a carbonic anhydrase inhibitor. Non-PGA drugs generally have poorer tolerabilityup-front payment, royalty payments in the eye than PGA drugs, and some have systemic adverse effects that limit the patient population in which they can be used safely. Moreover, their IOP-lowering effect is generally less than that of PGAs and the vast majority of non-PGAs are required to be dosed multiple times daily.

The existing classes of treatment available for glaucoma each have varying mechanisms of action, levels of IOP-lowering, side effects and other adverse effects, as described in the following table.

Summary of Existing Glaucoma Treatments:

Drug Classification

(Generic Names)

Mechanism of
Action*

IOP
Reduction**

Known Side Effects*

Other Precautions,
Warnings,
Contraindications and
Adverse Effects*

Prostaglandin analog

latanoprost

Travatan(travoprost)

Lumigan(bimatoprost)

Increase uveoscleral and/or trabecular outflow

6-8 mmHg

(25%-33%)

-   Eye redness (conjunctival hyperemia)

-   Visual disturbances (blurred vision, loss of visual acuity)

-   Itching (pruritis)

-   Burning

-   Stinging

-   Eye pain

-   Darkening of the eyelids (periocular hyperpigmentation)

-   Permanent eye (iris) color change

-   Macular edema

-   History of herpetic keratitis

-   Ocular edema

Drug Classification

(Generic Names)

Mechanism of
Action*

IOP
Reduction**

Known Side Effects*

Other Precautions,
Warnings,
Contraindications and
Adverse Effects*

Beta-adrenergic antagonist, or beta-blocker

timolol

Decrease aqueous production

N/A mmHg

(20%-25%)

-   Burning

-   Stinging

-   Eye lid swelling (Blepharitis)

-   Corneal inflammation (keratitis)

-   Itching (pruritis)

-   Eye pain

-   Dry eyes, foreign body sensation

-   Visual disturbances

-   Drooping eye lids (ptosis)

-   Swelling of retina (cystoid macular edema)

-   Muscle weakness

-   Anaphylaxis

-   Severe respiratory and cardiac reactions

-   Contraindicated in bronchial asthma (or history of), severe chronic obstructive pulmonary disease, sinus bradycardia (slower heart rate), second or third degree atrioventricular block, overt cardiac failure, cardiogenic shock

Alpha-adrenergic agonist, or alpha agonist

brimonidine

Decrease aqueous production; increase uveoscleral outflow

2-6 mmHg

(20%-25%)

-   Allergic conjunctivitis

-   Eye redness (conjunctival hyperemia)

-   Itchy eyes (eye pruritis)

-   Severe cardiovascular disease

-   Depression

-   Cerebral or coronary insufficiency

-   High blood pressure (orthostatic hypertension)

-   Contraindicated in patients on monoamine oxidase inhibitor therapy

Carbonic anhydrase inhibitor

dorzolamide

brinzolamide

Decrease aqueous production

3-5 mmHg

(15%-20%)

-   Bitter taste

-   Burning

-   Stinging

-   Allergic conjunctivitis

-   Corneal inflammation (superficial punctate keratitis)

-   Conjunctivitis

-   Eye lid reactions

-   Sulfonamide allergy

*According to FDA-approved labeling.
**mmHg, according to FDA-approved labeling; % from baseline, according to American Academy of Ophthalmology Glaucoma Panel.

The chart below illustrates the respective proportions of glaucoma prescriptions issued in 2013 by class, according to IMS Health.

Glaucoma Treatments Currently in Development.

We believe there are currently two leading classes of new drugs in clinical development for glaucoma: Rho kinase inhibitors and adenosine mimetics.

A Rho kinase inhibitor is currently in Phase 3 clinical trials and is the furthest along of the potential new glaucoma drug therapies: Aerie Pharmaceuticals, Inc.’s AR-13324. Like with PGAs, conjunctival hyperemia has been reported with the Rho kinase inhibitor class.

Adenosine mimetics are compounds that mimic or simulate some of the actions or effects of adenosine, a naturally-occurring molecule with many, diverse biologic effects. There are four known subreceptors that are specific to adenosine: A1, A2a, A2b and A3. These subreceptors can cause many effects if stimulated. In the adenosine mimetic group, there are compounds targeting three different adenosine subreceptors: A1, A2a and A3. We believe that A1 selectivity is necessary for optimal IOP-lowering effect. To our knowledge, the two compounds being developed by other companies that were selective for the A2a subreceptor have been discontinued from clinical development for glaucoma. A third compound being developed that we believe targets both the A1 (IOP-lowering) and the A3 (IOP-increasing) subreceptors is still being studied. We believe that because this third compound is dosed orally, it is challenging to isolate its pharmacologic effects solely to the eye. We believe we are the only company to be developing an adenosine mimetic highly selective for the A1 subreceptor for ophthalmic indications.

Market Opportunity

Since 1996, there have been no new drug classes approved in the United States for glaucoma. As a result, there are persistent inadequacies in the tools that ophthalmologists use to manage patients with glaucoma. Thus, we believe there is a need for an innovative glaucoma treatment that offers:

significant IOP-lowering;

a favorable safety and tolerability profile;

a novel mechanism of action that complements existing therapies; and

convenient dosing.

Our Solution—Trabodenoson

Trabodenoson is a first-in-class selective adenosine mimetic that is designed to lower IOP with a mechanism of action that we believe augments the natural function of the TM. In addition, by enhancing a naturally occurring process to make the eye function more like that of a younger, healthier eye, rather than changing the fundamental dynamics of pressure regulation in the eye, we believe there is a lower risk of unintended side effects that could result in safety or tolerability issues in the long term. We believetrabodenoson enhances metabolic activity in the TM, which helps clear the pathway for the aqueous humor, the fluid in the eye, to flow out of the eye, thereby lowering IOP. We believe thattrabodenoson’s mechanism of action improves the function of the eye, and thattrabodenoson has the potential to be used as a monotherapy in place of current glaucoma treatments. In addition, we expect thattrabodenoson’s purported mechanism of action in the TM should complement the activity of all currently-approved glaucoma drugs that work in other ways to lower IOP.

We believe the following elements oftrabodenoson’s product profile will drive its adoption, if approved, in the glaucoma market:

Meaningful IOP-Lowering. After four weeks of monotherapy treatment in a Phase 2 clinical trial in glaucoma patients who had discontinued any other medications,trabodenoson (500 mcg) lowered IOP by an average of 4.0 to 7.0 mmHg from study baseline and 3.5 to 5.0 mmHg from diurnal baseline, over the dosing interval. Moreover, IOP-lowering at week four was significantly better than IOP-lowering at week two.

Favorable Safety Profile. In four completedtrabodenoson clinical trials over a wide range of doses, no patients have been withdrawn due to atrabodenoson-related side effect in the eye. In our multiple-dose Phase 2 monotherapy clinical trial, we did not observe side effects in the eye that would indicate a tolerability problem at any of the doses tested. Specifically, there was no change in the background rate of conjunctival hyperemia in the patient population when treatment withtrabodenoson was initiated or continued for up to four weeks, even at the highest dose tested. Furthermore, in our most recently completed multiple-dose Phase 2 trial oftrabodenosonco-administered withlatanoprostin a population of PGA poor-responders, there also was no change in the rate of hyperemia from study baseline after four, eight or 12 weeks of treatment. No systemic effects of the drug have been identified, despite rigorous monitoring including cardiac and renal function, when administered as an eye drop. We believe this safety profile could be important in the potential fortrabodenoson to become a preferred treatment alternative for patients that experience undesired side effects with existing therapies.

Unique, Complementary Mechanism of Action. We believe thattrabodenoson’s mechanism of action augments a naturally occurring process by clearing the path for aqueous humor outflow in the TM. We expect that this mechanism of action should complement all currently-approved glaucoma drugs which work in other ways to lower IOP, including by reducing aqueous humor production and increasing outflow through the uveoscleral pathway. This complementary mechanism was confirmed in patients already receivinglatanoprost therapy in a recently completed multiple-dose Phase 2 trial. In this Phase 2 trial oftrabodenosonco-administered withlatanoprostin a population of PGA poor-responders, patients onlatanoprost experienced an additional 5.8 mmHg IOP lowering from their study baseline and 4.3 mmHg from their diurnal baseline after 12 weeks treatment (eight weeks BID plus four weeks QD). These results maketrabodenoson, with its favorable safety profile, a candidate to add to other glaucoma medications when a further reduction of the IOP is desirable.

Convenient Dosing. Current Phase 2 clinical data indicate that QD dosing withtrabodenoson in PGA poor-responders is well tolerated and lowers IOP significantly. We believe a QD dosing regimen minimizes the burden on patients to remember to take their medication, thus, we believe, potentially improving compliance with the therapy. If confirmed and approved in our Phase 3 program, QD dosing would maketrabodenoson easier to use than most non-PGA products, andtrabodenoson’s dosing frequency would match the best-in-class PGAs, which would facilitate an FDC with a PGA that could be dosed QD.

We believe thattrabodenoson’s IOP-lowering results, complementary mechanism of action, dosing and safety profile make it well suited for use in an FDC with a PGA, which could be a convenient option for patients currently using two or more glaucoma drugs to lower IOP.

Trabodenoson Discovery—Background

Adenosine is a naturally occurring molecule that has a broad array of biological effects. Its effects are mediated through activity at four known adenosine-specific subreceptors: A1, A2a, A2b and A3. These subreceptors are present throughout the body on the cells of different tissues, and at different concentrations. When adenosine binds and activates these different subreceptors, it can cause many diverse effects.

In 1995, a study was published in the Journal of Pharmacology and Experimental Therapeutics describing how adenosine mimetics can lower IOP by activating adenosine A1 subreceptors in rabbits. In 2001, an animal study published by the University of Pennsylvania School of Medicine confirmed that stimulation of A1 lowered IOP, but that stimulating A2a or A3 subreceptors increased IOP.

Our scientists began a rational deconstruction of this complex biology in order to isolate the protective activity of adenosine and to incorporate it into novel therapeutics. Beginning with the structure of adenosine, we created a series of molecules to bind with, and therefore induce the biological effects associated with stimulation

of a single adenosine subreceptor. In this way, the undesired biological actions of native adenosine were systematically removed, one by one by eliminating the activity at non-target subreceptors. This rational drug design process relied heavily on our understanding of structure activity relationships, which relate the variation in the structure of the adenosine mimetics and their ability to bind and activate ideally just one adenosine subreceptor. Ultimately, a number of molecules emerged from these efforts with isolated and specialized activity, including some adenosine mimetics that only targeted the A1 subreceptor, leading to the discovery oftrabodenoson.

The high affinity binding oftrabodenoson to the A1 subreceptor is shown by the small Ki in the table below, and its selectivity for this IOP-lowering activity is indicated by much higher Ki’s for A2a and A3 receptors where its binding is relatively weak.

Trabodenoson is a Potent and Selective A1 Adenosine Mimetic

   A1
(Ki, nM)
   A2a
(Ki, nM)
   A3
(Ki, nM)
   Selectivity Ratios 

Compound

        A2a/A1   A3/A1 

Trabodenoson

   0.97     4,690     704     4,835x     725x  

Trabodenoson’s key characteristics include:

1.Potency—Ki in single-digit nM range (0.97nM);

2.High Selectivity—over A2a> 1000-fold and A3>500-fold;

3.Ease of Fat Solubility—allowing corneal penetration so it can reach the TM; and

4.A high compatibility with the often sensitive tissues in the front of the eye.

We believe thattrabodenoson is the only adenosine mimetic with high selectivity for the single desired target of action, the A1 subreceptor, and that stimulation of this subreceptor in the TM effects a meaningful improvement in the metabolic activity in the TM that helps to clear the pathway for the aqueous humor to flow out of the eye, lowering IOP. This metabolic activity takes the form of an increase or up-regulation of proteases—such as Protease A or MMP-2—that digests and removes accumulated proteins that can block the healthy flow of the aqueous humor out of an eye with glaucoma. This metabolic activity is a naturally occurring or endogenous process that is enhanced by treatment withtrabodenoson. We believe this process does not radically change the way the TM controls eye pressure, but rather restores the natural process of pressure control in the TM, which is different from other therapies that decrease aqueous humor production or increase the permeability of the eye to increase outflow.

Product Pipeline

Our product pipeline includestrabodenoson, as a monotherapy delivered in an eye drop formulation, as well as an FDC that includestrabodenoson pluslatanoprost in an eye drop formulation, which we refer to as our FDC product candidate. We are also evaluating the potential fortrabodenoson to directly target optic neuropathies and degenerative retinal diseases. The following table summarizes key information about our product development programs.

Trabodenoson

Our first product candidate,trabodenoson, is a monotherapy dosed in an eye drop. Our clinical trials have shown thattrabodenoson has significant IOP-lowering effects, convenient dosing and also has a favorable safety profile when compared to the currently available glaucoma treatments, such as PGAs and non-PGAs.

Trabodenoson-Latanoprost Fixed-Dose Combination

As many as half of glaucoma patients, typically those with more severe disease, need to use two or more glaucoma drugs to sufficiently reduce their IOP. The available FDC products increase IOP-lowering but also have unpleasant tolerability challenges in the eye, as well as the adverse effects, safety warnings, precautions and contraindications that the two individually-dosed drugs carry in their FDA-approved package inserts. An FDC product containing a PGA plus a non-PGA has not yet been approved in the United States. We believe that none have gained FDA approval because the modest incremental benefit in IOP-lowering seen when a non-PGA is added to a PGA is too small in the context of the added side effects and clinical risks that come with the combined drugs. In contrast,mid-single digit percentages based on our completed Phase 2 study in whichtrabodenoson therapy was co-administered withlatanoprost, we believe that an FDC containing a PGA andtrabodenoson would be well received in the glaucoma market, especially for use in patients with higher IOPs that currently use twonet sales of products or more glaucoma drugs to lower IOP.

Our second product candidate is a combination oftrabodenoson with a PGA,latanoprost, to create an FDC. While our FDC product candidate has not yet been formulated as an FDC or administered to humans, we expect thattrabodenoson will not adversely affect the safety profile oflatanoprost, or any other currently-approved PGA, because of its favorable safety and tolerability profile from our completed Phase 2 trial in whichtrabodenoson andlatanoprost were co-administered. We believe thattrabodenoson’s mechanism for lowering IOP complements the mechanism of action oflatanoprost and other PGAs, which work primarily on the secondary uveoscleral outflow, becausetrabodenoson is believed to act through the TM, the largest aqueous humor outflow path in the eye. In fact, our IOP-lowering studies in cynomolgus monkeys have shown that IOP-lowering is significantly better when the eye is treated with bothtrabodenoson andlatanoprost, as compared to treatment withlatanoprost alone.

Our completed Phase 2 trial oftrabodenosonco-administered withlatanoprost also demonstrated IOP-lowering in patients who have previously had inadequate responses tolatanoprost. These patients represent PGA poor-responders, as evidenced by persistently elevated IOP at levels that typically require the addition of a second drug to further lower IOP. The safety profile oftrabodenosonco-administered withlatanoprost is similar to that oftrabodenoson monotherapy. Moreover,trabodenoson had a sufficiently long duration of action, allowing it to be effectively dosed QD in conjunction withlatanoprost. Assuming thetrabodenoson safety profile remains favorable, atrabodenoson-latanoprost FDC therapy could present a much improved risk/benefit profile over other combinations of currently-approved PGAs and non-PGAs.

Trabodenoson for Optic Neuropathy and Degenerative Retinal Diseases

The neuroprotective potential oftrabodenoson is supported by the basic biology of adenosine, which has shown that the stimulation of the A1 receptor can protect tissues of the central nervous system. A pre-clinical study of the impact of high IOP on RGCs showed thattrabodenoson could protect this key population of cells in the retina that, when lost, result in the irreversible vision loss associated with glaucoma. While we have not yet conducted a formal program of studies to prove neuroprotection, we plan to study the potential oftrabodenoson monotherapy and our FDC product candidate to slow the loss of vision significantly more than attributable to IOP lowering alone, either in glaucoma patients or in other rarer forms of optic neuropathies.

Clinical Data and Development Strategy

Our Phase 3 program fortrabodenoson as a monotherapy will incorporate the FDA-acceptable clinical endpoint of IOP, in studies with three months of treatment. We had an End-of-Phase 2 meeting with the FDA in 2015 to discuss our Phase 3 program fortrabodenoson monotherapy, and to confirm the design and endpoints for the Phase 3 pivotal trials. At the meeting, we reached agreement on the design for our initial Phase 3 study, as well as the overall regulatory path fortrabodenoson. The trial design for the initial Phase 3 study is a five-arm superiority trial that will include three doses oftrabodenoson. The primary endpoint of the study is IOP, determined at four timepoints during the day, after 4, 6 and 12 weeks of treatment. The IOP of thetrabodenoson treated subjects will be statistically compared to those of placebo treated subjects. A timolol arm will be included for study validation, but not for statistical comparison.

We initiated our Phase 3 program fortrabodenoson monotherapy in October 2015 and we expect to report top-line data from the first pivotal trial in the program by late 2016. If the primary objectives of all of the trials in our Phase 3 program are met, we plan to submit an NDA. We are planning to commence our Phase 3 program for the FDC oftrabodenoson andlatanoprost in early 2018.

Clinical Results

Trabodenoson Phase 2 Tolerability, Safety and Efficacy of Monotherapy in Glaucoma Patients

In 2012, we completed a successful Phase 2 dose-ranging clinical trial in 144 patients with OHT (ocular hypertension with no visual field loss) or POAG, which demonstrated a clear dose response totrabodenoson. Statistically significant results for the primary endpoint of our Phase 2 clinical trials indicate thattrabodenoson has IOP-lowering effects in line with the best existing therapies, with a favorable safety and tolerability profile at all doses tested. The trial was randomized, double-masked, placebo-controlled, and evaluated the efficacy, tolerability, safety, and pharmacokinetics oftrabodenoson over two or four weeks of BID dosing with eye drops. Separate groups of patients receivedtrabodenoson doses of 50, 100 or 200 mcg for two weeks, or 500 mcg for four weeks, and their IOP-lowering efficacy and safety data were compared to groups of patients dosed concurrently with placebo eye drops, also BID. To enter the trial, otherwise healthy patients had to have elevated IOPs (greater than or equal to 24 mmHg and less than or equal to 34 mmHg) when off of all glaucoma drugs, and a diagnosis of either OHT or POAG.

The primary efficacy endpoint was IOP (measured throughout the day). The primary efficacy analysis calculated the reduction in IOP from the patients’ IOP at the beginning of the study (recorded before active drug was administered at the study 8 AM baseline). A second analysis calculated the reduction in IOP from a time-matched diurnal baseline. The IOP drop from baseline for each dose group (50, 100, 200 and 500 mcg) was then compared statistically to the IOP drop of a matched placebo group treated concurrently.

Safety evaluations included recording of withdrawals or terminations and adverse events. In each patient, the treated eye was evaluated at regular intervals with internal eye exams (including pupil dilation with slit lamp examination of the inside of the eye) and external eye examinations (of the outside surface of the eye, eye lids and surrounding tissue). Visual function was also assessed. Overall health was assessed by physical exam, vital signs (including heart rate and blood pressure), electrocardiograms, or ECGs, for heart function and analysis of urine and blood samples (clinical chemistry), and plasma samples were collected to analyze the pharmacokinetic parameters, such as the half-life of any drug detected in the systemic circulation.

Results

Patient Population: The characteristics of the patients in the dose groups were similar, including their ages, baseline IOPs, and diagnoses (OHT or POAG). The table below reflects information regarding the demographics of the patient populations that participated in the study, and shows that both diagnoses groups had similar baseline IOPs, and that groups treated withtrabodenoson had characteristics that were similar to the placebo groups to which they were compared.

Baseline Demographics and IOP

       Trabodenoson Dose     
   Placebo   50 mcg   100 mcg   200 mcg   500 mcg   Total Active 

Mean Age

   59     56.6     55.6     53.8     57.6     56.3  

n

   59     17     17     17     34     85  

Baseline IOP (mmHg)

   26.6     26.1     25.6     26.1     26.2     26  

OHT n(%)

   22(37.3)     6(35.3)     8(47.1)     6(35.3)     14(41.2)     34(40.0)  

Baseline IOP (mmHg)

   26.7     27.2     25     27.1     26.3     26.3  

POAG n(%)

   37(62.7)     11(64.7)     9(52.9)     11(64.7)     20(58.8)     51(60.0)  

Baseline IOP (mmHg)

   26.5     25.5     26.1     25.5     26.1     25.9  

Efficacy

Both the 200 mcg dose and the 500 mcg doses at day 14, and the 500 mcg dose at day 28, met the primary endpoint demonstrating statistically significant improvements in IOP relative to the matched placebo (p<0.05 indicating a greater than 95% probability that the result was not a random event). Moreover, a clear increase in IOP-lowering efficacy was seen with increasing doses oftrabodenoson (i.e. a dose response), and the most efficacioustrabodenoson dose tested was the highest dose of 500 mcg.Trabodenoson’s primary efficacy endpoint (IOP drop from baseline) measured after four weeks of treatment (at day 28) had improved significantly from the same endpoint when measured after two weeks of treatment (at day 14). This improvement with additional treatment time was statistically significant (p=0.016). In the figure below, a clear trend for increasing IOP-lowering efficacy with increasing dose is evident. For the 500 mcg dose, the statistically significant increase in efficacy between day 14 and day 28 is illustrated on the right side of the figure.

On average, doubling doses between 50 and 500 mcg increases IOP lowering from diurnal baseline by approximately 0.7 mmHg.

The IOP-lowering at the highest and most efficacious dose (500 mcg) was evaluated in various patient sub-populations to gain a sense of the ability to generalize the results over a diverse patient population. The figure below compares the IOP drop from study baseline (the primary endpoint analysis) for all patients (far left) to various sub-populations to the right of that. All of these patient subgroups responded totrabodenoson’s IOP-lowering effect.

When we rationally designedtrabodenoson, our primary objective was to restore pressure regulation in eyes with high IOP, a risk factor for glaucoma. A healthy eye has a natural circadian rhythm that dictates a pattern of IOP over the day. We found that this pattern, or the shape of the IOP circadian rhythm curve throughout the day, is relatively unchanged bytrabodenoson treatment, except that the overall IOP during the day is reduced bytrabodenoson treatment as intended. We believe this indicates that the TM has been restored to an improved function resulting in a more normal average pressure, and that this normal daily IOP pattern indicates that the fundamental biology of pressure management in the eye has been preserved. The natural daily changes in IOP still exist, but at a significantly lower average pressure that we believe is less damaging to RGCs and the optic nerve. The figure below shows the primary efficacy parameter for the trial, IOP, at several timepoints throughout the day (diurnal IOP) for the highest dose tested and the placebo group at day 28.

Furthermore, after 28 days of BID dosing, the IOP-lowering effect persisted for an additional 24 hours after the last dose of medication, which we believe indicates the potential fortrabodenoson monotherapy to be dosed QD.

Safety and Tolerability

There were no serious adverse events or patients that withdrew due to safety findings that occurred once the drug was given. There were no signs of systemic safety issues inprocesses involving any of the non-ocular examinations, ECG evaluations licensed intellectual property, developmental and regulatory milestone payments, and sublicense revenue payments. Rocket is responsible for prosecuting and maintaining the licensed patents at Rocket’s expense, in cooperation with Licensors. Rocket also has the first responsibility to enforce and defend the licensed patents against infringement and/or laboratory tests performed. Systemically, administration oftrabodenoson eye drops was found to be well-tolerated. There were no changes noted from internal eye examinations or visual testing during drug treatment. The rate of conjunctival hyperemiachallenge, in patients treatedcooperation withtrabodenoson was unchanged from Licensors. For five years following the placebo run-in period (study baseline). There was no maximum tolerated dose determined because all doses tested were well-tolerated.

Trabodenoson Phase 2 Co-Administered with Latanoprost in Glaucoma Patients

In October 2014, we received top-line results from a Phase 2 trial in patients with POAG or OHT, in which trabodenoson eye drops were co-administered withlatanoprosteye drops. The objectiveeffective date of the studylicense agreement, Rocket has a right of first refusal to license any improvements to the licensed intellectual property obtained by Licensors at market value. Rocket is obligated to license (without charge) to Licensors for non-commercial use any improvements to the licensed intellectual property that Rocket creates.

14


As consideration for the licensed rights, Rocket shall pay Licensors an initial upfront license fee of €.03 million (approximately $.04 million), which was expensed as research and development costs. Rocket is obligated to evaluatemake aggregate payments of up to €1.4 million (approximately $1.5 million) to Licensors upon the safetyachievement of specified development and additional IOP-loweringregulatory milestones. With respect to any commercialized products covered by the LAD-I license, Rocket is obligated to pay a mid-single digit percentage royalty on net sales, subject to specified adjustments, by Rocket or its sublicensees or affiliates. In the event that Rocket enters into a sublicense agreement with a sublicensee, Rocket will be obligated to pay a portion of any consideration received from such sublicensees in specified circumstances.

Rocket may terminate this agreement at any time by providing Licensors with 90 days advance notice. The license is in effect of trabodenoson when added either BID or QD tolatanoprost. This trial enrolled 101 patients who had IOPs of greater than or equal to 24 mmHg despite one month of previous treatment withlatanoprost. These patients are considered PGA poor-responders, as evidenced by persistently elevated IOP at levels that typically require the addition offor a second drug to further lower IOP. The trial was randomized, double-masked, placebo- and active- controlled.

Following four weeks of latanoprosteye drops, otherwise healthy patients with an IOP greater than 24 mmHg and a diagnosis of either OHT or POAG were randomizedduration for Part 1each of the study. In Part 1,countries defined in this agreement for as long as a license right exists that covers the study arm consisted of BID-dosedtrabodenoson (1.5%; 500 mcg nominal dose) pluslatanoprost0.005%, at the approved dose, QD. The control arm consisted oftimolol0.5%, an approved BID dose pluslatanoprost0.005% QD. Patientslicensed product or process in both arms were treated for a total of eight weeks in Part 1 of the study to evaluate the additive effects of trabodenoson BID tolatanoprost QD, with an active control consisting oftimolol BID.

Atsuch country, or until the end of Part 1, after eight weeks of treatment, patients began Part 2 of the study. In Part 2, the study arm was switched to a QD dose oftrabodenoson (3.0%, 1,000 mcg nominal dose) pluslatanoprost 0.005% QD, and patients in the control arm were switched to placebo QD pluslatanoprost 0.005% QD. Part 2 was designed to measure the additive effects oftrabodenoson QD tolatanoprost QD over anany additional four weeks. The number of patients planned for enrollment was ~100 (50 patients per arm) for Part 1 and ~80 (40 patients per arm) for Part 2. This trial is outlined below.

The primary efficacy endpoint was IOP, measured throughout the day. The efficacy analyses calculated the reduction in IOP from the patients’ IOP at study baseline and diurnal baseline (recorded after takinglatanoprostfor four weeks but beforetrabodenoson or timololwere added). In Part 1, these IOP drops from baseline, onlatanoprost,were compared to the IOP drops of the control arm treated concurrently withtimolol. In Part 2, the IOP drop from baseline in patients receivingtrabodenosonQD pluslatanoprostQD was compared to patients receiving placebo QD pluslatanoprost QD.

Safety evaluations included recording of withdrawals or terminations and adverse events, or AEs. In each patient, both eyes were evaluated at regular intervals with internal eye exams (including pupil dilation with slit lamp examination of the inside of the eye) and external eye examinations (of the outside surface of the eye, eye lids and surrounding tissue). Visual function was also assessed. Overall health was assessed by physical exam, vital signs (including heart rate and blood pressure), electrocardiograms, or ECGs, for heart function and analysis of urine and blood samples (clinical chemistry). Plasma samples were collected to analyze the pharmacokinetic parameters, such as the half-life of any drug detected in the systemic circulation.

Results

Patient Population: The characteristics of the patients in the dose groups were similar, including their age, and baseline IOPs, which were not adequately controlled following a four-week run-in usinglatanoprosttherapy. The table below includes information on the demographics of the patientslegal protection that participated in the study.

Baseline Demographics and IOP

   Part 1   Part 2 

ITT population

  Trabodenoson
BID
   Timolol
BID
   Trabodenoson
QD
   Placebo
QD
 

n

   50     51     37     43  

Mean Age

   62     61     63     61  

Baseline IOP usinglatanoprost (mmHg)

   25.71     25.86     25.68     25.86  

OHT n (%)

   23(46%)     13(25.5%)     15(40.5%)     12(28%)  

Baseline IOP usinglatanoprost (mmHg)

   25.78     25.65     25.93     25.29  

POAG n (%)

   27(54%)     38(74.5%)     22(59.5%)     31(72%)  

Baseline IOP usinglatanoprost (mmHg)

   25.65     25.93     25.50     26.08  

Discontinuations:

In Part 1, there were four discontinuations due to either protocol violations or exclusionary criteria (three patients were in thetrabodenoson group and one was in thetimolol group). In Part 2, there were two discontinuations; one was discontinued due to an AE and the other did not to return during follow-up, but provided no explanation (both were in the placebo group).

Efficacy

After eight weeks of BID dosing in Part 1, patients treated withtrabodenoson co-administered withlatanoprostexperienced further mean reductions of IOP of 3.4 and 4.9 mmHg from diurnal and study baselines, respectively, beyond the IOP-lowering of latanoprost. After switching to QD trabodenoson in Part 2, and treating for an additional four weeks, QD dosing withtrabodenoson resulted in a mean reduction in IOP of 4.3 and 5.8 mmHg from diurnal and study baseline, respectively, from the IOP onlatanoprostalone. At the end of Part 2 (after 12 weeks), the IOP-lowering seen in the Study Eye (the eye treated withtrabodenoson) was statistically significantly greater than the IOP drop of the patient’s Control Eye (the patient’s other eye that only received QDlatanoprost).

In Part 1 the IOP drop at the end of 8 weeks of treatment, in this population oflatanoprost poor-responders, was less thantimolol BID (0.5%) which dropped pressure 6.1 and 7.6 mmHg, on average from diurnal and study baselines, respectively.

In Part 2 of the trial, QDtrabodenoson lowered IOP an additional 4.3 and 5.8 mmHg from diurnal and study baseline, respectively, beyond the effect oflatanoprost alone in this population oflatanoprost poor-responders.

Consistency of Results across Phase II Studies

Mean reductions in IOP from study baseline ranging from 5.0 mmHg after four weeks of BID treatment to 5.8 mmHg after four weeks of QD treatment in the trial were similar to the 6.5 mmHg IOP reduction seen at the end of the four weekTrabodenoson Phase 2 Tolerability, Safety and Efficacy of Monotherapy in Glaucoma Patients trial (the monotherapy trial). In the monotherapy trial, patients received only trabodenoson. The patients in the 2014 additivity trial represented a different patient population than those studied in the monotherapy trial. These patients had inadequate responses tolatanoprost,as evidenced by persistently high IOP, despitelatanoprost treatment for four weeks prior to randomization. This patient population typically requires the addition of a second drug to their PGA therapy to further lower IOP. Patients in the monotherapy trial, by contrast, were removed from all glaucoma medications, and thus represented a typical patient population studied in a Phase 3 glaucoma trial. Despite these differences in the patient populations, the efficacy of trabodenoson was consistent across trials, suggesting thattrabodenoson’s mechanism of action is effective across a wide-range of glaucoma disease severity.

Both OHT and POAG patients responded totrabodenoson with POAG subjects showing the largest IOP drops.

Safety and Tolerability

With the exception of a single patient who received placebo pluslatanoprost, no patients dropped out of the trial as a result of a drug-related adverse effect or due to drug intolerability.Trabodenoson was well tolerated in the eye, with no drug related hyperemia detectable by ocular exam at four, eight or 12 weeks. Mild hyperemia seen on the first day of dosing in a minority of patients was back to baseline by the 1 week post dose ocular exams.Trabodenoson had no detectable systemic effects in any of the non-ocular examinations, ECG evaluations or laboratory tests performed. Overall adverse events were similar in the BID phase (Trabodenoson 36%;Timolol 29%), with thetrabodenoson rate dropping to 26% without the first-day hyperemias, and were also similar in the QD phase (Trabodenoson 16%; Placebo 14%) between treatment groups. However,timolol (dosed in one eye only) had systemic adverse events associated with systemic beta blockade, including: dizziness, headache, fatigue and symptomatic sinus bradycardia.

Patients randomized totimololalso had lower pulse rates than in thetrabodenoson group (the pulse rate was measured 30 minutes and one hour after dosing). This difference was statistically significant in the overall data (p=0.033) as well as at the individual timepoints (p=0.041 and p=0.030 at the 30 minute and one hour post-dose timepoints, respectively).

The pulse rates for both groups are shown in the boxplot below, which includes the minimum and maximum values, median (white line), and the boundaries of the upper and lower quartiles (top and bottom of the box).

Trabodenoson Repeat-Dose Safety and Tolerability in Adult Healthy Volunteers

We conducted a randomized, double-masked, placebo-controlled, dose-escalation trial in healthy volunteers, aged 35-65, with the primary objective of characterizing the safety and tolerability profile oftrabodenoson and identifying a maximum tolerated dose (a dose that was associated with limiting or intolerable side effects).

Ten subjects were assigned to each of seven consecutive cohorts (six to activetrabodenoson and four to matched placebo). Cohorts 1 through 6 consisted of sequential, escalating doses (200, 400, 800, 1600, 2400 and 3200 mcg oftrabodenoson) which were given topically to a single eye, BID, for 14 days. The 3200 mcg dose was the highest dose that couldshould be administered to a single eye at one time due to, among others, the limitations

of the formulation. Cohort 7 included eight step-wise escalating doses oftrabodenoson, given in both eyes. Doses given to this cohort ranged from 200-3200 mcg in a single eye and totaled 1800-6400 mcg for both eyes combined. Dose escalation to the next dose level proceeded only after masked review of the safety data from the preceding dose level.

Systemic safety assessments included: adverse events, other medications used, physical examinations, vital signs, clinical laboratory tests of blood and urine samples, extensive monitoring of cardiac function and health (12-lead ECG tracings, continuous cardiac monitoring and cardiac troponin concentrations), lung function testing (FEV1), sleep (Karolinska Sleepiness Scale), kidney function and withdrawals or terminations. No systemic safety signals were found at any of the doses tested.

Ocular safety assessments included vision tests (visual acuity), IOP measurements, as well as internal and external eye examinations. No significant changes were seen in IOP measurements and examination of the periorbital area, eyelids, eyelashes, pupils, cornea, iris and sclera. The only ocular finding was short-lived, self-limited conjunctival hyperemia that was dose-related, usually mild in severity, decreased with continuing exposure, and was not accompanied by evidence that it was related to inflammation, such as persistent anterior chamber cells or flare. The incidence of clinically significant eye redness reported as an adverse event was extremely low (1 of 42) in subjects randomized totrabodenoson.

Early Terminations and Withdrawals

Three subjects randomized to placebo were terminated early from the study for reasons unrelated to the study drug. Only one subject assigned to active study drug was withdrawn. The study subject’s laboratory tests revealed findings consistent with gallbladder disease (chronic cholecystitis), so the subject was withdrawn from the clinical trial (without unmasking the subject’s treatment assignment) and referred for a surgical consult resulting in the subject having chronic gallbladder stones removed.

Pharmacokinetic Data

The pharmacokinetics data indicated that the exposure totrabodenoson generally increased in a dose-dependent manner. At the highest three doses, there were no apparent increases in systemic exposure with increasing dose. This plateau effect suggests that little additional drug is absorbed into systemic circulation following doses above 4800 mcg (2400 mcg per eye), as reflected in the figure below.

Conclusions

In conclusion, no safety or tolerability issues were identified in either the eye or the body as a whole. Due to the lack of clinically significant findings following in depth safety testing for systemic and ocular effects oftrabodenoson, no maximum tolerated dose could be identified. Systemic exposure totrabodenoson appeared to be limited above ocular doses totaling 4800 mcg, indicating an apparent limitation to the amount of drug that can be delivered to the body by dosing in the eye.

Trabodenoson Monotherapy Tolerability, Safety and Efficacy

We conducted a Phase 1/2 multi-center, randomized, double-masked, placebo-controlled, dose-escalation trial in 70 adults with POAG and OHT with the primary objective of characterizing the safety and tolerability of increasing doses of a pilot formulation oftrabodenoson monotherapy.

Subjects were sequentially assigned to one of seven consecutive cohorts (eight to activetrabodenoson and four to matched placebo); consisting of sequential, escalating single-doses of 2.5, 7.5, 20, 60, 180, 350 or 700 mcg oftrabodenoson given topically to a single study eye.

Efficacy (IOP-lowering), tolerability, safety and pharmacokinetics assessments were performed following study drug administration, and dose escalation from one cohort to the next cohort proceeded only after masked review of the safety data from the preceding cohort.

Conclusions

In conclusion,trabodenoson monotherapy ophthalmic solution up to and including 700 mcg were well-tolerated. This preliminary formulation oftrabodenoson demonstrated activity at lowering IOP following single doses of 350 mcg and 700 mcg in patients with POAG or OHT.

Development Plans

Having completed our Phase 2 trials and End-of-Phase 2 Meeting with the FDA, we plan to continue developingtrabodenoson as a monotherapy and an FDC withlatanoprost, along with the neuroprotective potential of both to slow the loss of vision significantly more than attributable to IOP-lowering alone either in glaucoma patients or other rarer forms of optic neuropathy. The figure below shows our plans for upcoming clinical trials.

Trabodenoson

We had an End-of-Phase 2 meeting with the FDA in 2015 to discuss our Phase 3 program fortrabodenoson monotherapy and to confirm the design and endpointsobtained for the Phase 3 pivotal trials. At the meeting, we reached agreement on the design of our initial Phase 3 study, as well as the overall regulatory path fortrabodenoson. We commenced our Phase 3 program fortrabodenoson monotherapylicense rights in October 2015. We expect to report top-line data from the first pivotal trial in the program by late 2016. If the primary objectives of all of the trials in the Phase 3 program are met, we plan to submit an NDA.

The overall program will encompass a total subject exposure totrabodenoson of at least 1,300 patients. The final design of the second Phase 3 trial will be impacted by the findings of the initial Phase 3 trial. Following a run-in period, both trials are expected to run for at least 12 weeks of active treatment with the primary endpoint of IOP-lowering over the day.

The initial Phase 3 trial will be a three-month study with five treatment arms, for a total of approximately 400 patients. There will be 3trabodenoson treatment arms. Thetrabodenoson doses to be evaluated are 1,000 mcg QD, 2,000 mcg QD, and 1,500 mcg BID. The trial will investigate both once-daily (QD) and twice-daily (BID) dosing, as some patients may benefit from a twice daily dosing regimen. The primary efficacy endpoint of the study is IOP, measured at four time points during the day after 4, 6 and 12 weeks of treatment. The IOP of thetrabodenoson treated subjects will be statistically compared to those of placebo treated subjects. A timolol arm will be included for study validation, but not for statistical comparison.

The FDA requires that a total of at least 1,300 patients be exposed to at least a single dose oftrabodenoson, and the complete submission package must also contain safety data from at least 300 patients treated withtrabodenoson for at least six months, and at least 100 patients treated for at least a year. These longer-term

treatments will be accomplished in a long-term safety trial conducted at the highest anticipatedtrabodenoson dose, and are expected to begin in late 2016. If the enrollment projections are met, the first data from our Phase 3 program is anticipated in late 2016. We are planning to complete the long-term safety study in late 2018. If the primary objectives of all trials in our Phase 3 program are met, we plan to submit an NDA to the FDA for marketing approval oftrabodenoson for the treatment of glaucoma in the United States.

Fixed-Dose Combination of Trabodenoson and Latanoprost

We are also developing an FDC oftrabodenoson andlatanoprost. We have not filed a separate investigational new drug application, or IND, for the FDC, as we expect to be able to rely on the existingtrabodenoson IND. Similarly, we have not conducted a Phase 1 trial for the FDC as we were able to rely on the safety and tolerability data generated in our completed trials fortrabodenoson as a monotherapy.

The results of the Phase 2 trial that evaluated the efficacy and safety of the combination oflatanoprost andtrabodenoson, at two dose levels, and when given QD and BID, will inform the design and format of the next study which will be structured to evaluate the safety and efficacy of various dose combinations and dosing patterns of an FDC oflatanoprost andtrabodenoson. Once FDC clinical supplies are available, based on discussion at our End-of-Phase 2 meeting with the FDA we believe that the FDA will allow us to continue the Phase 2 development using several FDC formulations with various dose combinations. However, the commencement of our Phase 2 program for the FDC product candidate will depend on successful cGMP manufacturing of stable FDC dosage forms. We expect to initiate our Phase 2 program in 2016 and plan to start our Phase 3 FDC program in early 2018. We expect our FDC product candidate to benefit many patients with higher IOPs and more severe disease that typically require more aggressive medical treatment. For this reason, the patient population for the FDC program is expected to carry a higher disease burden. As with the monotherapy product development, the FDA requirements for long-term dosing data (at least 300 patients treated with the FDC for at least six months, and at least 100 patients treated for at least a year) will require the program to include a long-term safety study.

Neuroprotection and Degenerative Retinal Diseases

We plan to study the neuroprotective potential oftrabodenoson monotherapy and our FDC product candidate to slow the loss of vision significantly more than attributable to IOP-lowering alone either in glaucoma patients or other rarer forms of optic neuropathy. While supported by the basic biology of adenosine, we have not yet conducted a formal program of studies to prove neuroprotection and have not filed an IND related to this program. This evaluation may include longer longitudinal studies in glaucoma patients, as potentially smaller patient groups with rapidly-progressing optic nerve damage. Although treatment times will be measured in years rather than months, this effort can run in parallel to the normal development trials, or may be included in the objectives of the planned long-term safety trials. The regulatory path for such an indication is thus far uncharted, so significant regulatory as well as clinical risk is anticipated for such a program and close interaction with regulatory agencies will be required. Due to the speculative nature of the development, it is difficult at this time to predict if or when an NDA submission in support of neuroprotection indication may be submitted. We plan to continue pre-clinical and proof-of-concept trials for optic neuropathies and degenerative retinal diseases beginning in 2016.each country.

Competition

The biotechnology and pharmaceutical industry isindustries, including in the field of gene therapy, are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products.products and novel therapies. While we believeRocket believes that ourits experience and scientific knowledge provide usprovides it with competitive advantages, we faceRocket faces potential competition from established brandedmany different sources, including larger and genericbetter-funded pharmaceutical and biotechnology companies, such as Novartis International AGnew market entrants and its subsidiary Alcon Labs, Pfizer/Allergan Inc., Bausch + Lomb, Inc. (now a unit of Valeant Pharmaceuticals International, Inc.), Merck & Co., Inc., Santen Inc., Aerie

Pharmaceuticals, Inc. and smaller biotechnology and pharmaceutical companies,new technologies, as well as from academic institutions, government agencies and private and public research institutions, which may in the future develop products to treat glaucoma.the indications targeted by Rocket’s pipeline that have not yet been conceived. Any product candidates that weRocket successfully developdevelops and commercializecommercializes will compete with existing therapies such as bone marrow transplantation and new therapies that may become available in the future. We believeRocket believes that the key competitive factors affecting the success of ourRocket’s product candidates, if approved, are likely to be efficacy, safety, convenience, price, pharmaco-economic value, tolerability and the availability of coverage and adequate reimbursement from governmental authorities and other third-party payors.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Glaukos Corporation recently commercialized a trabecular micro-bypass stent that is implanted in the eye during cataract surgery and allows fluid to flow from the anterior of the eye into the collecting channels, bypassing the TM. In addition, early-stage companies that are also developing glaucoma treatments, such as Aerie Pharmaceuticals, Inc., which is developing a Rho kinase/norepinephrine transport inhibitor, may prove to be significant competitors. We expect that our competitors will continueRocket intends to develop new glaucoma treatments,single treatment curative therapies for clinical indications that address mortality or high morbidity, which could differentiate Rocket from potential competitors developing alternative competitive therapies that may include eye drops, oral treatments, surgical procedures, implantable devicesrequire chronic or laser treatments.repetitive treatment.  

Other early-stage companies may also compete through collaborative arrangements with large and established companies. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors.companies developing gene therapies. These competitorscompanies also compete with usRocket in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, ourRocket’s programs.

OurRocket anticipates that it will face intense and increasing competition as new drugs and therapeutic modalities enter the market and advanced technologies become available. Rocket’s commercial opportunity could be reduced or eliminated if ourRocket’s potential competitors develop and commercialize products that are safer, more effective, have fewer adverse effects, are more convenient or are less expensive than any products that weRocket may develop. OurRocket’s potential competitors also may obtain FDA or other regulatory approval for their products more rapidly than weRocket may obtain approval for ours. In addition, our ability to compete may be affected because in many cases physicians, insurers or other third-party payors may encourage the use of genericits products. The market for glaucoma prescriptions is highly competitive and is currently dominated by generic drugs, such aslatanoprost andtimolol, and additional products are expected to become available on a generic basis over the coming years. If any of our product candidates are approved, we expect that they will be priced at a premium over competitive generic products and consistent with other branded glaucoma drugs.

Manufacturing

Trabodenoson is a small molecule that is capableRocket’s gene therapy platform has two main components: the production of being manufacturedLVV vectors and AAV vectors and the target cell transduction process, which results in reliable and reproducible synthetic processes from readily available starting materials. We believe the chemistry used to manufacturetrabodenoson is amenable to a scale up anddrug product. Rocket does not require unusual equipment in the manufacturing process. We do not currently operate manufacturing facilities for clinical or commercial production of ourits product candidates. WeRocket currently relyrelies on third-party manufacturers to produce the active pharmaceutical ingredientplasmids, vectors, cell banks and final drug product for ourits clinical trials. We manageRocket manages such production with all ourits vendors on a purchase order basis in accordance with applicable master service and supply agreements. We doRocket has not haveyet entered into long-term agreements with these manufacturers or any other third-party suppliers.Latanoprost andtimolol, usedsuppliers, as it is customary in our clinical trials, are available inthe industry to enter into commercial quantities from multiple reputable third-party manufacturers. We intendsupply agreements upon either achievement of proof-of-concept or as a company approaches registration trials. Rocket, however, intends to procure quantities on a purchase order basis from redundant and multiple sources for ourRocket’s clinical and commercial production.production to mitigate risk. If any of ourRocket’s existing third-party suppliers should become unavailable to usRocket for any reason, we believeRocket believes that there are a number of potential replacements, although weRocket might experience a delay in ourits ability to obtain alternative suppliers. WeRocket also dodoes not have any current contractual relationships for the manufacture of commercial supplies of ourits product candidates if they are approved.become registered. With respect to commercial production of ourRocket’s product candidates in the future, we planRocket plans to outsource production of the active pharmaceutical (drug substance) ingredients andas well as final drug product manufacturing (drug product) if they are approved and registered for marketing authorization by the applicable regulatory authorities.

bodies.

15


We expectRocket expects to continue to develop drug candidates that can be produced in a cost effective manner at contract manufacturing facilities. However, should a supplier or manufacturer on which we haveRocket has relied to produce a product candidate provide usRocket with a faulty product or such product is later recalled, weRocket would likely experience delays and additional costs, each of which could be significant.

Intellectual Property

Our success depends in part on our ability to obtain and maintain proprietary protection for our products and product candidates, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights.

We own a patent portfolio covering thetrabodenoson compound that includes issued patents in the United States, Europe, Japan, and several other countries. These composition-of-matter patents are scheduled to expire by early 2026 in the United States and by mid-2025 abroad. We also own an issued U.S. patent and have pending patent applications in Europe and Japan relating to the use oftrabodenoson for reducing IOP. The issued U.S. patent is scheduled to expire in 2031 and the pending foreign patent applications, if issued, are scheduled to expire by 2030. We recently had a U.S. composition-of-matter patent issued that covers polymorphs oftrabodenoson.This patent is scheduled to expire in 2033. A detailed freedom-to-operate analysis has been conducted and we are not aware of any third party rights or impediments to commercializingtrabodenoson for use in ophthalmic indications in the United States or Europe.

Our patent portfolio includes issued U.S. patents relating to combinations oftrabodenoson with carbonic anhydrase inhibitors, beta blockers and prostaglandins (PGAs). These U.S. patents are scheduled to expire in 2031 and 2032.

We are also pursuing additional patent applications in the United States and abroad relating to:

combinations oftrabodenoson with PGAs, carbonic anhydrase inhibitors or beta blockers, in patent applications which, if issued, are scheduled to expire by 2031;

polymorphs oftrabodenoson, in patent applications which, if issued, are scheduled to expire by 2033;

formulations oftrabodenoson, in patent applications which, if issued, are scheduled to expire by 2034; and

ocular neuroprotective uses oftrabodenoson, in patent applications which, if issued, are scheduled to expire by 2034.

As we advance the development of ourtrabodenoson products and clinical development we continue to look at opportunities to file additional patent applications covering new and innovative developments to ensure we have a patent portfolio that is multifaceted. For such additional applications, we will continue to seek patent protection in the United States and other jurisdictions that are important in the ophthalmic markets.

In addition to our patents and patent applications, we keep certain of our proprietary information as trade secrets, which we seek to protect by confidentiality agreements with our employees and third parties, and by seeking to maintain the physical security of our premises and physical and electronic security of our information technology systems.

Government Regulation

FDA Regulation and Marketing Approval

In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act or FDCA,(“FDCA”), and related regulations. Drugs are also subject tobiologics under the Public Health Service Act (“PHSA”), the regulations promulgated under both laws and other federal, state and local statutes and regulations. Failure to comply with the applicable United States regulatory requirements at any time during the product development

process, approval process or after approval may subject an applicant to administrative or judicial sanctions and non-approval of product candidates. These sanctions could include, among other things, the imposition by the FDA or an Institutional Review Board, or IRB, of a clinical hold on trials, the FDA’s refusal to approve pending applications or related supplements, withdrawal of an approval, untitled or warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, restitution, disgorgement, civil penalties or criminal prosecution. Such actions by government agencies could also require us to expend a large amount of resources to respond to the actions. Any agency or judicial enforcement action could have a material adverse effect on us.

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, approval, manufacture, distribution and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, packaging, storage, distribution, record keeping, approval, post-approval monitoring, advertising, promotion, sampling and import and export of our products. OurRocket’s drugs must be approved by the FDA through the NDA process, and Rocket’s biologics, including its gene therapy product candidate, through the BLA process, before they may be legally marketed in the United States. See “The NDA Approval Process” below.

Within the FDA, the FDA’s Center for Biologics Evaluation and Research (“CBER”) regulates gene therapy products and has published guidance documents with respect to the development these types of products. The FDA also has published guidance documents related to, among other things, gene therapy products in general, their preclinical assessment, observing subjects involved in gene therapy studies for delayed adverse events, potency testing, and chemistry, manufacturing and control information in gene therapy INDs.

The process required by the FDA before drugsa drug or biologic may be marketed in the United States generally involves the following:

completion of non-clinical laboratory tests, animal studies and formulation studies conducted according to Good Laboratory Practices, or GLP,Practice (“GLP”), or other applicable regulations;

submission of an IND, which allows clinical trials to begin unless FDA objects within 30 days;

performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug or biologic for its intended use or uses conducted in accordance with FDA regulations and Good Clinical Practices or GCP,(“GCP”), which are international ethical and scientific quality standards meant to ensure that the rights, safety and well-being of trial participants are protected and that the rolesintegrity of clinical trial sponsors, administrators, and monitors are well defined;the data is maintained;

preparation and submission to the FDA of an NDA;NDA in the case of a drug or BLA in the case of a biologic;

review of the product by an FDA advisory committee, where appropriate or if applicable;

satisfactory completion of pre-approval inspection of manufacturing facilities and clinical trial sites at which the product, or components thereof, are produced to assess compliance with cGMP requirements and of selected clinical trial sites to assess compliance with GCP requirements; and

FDA approval of an NDA or BLA which must occur before a drug or biologic can be marketed or sold.

Preclinical Studies

Preclinical studies include laboratory evaluation of the purity and stability of the manufactured drug substance or active pharmaceutical ingredient and the formulated drug or drug product, as well as in vitro and animal studies to assess the safety and activity of the drug for initial testing in humans and to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with

16


manufacturing information, analytical data, any available clinical data or literature and plans for clinical studies, among other things, are submitted to the FDA as part of an IND.

Companies usually must complete some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the drug in commercial quantities in accordance with cGMPcurrent Good Manufacturing Practice (“cGMP”) requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop methods for

testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

IND and Clinical Trials

Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements. Clinical trials are conducted under written study protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Prior to commencing the first clinical trial, an initial IND, which contains the results of preclinical testing along with other information, such as information about product chemistry, manufacturing and controls and a proposed protocol, must be submitted to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA unless the FDA within the 30-day time period raises concerns or questions about the drug product or the conduct of the clinical trial and imposes a clinical hold. A clinical hold may also be imposed at any time while the IND is in effect. In such a case, the IND sponsor must resolve any outstanding concerns with the FDA before the clinical trial may begin.begin or re-commence. Accordingly, submission of an IND may or may not result in the FDA allowing clinical trials to commence.commence or continue.

Where a gene therapy trial is conducted at, or sponsored by, institutions receiving National Institutes of Health (“NIH”), funding for recombinant DNA research, prior to the submission of an IND to the FDA, a protocol and related documentation is submitted to and the study is registered with the NIH Office of Biotechnology Activities (“OBA”), pursuant to the NIH Guidelines for Research Involving Recombinant DNA Molecules (“NIH Guidelines”). Compliance with the NIH Guidelines is mandatory for investigators at institutions receiving NIH funds for research involving recombinant DNA; however, many companies and other institutions not otherwise subject to the NIH Guidelines voluntarily follow them. The NIH is responsible for convening the Recombinant DNA Advisory Committee (“RAC”), a federal advisory committee that discusses protocols that raise novel or particularly important scientific, safety or ethical considerations, at one of its quarterly public meetings. The OBA will notify the FDA of the RAC’s decision regarding the necessity for full public review of a gene therapy protocol. RAC proceedings and reports are posted to the OBA website and may be accessed by the public.

A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of an NDA, BLA or IND so long as the clinical trial is conducted in compliance with GCP, and the FDA is able to validate the data from the study through an onsite inspection if the agency deems it necessary.

A separate submission to the existing IND must be made for each successive clinical trial to be conducted during product development. Further, an independent IRBInstitutional Review Board (“IRB”) for each site proposing to conductat which the clinical trial will be conducted must review and approve the study for any clinical trial before it commences at that site. Informed written consent must also be obtained from each trial subject. Regulatory authorities, including the FDA, an IRB, a data safety monitoring board or the sponsor, may suspend or terminate a clinical trial at any time on various grounds, including a finding that the participants are being exposed to an unacceptable health risk or that the clinical trial is not being conducted in accordance with FDA requirements.

For purposes of an NDA or BLA approval, human clinical trials are typically conducted in sequential phases that may overlap:

Phase 1– the1: The drug is initially given to healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. These trials may also provide early evidence on effectiveness. During Phase 1 clinical trials, sufficient information about the investigational drug’s pharmacokinetics and pharmacologic effects may be obtained to permit the design of well-controlled and scientifically valid Phase 2 clinical trials.

Phase 2– trials2: Trials are conducted in a limited number of patients in the target population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials.

Phase 3– when Phase 2 evaluations demonstrate that a dosage range of the product appears effective and has an acceptable safety profile, and provide sufficient information for the design of Phase 3 trials, Phase 3 trials are undertaken to provide statistically significant evidence of clinical efficacy and to further test for safety in an expanded patient population at multiple clinical trial sites. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained, and are intended to further evaluate dosage, effectiveness and safety, to establish the overall benefit-risk

Phase 3: When Phase 2 evaluations demonstrate that a dosage range of the product appears effective and has an acceptable safety profile, and provide sufficient information for the design of Phase 3 trials, Phase 3 trials are undertaken to provide statistically significant evidence of clinical efficacy and to further test for safety in an expanded patient population at

17


multiple clinical trial sites. They are intended to further evaluate dosage, effectiveness and safety, to establish the overall benefit-risk relationship of the investigational drug and to provide an adequate basis for product labeling and approval by the FDA. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug.

All clinical trials must be conducted in accordance with FDA regulations, GCP requirements and their protocols in order for the data to be considered reliable for regulatory purposes. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all.

An investigational drug product that is a combination of two different drugs in a single dosage form must comply with an additional rule that requires that each component make a contribution to the claimed effects of the drug product and the dosage of each component (amount, frequency, duration) is such that the combination is safe and effective for a significant patient population requiring such concurrent therapy as defined in the labeling of the drug product. This typically requires larger studies that test the drug against each of its components. In addition, typically, if a drug product is intended to treat a chronic disease, as is the case with our products, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more.

Government regulation may delay or prevent marketing of product candidates or new drugs for a considerable period of time and impose costly procedures upon our activities.

Disclosure of Clinical Trial Information

Sponsors of clinical trials of FDA-regulated products, including drugs, are required to register and disclose certain clinical trial information. Information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discussdisclose the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved.approved up to a maximum of two years. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.

The NDA and BLA Approval Process

In order to obtain approval to market a drug in the United States, a marketing application must be submitted to the FDA that provides data establishing to the FDA’s satisfaction the safety and effectiveness of the investigational drug for the proposed indication. Each NDA or BLA submission requires a substantial user fee payment unless a waiver or exemption applies. The application includes all relevant data available from pertinent non-clinical or preclinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated by investigators that meet GCP requirements.

During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points. These points may be prior to submission of an IND, at the End-of-Phase 1 or 2, and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date, for the FDA to provide advice and for the sponsor and the FDA to reach agreement on the next phase of development. Sponsors typically use the End-of-Phase 2 meetings to discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 trials that they believe will support approval of the new drug.

The results of product development, non-clinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA or BLA requesting approval to market the product. The FDA reviews all NDAs and BLAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. It may request additional information rather than accept aan NDA or BLA for filing. In this event, the NDA or BLA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. The FDA has 60 days from its receipt of an NDA or BLA to conduct an initial review to determine whether the application will be accepted for filing based on the agency’s threshold determination that the application is sufficiently complete to permit substantive review. If the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. The FDA reviews a BLA to determine, among other things, whether the proposed product is safe and potent, or effective, for its intended use, and has an acceptable purity profile, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, safety, strength, quality, potency and purity. The FDA has agreed to specific performance goals on the review of NDAs and BLAs and seeks to review standard NDAs for new molecular entities in 10 months

18


from the 60-day filing date (typically 12 months from submission of the NDA.NDA). The review process may be extended by the FDA for three additional months to consider certain late-submitted information or information intended to clarify information already provided in the submission. After the FDA completes its initialsubstantive review of an NDA or BLA, it will communicate to the sponsor that the drug will either be approved, or it will issue a complete response letter to communicate that the NDA or BLA will not be approved in its current form and inform the sponsor of changes that must be made or additional clinical, non-clinical or manufacturing data that must be received before the application can be approved, with no implication regarding the ultimate approvability of the application or the timing of any such approval, if ever. If or when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA or BLA, the FDA willmay issue an approval letter. FDA has committed to reviewing such resubmissions in two to six months depending on the type of information included. The FDA may refer applications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and, if so, under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving an NDA or BLA, the FDA typically will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA or BLA, the FDA may inspect one or more clinical sites to assure compliance with GCP. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it typically will outline the deficiencies and often will request additional testing or information. This may significantly delay further review of the application. If the FDA finds that a clinical site did not conduct the clinical trial in accordance with GCP, the FDA may determine the data generated by the clinical site should be excluded from the primary efficacy analyses provided in the NDA.NDA or BLA. Additionally, notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called Phase 4 trials may be made a condition to be satisfied for continuing drug approval. The results of Phase 4 trials can confirm the effectiveness of a product candidate and can provide important safety information. In addition, the FDA has authority to require sponsors to conduct post-marketing trials to specifically address safety issues identified by the agency. See “Post-Marketing Requirements” below.

The FDA also has authority to require a Risk Evaluation and Mitigation Strategy or a REMS,(“REMS”), from manufacturers to ensure that the benefits of a drug outweigh its risks. A sponsor may also voluntarily propose a REMS as part of the NDA or BLA submission. The need for a REMS is determined as part of the review of the NDA.NDA or BLA. Based on statutory standards, elements of a REMS may include “Dear Doctor letters,” a medication guide, more elaborate targeted educational programs, and in some cases elementsdistribution and use restrictions, referred to as “elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only

under certain circumstances, special monitoring and the use of patient registries. These elements are negotiated as part of the NDA or BLA approval, and in some cases the approval date may be delayed. Once adopted, REMS are subject to periodic assessment and modification.

Changes to some of the conditions established in an approved application, including changes in indications, labeling, manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA or BLA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA or BLA supplements as it does in reviewing NDAs.NDAs or BLAs.

Even if a product candidate receives regulatory approval, the approval may be limited to specific disease states, patient populations and dosages, or might contain significant limitations on use in the form of warnings, precautions or contraindications, or in the form of onerous risk management plans, restrictions on distribution or use, or post-marketing trial requirements. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product, including safety labeling or imposition of a REMS, the requirement to conduct post-market studies or clinical trials or even complete withdrawal of the product from the market. Delay in obtaining, or failure to obtain, regulatory approval for our products, or obtaining approval but for significantly limited use, would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future United States or foreign governmental action.

The Hatch-Waxman Amendments

Under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments, a portion of a product’s U.S. patent term that was lost during clinical development and regulatory review by the FDA may be restored by returning up to five years of patent life for a patent that covers a new product or its use. This period is generally one-half the time between the effective date of an IND (falling after issuance of the patent) and the submission date of an NDA, plus the time between

19


the submission date of an NDA and the approval of that application, provided that the sponsor acted with diligence. Patent term restorations, however, cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended and the extension must be applied for prior to expiration of the patent. The USPTO,U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.

Market Exclusivity

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain competing applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an Abbreviated New Drug Application or ANDA,(“ANDA”), or a 505(b)(2) NDA submitted by another company for another version of sucha drug whereproduct that contains the applicant does not own or have a legal right of reference to all the data required for approval.protected active moiety. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, or supplement, for example, for new indications, dosages or strengths of an existing drug. During the exclusivity period, the FDA may not approve an ANDA or 505(b)(2) application for the same conditions of approval as the innovator drug. This three-year exclusivity coversprotects only the conditions of approval associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs or 505(b)(2) applications with different conditions of approval. For example, if three-year exclusivity protected a new extended-release dosage form, the exclusivity would not block approval of an ANDA or 505(b)(2) application for drugs containing the original active agent.immediate-release version of the drug. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the non-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent exclusivity. This six-month exclusivity may be granted if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data.

Post-Marketing Requirements

Following approval of a new product, a pharmaceutical company and the approved product are subject to continuing regulation by the FDA, including, among other things, monitoring and recordkeeping activities, reporting to the applicable regulatory authorities of adverse experiences with the product, providing the regulatory authorities with updated safety and efficacy information, product sampling and distribution requirements, and complying with promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling, or off-label use, limitations on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet. Although physicians may, in their independent professional medical judgment, prescribe legally available drugs for off-label uses, manufacturers typically may not market or promote such off-label uses. Modifications or enhancements to the product or its labeling or changes of the site of manufacture are often subject to the approval of the FDA and other regulators, who may or may not grant approval or may include a lengthy review process.

Prescription drug advertising is subject to federal, state and foreign regulations. In the United States, the FDA regulates prescription drug promotion, including direct-to-consumer advertising. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. Any distribution of prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act or the PDMA,(“PDMA”), a part of the FDCA.

In the United States, once a product is approved, its manufacturing is subject to comprehensive and continuing regulation by the FDA. The FDA regulations require that products be manufactured in specific approved facilities and in accordance with cGMP. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products in accordance with cGMP regulations. cGMP regulations require among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. These regulations also impose certain organizational, procedural and documentation requirements with respect to manufacturing and quality assurance activities. NDA holders using

20


contract manufacturers, laboratories or packagers are responsible for the selection and monitoring of qualified firms, and, in certain circumstances, qualified suppliers to these firms. These firms and, where applicable, their suppliers are subject to inspections by the FDA at any time, and the discovery of violative conditions, including failure to conform to cGMP, could result in enforcement actions that interrupt the operation of any such product or may result in restrictions on a product, manufacturer, or holder of an approved NDA, including, among other things, recall or withdrawal of the product from the market.

In addition, the manufacturer and/or sponsor under an approved NDA are subject to annual product and establishment fees. These fees are typically increased annually.

The FDA also may require post-marketing testing, also known as Phase 4 testing, REMS to monitor the effects of an approved product or place conditions on an approval via a REMS that could restrict the distribution or use of the product. Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicial or administrative

enforcement, untitled or warning letters from the FDA, mandated corrective advertising or communications with doctors, withdrawal of approval, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of our products under development.

Coverage and Reimbursement

Sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability of reimbursement from third-party payors, including government healthcare program administrative authorities, managed care organizations, private health insurers, and other entities. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all of part of the costs associated with their prescription drugs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Therefore, our products, once approved, may not obtain market acceptance unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.

The process for determining whether a third-party payor will provide coverage for a drug product typically is separate from the process for setting the price of a drug product or for establishing the reimbursement rate that the payor will pay for the drug product once coverage is approved. Third-party payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the FDA-approved drugs for a particular indication. A decision by a third-party payor not to cover our product candidates could reduce physician utilization of our products once approved. Moreover, a third-party payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Additionally, coverage and reimbursement for drug products can differ significantly from payor to payor. One third-party payor’s decision to cover a particular drug product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate. As a result, the coverage determination process will require us to provide scientific and clinical support for the use of our products to each payor separately and will be a time-consuming process.

The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort. Third-party payors are increasingly challenging the prices charged for drug products and medical services, examining the medical necessity and reviewing the cost effectiveness of drug products and medical services, in addition to questioning safety and efficacy. If these third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products after FDA approval or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit.

In particular, our success may depend on our ability to obtain coverage and adequate reimbursement through Medicare Part D plans for our products that obtain regulatory approval. The Medicare Part D program provides a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Parts A and B, Part D coverage is not standardized. In general, Part D prescription drug plan sponsors have flexibility regarding coverage of Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of

covered Part D drugs, though not necessarily all the drugs in each category or class, with certain exceptions. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutics committee. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive regulatory approval. However, any negotiated prices for

21


our future products covered by a Part D prescription drug plan will likely be discounted, thereby lowering the net price realized on our sales to pharmacies. Moreover, while the Part D program applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from Medicare Part D may result in a similar reduction in payments from non-government payors.

The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the U.S. Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of our product candidates, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates, once approved. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the United States and generally tend to be significantly lower.

Anti-Kickback and False Claims Laws and Other Regulatory Matters

In the United States, among other things, the research, manufacturing, distribution, sale and promotion of drug products and medical devices are potentially subject to regulation and enforcement by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency, state Attorneys General and other state and local government agencies. Our current and future business activities, including for example, sales, marketing and scientific/educational grant programs must comply with healthcare regulatory laws, as applicable, which may include the Federal Anti-Kickback Statute, the Federal False Claims Act, as amended, the privacy and security regulations promulgated under the Health Insurance Portability and Accountability Act or HIPAA,(“HIPAA”), as amended, physician payment transparency laws, and similar state laws. Pricing and rebate programs must comply with the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. The handling of any controlled substances must comply with the U.S. Controlled Substances Act and Controlled Substances Import and Export Act. Products must meet applicable

child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.

The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.

The Federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully, directly or indirectly, in cash or in kind, solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of, any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value. The Federal Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Federal Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Additionally, the intent standard under the Federal Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act, as amended by the Health Care Education and Reconciliation Act or

22


(collectively, the ACA,“ACA”), to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the ACA codified case law that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the Federal False Claims Act. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties, and exclusion from participation in federal healthcare programs. In addition, many states have adopted laws similar to the Federal Anti-Kickback Statute. Some of these state prohibitions apply to the referral of patients for healthcare services reimbursed by any insurer, not just federal healthcare programs such as Medicare and Medicaid. Due to the breadth of these federal and state anti-kickback laws, and the potential for additional legal or regulatory change in this area, it is possible that our future business activities, including our sales and marketing practices and/or our future relationships with ophthalmologists and optometrists might be challenged under anti-kickback laws, which could harm us.

Federal false claims and false statement laws, including the civil False Claims Act, prohibits any person or entity from, among other things, knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false or fraudulent. This statute has been interpreted to prohibit presenting claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Although we would not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law. For example, pharmaceutical companies have been found liable under the Federal civilCivil False Claims Act in connection with their off-label promotion of drugs. Penalties for a civil False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although the Federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal

criminal statutes. If the government were to allege that we were, or convict us of, violating these false claims laws, we could be subject to a substantial fine and may suffer a decline in our stock price. In addition, private individuals have the ability to bring actions under the Federal civilCivil False Claims Act and certain states have enacted laws modeled after the Federal False Claims Act.

Additionally, HIPAA created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

There are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, as discussed below, a similar federal requirement under the Physician Payments Sunshine Act, requires certain manufacturers to track and report to the federal government certain payments provided to physicians and teaching hospitals made in the previous calendar year, as well as certain ownership and investment interests held by physicians and their immediate family members. These laws may affect our sales, marketing and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state and federal authorities.

In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act or HITECH,(“HITECH”), and their respective implementing regulations, including the Final Omnibus Rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information on certain types of individuals and organizations. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to business associates, defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other and from HIPAA in significant ways and may not have the same effect, thus complicating compliance efforts.

The failure to comply with regulatory requirements subjects us to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements can result in significant criminal, civil and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in federal healthcare programs, such as Medicare and Medicaid, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of product approvals, refusal to allow us to enter into supply contracts, including government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

23


We plan to develop a comprehensive compliance program that establishes internal controls to facilitate adherence to the law and program requirements to which we will or may become subject because we intend to commercialize products that could be reimbursed under a federal healthcare program and other governmental healthcare programs.

Changes in law or the interpretation of existing law could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling;

(iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.

Affordable Care Act and Other Reform Initiatives

In the United States and some foreign jurisdictions, there have been, and likely will continue to be, a number of legislative and regulatory changes and proposed changes regarding the healthcare system directed at broadening the availability of healthcare and containing or lowering the cost of healthcare.

By way of example, in March 2010, the ACA was enacted. The ACA includes measures that have or will significantly change the way healthcare is financed by both governmental and private insurers. Among the provisions of the ACA of greatest importance to the pharmaceutical industry are the following:

The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the U.S. Department of Health and Human Services in exchange for state Medicaid coverage of most of the manufacturer’s drugs. The ACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs and biologic agents to 23.1% of average manufacturer price or AMP,(“AMP”) and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP.

The ACA expanded the types of entities eligible to receive discounted 340B pricing, although, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs used in orphan indications. In addition, because 340B pricing is determined based on AMP and Medicaid drug rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discounts to increase. The ACA imposed a requirement on manufacturers of branded drugs and biologic agents to provide a 50% discount off the negotiated price of branded drugs dispensed to Medicare Part D beneficiaries in the coverage gap (i.e., “donut hole”).

The ACA imposed an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications.

The ACA included the Federal Physician Payments Sunshine Act, which requires certain pharmaceutical manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exception, to track certain financial arrangements with physicians and teaching hospitals, including any “transfer of value” provided, as well as any ownership or investment interests held by physicians and their immediate family members. Covered manufacturers were required to begin collecting data on August 1, 2013 and submit reports on aggregate payment data to CMS for the first reporting period (August 1, 2013—December 31, 2013) by March 31, 2014, and were required to report detailed payment data for the first reporting period and submit legal attestation to the completeness and accuracy of such data by June 30, 2014. Thereafter, covered manufacturers must submit reports by the 90th day of each subsequent calendar year. The information reported was made publicly available on a searchable website in September 2014.

The ACA established a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. The research conducted by the Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.

The ACA created the Independent Payment Advisory Board which has the authority to recommend certain changes to the Medicare program to reduce expenditures by the program that could result in reduced payments for prescription drugs. Under certain circumstances, these recommendations will become law unless Congress enacts legislation that will achieve the same or greater Medicare cost savings.

The ACA established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to improve quality of care and lower program costs of Medicare, Medicaid and the Children’s

24


The ACA established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to improve quality of care and lower program costs of Medicare, Medicaid and the Children’s

Health Insurance Program, potentially including prescription drug spending. Funding has been allocated to support the mission of the Center for Medicare and Medicaid Innovation through 2019.

Many of the details regarding the implementation of the ACA are yet to be determined, and at this time, it remains unclear the full effect that the ACA would have on our business.

Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, in August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors, which may adversely affect our future profitability.

European Union Drug Development

In the European Union, our products will also be subject to extensive regulatory requirements. As in the United States, medicinal products can only be marketed if an MAAa marketing authorization application (“MAA”) from the competent regulatory agencies has been obtained, and the various phases of preclinical and clinical research in the European Union are subject to significant regulatory controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trial regulatory framework, setting out common rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed and applied the provisions of the Directive differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must be approved by two distinct bodies in each of the EU countries where the trial is to be conducted: the National Competent Authority or NCA,(“NCA”) and one or more Ethics Committees or ECs.(“ECs”). In addition, all serious adverse reactions to the investigated drug that occur during the clinical trial must be reported to the NCA and ECs of the Member State where they occurred.

The EU clinical trials legislation is currently undergoing a revision process mainly aimed at making more uniform and streamlining the clinical trials authorization process, simplifying adverse event reporting procedures, improving the supervision of clinical trials and increasing the transparency of clinical trials.

European Union Drug Review Approval

In the European Economic Area or EEA,(“EEA”), which is comprised of the 28 Member States of the European Union plus Norway, Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining an MAA. There are two types of MAAs: (1) the Community MAA, which is issued by the European Commission through the Centralized Procedure based on the opinion of the Committee for Medicinal Products for Human

Use or CHMP,(“CHMP”), a body of the EMA, and which is valid throughout the entire territory of the EEA; and (2) the National MAA, which is issued by the competent authorities of the Member States of the EEA and only authorized marketing in that Member State’s national territory and not the EEA as a whole.

The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products and medicinal products containing a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU. The National MAA is for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MAA can be recognized in another Member States through the Mutual Recognition Procedure. If the product has not received a National MAA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is submitted to the competent authorities of each of the Member States in which the MAA is sought, one of which is selected by the applicant as the Reference Member State or RMS.(“RMS”). If the RMS proposes to authorize the product, and the other Member States do not raise objections, the product is granted a national MAA in all the Member States where the authorization was sought. Before granting the MAA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

25


In addition, in the European Union, the EMA’s Committee for Advanced Therapies (“CAT”) is responsible for assessing the quality, safety and efficacy of advanced therapy medicinal products. The role of the CAT is to prepare a draft opinion on an application for marketing authorization for a gene therapy medicinal candidate that is submitted to the EMA. The development and evaluation of a gene therapy medicinal product must be considered in the context of the relevant European Union guidelines, and the EMA may issue new guidelines concerning the development and marketing authorization for gene therapy medicinal products and require that we comply with these new guidelines.

Other Regulations

We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.

Research and Development

For the years ended December 31, 2017 and 2016, Private Rocket’s research and development expenses were $14.9 million and $6.0 million, respectively.

Employees

We had seventeen20 employees as of March 15, 2016.1, 2018. None of our employees are represented by any collective bargaining unit. We believe that we maintain good relations with our employees.

Corporate Information

We were incorporated in Delaware in 1999.1999 as Inotek Pharmaceuticals Corporation. In January 2018, we merged with Rocket Pharmaceuticals, Ltd. and changed our name to Rocket Pharmaceuticals, Inc. Our principal executive offices are located at 91 Hartwell Avenue, Lexington, MA 02421,The Alexandria Center for Life Science, 430 East 29th Street, Suite 1040, New York, NY 10016, and our telephone number is (781) 676-2100.(646) 440-9100. Our internet address is www.inotekpharma.com.www.rocketpharma.com. We use our website as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. We make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the Investors section of our website. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D. C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. The information found on our website is not incorporated by reference into this report or any other report we file with or furnish to the SEC. Our common stock is listed on the NASDAQNasdaq Global Market under the symbol “ITEK.“RCKT.

Research and Development

For the years ended December 31, 2015 and 2014, our research and development expenses were $12.6 million and $5.6 million, respectively.

Item 1A.

Risk Factors

Item 1A. Risk Factors

We operate in an industry that involves numerous risks and uncertainties. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this Annual Report on Form 10-K, including our financial statements and related notes hereto. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. The risks and uncertainties described below may change over time and other risks and uncertainties, including those that we do not currently consider material, may impair our businessbusiness. In these circumstances, the market price of our common stock could decline.

Risks Related to OurRocket’s Financial Position

Rocket has a history of operating losses, and NeedRocket may not achieve or sustain profitability. Rocket anticipates that it will continue to incur losses for Additional Capitalthe foreseeable future. If Rocket fails to obtain additional funding to conduct its planned research and development effort, Rocket could be forced to delay, reduce or eliminate its product development programs or commercial development efforts.

We currently have no source of revenue and may never become profitable.

We are a clinical-stage biopharmaceuticalRocket is an early-stage gene therapy company with a limited operating history on which to base your investment decision. Gene therapy product development is a highly speculative undertaking and involves a substantial degree of risk. Rocket’s operations to date have been limited primarily to organizing and staffing its company, business planning, raising capital, acquiring and developing product and technology rights and conducting preclinical research and development activities for its product candidates. Rocket has

26


never generated any revenue from product sales. Rocket has not obtained regulatory approvals for any of its product candidates, and has funded its operations to date through proceeds from sales of its preferred stock.

Private Rocket has incurred net losses since its inception. Private Rocket incurred net losses of $19.6 million and $7.6 million for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, Private Rocket had an accumulated deficit of $31.3 million. Substantially all of its operating losses have resulted from costs incurred in connection with its research and development programs and from general and administrative costs associated with its operations. Rocket expects to continue to incur significant expenses and operating losses over the next several years and for the foreseeable future as Rocket intends to continue to conduct research and development, clinical testing, regulatory compliance activities, manufacturing activities, and, if any of its product candidates is approved, sales and marketing activities that, together with anticipated general and administrative expenses, will likely result in Rocket incurring significant losses for the foreseeable future. Rocket’s prior losses, combined with expected future losses, have had and will continue to have an adverse effect on Rocket’s stockholders’ deficit and working capital.

Rocket may need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force Rocket to delay, limit or terminate certain of its licensing activities, product development efforts or other operations.

Rocket expects to require substantial future capital in order to seek to broaden licensing of its gene therapy platforms, complete preclinical and clinical development for its current product candidates and other future product candidates, if any, and potentially commercialize these product candidates. Rocket expects its spending levels to increase in connection with its preclinical and clinical trials. In addition, if Rocket obtains marketing approval for any of its product candidates, Rocket expects to incur significant expenses related to product sales, medical affairs, marketing, manufacturing and distribution. Furthermore, Rocket expects to incur additional costs associated with operating as a public company. Accordingly, Rocket will need to obtain substantial additional funding in connection with its continuing operations. If Rocket is unable to raise capital when needed or on acceptable terms, Rocket could be forced to delay, reduce or eliminate certain of its licensing activities, its research and development programs or other operations.

Private Rocket’s operations have consumed significant amounts of cash since inception. As of December 31, 2017, Private Rocket’s cash was $18.1 million. Rocket’s future capital requirements will depend on many factors, including:

the timing of enrollment, commencement, completion and results of Rocket’s clinical trials, including Rocket’s only current clinical trial for Fanconi Anemia;

the results of Rocket’s preclinical studies for Rocket’s current product candidates and any subsequent clinical trials;

the scope, progress, results and costs of drug discovery, laboratory testing, preclinical development and clinical trials, if any, for Rocket’s internal product candidates;

the costs associated with building out additional laboratory and manufacturing capacity, if any;

the costs, timing and outcome of regulatory review of Rocket’s product candidates;

the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any of Rocket’s product candidates for which Rocket receives marketing approval;

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing its intellectual property rights and defending any intellectual property-related claims;

Rocket’s current licensing agreements or collaborations remaining in effect;

Rocket’s ability to establish and maintain additional licensing agreements or collaborations on favorable terms, if at all;

the extent to which Rocket acquires or in-licenses other product candidates and technologies; and

the costs associated with being a public company.

Many of these factors are outside of Rocket’s control. Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and Rocket may never generate the necessary data or results required to obtain regulatory and marketing approval and achieve product sales. In addition, Rocket’s product candidates, if approved, may not achieve commercial success. Accordingly, Rocket will need to continue to rely on additional financing to achieve its business objectives.

27


To the extent that additional capital is raised through the sale of equity or equity-linked securities, the issuance of those securities could result in substantial dilution for Rocket’s current shareholders and the terms may include liquidation or other preferences that adversely affect the rights of Rocket’s current shareholders. Adequate additional financing may not be available to Rocket on acceptable terms, or at all. Rocket also could be required to seek funds through arrangements with partners or otherwise that may require Rocket to relinquish rights to its intellectual property, its product candidates or otherwise agree to terms unfavorable to Rocket.

Rocket’s limited operating history may make it difficult for Rocket to evaluate the success of its business to date and to assess Rocket’s future viability.

Rocket’s operations to date have predominantly focused on organizing and staffing its company, business planning, raising capital, acquiring its technology, administering and expanding its gene therapy platforms, identifying potential product candidates, undertaking research, preclinical studies and clinical trials of its product candidates and establishing licensing arrangements and collaborations. Rocket has not yet completed clinical trials of its product candidates, obtained marketing approvals, manufactured a commercial-scale product or conducted sales and marketing activities necessary for successful commercialization. Consequently, any predictions made about Rocket’s future success or viability may not be as accurate as they could be if Rocket had a longer operating history. Our

In addition, as a new business, Rocket may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. Rocket expects to eventually transition from a company with a licensing and research focus to a company that is also capable of supporting clinical development activities and Rocket may need to transition to supporting commercial activities in the future. Rocket cannot guarantee that it will be successful in these transitions.

Rocket’s ability to use its net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss (“NOL”) carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Rocket may experience ownership changes in the future. As a result, if Rocket earns net taxable income, Rocket’s ability to use its pre-change net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to Rocket. Furthermore, Rocket’s ability to use net operating loss carryforwards to offset U.S. federal taxable income in the future may be further limited by certain provisions set forth in The Tax Cuts and Jobs Act, which could potentially result in increased future tax liability to Rocket. In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. At December 31, 2017, Private Rocket had net operating losses of approximately $24.8 million for New York City tax purposes. As of December 31, 2017, Rocket had no unrecognized tax benefits or liabilities for uncertain tax positions. Rocket files income tax returns in the United States and New York State and New York City, but for the year ended December 31, 2017, did not report any income effectively connected with a U.S. trade or business.

As of December 31, 2017, Inotek had federal NOL carryforwards for income tax purposes of $127.1 million that will expire at various dates through 2037 and state NOL carryforwards of $83.4 million that will expire at various dates through 2037, available to reduce future federal and state income taxes, if any. As of December 31, 2017, Inotek had federal research and development tax credits of $5.2 million and state research and development tax credits of $0.8 million. The pre-change NOL carryforwards, although subject to an annual limitation, as well as any post-change NOL carryforwards, can be utilized in future years, provided that sufficient income is generated and no future ownership changes occur that may limit Inotek’s NOL carryforwards. Additionally, the Reverse Merger on January 4, 2018 is expected to significantly limit utilization of Inotek’s NOL carryforwards as the Reverse Merger was considered to be an ownership change, though the actual amount of the NOL limitation has not yet been determined.

Rocket has never generated any revenue from product sales and may never be profitable.

Rocket’s ability to generate revenue and become profitableachieve profitability depends upon ouron Rocket’s ability, alone or with strategic collaboration partners, to successfully complete the development of, our product candidates for the treatment of glaucoma and obtain the regulatory, pricing and reimbursement approvals necessary regulatory approvals for ourto commercialize its product candidates. We have never been profitable, have noRocket does not anticipate generating revenues from product sales for the foreseeable future, if ever. Rocket’s ability to generate future revenues from product sales depends heavily on its success in:

completing research and preclinical and clinical development of Rocket’s product candidates;

seeking and obtaining regulatory and marketing approvals for product candidates for which Rocket completes clinical studies;

28


developing a sustainable, commercial-scale, reproducible, and transferable manufacturing process for Rocket’s vectors and product candidates;

establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate (in amount and quality) products and services to support clinical development and the market demand for Rocket’s product candidates, if approved;

launching and commercializing product candidates for which Rocket obtains regulatory and marketing approval, either by collaborating with a partner or, if launched independently, by establishing a sales force, marketing and distribution infrastructure;

obtaining sufficient pricing and reimbursement for Rocket’s product candidates from private and governmental payors;

obtaining market acceptance of Rocket’s product candidates and gene therapy as a viable treatment option;

addressing any competing technological and market developments;

identifying and validating new gene therapy product candidates;

negotiating favorable terms in any collaboration, licensing or other arrangements into which Rocket may enter; and

maintaining, protecting and expanding Rocket’s portfolio of intellectual property rights, including patents, trade secrets and know-how.

Even if one or more of the product candidates that Rocket will develop is approved for commercial sale, and to date have not generated any revenue from product sales. Even if we receive regulatory approval for the sale of our product candidates, we do not know when such product candidates will generate revenue, if at all. Our ability to generate product revenue depends on a number of factors, including our ability to:

successfully complete clinical development, and receive regulatory approval, for our product candidates, includingtrabodenoson monotherapy andtrabodenoson withlatanoprost as a fixed-dose combination, or FDC;

set an acceptable price for our product candidates and obtain coverage and adequate reimbursement from third-party payors;

establish sales, marketing and distribution systems for our product candidates;

add operational, financial and management information systems and personnel, including personnel to support our clinical, manufacturing and planned future commercialization efforts;

have commercial quantities of our product candidates manufactured at acceptable cost levels;

successfully market and sell our product candidates in the United States and enter into partnerships or other arrangements to commercialize our product candidates outside the United States; and

maintain, expand and protect our intellectual property portfolio.

In addition, because of the numerous risks and uncertaintiesRocket anticipates incurring significant costs associated with commercializing any approved product development, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. In addition, ourcandidate. Rocket’s expenses could increase beyond expectations if we areRocket is required by the U.S. Food and Drug Administration, or FDA, and comparable non-U.S. regulatory authorities,the EMA, or other regulatory authoritiesagencies, domestic or foreign, to perform studies or clinical trialsand other studies in addition to those that weRocket currently anticipate.anticipates. Even if our product candidates are approved for commercial sale, we anticipate incurring significant costs associated with the commercial launch of these products.

Our ability to become and remain profitable depends on our ability to generate revenue. Even if we areRocket is able to generate revenues from the sale of our product candidates, weany approved products, Rocket may not become profitable and may need to

obtain additional funding to continue operations. If we fail

Risks Related to become profitable orProduct Regulatory Matters

Rocket’s gene therapy product candidates are unablebased on novel technology, which makes it difficult to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levelspredict the time and be forced to reduce our operations. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the valuecost of our Company and could impair our ability to raise capital, expand our business or continue our operations. A decline in the value of our Company could also cause you to lose all or part of your investment.

We have a history of net losses and anticipate that we will continue to incur net losses for the foreseeable future.

We have a history of losses and anticipate that we will continue to incur net losses for the foreseeable future. Our net losses were $68.0 million and $9.5 million for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, we had an accumulated deficit of $196.0 million.

Investment in pharmaceutical product development is highly speculative because it entails substantial upfront expenditures and significant risk that a product candidate will fail to gaindevelopment and subsequently obtaining regulatory approval or become commercially viable. We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. We are not currently generating revenues, and we cannot estimate with precision the extent of our future losses. We do not currently have anyapproval. Currently, only a few gene therapy products that are available for commercial sale and we may never generate revenue from selling products or achieve profitability. We expect to continue to incur substantial and increasing losses through the projected commercialization of our product candidates. None of our product candidates have been approved for marketing in the United States and the European Union.

Rocket has concentrated its research and development efforts to date on a gene therapy platform, and Rocket’s future success depends on the successful development of viable gene therapy product candidates. Rocket cannot guarantee that it will not experience problems or delays in developing current or future product candidates or that such problems or delays will not cause unanticipated costs, or that any such development problems or delays can be resolved. Rocket may never receivealso experience unanticipated problems or delays in developing Rocket’s manufacturing capacity or transferring Rocket’s manufacturing process to commercial partners, which may prevent Rocket from completing its clinical studies or commercializing its products on a timely or profitable basis, if at all.

In addition, the clinical study requirements of the FDA, the European Medicines Agency, or the EMA, and other regulatory agencies and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the potential products. The regulatory approval process for novel product candidates such as Rocket’s can be more expensive and take longer than for other, better known or more extensively studied pharmaceutical or other product candidates. Currently, only a few gene therapy products have received marketing authorization in the U.S. or the European Union, including Novartis Pharmaceuticals’ Kymriah, Kite Pharma’s Yescarta, and Spark Therapeutics’ Luxturna. It is therefore difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for Rocket’s product candidates in the United States, the European Union or other jurisdictions. Approvals by the EMA may not be indicative of what the FDA may require for approval. AsDelay or failure to obtain, or unexpected costs in obtaining, the regulatory approvals necessary to bring a result of these factors, we are uncertain when or if we will achieve profitability and, if so, whether we will be ablepotential product to sustain it. Ourmarket could decrease Rocket’s ability to producegenerate sufficient product revenue and achieve profitability is dependent onRocket’s business, financial condition, results of operations and prospects could be materially harmed.

Regulatory requirements governing gene therapy products have evolved and may continue to change in the future. For example, CBER may require Rocket to perform additional nonclinical studies or clinical trials that may increase Rocket’s development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of Rocket’s gene therapy product candidates or lead to significant post-approval limitations or restrictions.

29


In addition, EMA’s CAT and other regulatory review committees and advisory groups and any new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies, increase our abilitydevelopment costs, lead to complete the developmentchanges in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates obtain necessary regulatory approvals, and have our products manufactured and successfully marketed. We cannot assure you thator lead to significant post-approval limitations or restrictions. As we will be profitable even if we successfully commercialize our products. Failure to become and remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations.

We have financed our operations with a combination of private and public grants and contracts and equity and preferred stock offerings. From 1997 to 2004, we received non-dilutive funding totaling over $50 million through federal and private grants and contracts. Since 2004, we have raised additional equity capital with funding from biotechnology and pharmaceutical investors. In February 2004, we completed the sale of approximately $20 million of Series A preferred stock. In October 2005, we completed the sale of $35 million of Series B preferred stock. In October of 2007, we completed the sale of approximately $24 million of Series C preferred stock. In June 2011, we completed the sale of an aggregate of approximately $23.5 million of Series AA preferred stock in four separate closings during the preceding year. In February 2013, we completed the sale of approximately $3.5 million of convertible promissory notes in three separate closings during the preceding eight months. In July 2013, we completed the sale of an additional approximately $13.5 million of Series AA preferred stock, including the conversion of the convertible promissory notes, in two separate closings during the previous two months. In December 2014, we completed the issuance and sale of $2.0 million of subordinated convertible promissory notes.

In February 2015, we completed our initial public offering of 6,667,000 shares of our common stock at a price of $6.00 per share and a concurrent offering of $20.0 million aggregate principal amount of 5.0% Convertible Senior Notes due in 2020 (the “2020 Convertible Notes”). In March 2015, the underwriters exercised 299,333 shares of common stock at $6.00 per share and $1.0 million of the 2020 Convertible Notes pursuant to their overallotment options. We received net proceeds of approximately $36.5 million, after deducting underwriting discounts and offering-related costs, from our equity issuances and approximately $18.9 million in net proceeds, after deducting underwriting discounts and offering-related costs, from our debt issuances.

In August 2015, we completed an underwritten public offering of our common stock (the “Follow-on Offering”). We issued 6,210,000 shares of our common stock at a price of $12.75 per share, including 810,000 shares from the underwriters’ full exercise of their overallotment option, and we received net proceeds of $74.0 million, after deducting underwriting discounts and offering-related costs.

We expect our research and development expenses to continue to be significant in connection with our product development activities, including our planned Phase 2 clinical trials for our FDC product candidate and our planned Phase 3 programs. In addition, if we obtain regulatory approval foradvance our product candidates, we expect to incur increased sales and marketing expenses. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have a material adverse effect on our stockholders’ deficit, financial position, cash flows and working capital.

We will need to obtain additional financing to fund our operations and, if we are unable to obtain such financing, we may be unable to complete the development and commercialization of our primary product candidates.

Our operations have consumed substantial amounts of cash since inception. At December 31, 2015, our cash and cash equivalents and short-term investments aggregated $111.3 million. We estimate that these funds will be sufficientrequired to fund our projected operating requirements through 2017. We will need to obtain additional financing to conduct additional trials for the approval of our drug candidatesconsult with these regulatory and complete the development of any additional product candidates we might acquire. Moreover, our fixed expenses such as rentadvisory groups, and other contractual commitments are substantial and are expected to increase in the future.

Adequate additional funding may not be available to us on acceptable terms, or at all.comply with applicable guidelines. If we are unablefail to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future potential commercialization efforts. Our forecast of the period of time through which our financial resources will be adequate to support our operating requirements is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this forecast on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate.

Our future funding requirements will depend on many factors, including, but not limited to:

the progress, timing, scope and costs of our clinical trials, including the ability to enroll patients in our planned and potential future clinical trials in a timely manner;

the time and cost necessary to obtain regulatory approvals that may be required by regulatory authorities;

our ability to successfully commercialize our product candidates;

the amount of sales and other revenues from product candidates that we may commercialize, if any, including the selling prices for such product candidates and the availability of coverage and adequate reimbursement from third parties;

selling and marketing costs associated with our product candidates, including the cost and timing of expanding our marketing and sales capabilities;

the terms and timing of any potential future collaborations, licensing or other arrangements that we may establish;

cash requirements of any future acquisitions and/or the development of other product candidates;

the costs of operating as a public company;

the time and cost necessary to respond to technological and market developments;

the costs of maintaining and expanding our existing intellectual property rights; and

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

Until we can generate a sufficient amount of revenue, we may finance future cash needs through public or private equity offerings, license agreements, debt financings, collaborations, strategic alliances, marketing or distribution arrangements or a combination thereof. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. General market conditions or the market price of our common stock may not support capital raising transactions such as an additional public or private offering of our common stock or other securities. In addition, our ability to raise additional capital may be dependent upon our stock being quoted on The NASDAQ Global Market, or NASDAQ, or upon obtaining shareholder approval. There can be no assurance that we will be able to satisfy the criteria for continued listing on NASDAQ or that we will be able to obtain shareholder approval if it is necessary. If adequate funds are not available,do so, we may be required to delay or reduce the scopediscontinue development of or eliminate one or morecertain of our researchproduct candidates. These additional processes may result in a review and approval process that is longer than we otherwise would have expected. Delay or development programs or our commercialization efforts.

We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. In addition, if we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. Our inabilityfailure to obtain, additional funding when we need itor unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could seriously harm our business.

Additional capital that we may need to operate or expand our business may not be available.

We may require additional capital to operate or expand our business. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock. Furthermore, volatility in the credit or equity markets may have an adverse effect ondecrease our ability to obtain debt or equity financing or the cost of such financing. If we do not have funds available to enhance our solution, maintain the competitiveness of our technologygenerate product revenue, and pursue business opportunities, this could have an adverse effect on our business, operating results and financial condition.

Risks Related to Development, Regulatory Approval and Commercialization

We depend substantially on the success of our product candidates, particularly trabodenoson monotherapy and trabodenoson FDC, which are still in development. If we are unable to successfully develop and commercialize our product candidates, or experience significant delays in doing so, our business will be materially harmed.

Our business and the ability to generate revenue related to product sales, if ever, will depend on the successful development, formulation and manufacturing, regulatory approval and commercialization of our product candidates trabodenoson monotherapy andtrabodenosonFDC, which are still in development, and other potential products we may develop or license. We have invested a significant portion of our efforts and financial resources in the development of our existing product candidates. The success of our product candidates will depend on several factors, including:

successful completion of clinical trials, and the supporting non-clinical toxicology, formulation development, and manufacturing of supplies for the clinical program in accordance with current Good Manufacturing Practices, or cGMP;

receipt of regulatory approvals from the FDA and other applicable regulatory authorities outside the United States;

establishment of arrangements with third-party manufacturers;

obtaining and maintaining patent and trade secret protection and regulatory exclusivity;

protecting our rights in our intellectual property;

launching commercial sales of our product candidates, if and when approved;

acceptance of any approved product by the medical community and patients;

obtaining coverage and adequate reimbursement from third-party payors for product candidates, if and when approved;

effectively competing with other products; and

achieving a continued acceptable safety and efficacy profile for our product candidates following regulatory approval, if and when received.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully develop and commercialize our product candidates, which would materially harm our business and we may not be able to earn sufficient revenues and cash flows to continue our operations.

Our product candidates aretrabodenoson as a monotherapy and as an FDC consisting oftrabodenosonwith a prostaglandin analog, or PGA. We have no other product candidates in our near term product pipeline. As a result, we are substantially dependent on the successful development and commercialization oftrabodenoson. If thecondition, results of our chronic toxicology program were to identify a safety problem, or if our currentoperations and upcoming pivotal trials oftrabodenoson monotherapy or our current Phase 2 program for the FDC product candidate were to demonstrate lack of efficacy in lowering intraocular pressure, or IOP, or any safety issues related totrabodenoson, our development strategyprospects would be materially and adversely affected.harmed.

We have not obtained regulatory approval for anyRocket may encounter substantial delays in commencement, enrollment or completion of our product candidates in the United States or in any other country.

We currently do not have any product candidates that have gained regulatory approval for sale in the United States or in any other country, and we cannot guarantee that we will ever have marketable products. Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for and successfully commercialize product candidates in a timely manner. We cannot commercialize product candidates in the United States without first obtaining regulatory approval to market each product from the FDA; similarly, we cannot commercialize product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. We have completed a Phase 2 trial in which we testedtrabodenoson co-administered withlatanoprost. We attended an End-of-Phase 2 meeting with the FDA fortrabodenoson monotherapy in the first half of 2015 and initiated a pivotal Phase 3 program in the fourth quarter of 2015, which consists of two Phase 3 monotherapy pivotal trials and a long-term safety study. We cannot predict whether any of our future trials, including our planned long-term safety trial oftrabodenoson, will be successful or whether regulators will agree with our conclusions regarding the preclinical studies andRocket’s clinical trials we have conductedor may fail to date or will conduct. Moreover, any determination of changes in a study designdemonstrate safety and its confirmation with the FDA could result in a significant range of costs for the Phase 3 pivotal and long-term safety trials.

Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate in preclinical studies and well-controlled clinical trials, and, with respect to approval in the United States,efficacy to the satisfaction of the FDA, that the product candidate is safe and effective for

use for that target indication and that the manufacturing facilities, processes and controls are adequate. In the United States, we have not submitted a New Drug Application, or NDA, for any of our product candidates. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and approval may not be obtained. If we submit an NDA to the FDA, the FDA must decide whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA.

Regulatory authorities outside of the United States, such as in Europe and Japan and in emerging markets, also have requirements for approval of drugs for commercial sale with which we must comply prior to marketing in those areas. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates. Clinical trials conducted in one country may not be accepted byapplicable regulatory authorities, in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking non-U.S. regulatory approval could require additional non-clinical studies or clinical trials, which could be costlyprevent Rocket from commercializing its current and time consuming. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval or additional risks. For all of these reasons, we may not obtain non-U.S. regulatory approvalsfuture product candidates on a timely basis, if at all.

The process to develop, obtainBefore obtaining marketing approval from regulatory approvalauthorities for the sale of Rocket’s current and commercializefuture product candidates, is long, complex and costly both inside and outside of the United States, and approval is never guaranteed. Even if our product candidates were to successfully obtain approval from the regulatory authorities, any approval might significantly limit the approved indications for use, or require that precautions, contraindications, or warnings be included on the product labeling, or require expensive and time-consuming post-approvalRocket must conduct extensive clinical trials or surveillance as conditions of approval. Following any approval for commercial sale of our product candidates, certain changes to the product, such as changes in manufacturing processes and additional labeling claims, will be subject to additional FDA review and approval. Also, regulatory approval for any of our product candidates may be withdrawn. If we are unable to obtain regulatory approval for our product candidates in one or more jurisdictions, or any approval contains significant limitations, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed. Furthermore, we may not be able to obtain sufficient funding or generate sufficient revenue and cash flows to continue the development of any other product candidate in the future.

Regulatory approval may be substantially delayed or may not be obtained for one or all of our product candidates if regulatory authorities require additional time or studies to assess the safety and efficacy of our product candidates.

We may be unable to initiate or complete development of our product candidates on schedule, if at all. To complete the studies for our product candidates, we will require additional funding. In addition, if regulatory authorities require additional time or studies to assess the safety or efficacy of our product candidates, we may not have or be able to obtain adequate funding to complete the necessary steps for approval for any or all of our product candidates. Preclinical studies and clinical trials required to demonstrate the safety and efficacy of ourRocket’s product candidates. Clinical trials are expensive, time-consuming, and outcomes are uncertain.

To date, Rocket’s experience with clinical trials has been limited. Rocket’s only clinical programs to date have been performed under a physician-sponsored investigational new drug application, or IND, held by the Fred Hutchinson Cancer Research Center in Seattle, Washington, or Hutch, and under an Investigational Medicinal Product Dossier, or IMPD, in Spain sponsored by CIEMAT. The clinical trials performed by these sponsors are for a lentiviral treatment for Fanconi Anemia, a rare mutation of the FANC-A gene, which are still ongoing. Rocket intends to assume responsibility for or obtain the authority to reference the clinical trials performed under one or both of the IND and IMPD held by its collaborators, but has not completed any clinical trials to date. Rocket cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A clinical trial failure can occur at any stage of testing.

Identifying and qualifying patients to participate in clinical trials of Rocket’s product candidates are time consumingis critical to Rocket’s success. Rocket may not be able to identify, recruit and expensive and together take several years or more to complete. Delays in regulatory approvals or rejections of applications for regulatory approval in the United States, Europe, Japan or other markets may result from many factors, including:

our inability to obtain sufficient funds required for a clinical trial;

requests from regulatory authorities for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;

questions from regulatory authorities regarding interpretations of data and results and the emergence of new information regarding our product candidates or other products;

clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;

failure to reach agreement with the FDA or comparable non-US regulatory authorities regarding the scope or design of our clinical trials;

our inability to enroll a sufficient number of patients, who meet the inclusion and exclusion criteria in our clinical trials. For example, we are seeking patientsor those with elevated levels of IOP for ourrequired or desired characteristics, to complete clinical trials which are more difficult to find;in a timely manner. Patient enrollment and trial completion is affected by numerous factors including:

severity of the disease under investigation;

 

our inability to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

design of the study protocol;

 

our inability

size of the patient population;

eligibility criteria for the study in question;

perceived risks and benefits of the product candidate under study, including as a result of adverse effects observed in similar or competing therapies;

proximity and availability of clinical study sites for prospective patients;

availability of competing therapies and clinical studies;

efforts to facilitate timely enrollment in clinical studies;

patient referral practices of physicians; and

ability to monitor patients adequately during and after treatment.

In particular, each of the conditions for which Rocket plans to reach agreements on acceptable termsevaluate its current product candidates are rare genetic diseases with prospective contract research organizations, or CROs,limited patient pools from which to draw for clinical studies. Additionally, the process of finding and trial sites,diagnosing patients may prove costly. Finally, the terms of which cantreatment process requires that the cells be obtained from patients and then shipped to a transduction facility within the required timelines, and this may introduce unacceptable shipping-related delays to the process.

In addition, to the extent Rocket seeks to obtain regulatory approval for its product candidates in foreign countries, Rocket’s ability to successfully initiate, enroll and complete a clinical study in any foreign country is subject to extensive negotiation and may vary significantly among different CROs and trial sites;numerous risks unique to conducting business in foreign countries, including:

difficulty in establishing or managing relationships with clinical research organizations, or CROs, and physicians;

 

our inability to identify and maintain

different standards for the conduct of clinical trials;

30


absence in some countries of established groups with sufficient regulatory expertise for review of AAV gene therapy protocols;

Rocket’s inability to locate qualified local partners or collaborators for such clinical trials; and

the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatment.

If Rocket has difficulty enrolling a sufficient number of trial sites, manypatients to conduct its clinical trials as planned, Rocket may need to delay, limit or terminate planned clinical trials, the occurrence of any of which would harm our business, financial condition, results of operations and prospects. Moreover, Rocket intends to rely on the nonclinical studies and clinical trials performed by Hutch and CIEMAT, and the FDA or the regulatory authority in any other country in which we decide to perform clinical trials or seek approval may alreadynot accept that results of the Hutch and CIEMAT studies and trials. Any inability to successfully complete preclinical studies and clinical trials could result in additional costs to Rocket or impair Rocket’s ability to generate revenues from product sales, regulatory and commercialization milestones and royalties.

Rocket has not completed any clinical studies of its current product candidates. Initial results in Rocket’s ongoing clinical studies may not be engagedindicative of results obtained when these studies are completed. Furthermore, success in early clinical studies may not be indicative of results obtained in later studies.

Rocket’s Fanconi Anemia gene therapy treatments are currently in clinical trials being conducted by Rocket’s partners, Hutch and CIEMAT. Several of Rocket’s other gene therapy programs are in the preclinical stages. Study designs and results from previous or ongoing studies and clinical trials are not necessarily predictive of future study or clinical trial programs,results, and initial or interim results may not continue or be confirmed upon completion of the study or trial. Positive data may not continue or occur for subjects in Rocket’s clinical studies or for any future subjects in Rocket’s ongoing or future clinical studies, and may not be repeated or observed in ongoing or future studies involving Rocket’s product candidates. Furthermore, Rocket’s product candidates may also fail to show the desired safety and efficacy in later stages of clinical development despite having successfully advanced through initial clinical studies. Rocket cannot guarantee that any of these studies will ultimately be successful or that preclinical or early stage clinical studies will support further clinical advancement or regulatory approval of Rocket’s product candidates.

Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including some thatchanges in regulatory policy during the period of product development.

Even if Rocket successfully completes the necessary preclinical studies and clinical trials, Rocket cannot predict when, or if, Rocket will obtain regulatory approval to commercialize a product candidate and the approval may be for a more narrow indication than Rocket seeks.

Rocket cannot commercialize a product candidate until the same indications targeted by ourappropriate regulatory authorities have reviewed and approved the product candidates;

any determination that a clinical trial presents unacceptable health risks;

lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions;

our inability to obtaincandidate. Rocket has not received approval from Institutional Review Boards, or IRBs,regulatory authorities in any jurisdiction to conductmarket any of its product candidates. Even if Rocket’s product candidates meet their safety and efficacy endpoints in clinical trials, atthe regulatory authorities may not complete their respective sites;

our inability to manufacturereview processes in a timely manner, issue a complete response letter, or obtain from third parties sufficient quantities or quality of the product candidates or other materials required for a clinical trial;

difficulty in maintaining contact with patients after treatment, resulting in incomplete data; and

unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results regarding the effectiveness of product candidates during clinical trials.

Changes in regulatory requirements and guidance may also occur and we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial.

If the FDA requires us to change the design of our planned pivotal trials, the actual costs of these trials may be greater than what we estimated based on our current expectations regarding the design of these trials. If we are required to conduct additional clinical trials or other studies with respect to any of our product candidates beyond those that we initially contemplated, if we are unable to successfully complete our clinical trials or other studies or if the results of these studies are not positive or are only modestly positive, we may be delayed in obtaining regulatory approval for that product candidate, weultimately, Rocket may not be able to obtain regulatory approval at all or weapproval. In addition, Rocket may obtain approval for indications that are not as broad as intended. Our product development costs will also increase if we experience delays or rejections if an FDA Advisory Committee recommends disapproval or restrictions on use. In addition, Rocket may experience delays or rejections based upon additional government regulation from future legislation or administrative actions, or changes in testing or approvals and we may not have sufficient funding to completeregulatory authority policy during the testing and approval process. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products if and when approved. If any of this occurs, our business will be materially harmed.

We have not yet successfully formulated, and may be unable to formulate or manufacture our fixed-dose combination product candidate in a way that is suitable for clinical or commercial use. Any such delay or failure could materially harm our commercial prospects, result in higher costs and deprive usperiod of product candidate revenues.

We completed a Phase 2 trial to evaluate the efficacy, tolerability and safety oftrabodenoson when co-administered with commercially-availablelatanoprost eye drops. However, we have not yet formulated our FDC product candidate to include these two drugs in a single combination dose, and we may never be able to formulate or manufacture our FDC product candidate in a way that is suitable for clinical or commercial use. Any delay or failure to develop a suitable product formulation or manufacturing process for our FDC product candidate could materially harm our commercial prospects, result in higher costs or deprive us of potential product revenues.

Failure can occur at any stage of clinical development. If the clinical trials for our product candidates are unsuccessful, we could be required to abandon development.

A failure of one or more clinical trials can occur at any stage of testing for a variety of reasons. The outcome of preclinical testing and early clinical trials may not be predictive of the outcome of laterdevelopment, clinical trials and interim results of athe review process. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that Rocket’s data are insufficient for approval and require additional preclinical, clinical trial do not necessarily predict final results.or other studies. In addition, adverse events may occur or other risks may be discovered in any clinical trials that will cause us to suspend or terminate our clinical trials. In some instances, there can be significant variability in safety and/or efficacy results between different trialsvarying interpretations of the same product candidate due to numerous factors, including but not limited to changes in or adherence to trial protocols, differences in size and type of the patient populations and the rates of dropout among clinical trial participants. Prior to initiation of our Phase 3 monotherapy clinical trial in October 2015, we had exposed 233 clinical trial subjects totrabodenoson. The FDA expects that a total of at least 1,300 patients will be exposed to at least a single dose oftrabodenoson before submission of an NDA, and the complete NDA submission package must also contain safety data obtained from at least 300 patients treated withtrabodenoson for at least six months, and at least 100 patients treated for at least a year. Our future clinical trial results therefore may not demonstrate safety and efficacy sufficient to obtain regulatory approval for our product candidates. Moreover, we still need to evaluate the long-term safety effects of our product candidates, the results of which could adversely affect our clinical development program.

Flaws in the design of a clinical trial may not become apparent until the clinical trial is well-advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support regulatory approval. In addition, clinical trials often reveal that it is not practical or feasible to continue development efforts. Further, we have never submitted an NDA for any product candidates.

We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. Further, regulatory agencies and IRBs may at any time order or data safety monitoring boards may at any time recommend to the sponsor the temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants.

If the results of our clinical trials for our current product candidates or clinical trials for any future product candidates do not achieve the primary efficacy endpoints or demonstrate unexpected safety issues, the prospects for approval of our product candidates will be materially adversely affected. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have failed to achieve similar results in later clinical trials, including longer term trials, or have failed to obtain regulatory approval of their product candidates. Many compounds that initially showed promise in clinical trials or earlier stage testing have later been found to cause undesirable or unexpected adverse effects that have prevented further development of the compound. In addition, we have typically only tested our product candidates in a single eye, which may not

accurately predict the efficacy or safety of our product candidates when dosed in both eyes. Our current and planned Phase 3 pivotal trials and long-term safety study oftrabodenoson monotherapy may not produce the results that we expect. Our current and planned clinical trials are also designed to test the use oftrabodenoson in combination withlatanoprost in a single dosage form. Accordingly, the efficacy of our primary product candidates may not be similar or correspond directly to their efficacy when used as a monotherapy. Our current product candidates remain subject to the risks associated with clinical drug development as indicated above.

In addition to the circumstances noted above, we may experience numerous unforeseen events that could cause our clinical trials to be delayed, suspended or terminated, or which could delay, limit or prevent our ability to receive regulatorythe receipt of marketing approval for a product candidate.

Regulatory authorities also may approve a product candidate for more limited indications than requested or commercialize our product candidates, including:

clinical trialsthey may impose significant limitations in the form of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or implement a clinical hold;

the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

regulators or IRBs may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

we may elect or be required to suspend or terminate clinical trials of our product candidates based on a finding that the participants are being exposed to health risks;

the cost of clinical trials of our product candidates may be greater than we anticipate;

the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and

our product candidates may have undesirable adverse effects or other unexpected characteristics.

If we elect or are required to suspend or terminate a clinical trial of any of our product candidates, our commercial prospects will be adversely impacted and our ability to generate product revenues may be delayed or eliminated.

Our product candidates may have undesirable adverse effects, which may delay or prevent regulatory approval or, if approval is received, require our products to be taken off the market, require them to include safetynarrow indications, warnings or otherwise limit their sales.

Unforeseen adverse effects from any of our product candidates could arise either during clinical developmentRisk Evaluation and Mitigation Strategies, or if approved, after the approved product has been marketed. In particular, we are aware of the known potential of adenosine and adenosine-like drugs to affect the heart if present in the systemic circulation at high enough levels.

Any undesirable adverse effects that may be caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA and comparable non-U.S. regulatory authorities for any or all targeted indications, and in turn prevent us from commercializing our product candidates and generating revenues from their sale. In addition, if any of our product candidates receives regulatory approval and we or others later identify undesirable adverse effects caused by the product, we could face one or more of the following consequences:

REMS. These regulatory authorities may require precautions or contra-indications with respect to conditions of use or they may grant approval subject to the performance of costly post-marketing clinical trials. In addition, of labeling statements, such as a “black box” warning or a contraindication, or other labeling changes;

regulatory authorities may withdraw their approvalnot approve the labeling claims that are necessary or desirable for the successful commercialization of Rocket’s product candidates. Any of the product;
foregoing scenarios could materially harm the commercial prospects for Rocket’s product candidates and materially harm its business, financial condition, results of operations and prospects.

31


Even if Rocket obtains regulatory authorities may seize the product;

we may be required to change the way that theapproval for a product is administered, conduct additional clinical trials or recall the product;

we may becandidate, its products will remain subject to litigation or product liability claims, fines, injunctions, or criminal penalties; and
regulatory scrutiny.

our reputationEven if Rocket obtains regulatory approval in a jurisdiction, the applicable regulatory authority may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing such product, which in turn could delay or prevent us from generatingstill impose significant revenues from its sale.

Trabodenoson is an adenosine mimetic. Adenosine is used therapeutically to manage cardiovascular arrhythmias, such as paroxysmal supraventricular tachycardia, a type of accelerated heart rate. All of our data to date reflects thattrabodenoson does not have systemic effects, including no impactrestrictions on the cardiovascular system when dosedindicated uses or marketing of Rocket’s product candidates, or impose ongoing requirements for potentially costly post-approval studies, post-market surveillance or patient or drug restrictions. Additionally, the holder of an approved Biologics License Application, or BLA, is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the eye. However, we are still conducting additional trialsBLA. The holder of an approved BLA must also submit new or supplemental applications and obtain FDA approval fortrabodenoson and systemic effects may arise in future trials. Furthermore, iftrabodenoson has certain changes to the perceptionapproved product, product labeling or manufacturing process. FDA guidance advises that patients treated with some types of havinggene therapy undergo follow-up observations for potential adverse effects because it is an adenosine mimetic, it may be negatively viewed by ophthalmologistsevents for as long as 15 years. Advertising and optometrists, patients, patient advocacy groups, third-party payorspromotional materials must comply with FDA rules and the medical community which would adversely affect the market acceptance of our product candidates. are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, the use of our product candidates outside the indications approved for use, or off-label use, or the use of our product candidate in an inappropriate manner, may increase the risk of injury to patients. If approved, clinicians may use our products for off-label uses, as the FDA does not restrict or regulate a clinician’s choice of treatment within the practice of medicine. Off-label use of our products may increase the risk of product liability claims against us. Product liability claimsmanufacturers and their facilities are expensive to defend and could divert our management’s attention and result in substantial damage awards against us.

If our product candidates receive regulatory approval, we will be subject to ongoing regulatory requirementspayment of user fees and we may face future development, manufacturing and regulatory difficulties.

Our product candidates, if approved, will also be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping, submission of safety and other post-market approval information, importation and exportation. In addition, approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA and European Medicines Agency, or EMA, requirements and the requirements of other similar agencies, including ensuring that quality control and manufacturing procedures conform to cGMP requirements. As such, we and our potential future contract manufacturers will be subject to continual review and periodic inspections to assessby the FDA and other regulatory authorities for compliance with cGMP. Accordingly, wegood manufacturing practices, or GMP, and others with whom we work will be requiredcurrent good tissue practice, or cGMP, adherence to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA, EMA and other similar foreign agencies and to comply with certain requirements concerning advertising and promotion for our product candidates. Promotional communications with respect to prescription drugs also are subject to a variety of legal and regulatory restrictions and must be consistent with the informationcommitments made in the product’s approved labeling. Accordingly, once approved, we may not promote our products, if any, for indicationsBLA. If Rocket or uses for which they are not approved.

If a regulatory agency discovers previously unknown problems with a product such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, itregulatory agency may impose restrictions onrelative to that product or us,the manufacturing facility, including requiring recall or withdrawal of the product from the market. market or suspension of manufacturing.

If our product candidates failRocket fails to comply with applicable regulatory requirements following approval of any of its product candidates, a regulatory agency may:

issue warning letters or untitled letters;

require product recalls;

mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

require us or our potential future collaborators to enter intomay take a consent decree or permanent injunction, which can include shutdownvariety of manufacturing facilities, imposition of various fines, reimbursements for inspection costs, required due dates for specific actions, and penalties for noncompliance;

impose other administrative or judicial civil or criminal penalties or pursue criminal prosecution;

withdraw regulatory approval;

refuse to approve pending applications or supplements to approved applications filed by us or by our potential future collaborators;

impose restrictions on operations, including costly new manufacturing requirements; or

seize or detain products.

If we are unable to effectively establish a direct sales force in the United States, our business may be harmed.

We currently do not have an established sales organization and do not have a marketing or distribution infrastructure. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. Iftrabodenoson receives marketing approval in the United States, we plan to commercialize it by establishing a glaucoma-focused specialty sales force of approximately 150 people targeting high-prescribing ophthalmologists and optometrists throughout the United States. We will need to incur significant additional expenses and commit significant additional time and management resources to establish and train a sales force to market and sell our products. We may not be able to successfully establish these capabilities despite these additional expenditures.

Factors that may inhibit our efforts to successfully establish a sales force include:

our inability to compete with other pharmaceutical companies to recruit, hire, train and retain adequate numbers of effective sales and marketing personnel with requisite knowledge of our target market;

the inability of sales personnel to obtain access to adequate numbers of ophthalmologists and optometrists to prescribe any future approved products;

unforeseen costs and expenses associated with creating an independent sales and marketing organization; and

a delay in bringing products to market after efforts to hire and train our sales force have already commenced.

In the event we are unable to successfully market and promote our products, our business may be harmed.

We currently intend to explore the licensing of commercialization rights or other forms of collaboration outside of the United States, which will expose us to additional risks of conducting business in international markets.

The non-U.S. markets are an important component of our growth strategy. If we fail to obtain licenses or enter into collaboration arrangements with selling parties, or if these parties are not successful, our revenue-generating growth potential will be adversely affected. Moreover, international business relationships subject us to additional risks that may materially adversely affect our ability to attain or sustain profitable operations, including:

 

efforts to enter into collaboration or licensing arrangements with third parties in connection with our international sales, marketing and distribution efforts may increase our expenses or divert our management’s attention from the acquisition or development of product candidates;

changes in a specific country’s or region’s political and cultural climate or economic condition;

issue a warning letter asserting that Rocket is in violation of the law;

 

differing regulatory requirements for drug approvals

seek an injunction or impose civil or criminal penalties or monetary fines;

suspend or withdraw regulatory approval;

suspend any ongoing clinical studies;

refuse to approve a pending marketing application, such as a BLA or supplements to a BLA submitted by Rocket;

seize products; or

refuse to allow Rocket to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require Rocket to expend significant time and marketing internationally, whichresources in response and could result in our being requiredgenerate negative publicity. The occurrence of any event or penalty described above may inhibit Rocket’s ability to conduct additional clinical trials or other studies before being able to successfully commercialize ourits product candidates in any jurisdiction outside the United States;

differing reimbursement regimes and price controls in certain non-U.S. markets;

difficultygenerate revenues and could harm its business, financial condition, results of effective enforcement of contractual provisions in local jurisdictions;

potentially reduced protection for intellectual property rights;

potential third-party patent rights in countries outside of the United States;

unexpected changes in tariffs, trade barriersoperations and regulatory requirements;

prospects.

economic weakness, including inflation, or political instability, particularly in non-U.S. economies and markets, including several countries in Europe;

compliance with tax, employment, immigration and labor laws for employees traveling abroad;

the effects of applicable foreign tax structures and potentially adverse tax consequences;

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incidental to doing business in another country;

workforce uncertainty in countries where labor unrest is more common than in the United States;

the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

failure of our employees and contracted third parties to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act;

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

These and other risks may materially adversely affect our ability to attain or sustain revenue from international markets.

We face competition from established branded and generic pharmaceutical companies and if our competitors are able to develop and market products that are preferred over our products, our commercial opportunity will be reduced or eliminated.

The development and commercialization of new drug products is highly competitive. We face competition from established branded and generic pharmaceutical companies, smaller biotechnology and pharmaceutical companies, as well as from academic institutions, government agencies and private and public research institutions, which may in the future develop products to treat glaucoma. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Glaukos Corporation recently commercialized a trabecular micro-bypass stent that is implanted in the eye during cataract surgery and allows fluid to flow from the anterior of the eye into the collecting channels, bypassing the TM. In addition, early-stage companies that are also developing glaucoma treatments may prove to be significant competitors, such as Aerie Pharmaceuticals,

Inc., which is developing a Rho kinase/norepinephrine transport inhibitor. We expect that our competitors will continue to develop new glaucoma treatments, which may include eye drops, oral treatments, surgical procedures, implantable devices or laser treatments. Other early-stage companies may also compete through collaborative arrangements with large and established companies. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer adverse effects, are more convenient or are less expensive than our product candidates. The market for glaucoma prescriptions is highly competitive and is currently dominated by generic drugs, such aslatanoprost andtimolol, and additional products are expected to become available on a generic basis over the coming years. If any of our product candidates are approved, we expect that they will be priced at a premium over competitive generic products and consistent with other branded glaucoma drugs.

If our competitors market products that are more effective, safer, have fewer side effects or are less expensive than our product candidates or that reach the market sooner than our potential future products, if any, we may not achieve commercial success.

The commercial success of our product candidates will depend on the degree of market acceptance among ophthalmologists and optometrists, patients, patient advocacy groups, third-party payors and the medical community.

Our product candidates may not gain market acceptance among ophthalmologists and optometrists, patients, patient advocacy groups, third-party payors and the medical community. There are a number of available therapies marketed for the treatment of glaucoma. Some of these drugs are branded and subject to patent protection, but most others, includinglatanoprost and many beta blockers, are available on a generic basis. Many of these approved drugs are well established therapies and are widely accepted by ophthalmologists and optometrists, patients and third-party payors. Insurers and other third-party payors may also encourage the use of generic products. Additionally, in patients with normal tension glaucoma whose IOP falls into the normal range, IOP is generally much more difficult to reduce. In these patients,trabodenoson may offer little or no clinical benefit, which may ultimately limit its utility in this subpopulation of glaucoma patients. The degree of market acceptance of our product candidates will depend on a number of factors, including:

the market price, affordability and patient out-of-pocket costs of our product candidates relative to other available products, which are predominantly generics;

the degree to which our product candidates obtain coverage and adequate reimbursement;

the effectiveness of our product candidates as compared with currently available products and any products that may be approved in the future;

patient willingness to adopt our product candidates in place of current therapies;

varying patient characteristics including demographic factors such as age, health, race and economic status;

changes in the standard of care for the targeted indications for any of our product candidates;

the prevalence and severity of any adverse effects or perception of any potential side effects;

limitations or warnings contained in a product candidate’s FDA-approved labeling;

limitations in the approved clinical indications for our product candidates;

relative convenience and ease of administration;

the strength of our selling, marketing and distribution capabilities;

the quality of our relationship with patient advocacy groups;

sufficient third-party coverage and reimbursement; and

product liability claims.

In addition, the potential market opportunityFDA’s policies, and those of comparable foreign regulatory authorities, may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of Rocket’s product candidates. Rocket cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative actions, either in the U.S. or abroad. If Rocket is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if Rocket is not able to maintain regulatory compliance, Rocket may lose any marketing approval which Rocket may have obtained and Rocket may not achieve or sustain profitability, which would materially harm Rocket’s business, financial condition, results of operations and prospects.

Rocket may never obtain FDA approval for our product candidates is difficult to precisely estimate. Our estimates of the potential market opportunity for our product candidates include several key assumptions based on our industry knowledge, industry publications, third-party research reports and other surveys. If any of these assumptions proves to be inaccurate, then the actual market for our product candidates could be smaller than our estimates of our potential market opportunity. If the actual market for our product candidates is smaller than we expect, our product revenue may be limited, and it may be more difficult for us to achieve or maintain profitability. If we fail to achieve market acceptance of ourits product candidates in the United States, and abroad, our revenue willeven if Rocket does, Rocket may never obtain approval for or commercialize any of its product candidates in any other jurisdiction, which would limit Rocket’s ability to realize its full market potential.

In order to eventually market any of Rocket’s product candidates in any particular foreign jurisdiction, Rocket must establish and comply with numerous and varying regulatory requirements regarding safety and efficacy on a jurisdiction-by-jurisdiction basis. Approval by the FDA in the United States, if obtained, does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, preclinical studies and clinical trials conducted in one country may not be more limitedaccepted by regulatory authorities in other countries, and it willregulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for Rocket and require additional preclinical studies or clinical trials which could be more difficultcostly and time-consuming. Regulatory requirements can vary widely from country to achieve profitability.country and could delay or prevent the introduction of Rocket’s products in those countries. The foreign regulatory approval process involves

32


similar risks to those associated with FDA approval. Rocket does not have any product candidates approved for sale in any jurisdiction, including international markets, nor has Rocket attempted to obtain such approval. If we failRocket fails to comply with regulatory requirements in international markets or to obtain and sustain coveragemaintain required approvals, or if regulatory approvals in international markets are delayed, Rocket’s target market will be reduced and Rocket’s ability to realize the full market potential of its products will be unrealized.

Rocket’s product candidates may cause undesirable and unforeseen side effects or be perceived by the public as unsafe, which could delay or prevent their advancement into clinical trials or regulatory approval, limit the commercial potential or result in significant negative consequences.

Gene therapy is still a relatively new approach to disease treatment and adverse side effects could develop with Rocket’s product candidates. There also is the potential risk of delayed adverse events following exposure to gene therapy products due to persistent biologic activity of the genetic material or other components of products used to carry the genetic material.

Possible adverse side effects that could occur with treatment with gene therapy products include an adequate levelimmunologic reaction soon after administration which could substantially limit the effectiveness and durability of the treatment. If certain side effects are observed in testing of Rocket’s potential product candidates, Rocket may decide or be required to halt or delay further clinical development of its product candidates.

In addition to side effects caused by the product candidate, the administration process or related procedures associated with a given product candidate also can cause adverse side effects. If any such adverse events occur, Rocket’s clinical trials could be suspended or terminated. Under certain circumstances, the FDA, the European Commission, the EMA or other regulatory authorities could order Rocket to cease further development of, or deny approval of, Rocket’s product candidates for any or all targeted indications. Moreover, if Rocket elects, or is required, to not initiate or to delay, suspend or terminate any future clinical trial of any of its product candidates, the commercial prospects of such product candidates may be harmed and Rocket’s ability to generate product revenues from any of these product candidates may be delayed or eliminated. Any of these occurrences may harm Rocket’s ability to develop other product candidates, and may harm Rocket’s business, financial condition and prospects significantly.

Furthermore, if undesirable side effects caused by Rocket’s product candidate are identified following regulatory approval of a product candidate, several potentially significant negative consequences could result, including:

regulatory authorities may suspend or withdraw approvals of such product candidate;

regulatory authorities may require additional warnings on the label;

Rocket may be required to change the way a product candidate is administered or conduct additional clinical trials; and

Rocket’s reputation may suffer.

Any of these occurrences may harm Rocket’s business, financial condition and prospects significantly.

Rocket may be unable to obtain orphan drug designation or exclusivity for some product candidates. If Rocket’s competitors are able to obtain orphan drug exclusivity for products that constitute the same drug and treat the same indications as its product candidates, Rocket may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.

Regulatory authorities in some jurisdictions, including the U.S. and the European Union, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, the FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as having a patient population of fewer than 200,000 individuals in the U.S., or a patient population greater than 200,000 in the U.S. where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the U.S. In the European Union, following the opinion of the EMA’s Committee for Orphan Medicinal Products, the European Commission grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the European Union. Additionally, orphan designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biologic product.

33


Generally, if a product candidate with an orphan drug designation receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA or the European Commission from approving another marketing application for a product that constitutes the same drug treating the same indication for that marketing exclusivity period, except in limited circumstances. If another sponsor receives such approval before Rocket does (regardless of Rocket’s orphan drug designation), Rocket will be precluded from receiving marketing approval for Rocket’s product for the applicable exclusivity period. The applicable period is seven years in the U.S. and 10 years in the European Union. The exclusivity period in the U.S. can be extended by six months if the BLA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The exclusivity period in the European Union can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be revoked if any regulatory agency determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

Even if Rocket requests orphan drug designation for any of its product candidates, Rocket cannot guarantee that the FDA or the European Commission will grant any of its product candidates such designation. Additionally, the designation of any of Rocket’s product candidates as an orphan product does not guarantee that any regulatory agency will accelerate regulatory review of, or ultimately approve, that product candidate, nor does it limit the ability of any regulatory agency to grant orphan drug designation to product candidates of other companies that treat the same indications as Rocket’s product candidates prior to Rocket’s product candidates receiving exclusive marketing approval.

Even if Rocket obtains orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the product candidate from competition because different drugs can be approved for the same condition. In the U.S., even after an orphan drug is approved, the FDA may subsequently approve another drug for the same condition if the FDA concludes that the latter drug is not the same drug or is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In the European Union, marketing authorization may be granted to a similar medicinal product for the same orphan indication if:

the second applicant can establish in its application that its medicinal product, although similar to the orphan medicinal product already authorized, is safer, more effective or otherwise clinically superior;

the holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application; or

the holder of the marketing authorization for the original orphan medicinal product cannot supply sufficient quantities of orphan medicinal product.

Risks Related to Manufacturing, Development and Commercialization of Rocket’s Product Candidates

Products intended for use in gene therapies are novel, complex and difficult to manufacture. Rocket could experience production problems that result in delays in its development or commercialization programs, limit the supply of its products or otherwise harm its business.

Rocket currently has development, manufacturing and testing agreements with third parties to manufacture supplies of its product candidates. Several factors could cause production interruptions, including equipment malfunctions, facility contamination, raw material shortages or contamination, natural disasters, disruption in utility services, human error or disruptions in the operations of suppliers.

Rocket’s product candidates require processing steps that are more complex than those required for small molecule pharmaceuticals.

Rocket may encounter problems contracting with, hiring and retaining the experienced scientific, quality control and manufacturing personnel needed to operate Rocket’s manufacturing process which could result in delays in Rocket’s production or difficulties in maintaining compliance with applicable regulatory requirements.

Any problems in Rocket’s manufacturing process or the facilities with which Rocket contracts could make Rocket a less attractive collaborator for potential partners, including larger pharmaceutical companies and academic research institutions, which could limit Rocket’s access to attractive development programs. Problems in third-party manufacturing processes or facilities also could restrict Rocket’s ability to meet market demand for Rocket’s products. Additionally, should Rocket manufacturing agreements with third parties be terminated for any reason, there may be a limited number of manufacturers who would be suitable replacements and it could take a significant amount of time to transition the manufacturing to a replacement.

34


Rocket may not successfully commercialize Rocket’s drug candidates.

Rocket’s gene therapy product candidates are subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies, and Rocket’s failure to develop safe, commercially viable products would severely limit Rocket’s ability to become profitable or to achieve significant revenues. Rocket may be unable to successfully commercialize Rocket’s product candidates because of several reasons, including:

some or all of Rocket’s product candidates may be found to be unsafe or ineffective or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances;

Rocket’s product candidates, if safe and effective, may nonetheless not be able to be developed into commercially viable products;

it may be difficult to manufacture or market its product candidates on a scale that is necessary to ultimately deliver its products to end-users;

proprietary rights of third parties may preclude Rocket from marketing its product candidates; and

third parties may market superior or equivalent drugs which could adversely affect the commercial viability and success of Rocket’s product candidates.

Rocket’s ability to successfully develop and commercialize its product candidates will substantially depend upon the availability of reimbursement funds for ourthe costs of the resulting drugs and related treatments.

Market acceptance and sales of Rocket’s product candidates by third-party payors, potential future sales would be materially adversely affected.

The course of treatment for glaucoma patients primarily includes older drugs, and the leading products for the treatment of glaucoma currently in the market, includinglatanoprost andtimolol, are available as generic brands. There will be no commercially viable market for our product candidates without coverage and adequate reimbursement from third-party payors, and anymay depend on coverage and reimbursement policy may be affected by future healthcarepolicies and health care reform measures. WeDecisions about formulary coverage as well as levels at which government authorities and third-party payors, such as private health insurers and health maintenance organizations, reimburse patients for the price they pay for Rocket’s products as well as levels at which these payors pay directly for Rocket’s products, where applicable, could affect whether Rocket is able to successfully commercialize these products. Rocket cannot be certainguarantee that coverage and adequate reimbursement will be available for ourany of its product candidates. Nor can Rocket guarantee that coverage or reimbursement amounts will not reduce the demand for, or the price of, its product candidates. Rocket has not commenced efforts to have its product candidates or any other future product candidates we develop. Additionally, even if there is a commercially viable market, if the level of reimbursement is below our expectations, our anticipated revenue and gross margins will be adversely affected.

Third-party payors, such asreimbursed by government or private healthcare insurers, carefully review and increasingly question and challenge thethird-party payors. If coverage of and the prices charged for drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. Reimbursement rates may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. A current trend in the U.S. healthcare industry is toward cost containment. Large public and private payors, managed care organizations, group purchasing organizations and other similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement are not available or are available only at limited levels, for, particular treatments. Such third-party payors, including Medicare, may question the coverage of, and challenge the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for our product candidates, which could result in product revenues being lower than anticipated. We believe our drugs will be priced significantly higher than existing generic drugs and consistently with current branded drugs. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. If we are unable to show a significant benefit relative to existing generic drugs, Medicare, Medicaid and private payorsRocket may not be willingable to cover or provide adequate reimbursement for our drugs, which would significantly reduce the likelihood of them gaining market acceptance.successfully commercialize its products. In the United States, no uniform policy requirement for coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor.

We expect that private insurers will consider the efficacy, cost effectiveness, safety and tolerability of our product candidates in determining whether to approve coverage and set reimbursement levels for such products. Obtaining these approvals can be a time consuming and expensive process. Our business and prospects would be materially adversely affected if we do not receive approval for coverage and reimbursement of our product

candidates from private insurers on a timely or satisfactory basis. Limitations on coverage and reimbursement could also be imposed by government payors, such as the local Medicare carriers, fiscal intermediaries, or Medicare Administrative Contractors. Further, Medicare Part D, which provides a pharmacy benefit to certain Medicare patients, does not require participating prescription drug plans to cover all drugs within a class of products. Our business could be materially adversely affected if private or governmental payors, including Medicare Part D prescription drug plans were to limit access to, or deny or limit reimbursement of, our product candidates or other potential products.

Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. For example, reimbursement in the European Union must be negotiated on a country-by-country basis and in many countries the product cannot be commercially launched until reimbursement is approved. The negotiation process in some countries can exceed 12 months. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products to other available therapies.

If the prices for our product candidates decrease or if governmental and other third-party payors do not provide coverage and adequate reimbursement levels, our revenue, potential for future cash flows and prospects for profitability will suffer.

Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.

The pricing of prescription pharmaceuticals is also subject to governmental control outside of the United States. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.

If we are found in violation of federal or state “fraud and abuse” laws or other healthcare laws, we may face penalties, which may adversely affect our business, financial condition and results of operation.

In the United States, we are subject to various federal and state healthcare “fraud and abuse” laws, including anti-kickback laws, false claims laws and other laws intended, among other things, to reduce fraud and abuse in federal and state healthcare programs. The Federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration, directly or indirectly, in cash or in kind, that is intended to induce or reward the referral of business, including the purchase, lease, order or arranging for or recommending the purchase, lease or order of any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as Medicare or Medicaid. Although we seek to structure our business arrangements in compliance with all applicable requirements, many healthcare fraud and abuse laws are broadly written, and it may be difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the Federal Anti-Kickback Statute. The federal false claims and civil monetary penalties laws, including the civil False Claims Act prohibits any individual or entity from, among other things, knowingly presenting or causing to be presented for payment to the government, including the federal healthcare programs, claims for reimbursed drugs or services that are false or fraudulent, or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government. The civil False Claims Act has been interpreted to prohibit presenting claims for items or services that were not provided as claimed, or claims for medically unnecessary items or services. Cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products or the

provision of kickbacks have resulted in the submission of false claims to governmental healthcare programs. In addition, private individuals have the ability to bring actions on behalf of the government under the civil False Claims Act as well as under the false claims laws of several states. Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, we are prohibited from, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services to obtain money or property of any healthcare benefit program.

Additionally, the federal Physician Payments Sunshine Act withinMarch 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act, or collectively the ACA, and its implementing regulations, require that certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to certain payments or other transfers of value provided to physicians and teaching hospitals, and certain ownership and investment interests held by physicians and their immediate family members.

Many states have adopted laws similar to the aforementioned laws, including state anti-kickback and false claims laws, some of which apply to the referral of patients for healthcare services reimbursed by any source, not just governmental payors. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 U.S. Department of Health and Human Services Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There may be ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties.

In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementing regulations, including the Final Omnibus Rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information on certain types of individuals and organizations. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to business associates, defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other and from HIPAA in significant ways and may not have the same effect, thus complicating compliance efforts.

Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of our practices may be challenged under these laws. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that the government could allege violations of, or convict us of violating, these laws. If we are found in violation of one of these laws, we could be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from governmental funded federal or state healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations. Were this to occur, our business, financial condition and results of operations and cash flows may be materially adversely affected.

Recently enacted and future legislation may increase the difficulty and cost of commercializing our product candidates and may affect the prices we may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay regulatory approval of our product candidates, restrict or regulate post-marketing activities and affect our ability to profitably sell our product candidates for which we obtain regulatory approval.

In March 2010, President ObamaPPACA, was signed into law, the ACA, a sweeping law intendedand in recent years, numerous proposals to among other things, broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees onchange the health industry and impose additional health policy reforms. Among other changescare system in the U.S. have been made. These reform proposals include measures that affect the pharmaceutical industry, the ACA increased manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate amount for both branded and generic drugs and revised the definition of average manufacturer price,would limit or AMP, which may also increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also expanded Medicaid drug rebates, which previously had been payable only on fee-for-service utilization, to Medicaid managed care utilization, and created an alternative rebate formulaprohibit payments for certain new formulationsmedical treatments or subject the pricing of certain existingdrugs to government control. In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to government control. If Rocket’s products are or become subject to government regulation that is intended to increaselimits or prohibits payment for Rocket’s products, or that subjects the rebates due on those drugs. Further, the ACA imposed a significant annual fee on companies that manufacture or import branded prescription drug products and requires manufacturers to provide a 50% point-of-sale discount off the negotiated price of applicable branded drugs dispensedRocket’s products to beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.” Substantial new provisions affecting compliance have also been enacted, including the Physician Payments Sunshine Act, as described above. Although it is too early to determine the full effect of the ACA, the new law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, was unable to reach the required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors, which may adversely affect our future profitability.

Legislative and regulatory proposals have been introduced at both the state and federal level to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing approval testing and other requirements.

There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business in the future, or the effect any future legislation or regulation will have on us.

If we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues and liquidity may suffer, and our products could be subject to restrictions or withdrawal from the market.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenues from our products. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are unable to generate revenues from our product sales, our potential for achieving profitability will be diminished and the capital necessary to fund our operations will be increased.

Wegovernmental control, Rocket may not be able to identify additional therapeutic opportunitiesgenerate revenue, attain profitability or commercialize its products.

In addition, third-party payors are increasingly limiting both coverage and the level of reimbursement of new drugs. They may also impose strict prior authorization requirements and/or refuse to provide any coverage of uses of approved products for ourmedical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly-approved drugs. If Rocket is unable to obtain adequate levels of reimbursement for its product candidates, orRocket’s ability to expand our portfolio of products.

We may explore other therapeutic opportunities withtrabodenosonsuccessfully market and seek to commercialize a portfolio of new ophthalmic drugs in addition to oursell its product candidates will be harmed. The manner and level at which reimbursement is provided for services related to Rocket’s product candidates (e.g., for administration of Rocket’s product to patients) is also important to successful commercialization of its product candidates. Inadequate reimbursement for such services may lead to physician resistance and limit Rocket’s ability to market or sell its products.

Rocket faces intense competition and rapid technological change and the possibility that weits competitors may develop therapies that are more advanced or effective than Rocket’s, which may adversely affect Rocket’s financial condition and its ability to successfully commercialize its product candidates.

Rocket is engaged in gene therapy for severe genetic and rare diseases, which is a competitive and rapidly changing field. Although Rocket is not currently developing. Weaware of any gene therapy competitors addressing any of the same indications as those in Rocket’s pipeline, Rocket may have nocompetitors both in the United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions.

Rocket’s potential products in ourcompetitors may have substantially greater financial, technical and other resources, such as larger research and development pipeline other than those potentialstaff, manufacturing capabilities, experienced marketing and manufacturing organizations. These competitors may succeed in developing, acquiring or licensing on an exclusive basis, products that are formulations oftrabodenosonmore effective or less costly than any product

35


candidate that applytrabodenoson for the treatment of glaucoma, other neuropathiesRocket may develop, or achieve earlier patent protection, regulatory approval, product commercialization and degenerative retinal diseases.

Research programs to pursue the development of ourmarket penetration than Rocket. Additionally, technologies developed by Rocket’s competitors may render its potential product candidates for additional indicationsuneconomical or obsolete, and to identify new potential products and disease targets require substantial technical, financial and human resources whether or not we ultimately are successful. Our research programs may initially show promise in identifying potential indications and/or potential products, yet fail to yield results for clinical development for a number of reasons, including:

the research methodology usedRocket may not be successful in identifying potential indicationsmarketing Rocket’s product candidates against those of Rocket’s competitors.

In addition, as a result of the expiration or successful challenge of Rocket’s patent rights, Rocket could face increased litigation with respect to the validity and/or potential products;

scope of patents relating to Rocket’s competitors’ products. The availability of Rocket’s competitors’ products could limit the demand, and the price Rocket is able to charge, for any products that Rocket may develop and commercialize, thereby causing harm to Rocket’s business, financial condition, results of operations and prospects.

Rocket may not be successful in its efforts to build a pipeline of additional product candidates.

Rocket’s business model is centered on applying its expertise in rare genetic diseases by establishing focused selection criteria to develop and advance a portfolio of gene therapy product candidates through development into commercialization. Rocket may after further study, be shown to have harmful adverse effects or other characteristics that indicate they are unlikely to be effective drugs; or

it may take greater human and financial resources to identify additional therapeutic opportunities for our product candidates or to develop suitable potential products through internal research programs and clinical trials than we will possess, thereby limiting our ability to diversify and expand our product portfolio.

Because we have limited financial and managerial resources, we focus on research programs and product candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other potential products or for other indications that later prove to have greater commercial potential or a greater likelihood of success. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.

Accordingly, there can be no assurance that we will evernot be able to continue to identify additional therapeutic opportunities for ourand develop new product candidates in addition to the pipeline of product candidates that its research and development efforts to date have resulted in. Even if Rocket is successful in continuing to build Rocket’s pipeline, the potential product candidates that Rocket identifies may not be suitable for clinical development. If Rocket does not successfully develop and commercialize product candidates based upon its approach, Rocket will not be able to obtain product revenue in future periods, which would likely result in significant harm to Rocket’s financial position and results of operations.

The success of Rocket’s research and development activities, upon which Rocket primarily focuses, is uncertain.

Rocket’s primary focus is on its research and development activities and the clinical testing and commercialization of its product candidates. Research and development was Rocket’s most significant operating expense for the year ended December 31, 2017. Research and development activities, by their nature, preclude definitive statements as to the time required and costs involved in reaching certain objectives. Actual research and development costs, therefore, could significantly exceed budgeted amounts and estimated time frames may require significant extension. Cost overruns, unanticipated regulatory delays or to develop suitable potential products through internaldemands, unexpected adverse side effects or insufficient therapeutic efficacy will prevent or substantially slow Rocket’s research programs, whichand development effort and Rocket’s business could materially adversely affect our future growthultimately suffer. Rocket anticipates that it will remain principally engaged in research and prospects.development activities for an indeterminate, but substantial, period of time.

Risks Related to Our Reliance on Third Parties

We currently dependRocket relies on third parties to conduct some of the operations of ourits preclinical studies and clinical trials and perform other portions of our operations, and we may not be able to control their work as effectively as if we performed these functions ourselves.

We rely on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to oversee and conduct our clinical trials, and to perform data collection and analysis of our

product candidates. We expect to rely on these third parties to conduct clinical trials of any other potential products that we develop. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our program. In addition, any CRO that we retain will be subject to the FDA’s regulatory requirements or similar foreign standards and we do not have control over compliance with these regulations by these providers. Our agreements with third-party service providers are on trial-by-trial and project-by-project bases. Typically, we may terminate the agreements with notice and occasionally the third party service provider may terminate the agreement without notice. Typically, we are responsibletasks for the third party’s incurred costs and occasionally we have to pay cancellation fees. If any of our relationships with our third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or regulatory approval of our product candidates or commercialization of our product candidates, producing additional losses and depriving us of potential product revenue.

Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities, and we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan, the protocols for the trial and the FDA’s regulations and international standards, referred to as Good Clinical Practice, or GCP, requirements, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Preclinical studies must also be conducted in compliance with other requirements, such as Good Laboratory Practice, or GLP, and the Animal Welfare Act. Managing performance of third-party service providers can be difficult, time consuming and cause delays in our development programs. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers.

Furthermore, these third parties may conduct clinical trials for competing drugs or may have relationships with other entities, some of which may be our competitors. As such, the ability of these third parties to provide services to us may be limited by their work with these other entities. The use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated.

Rocket. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or comply with regulatory requirements, Rocket may not be able to obtain regulatory approval for or commercialize Rocket’s product candidates and Rocket’s business, financial condition and results of operations could be substantially harmed.

Rocket has relied upon and plans to continue to rely upon third parties, including contract research organizations, which we refer to as CROs, medical institutions, and contract laboratories to monitor and manage data for Rocket’s ongoing preclinical and clinical programs. Nevertheless, Rocket maintains responsibility for ensuring that each of Rocket’s clinical trials and preclinical studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and Rocket’s reliance on these third parties does not relieve Rocket of its regulatory responsibilities. Rocket and its vendors are required to comply with current requirements on GMP, good clinical practice, or GCP, and good laboratory practice, or GLP, which are a collection of laws and regulations enforced by the FDA, EMA or comparable foreign authorities for all of Rocket’s drug candidates in clinical development.

Regulatory authorities enforce these regulations through periodic inspections of preclinical study and clinical trial sponsors, principal investigators, preclinical study and clinical trial sites, and other contractors. If Rocket or any of its vendors fails to comply with applicable regulations, the data generated in Rocket’s preclinical studies and clinical trials may be deemed unreliable and the FDA, EMA or comparable foreign authorities may require Rocket to perform additional preclinical studies and clinical trials before approving Rocket’s marketing applications. Rocket cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of Rocket’s clinical trials comply with GCP regulations. In addition, Rocket’s clinical trials must be conducted with products produced consistent with GMP regulations. Rocket’s failure to comply with these regulations may require Rocket to repeat clinical trials, which would delay the development and regulatory approval processes.

If any of Rocket’s relationships with these third parties, medical institutions, clinical investigators or contract laboratories terminate, Rocket may not be able to enter into arrangements with alternative CROs on commercially reasonable terms, or at all. In addition, Rocket’s CROs are not its employees, and except for remedies available to Rocket under its agreements with such CROs, Rocket cannot control whether or not they devote sufficient time and resources to Rocket’s ongoing preclinical and clinical programs.

36


If Rocket’s CROs do not successfully carry out their contractual duties or obligations andor meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinicalRocket’s protocols, according to regulatory requirements, or for other reasons, ourRocket’s clinical trials may be extended, delayed or terminated and Rocket may not be able to obtain regulatory approval for or successfully commercialize its product candidates. CROs may also generate higher costs than anticipated. As a result, Rocket’s business, financial condition and results of operations and the commercial prospects for our currentRocket’s product candidates or our other potential products could be harmed, ourmaterially and adversely affected, Rocket’s costs could increase, and ourits ability to obtain regulatory approval and commence product salesgenerate revenue could be delayed.

We have no manufacturing capacitySwitching or experienceadding additional CROs, medical institutions, clinical investigators or contract laboratories involves additional cost and anticipate continued reliance on third-party manufacturers for therequires management time and focus. In addition, there is a natural transition period when a new CRO commences work replacing a previous CRO. As a result, delays occur, which can materially impact Rocket’s ability to meet its desired clinical development and commercialization of our product candidates in accordancetimelines. Though Rocket carefully manages its relationships with manufacturing regulations.

We doits CROs, Rocket cannot guarantee that Rocket will not currently, nor currently intend to, operate manufacturing facilities for clinicalencounter similar challenges or commercial production of our product candidates. We have no experience in drug formulation, and we lack the resources and the capabilities to manufacture our product candidates and potential products on a clinical or commercial scale. We do not intend to develop facilities for the manufacture of product candidates for clinical trials or commercial purposesdelays in the foreseeable future. We currently rely on third-party manufacturers to produce the active pharmaceutical ingredient and final drug product for our clinical trials. We currently have only one supplier of active pharmaceutical ingredient. We manage such production with all our vendors on a purchase order basis in accordance with applicable master service and supply agreements. We dofuture or that these delays or challenges will not have long-term agreements with any of these or any other third-party suppliers. To the extent we terminate our existing supplier arrangements in

the future and seek to enter into arrangements with alternative suppliers, we might experience a delay in our ability to obtain adequate supply for our clinical trials and commercialization. We also do not have any current contractual relationships for the manufacture of commercial supplies of any of our product candidates if and when they are approved. Our third-party manufacturers have made only a limited number of lots of our product candidates to date and have not made any commercial lots. The manufacturing processes for our product candidates have never been tested at commercial scale, and the process validation requirement has not yet been satisfied for any product candidate. These manufacturing processes and the facilities of our third-party manufacturers will be subject to inspection and approval by the FDA before we can commence the manufacture and sale of our product candidates, and thereafter on an ongoing basis. Some of our third-party manufacturers have never been inspected by the FDA and have not been through the FDA approval process for a commercial product. Some of our third-party manufacturers are subject to FDA inspection from time to time. Failure by these third-party manufacturers to pass such inspections and otherwise satisfactorily complete the FDA approval regimen with respect to our product candidates may result in regulatory actions such as the issuance of FDA Form 483 inspectional observations, warning letters or injunctions or the loss of operating licenses. Based on the severity of the regulatory action, our clinical or commercial supply of our product candidates could be interrupted or limited, which could have a material adverse effect on our business.its business, financial condition or results of operations.

WithRocket expects to rely on third parties to conduct some or all aspects of its drug product manufacturing, research and preclinical and clinical testing, and these third parties may not perform satisfactorily.

Rocket does not expect to independently conduct all aspects of its gene therapy production, product manufacturing, research and preclinical and clinical testing. Rocket currently relies, and expects to continue to rely, on third parties with respect to these items. In some cases, these third parties are academic, research or similar institutions that may not apply the same quality control protocols utilized in certain commercial productionsettings.

Rocket’s reliance on these third parties for research and development activities will reduce Rocket’s control over these activities but will not relieve Rocket of ourits responsibility to ensure compliance with all required regulations and study protocols. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct Rocket’s studies in accordance with regulatory requirements or Rocket’s stated study plans and protocols, Rocket will not be able to complete, or may be delayed in completing, the preclinical and clinical studies required to support future product candidates in the future, we plan on outsourcing productionsubmissions and approval of the active pharmaceutical ingredients and finalits product manufacturing if and when approved for marketing by the applicable regulatory authorities. This process is difficult and time consuming and we can give no assurance that wecandidates.

Generally, these third parties may terminate their engagements with Rocket at will upon notice. If Rocket needs to enter commercial supply agreements with any contract manufacturers on favorable terms or at all.into alternative arrangements, it could delay Rocket’s product development activities.

Reliance on third-party manufacturers entails risks to which Rocket would not be subject if Rocket manufactured the product candidates itself, including:

 

manufacturing delays if our third-party manufacturers give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform according to the terms of their agreements with us;

the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;

 

the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us;

reduced control as a result of using third-party manufacturers for all aspects of manufacturing activities;

 

the possible breach of the manufacturing agreement by the third party;

the risk that these activities are not conducted in accordance with Rocket’s study plans and protocols;

 

product loss due to contamination, equipment failure or improper installation or operation of equipment or operator error;

termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to Rocket; and

 

disruptions to the operations of its third-party manufacturers or suppliers caused by conditions unrelated to its business or operations, including the bankruptcy of the manufacturer or supplier.

Any of these events could lead to clinical study delays or failure to obtain regulatory approval, or impact Rocket’s ability to successfully commercialize future products. Some of the third-party manufacturer to comply with applicable regulatory requirements; and

the possible misappropriation of our proprietary information, including our trade secrets and know-how.

Our manufacturers may not perform as agreed or may not remain in the contract manufacturing business. In the event of a natural disaster, business failure, strike or other difficulty, we may be unable to replace a third-party manufacturer in a timely manner and the production of our product candidates and potential productsthese events could be interrupted, resulting in delays and additional costs. We may also have to incur other charges and expensesthe basis for products that fail to meet specifications and undertake remediation efforts.

If third-party manufacturers fail to comply with manufacturing regulations, our financial results and financial condition will be adversely affected.

Before a third party can begin the commercial manufacturing of our product candidates and potential products, their manufacturing facilities, processes and quality systems must be in compliance with applicable regulations. Due to the complexity of the processes used to manufacture pharmaceutical products and product candidates, any potential third-party manufacturer may be unable to initially pass federal, stateFDA action, including an injunction, recall, seizure or international regulatory inspections in a cost effective manner. If contract manufacturers fail to pass such inspection, our

commercial supply of drug substance will be significantly delayed and may result in significant additional costs. In addition, pharmaceutical manufacturing facilities are continuously subject to inspection by the FDA and comparable non-U.S. regulatory authorities, before and after product approval, and must comply with cGMP. Our contract manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages in qualified personnel. In addition, contract manufacturers’ failure to achieve and maintain high manufacturing standards in accordance with applicable regulatory requirements, or the incidence of manufacturing errors, could result in patient injury, product liability claims, product shortages, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. If a third-party manufacturer with whom we contract is unable to comply with manufacturing regulations, we may also be subject to fines, unanticipated compliance expenses, recall or seizure of our products, product liability claims, total or partial suspension of production and/or enforcement actions, including injunctions, and criminal or civil prosecution. These possible sanctions could materially adversely affect our financial results and financial condition.production.

Furthermore, changes in the manufacturing process or procedure, including a change in the location where the product is manufactured or a change of a third-party manufacturer, will require prior FDA review and/or approval of the manufacturing process and procedures in accordance with the FDA’s regulations, or comparable foreign requirements. This review may be costly and time consuming and could delay or prevent us from conducting our clinical trials or launching a product. The new facility will also be subject to pre-approval inspection. In addition, we have to demonstrate that the product made at the new facility is equivalent to the product made at the former facility by physical and chemical methods, which are costly and time consuming. It is also possible that the FDA may require clinical testing as a way to prove equivalency, which would result in additional costs and delay.

Any collaboration arrangement that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our current and future product candidates.

We plan to seek collaboration arrangements with pharmaceutical or biotechnology companies for the development or commercialization of our current and future product candidates outside of the United States. We will face, to the extent that we decide to enter into collaboration agreements, significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement. WeRocket may not be successful in ourfinding strategic collaborators for continuing development of certain of its product candidates or successfully commercializing its product candidates.

Rocket may seek to establish strategic partnerships for developing and/or commercializing certain of Rocket’s product candidates due to relatively high capital costs required to develop the product candidates, manufacturing constraints or other reasons. Rocket may not be successful in its efforts to establish and implement collaborationssuch strategic partnerships or other alternative arrangements should we choosefor its product candidates for several reasons, including because its research and development pipeline may be insufficient, Rocket’s product candidates may be deemed to enter into such arrangements, and the termsbe at too early of the arrangementsa stage of development for collaborative effort or third parties may not be favorable to us. If and when we collaborate with a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. To the extent such collaborators have programs that are competitive with our view Rocket’s

37


product candidates theyas having the requisite potential to demonstrate efficacy or market opportunity. In addition, Rocket may decide to focus time and resources on development of those programs rather than our product candidates.

Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.

If we are not able to establish collaborations, we may have to alter our development and commercialization plans.

The development and potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates.

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such collaboration could be more attractive than the one with us for our product candidates. We may also be restricted under future licenseexisting agreements from entering into future agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

If we areRocket is unable to reach agreements with suitable licensees or collaborators on a timely basis, on acceptable terms or at all, weRocket may have to curtail the development of a product candidate, reduce or delay its development program, or one or more of our other development programs, delay its potential commercialization, or reduce the scope of any sales or marketing activities or increase ourRocket’s expenditures and undertake development or commercialization activities at ourits own expense. If we electRocket elects to independently fund and undertake development or commercialization activities, on our own, weRocket may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we failRocket fails to enter into collaborationscollaboration arrangements and dodoes not have sufficient funds or expertise to undertake the necessary development and commercialization activities, weRocket may not be able to further develop ourits product candidates and Rocket’s business, financial condition, results of operations and prospects may be materially harmed.

The commercial success of any of Rocket’s product candidates will depend upon its degree of market acceptance by physicians, patients, third-party payors and others in the medical community.

Ethical, social, legal and other concerns about gene therapy could result in additional regulations restricting or bring themprohibiting Rocket’s products. Even with the requisite approvals from the FDA in the United States, the EMA in the European Union and other regulatory authorities internationally, the commercial success of Rocket’s product candidates will depend, in part, on the acceptance of physicians, patients and health care payors of gene therapy products in general, and Rocket’s product candidates in particular, as medically beneficial, cost-effective and safe. Any product that Rocket commercializes may not gain acceptance by physicians, patients, health care payors and others in the medical community. If these products do not achieve an adequate level of acceptance, Rocket may not generate significant product revenue and may not become profitable. The degree of market acceptance of gene therapy products and, in particular, Rocket’s product candidates, if approved for commercial sale, will depend on several factors, including:

the efficacy and safety of such product candidates as demonstrated in preclinical studies and clinical trials;

the potential and perceived advantages of product candidates over alternative treatments;

the cost of Rocket’s treatment relative to alternative treatments;

the clinical indications for which the product candidate is approved by the FDA or the European Commission;

patient awareness of, and willingness to seek, gene therapy;

the willingness of physicians to prescribe new therapies;

the willingness of physicians to undergo specialized training with respect to administration of Rocket’s product candidates;

the willingness of the target patient population to try new therapies;

the prevalence and severity of any side effects;

product labeling or product insert requirements of the FDA, EMA or other regulatory authorities, including any limitations or warnings contained in a product’s approved labeling;

relative convenience and ease of administration;

the strength of marketing and distribution support;

the timing of market introduction of competitive products;

publicity concerning Rocket’s products or competing products and treatments; and

sufficient third-party payor coverage and reimbursement.

Even if a potential product displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be fully known until after it is approved and launched. The failure of any of Rocket’s product candidates to achieve market acceptance could materially harm Rocket’s business, financial condition, results of operations and generate product revenue.prospects.

38


RTW Investments, LP, Rocket’s principal stockholder, may have the ability to significantly influence all matters submitted to stockholders for approval.

RTW Investments, LP (“RTW”), in the aggregate, beneficially owns approximately 39.18% of Rocket’s outstanding shares of common stock. This concentration of voting power gives RTW the power to significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, RTW could significantly influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets.

Risks Related to Intellectual PropertyPersonnel and Other Risks Related to Rocket’s Business

WeRocket’s business could suffer if it loses the services of, or fails to attract, key personnel.

Rocket is highly dependent upon the efforts of the company’s senior management, including Rocket’s Chief Executive Officer, Gaurav Shah, MD; Rocket’s Chief Medical Officer and Head of Clinical Development, Jonathan Schwartz, MD; and Rocket’s Chief Operating Officer and Head of Development, Kinnari Patel. The loss of the services of these individuals and other members of Rocket’s senior management could delay or prevent the achievement of research, development, marketing, or product commercialization objectives. Rocket’s employment arrangements with the key personnel are “at-will.” Rocket does not maintain any “key-man” insurance policies on any of the key employees nor does Rocket intend to obtain such insurance. In addition, due to the specialized scientific nature of Rocket’s business, Rocket is highly dependent upon its ability to attract and retain qualified scientific and technical personnel and consultants. In view of the stage of Rocket’s organizational development and research and development programs, Rocket has restricted its hiring to research scientists, consultants and a small administrative staff and has made only limited investments in manufacturing, production, sales or regulatory compliance resources. There is intense competition among major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions for qualified personnel in the areas of Rocket’s operations, however, and Rocket may be unsuccessful in attracting and retaining these personnel.

Rocket may need to expand its organization and may experience difficulties in managing this growth, which could disrupt its operations.

As of March 1, 2018, Rocket had 20 full-time employees. As Rocket’s business activities expand, Rocket may expand its full-time employee base and hire more consultants and contractors. Rocket’s management may need to divert a disproportionate amount of its attention away from day-to-day activities and devote a substantial amount of time to managing these growth activities. Rocket may not be able to protect oureffectively manage the expansion of its operations, which may result in weaknesses in Rocket’s infrastructure, operational setbacks, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Rocket’s expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If Rocket’s management is unable to effectively manage Rocket’s growth, Rocket’s expenses may increase more than expected, Rocket’s ability to generate and/or grow revenues could be reduced and Rocket may not be able to implement its business strategy.

Rocket’s employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

Rocket is exposed to the risk of fraud or other misconduct by its employees, consultants and commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to Rocket. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to Rocket’s reputation or could cause regulatory agencies not to approve Rocket’s product candidates. Rocket has a code of business ethics and conduct applicable to all employees, but it is not always possible to identify and deter employee or third-party misconduct, and the precautions Rocket takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting Rocket from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against Rocket, and Rocket is not successful in defending the company or asserting its rights, those actions could have a significant impact on Rocket’s business, including the imposition of significant fines or other sanctions.

Rocket’s internal computer systems, or those of its third-party collaborators or other contractors, may fail or suffer security breaches, which could result in a material disruption of Rocket’s development programs.

39


Rocket’s internal computer systems and those of its current and any future collaborators and other consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While Rocket has not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in Rocket’s operations, it could result in a material disruption of Rocket’s development programs and its business operations, whether due to a loss of its trade secrets or other proprietary information or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in Rocket’s regulatory approval efforts and significantly increase Rocket’s costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, Rocket’s data or applications, or inappropriate disclosure of confidential or proprietary information, Rocket could incur liability, its competitive position could be harmed and the further development and commercialization of Rocket’s product candidates could be delayed.

Rocket may be subject to claims that its employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties or that Rocket’s employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Rocket employs individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including its competitors or potential competitors. Although Rocket endeavors to ensure that its employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for Rocket, Rocket may be subject to claims that Rocket or its employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of Rocket’s employee’s former employer or other third parties. Litigation may be necessary to defend against these claims. If Rocket fails in defending any such claims, in addition to paying monetary damages, Rocket may lose valuable intellectual property rights or personnel, which could adversely impact Rocket’s business. Even if Rocket is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Given Rocket’s commercial relationships outside of the United States, in particular in the European Union, a variety of risks associated with international operations could harm its business.

Rocket engages in various commercial relationships outside the United States and Rocket may commercialize its product candidates outside of the United States. In many foreign countries, it is common for others to engage in business practices that are prohibited by U.S. laws and regulations applicable to Rocket, including the Foreign Corrupt Practices Act. Although Rocket may implement policies and procedures specifically designed to comply with these laws and policies, there can be no assurance that Rocket’s employees, contractors and agents will comply with these laws and policies. If Rocket is unable to successfully manage the challenges of international expansion and operations, Rocket’s business and operating results could be harmed.

Rocket may be, and expect that it will be to the extent Rocket commercializes its product candidates outside the United States, subject to various risks associate with operating internationally, including:

different regulatory requirements for approval of drugs and biologics in foreign countries;

reduced protection for intellectual property rights;

unexpected changes in tariffs, trade barriers and regulatory requirements;

economic weakness, including inflation, or political instability in particular foreign economies and markets;

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

workforce uncertainty in countries where labor unrest is more common than in the United States;

shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;

business interruptions resulting from geopolitical actions, including war and terrorism or natural disasters including earthquakes, typhoons, floods and fires, or from economic or political instability; and

greater difficulty with enforcing Rocket’s contracts in jurisdictions outside of the United States.

These and related risks could materially harm Rocket’s business, financial condition, results of operations and prospects.

40


Risks Related to Rocket’s Intellectual Property

Rocket’s rights to intellectual property for the development and commercialization of its product candidates are subject to the terms and conditions of licenses granted to Rocket by others.

Rocket is heavily reliant upon licenses to certain patent rights and proprietary technology from third parties that are important or necessary to the development of its technology and products, including technology related to Rocket’s manufacturing process and Rocket’s gene therapy product candidates. These and other licenses may not provide exclusive rights to use such intellectual property and technology in all relevant fields of use and in all territories in which Rocket may wish to license its platform or develop or commercialize its technology and products in the marketplace.future. As a result, Rocket may not be able to prevent competitors from developing and commercializing competitive products in territories not included in all of its licenses.

We dependLicenses to additional third-party technology that may be required for Rocket’s licensing or development programs may not be available in the future or may not be available on ourcommercially reasonable terms, or at all, which could materially harm Rocket’s business and financial condition.

In some circumstances, Rocket may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain or enforce the patents, covering technology that Rocket’s license from third parties. If Rocket’s licensors fail to maintain such patents, or lose rights to those patents or patent applications, the rights Rocket has licensed may be reduced or eliminated and Rocket’s right to develop and commercialize any of its products that are the subject of such licensed rights could be impacted. In addition to the foregoing, the risks associated with patent rights that Rocket licenses from third parties will also apply to patent rights Rocket may own in the future.

Furthermore, the research resulting in certain of Rocket’s licensed patent rights and technology was funded by the U.S. government. As a result, the government may have certain rights, or march-in rights, to such patent rights and technology. When new technologies are developed with government funding, the government generally obtains certain rights in any resulting patents, including a non-exclusive license authorizing the government to use the invention for non-commercial purposes. These rights may permit the government to disclose Rocket’s confidential information to third parties and to exercise march-in rights to use or allow third parties to use Rocket’s licensed technology. The government can exercise its march-in rights if it determines that action is necessary because Rocket fails to achieve practical application of the government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations or to give preference to U.S. industry. In addition, Rocket’s rights in such inventions may be subject to certain requirements to manufacture products embodying such inventions in the U.S. Any exercise by the government of such rights could harm Rocket’s competitive position, business, financial condition, results of operations and prospects.

If Rocket is unable to obtain and maintain patent protection for is products and related technology, or if the scope of the patent protection obtained is not sufficiently broad, Rocket’s competitors could develop and commercialize products and technology similar or identical to Rocket’s, and Rocket’s ability to protect our proprietary technology. We rely largely on trade secret and patent laws, and confidentiality, licensing and other agreements with employees and third parties, all of which offer only limited protection. Oursuccessfully commercialize its products may be harmed.

Rocket’s success depends, in large part, on our ability and any future licensee’sits ability to obtain and maintain patent protection in the United StatesU.S. and other countries with respect to ourits product candidates and its manufacturing technology. Rocket’s licensors have sought and Rocket may intend to seek to protect its proprietary technologyposition by filing patent applications in the U.S. and products. We believe we will continueabroad related to many of its novel technologies and product candidates that are important to its business.

The patent prosecution process is expensive, time-consuming and complex, and Rocket may not be able to obtain, through prosecution of our current pendingfile, prosecute, maintain, enforce or license all necessary or desirable patent applications adequateat a reasonable cost or in a timely manner. In addition, certain patents in the field of gene therapy that may have otherwise potentially provided patent protection for our proprietary drug technology. If we are compelledcertain of Rocket’s product candidates have expired or will soon expire. In some cases, the work of certain academic researchers in the gene therapy field has entered the public domain, which Rocket believes precludes its ability to spend significant timeobtain patent protection for certain inventions relating to such work. It is also possible that Rocket will fail to identify patentable aspects of its research and money protecting or enforcing our patents ordevelopment output before it is too late to obtain patent protection.

Rocket is party to intellectual property license agreements with several entities, each of which is important to its business, and Rocket expects to enter into additional license agreements in the future. Rocket’s patent portfolio consists solely of patent applications designing around patents heldin-licensed pursuant to those license agreements, and those agreements impose, and Rocket expects that future license agreements will impose, various diligence, development and commercialization timelines, milestone obligations, payments and other obligations on Rocket. If Rocket or its licensees fail to comply with Rocket’s obligations under these agreements, or Rocket is subject to a bankruptcy, the licensor may have the right to terminate the license, in which event Rocket could lose certain rights provided by others or licensing or acquiring, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospectsthe licenses, including that Rocket may be harmed. If we are unable to effectively protect the intellectual property that we own, other companies maynot be able to offermarket products covered by the same or similar productslicense. In addition, the patent rights we have in-

41


licensed from Hutch relate only to Hutch’s “Prodigy” platform, a portable platform for sale, which could materially adversely affect our competitive business positionhematopoietic stem/progenitor cell gene therapy, and harm our business prospects. Our patents may be challenged, narrowed, invalidated, or circumvented, which could limit our abilitynot to stop competitorsRP-L101, Rocket’s LVV-based program targeting FA that is in-licensed from marketing the same or similar products or limit the length of term of patent protection that we may have for our products.Hutch.

The patent positionsposition of biotechnology and pharmaceutical productscompanies generally is highly uncertain, involves complex legal and factual questions and has, in recent years, been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of Rocket’s patent rights are often complexhighly uncertain. Pending and uncertain. The breadth of claims allowedfuture patent applications may not result in pharmaceutical patents in the United Statesbeing issued which protect Rocket’s technology or product candidates or which effectively prevent others from commercializing competitive technologies and many jurisdictions outside of the United States is not consistent. For example, in many jurisdictions the support standards for pharmaceutical patents are becoming increasingly strict. Some countries prohibit method of treatment claims in patents.product candidates. Changes in either the patent laws or interpretationsinterpretation of the patent laws in the United StatesU.S. and other countries may diminish the value of Rocket’s patent rights or narrow the scope of Rocket’s patent protection.

While we believe our intellectual property or create uncertainty.allows us to pursue our current development programs, several companies and academic institutions are pursuing alternate approaches to gene therapy and have built intellectual property around these approaches and methods. For example, Institute Pasteur controls a patent family related to vector elements for lentiviral-based gene therapy. These patents relate to an element that improves nuclear localization. While these patents expire from 2019 to 2023, if our products were to launch before these dates, we may need to secure a license. In addition, publicationRocket may not be aware of information related to our current product candidates and potential products may prevent us from obtaining or enforcing patentsall third-party intellectual property rights potentially relating to theseits technology and product candidatescandidates. Publications of discoveries in the scientific literature often lag the actual discoveries, and potential products, including, without limitation, composition-of-matter patents, which are generally believed to offer the strongest patent protection.

Our intellectual property consists of issued patents and pending patent applications related to our product candidatesin the U.S. and other proprietary technology which cover compositions of matter, methods of use, combinations with other glaucoma products, formulations, polymorphs and the protection of the optic nerve. Fortrabodenoson, the composition patentsjurisdictions are scheduled to expiretypically not published until 18 months after filing or, in 2025 and 2026, in Europe and the United States, respectively. Thetrabodenoson polymorph US patent is scheduled to expire in 2033. See “Business—Intellectual Property” included in this Annual Report on Form 10-K for the year ended December 31, 2015, for further information about our issued patents and patent applications.

Patentssome cases, not at all. Therefore, Rocket cannot be certain that we own or may license in the future do not necessarily ensure the protection of our product candidates for a number of reasons, including without limitation the following:

we may not have beenRocket was the first to make the inventions covered by ourclaimed in any owned or any licensed patents or pending patent applications;

we may not have beenapplications, or that Rocket was the first to file for patent protection of such inventions.

Even if the patent applications for these inventions;

any patents issued to usRocket licenses or may not cover our products as ultimately developed;

our pending patent applications may not resultown in issued patents, and even if theythe future do issue as patents, they may not issue in a form that will provide usRocket with any meaningful protection, prevent competitors or other third parties from competing with Rocket or otherwise provide Rocket with any competitive advantages,advantage. Rocket’s competitors or other third parties may be challenged and invalidated by third parties;

our patents may not be broad or strong enough to prevent competition from other products that are identical or similar to our product candidates;

there can be no assurance that the termavail themselves of a patent can be extendedsafe harbor under the provisionsDrug Price Competition and Patent Term Restoration Act of patent term extension afforded by U.S. law or similar provisions in foreign countries, where available;

our patents,1984 (Hatch-Waxman Amendments) to conduct research and patents that we may obtain in the future, may not prevent generic entry into the U.S. market for ourtrabodenoson and other product candidates;

we may be required to disclaim part of the term of one or more patents;

there may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim;

there may be patents issued to third parties that will affect our freedom to operate;

if our patents are challenged, a court could determine that they are invalid or unenforceable;

there might be significant changes in the laws that govern patentability, validity and infringement of our patents that adversely affects the scope of our patent rights;

a court could determine that a competitor’s technology or product does not infringe our patents;

our patents could irretrievably lapse due to failure to pay fees or otherwise comply with regulations or could be subject to compulsory licensing; and

we may fail to obtain patents covering important products and technologies in a timely fashion or at all.

In addition, on September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent Office is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act have not yet become effective. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act, in particular the first-to-file provision, and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

If we encounter delays in our development or clinical trials the period of time during which we could market our product candidates under patent protection would be reduced.

Our competitors may seek to invalidate our patents.

Our competitorsand may be able to circumvent our patentsRocket’s patent rights by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may seek to market generic versions of any approved products by submitting Abbreviated New Drug Applications, or ANDAs, to the FDA in which our competitors claim that our patents are invalid, unenforceable and/or not infringed. Alternatively, our competitors may seek approval to market their own products similar to or otherwise competitive with our products. In these circumstances, we may need to defend and/or assert our patents, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid and/or unenforceable. We may also fail to identify patentable aspects of our research and development before it is too late to obtain patent protection. Even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

The issuance of a patent is not conclusive as to its inventorship, scope, ownership, priority, validity or enforceability. In that regard, third partiesenforceability, and Rocket’s patent rights may challenge our patentsbe challenged in the courts or patent offices in the United StatesU.S. and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit ourRocket’s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of ouris technology and product candidates. In addition, givenGiven the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.

A significant portion of our As a result, Rocket’s intellectual property portfolio currently includes pendingmay not provide sufficient rights to exclude others from commercializing products similar or identical to Rocket’s.

If Rocket breaches its license agreements, it could have a material adverse effect on Rocket’s commercialization efforts for its product candidates.

If Rocket breaches any of the agreements under which Rocket licenses intellectual property relating to the use, development and commercialization rights to its product candidates or technology from third parties, Rocket could lose license rights that are important to its business. Licensing of intellectual property is of critical importance to Rocket’s business and involves complex legal, business and scientific issues. Disputes may arise between Rocket and its licensors regarding intellectual property subject to a license agreement, including:

the scope of rights granted under the license agreement;

whether and the extent to which Rocket technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

Rocket’s right to sublicense patent and other intellectual property rights to third parties under collaborative development relationships;

Rocket’s diligence obligations with respect to the use of the licensed technology in relation to its development and commercialization of is product candidates, and what activities satisfy those diligence obligations;

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by Rocket’s licensors and Rocket and its partners; and

42


whether and the extent to which inventors are able to contest to the assignment of their rights to Rocket’s licensors.

If disputes over intellectual property that Rocket has in-licensed prevent or impair Rocket’s ability to maintain its current licensing arrangements on acceptable terms, Rocket may be unable to successfully develop and commercialize the affected product candidates. In addition, if disputes arise as to ownership of licensed intellectual property, Rocket’s ability to pursue or enforce the licensed patent applications that have not yet issued as patents.rights may be jeopardized. If our pending patent applicationsRocket or its licensors fail to issue our business will be adversely affected.adequately protect this intellectual property, Rocket’s ability to commercialize its products could suffer.

Our commercial success will depend significantly on maintaining and expanding patent protection for our product candidates,Rocket may incur substantial costs as well as successfully defending our current and future patents against third-party challenges. Asa result of December 31, 2015, we own at least 50 issued patents and have at least 40 pending patent applications in the United States and a number of foreign jurisdictionslitigation or other proceedings relating to our current product candidates and proprietary technology. See “Business—Intellectual Property” included in this Annual Report on Form 10-K for further information about our issued patents and patent applications. Our intellectual property consists of patents and pending patent applications related to our product candidates and other proprietary technology which cover compositions of matter, methods of use, combinations with other glaucoma products, formulations, polymorphs and the protection of the optic nerve. Fortrabodenoson, the composition of matter patents are scheduled to expire in 2025 and 2026, in Europe and the United States, respectively. Thetrabodenoson polymorph US patent is scheduled to expire in 2033.

There can be no assurance that our patent applications will issue as patents in the United States or foreign jurisdictions in which such applications are pending. Even if patents do issue on any of these applications, there can be no assurance that a third party will not challenge their validity or that we will obtain sufficient claim scope in those patents to prevent a third party from competing successfully with our products.

We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. To the extent we are able to obtain patents or other intellectual property rights in any foreign jurisdictions, it may be difficult for us to prevent infringement of our patents or misappropriation of these intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The United States Patent and Trademark Office, or the USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In this event, competitors might be able to enter the market earlier than would otherwise have been the case.

We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our products.

Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights and Rocket may be unable to protect its rights to, or use, its technology.

If Rocket chooses to engage in legal action to prevent a third-party from using the inventions claimed in its patents or patents which Rocket licenses, that third-party has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third-party. These lawsuits are expensive and would consume time and other resources even if Rocket were successful in stopping the infringement of third parties. For example,these patents. In addition, there could be issuedis a risk that the court will decide that these patents of which we are not awarevalid and that our product candidates or potential products infringe.Rocket does not have the right to stop the other party from using the inventions. There is also could bethe risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that we believe wesuch other party’s activities do not infringe butRocket’s rights to these patents.

Furthermore, a third-party may claim that we may ultimately be found to infringe.

Moreover,Rocket is using inventions covered by the third-party’s patent applications are in some cases maintained in secrecy until patents are accepted or issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our product candidates or potential products infringe. For example, pending applications may exist that claim or can be amended to claim subject matter that our product candidates or potential products infringe. Competitors may file continuing patent applications claiming priority to already issued patents in the form of continuation, divisional, or continuation-in-part applications, in order to maintain the pendency of a patent family and attempt to cover our product candidates.

Third parties may assert that we are employing their proprietary technology without authorizationrights and may sue us for patentgo to court to stop Rocket from engaging in its normal operations and activities, including making or other intellectual property infringement.selling its product candidates. These lawsuits are costly and could adversely affect ourRocket’s results of operations and divert the attention of managerial and scientifictechnical personnel. There is a risk that a court would decide that Rocket is infringing the third-party’s patents and would order Rocket to stop the activities covered by the patents. In addition, there is a risk that a court will order Rocket to pay the other party damages for having violated the other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we areRocket is sued for patent infringement, weRocket would need to demonstrate that our product candidates, potentialits products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid or unenforceable, and we may not be able to do this.invalid. Proving invalidity, or unenforceabilityin particular, is difficult. For example, in the United States, proving invaliditydifficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successfulRocket’s competitors have filed, and may in the future file, patent applications covering technology similar to Rocket’s. Any such patent application may have priority over Rocket’s in-licensed patent applications and could further require Rocket to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to Rocket’s, Rocket may have to participate in an interference proceeding declared by the U.S. Patent and Trademark Office, to determine priority of invention in the U.S. The costs of these proceedings we may incur substantial costs and the time and attention of our management and scientific personnel could be divertedsubstantial, and it is possible that such efforts would be unsuccessful, resulting in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resourcesloss of Rocket’s United States patent position with respect to bring these actions to a successful conclusion. If a court holds that any third-party patents are valid, enforceable and cover our products or their use, the holderssuch inventions.

Some of any of these patentsRocket’s competitors may be able to block our ability to commercialize our products unless we acquire or obtain a license undersustain the applicable patents or until the patents expire. We may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introductioncosts of our products or lead to prohibition of the manufacture or sale of products by us. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, in any such proceeding orcomplex patent litigation we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found tomore effectively than Rocket can because they have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact on our business.substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on ourRocket’s ability to raise the funds necessary to continue ourits operations.

WeIf Rocket is unable to protect the confidentiality of its trade secrets, its business and competitive position may face claimsbe harmed.

In addition to the protection afforded by patents, Rocket relies upon unpatented trade secret protection, unpatented know-how and continuing technological innovation to develop and maintain its competitive position. Rocket seeks to protect its proprietary technology and processes, in part, by entering into confidentiality agreements with its contractors, collaborators, employees and consultants. Nonetheless, Rocket may not be able to prevent the unauthorized disclosure or use of infringement, misappropriationits technical know-how or other violationstrade secrets by the parties to these agreements, however, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures is difficult and Rocket does not know whether the steps Rocket has taken to protect its proprietary technologies will be effective. If any of the rightscontractors, collaborators, employees and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, Rocket may not have adequate remedies for any such breach or violation. As a result, Rocket could lose its trade secrets. Enforcing a claim that a third-party illegally obtained and is using its trade secrets, like patent litigation, is expensive and time consuming and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing or unwilling to protect trade secrets.

Rocket’s trade secrets could otherwise become known or be independently discovered by Rocket’s competitors. Competitors could purchase Rocket’s product candidates and attempt to replicate some or all of the competitive advantages Rocket derives from its development efforts, willfully infringe Rocket’s intellectual property holders.rights, design around Rocket’s protected technology or develop

Pharmaceutical companies, biotechnology companies and academic institutions may43


their own competitive technologies that fall outside of Rocket’s intellectual property rights. If any of Rocket’s trade secrets were to be lawfully obtained or independently developed by a competitor, Rocket would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with usRocket. If Rocket’s trade secrets are not adequately protected or sufficient to provide an advantage over Rocket’s competitors, Rocket’s competitive position could be adversely affected, as could Rocket’s business. Additionally, if the steps taken to maintain Rocket’s trade secrets are deemed inadequate, Rocket may have insufficient recourse against third parties for misappropriating Rocket’s trade secrets.

If Rocket is unable to obtain or protect intellectual property rights related to its product candidates, Rocket may not be able to compete effectively in its markets.

Rocket relies upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to its product candidates. The strength of patents in the commercialization oftrabodenoson for use in ophthalmic indicationsbiotechnology and filingpharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications potentially relevant to our business. In order to contend with the strong possibility of third-party intellectual property conflicts, we periodically conduct freedom-to-operate studies, but such studies may not uncover all patents relevant to our business.

From time to time, we find it necessarythat Rocket owns or prudent to obtain licenses from third-party intellectual property holders. Where licenses are readily available at reasonable cost, such licenses are considered a normal cost of doing business. In other instances, however, we may use the results of freedom-to-operate studies to guide our early-stage research away from areas where we are likely to encounter obstacles in the form of third-party intellectual property. For example, where a third party holds relevant intellectual property and is a direct competitor, a license might not be available on commercially reasonable terms or available at all. We strive to identify potential third-party intellectual property issues in the early stages of research of our research programs, in order to minimize the cost and disruption of resolving such issues.

In spite of these efforts to avoid obstacles and disruptions arising from third-party intellectual property, it is impossible to establish with certainty that our products will be free of claims that we infringe, misappropriate or otherwise violate the rights of third-party intellectual property holders. Even with modern databases and online search engines, freedom-to-operate searches are imperfect andin-licenses may fail to identifyresult in issued patents with claims that cover its product candidates in the United States or in other foreign countries. There is no assurance that all of the potentially relevant prior art relating to patents and published applications. Even whenpatent applications owned or in-licensed by Rocket has been found, which can invalidate a third-party patent is identified, we may conclude that we do not infringe the patent or that theprevent a patent is invalid. If the third-partyfrom issuing from a pending patent owner disagrees with our conclusion and we continue with the business activity in question, patent litigation may result. We might decide to initiate litigation in an attempt to have a court declare the third-party patent invalid or non-infringed by our activity.

We may be subject to claims that we or our employees have misappropriated the intellectual property, including trade secrets, of a third party, or claiming ownership of what we regard as our own intellectual property.

Many of our employees were previously employed at universities, biotechnology companies or other pharmaceutical companies, including our competitors or potential competitors. Some of these employees, including each member of our senior management, executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment. Although we try to ensure that our employees do not use the intellectual property and other proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed such intellectual property, including trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. We are not aware of any threatened or pending claims related to these matters or concerning the agreements with our senior management, but litigation may be necessary in the future to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.application. Even if we are successful in defending againstpatents do successfully issue and even if such claims, litigation could result in substantial costs and be a distraction to management.

In addition, while we typically require our employees, consultants and contractors whopatents cover Rocket’s product candidates, third parties may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own,challenge their validity, enforceability or scope, which may result in claimssuch patents being narrowed or invalidated. Furthermore, even if they are unchallenged, patents and patent applications owned or in-licensed by Rocket may not adequately protect Rocket’s intellectual property, provide exclusivity for Rocket’s product candidates or against us relatedprevent others from designing around Rocket’s claims. Any of these outcomes could impair Rocket’s ability to prevent competition from third parties, which may have an adverse impact on Rocket’s business.

If the ownershippatent applications Rocket holds or has in-licensed with respect to its programs or product candidates fail to issue, if their breadth or strength of such intellectual property. If weprotection is threatened, or if they fail in prosecuting or defending any such claims, into provide meaningful exclusivity for Rocket’s product candidates, it could dissuade companies from collaborating with it to develop product candidates, and threaten Rocket’s ability to commercialize, future products. In addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distractionRocket’s existing patent application filings, Rocket expects to our management and scientific personnel.

We may be unablecontinue to adequately prevent disclosure offile additional patent applications covering Rocket’s product candidates.  Further, Rocket intends to pursue additional activities to protect the patents, trade secrets and other proprietary information.intellectual property covering its product candidates.  Rocket cannot offer any assurances about which, if any, patents will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to us could deprive Rocket of rights necessary for the successful commercialization of any product candidates that Rocket may develop. Further, if Rocket or the relevant licensor encounters delays in regulatory approvals, the period of time during which Rocket could market a product candidate under patent protection could be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, Rocket cannot be certain that Rocket or the relevant licensor was the first to file any patent application related to a product candidate. Furthermore, if third parties have filed such patent applications, an interference proceeding in the United States can be initiated by a third-party to determine who was the first to invent any of the subject matter covered by the patent claims of Rocket’s applications. In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available however the life of a patent, and the protection it affords, is limited. Even if patents covering Rocket’s product candidates are obtained, once the patent life has expired for a product, Rocket may be open to competition from generic medications.

We relyIn addition to the protection afforded by patents, Rocket relies on trade secretssecret protection and confidentiality agreements to protect our proprietary know-how that is not patentable or that Rocket elects not to patent, processes for which patents are difficult to enforce and technological advances, especially where we haveany other elements of Rocket’s product candidate discovery and development processes that involve proprietary know-how, information or technology that is not filed a patent application or where we do not believe patent protection is appropriate or obtainable.covered by patents. However, trade secrets arecan be difficult to protect. We relyRocket seeks to protect its proprietary technology and processes, in part, onby entering into confidentiality agreements with ourits employees, consultants, outside scientific collaborators, sponsored researchersadvisors and othercontractors. Rocket also seeks to preserve the integrity and confidentiality of its data and trade secrets by maintaining physical security of its premises and physical and electronic security of its information technology systems. While Rocket has confidence in these individuals, organizations and systems, agreements or security measures may be breached, and Rocket may not have adequate remedies for any breach. In addition, Rocket’s trade secrets may otherwise become known or be independently discovered by competitors.

Although Rocket expects all of its employees and consultants to assign their inventions to Rocket, and all of Rocket’s employees, consultants, advisors and any third parties who have access to protect ourits proprietary know-how, information or technology to enter into confidentiality agreements, Rocket cannot provide any assurances that all such agreements have been duly executed or that its trade secrets and other proprietary information. However, any party with whom we have executed such an agreement may breach that agreement and disclose ourconfidential proprietary information including ourwill not be disclosed or that competitors will not otherwise gain access to its trade secrets. Accordingly, these agreements may not effectively prevent disclosure of confidentialsecrets or independently develop substantially equivalent information and may not provide an adequate remedy in the event oftechniques. Misappropriation or unauthorized disclosure of confidential information. CostlyRocket’s trade secrets could impair its competitive position and time-consuming litigation could be necessarymay have a material adverse effect on its business. Additionally, if the steps taken to enforce and determine the scope of our proprietary rights.maintain Rocket’s trade secrets are deemed inadequate, Rocket may have insufficient recourse

44


against third parties for misappropriating its trade secret. In addition, others may independently discover ourRocket’s trade secrets and proprietary information. Further,For example, the FDA, as part of its Transparency Initiative, a proposal by the FDA to increase disclosure and make data more accessible to the public, is currently considering whether to make additional information publicly available on a routine basis, including information that weRocket may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Failure

Further, the laws of some foreign countries do not protect proprietary rights to obtainthe same extent or maintainin the same manner as the laws of the United States. As a result, Rocket may encounter significant problems in protecting and defending its intellectual property, both in the United States and abroad. If Rocket is unable to prevent material disclosure of the non-patented intellectual property related to its technologies to third parties, and there is no guarantee that Rocket will have any such enforceable trade secret protection, it may not be able to establish or maintain a competitive advantage in its market, which could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitivematerially adversely affect its business, positionresults of operations and financial results.condition.

Detecting the disclosure or misappropriation of a trade secret and enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

Any lawsuits relating to infringementThird-party claims of intellectual property infringement may prevent or delay Rocket’s development and commercialization efforts.

Rocket’s commercial success depends in part on its avoiding infringement of the patents and proprietary rights brought by or against us will be costly and time consuming and may adversely impact the price of our common stock.

We may be required to initiate litigation to enforce or defend our intellectual property. These lawsuits can be very time consuming and costly.third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industry generally. Such litigationindustries, including patent infringement lawsuits, interferences, oppositions, ex parte reexaminations, post-grant review, and inter partes review proceedings before the U.S. Patent and Trademark Office, or proceedings could substantially increase our operating expensesU.S. PTO, and reducecorresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the resources availablefields in which Rocket is pursuing development candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that Rocket’s product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that Rocket is employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for development activitiestreatment related to the use or manufacture of Rocket’s product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that Rocket’s product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of Rocket’s technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of Rocket’s product candidates, any molecules formed during the manufacturing process or any future sales, marketingfinal product itself, the holders of any such patents may be able to block Rocket’s ability to commercialize such product candidate unless Rocket obtained a license under the applicable patents, or distribution activities.

until such patents expire. Similarly, if any third-party patents were held by a court of competent jurisdiction to cover aspects of Rocket’s formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patents may be able to block Rocket’s ability to develop and commercialize the applicable product candidate unless Rocket obtained a license or until such patent expires. In any infringement litigation, any award of monetary damages we receiveeither case, such a license may not be available on commercially valuable. reasonable terms or at all.

Parties making claims against Rocket may obtain injunctive or other equitable relief, which could effectively block Rocket’s ability to further develop and commercialize one or more of its product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from Rocket’s business. In the event of a successful claim of infringement against Rocket, Rocket may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign Rocket’s infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

Rocket may not be successful in obtaining or maintaining necessary rights to gene therapy product components and processes for its development pipeline through acquisitions and in-licenses.

Presently Rocket has rights to the intellectual property, through licenses from third parties and under patents that Rocket owns, to develop its gene therapy product candidates. Because Rocket’s programs may involve additional product candidates that may require the use of proprietary rights held by third parties, the growth of Rocket’s business will likely depend in part on its ability to acquire, in-license or use these proprietary rights. In addition, Rocket’s product candidates may require specific formulations to work effectively and efficiently and these rights may be held by others. Rocket may be unable to acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from third parties that Rocket identifies. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that Rocket may consider attractive. These established companies may have a competitive advantage over Rocket due to their size, cash resources and greater clinical development and commercialization capabilities.

45


For example, Rocket sometimes collaborates with U.S. and foreign academic institutions to accelerate its preclinical research or development under written agreements with these institutions. Typically, these institutions provide Rocket with an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration. Regardless of such right of first negotiation for intellectual property, Rocket may be unable to negotiate a license within the specified time frame or under terms that are acceptable to it. If Rocket is unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking Rocket’s ability to pursue its program.

In addition, companies that perceive Rocket to be a competitor may be unwilling to assign or license rights to it. Rocket also may be unable to license or acquire third-party intellectual property rights on terms that would allow it to make an appropriate return on its investment. If Rocket is unable to successfully obtain rights to required third-party intellectual property rights, Rocket’s business, financial condition and prospects for growth could suffer.

If Rocket fails to comply with its obligations in the agreements under which Rocket licenses intellectual property rights from third parties or otherwise experiences disruptions to Rocket’s business relationships with its licensors, Rocket could lose license rights that are important to its business.

Rocket is a party to a number of intellectual property license agreements that are important to its business and expect to enter into additional license agreements in the future. Rocket’s existing license agreements impose, and Rocket expects that future license agreements will impose, various diligence, milestone payment, royalty and other obligations on Rocket. If Rocket fails to comply with its obligations under these agreements, or Rocket is subject to a bankruptcy, the licensor may have the right to terminate the license, in which event Rocket would not be able to market products covered by the license.

Rocket may need to obtain licenses from third parties to advance its research or allow commercialization of its product candidates, and it has done so from time to time. Rocket may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, Rocket may be required to expend significant time and resources to develop or license replacement technology. If Rocket is unable to do so, it may be unable to develop or commercialize the affected product candidates, which could harm its business significantly. Rocket cannot provide any assurances that third-party patents do not exist which might be enforced against its current product candidates or future products, resulting in either an injunction prohibiting its sales, or, with respect to its sales, an obligation on Rocket’s part to pay royalties and/or other forms of compensation to third parties.

In many cases, patent prosecution of Rocket’s licensed technology is controlled solely by the licensor. If Rocket’s licensors fail to obtain and maintain patent or other protection for the proprietary intellectual property Rocket licenses from them, Rocket could lose its rights to the intellectual property or its exclusivity with respect to those rights, and its competitors could market competing products using the intellectual property. In certain cases, Rocket controls the prosecution of patents resulting from licensed technology. In the event Rocket breaches any of its obligations related to such prosecution, Rocket may incur significant liability to its licensing partners. Licensing of intellectual property is of critical importance to Rocket’s business and involves complex legal, business and scientific issues and is complicated by the rapid pace of scientific discovery in Rocket’s industry. Disputes may arise regarding intellectual property subject to a licensing agreement, including:

the scope of rights granted under the license agreement and other interpretation-related issues;

the extent to which Rocket’s technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

the sublicensing of patent and other rights under Rocket’s collaborative development relationships;

Rocket’s diligence obligations under the license agreement and what activities satisfy those diligence obligations;

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by Rocket’s licensors and Rocket and Rocket’s partners; and

the priority of invention of patented technology.

If disputes over intellectual property that Rocket has licensed prevent or impair Rocket’s ability to maintain its current licensing arrangements on acceptable terms, Rocket may be unable to successfully develop and commercialize the affected product candidates.

Rocket may be involved in lawsuits to protect or enforce its patents or the patents of its licensors, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe Rocket’s patents or the patents of Rocket’s licensors. To counter infringement or unauthorized use, Rocket may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement

46


proceeding, a court may decide that a patent of Rocket’s or Rocket’s licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that Rocket’s patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of Rocket’s patents at risk of being invalidated or interpreted narrowly and could put Rocket’s patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by Rocket may be necessary to determine the priority of inventions with respect to Rocket’s patents or patent applications or those of Rocket’s licensors. An unfavorable outcome could require Rocket to cease using the related technology or to attempt to license rights to it from the prevailing party. Rocket’s business could be harmed if the prevailing party does not offer it a license on commercially reasonable terms. Rocket’s defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract Rocket’s management and other employees. Rocket may not be able to prevent, alone or with its licensors, misappropriation of its intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of ourRocket’s confidential information could be compromised by disclosure during this type of litigation. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are resolved. Further, any claims we assert against a perceived infringerThere could provoke these parties to assert counterclaims against us alleging that we have infringed their patents. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

In addition, our patents and patent applications could face other challenges, such as interference proceedings, opposition proceedings, re-examination proceedings, and other forms of post-grant review. In the United States, for example, post-grant review has recently been expanded. Any of these challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to challenge. Any of these challenges, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert our management and scientific personnel’s time and attention.

In addition, there couldalso be public announcements of the results of hearings, motions or other interim proceedings or developments, and ifdevelopments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the market price of ourRocket’s common stock.

WePatent reform legislation could increase the uncertainties and costs surrounding the prosecution of Rocket’s patent applications and the enforcement or defense of Rocket’s issued patents.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will needbe prosecuted and may also affect patent litigation. The U.S. PTO is currently developing regulations and procedures to obtain FDA approvalgovern administration of any proposed product names,the Leahy-Smith Act, and any failure or delaymany of the substantive changes to patent law associated with such approval may adversely affect ourthe Leahy-Smith Act, and in particular, the first to file provisions, were enacted March 16, 2013. However, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of Rocket’s business.

Any name we intend to use for our product candidates will require approval from However, the FDA regardlessLeahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of whether we have secured a formal trademark registration from the USPTO. The FDA typically conducts a review of proposed product names, including an evaluation of the potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies certain medical claims or contributes to an overstatement of efficacy. If the FDA objects to any of our proposed product names, we may be required to adopt an alternative name for our product candidates. If we adopt an alternative name, we would lose the benefit of our existing trademarkRocket’s patent applications for such product candidate and may be required to expend significant additional resources in an effort to identify a suitable product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our product candidates.

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation extending the terms of our patents and obtaining data exclusivity for our product candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA regulatory approval for our product candidates, one or more of our U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The

Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. Patent term restorations, however, cannot extend the remaining termenforcement or defense of a patent beyond a totalRocket’s issued patents, all of 14 years from the date of product approval by the FDA.

The application for patent term extension is subject to approval by the USPTO, in conjunction with the FDA. It takes at least six months to obtain approval of the application for patent term extension. We may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may obtain earlier approval of competing products, and our ability to generate revenues could be materially adversely affected.

Risks Related to Our Business Operations and Industry

We will need to significantly increase the size of our organization, and we may experience difficulties in managing growth.

We are currently a small company with seventeen full-time employees as of March 22, 2016, and we outsource to consultants or other organizations a portion of our operations, including but not limited to research and development and conduct of clinical trials and certain administrative functions. In order to commercialize our product candidates, we will need to substantially increase our operations. We plan to continue to build our compliance, financial and operating infrastructure to ensure the maintenance of a well-managed company. We expect to significantly expand our employment base when we reach the full commercial stages of our current product candidates’ life cycle.

Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. In addition, to meet our obligations as a public company, we will need to increase our general and administrative capabilities. Our management, personnel and systems currently in place may not be adequate to support this future growth. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:

manage our clinical trials and the regulatory process effectively;

manage the manufacturing of product candidates and potential products for clinical and commercial use;

integrate current and additional management, administrative, financial and sales and marketing personnel;

develop a marketing and sales infrastructure;

hire new personnel necessary to effectively commercialize our product candidates;

develop our administrative, accounting and management information systems and controls; and

hire and train additional qualified personnel.

Product candidates that we may acquire or develop in the future may be intended for patient populations that are large. In order to continue development and marketing of these product candidates, if approved, we would need to significantly expand our operations. Our staff, financial resources, systems, procedures or controls may be inadequate to support our operations and our management may be unable to manage successfully future market opportunities or our relationships with customers and other third parties. In particular, we will need to build out our finance, accounting and reporting infrastructure to meet our reporting obligations as a public

company. Because we have never had this infrastructure, there may be increased risk that we will not be able to adequately meet these reporting obligations in a timely manner.

We are a clinical-stage company and it may be difficult for you to evaluate the success of our business to date and to assess our future viability.

We are a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of therapies for glaucoma. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, conducting research and developing our product candidates. We have not yet demonstrated our ability to successfully complete a pivotal Phase 3 clinical trial, obtain regulatory approval of a product candidate, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history and more experience with late stage development and commercialization of product candidates.

In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a product development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

We depend upon our key personnel and our ability to attract and retain employees.

Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees. We are highly dependent on our senior management team and our scientific founders, as well as the other principal members of our management and scientific teams. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time. The loss of the services of any member of our senior management or scientific team or the inability to hire or retain experienced management personnel could adversely affect our ability to execute our business plan and harm our operating results.

Because of the specialized scientific and managerial nature of our business, we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel. In particular, the loss of David P. Southwell, our President and Chief Executive Officer, Rudolf A. Baumgartner, M.D., our Executive Vice President and Chief Medical Officer, William K. McVicar, Ph.D., our Executive Vice President and Chief Scientific Officer or Dale Ritter, our Vice President—Finance, could be detrimental to us if we cannot recruit suitable replacements in a timely manner. We do not currently carry “key person” insurance on the lives of members of executive management. The competition for qualified personnel in the pharmaceutical field is intense. Due to this intense competition, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, or SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

If we engage in acquisitions in the future, we will incur a variety of costs and we may never realize the anticipated benefits of such acquisitions.

We may attempt to acquire companies, businesses, technologies, services, products or other product candidates in the future that we believe are a strategic fit with our business. We have no present agreement regarding any material acquisitions. However, if we do undertake any acquisitions, the process of integrating an acquired business, technology, service, product candidates or potential products into our business may result in unforeseen operating difficulties and expenditures, including diversion of resources and management’s attention from our core business. In addition, we may fail to retain key executives and employees of the companies we acquire, which may reduce the value of the acquisition or give rise to additional integration costs. Future acquisitions could result in additional issuances of equity securities that would dilute the ownership of existing stockholders. Future acquisitions could also result in the incurrence of debt, actual or contingent liabilities or the amortization of expenses related to other intangible assets, any of which could adversely affect our operating results. In addition, we may fail to realize the anticipated benefits of any acquisition.

Our business is affected by macroeconomic conditions.

Various macroeconomic factors could adversely affect our business and the results of our operations and financial condition, including changes in inflation, interest rates and foreign currency exchange rates and overall economic conditions and uncertainties, including those resulting from current and future conditions in the global financial markets. For instance, if inflation or other factors were to significantly increase our business costs, it may not be feasible to pass through price increases to patients. Interest rates, the liquidity of the credit markets and the volatility of the capital markets could also affect the value of our investments and our ability to liquidate our investments in order to fund our operations.

Interest rates and the ability to access credit markets could also adversely affect the ability of patients, payors and distributors to purchase, pay for and effectively distribute our products. Similarly, these macroeconomic factors could affect the ability of our potential future contract manufacturers, sole-source or single-source suppliers or licensees to remain in business or otherwise manufacture or supply product. Failure by any of them to remain in business could affect our ability to manufacture products.

If product liability lawsuits are successfully brought against us, our insurance may be inadequate and we may incur substantial liability.

We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates. We will face an even greater risk if we commercially sell our product candidates or any other potential products that we develop. We maintain product liability insurance with an aggregate limit of $10 million that cover our clinical trials and we plan to maintain insurance against product liability lawsuits for commercial sale of our product candidates. Historically, the potential liability associated with product liability lawsuits for pharmaceutical products has been unpredictable. Although we believe that our current insurance is a reasonable estimate of our potential liability and represents a commercially reasonable balancing of the level of coverage as compared to the cost of the insurance, we may be subject to claims in connection with our clinical trials and, in the future, commercial use of our product candidates, for which our insurance coverage may not be adequate, and the cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial.

For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of the merits or eventual outcome, liability claims may result in:

reduced resources of our management to pursue our business strategy;

decreased demand for our product candidates or potential products that we may develop;

injury to our reputation and significant negative media attention;

withdrawal of clinical trial participants;

termination of clinical trial sites or entire trial programs;

initiation of investigations by regulators;

product recalls, withdrawals or labeling, marketing or promotional restrictions;

significant costs to defend resulting litigation;

diversion of management and scientific resources from our business operations;

substantial monetary awards to trial participants or patients;

loss of revenue; and

the inability to commercialize any products that we may develop.

We will need to increase our insurance coverage if our product candidates receive marketing approval and we begin selling them. However, the product liability insurance we will need to obtain in connection with the commercial sales of our product candidates, if and when they receive regulatory approval, may be unavailable in meaningful amounts or at a reasonable cost. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, if and when they obtain regulatory approval, which could materially adversely affect our business, financial condition, results of operations, cash flows and prospects.

Additionally, we do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, employment practices liability, auto, property, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would materially adversely affect our financial position, cash flows and results of operations.

Business interruptions could delay us in the process of developing our products and could disrupt our sales.

Our headquarters is located in Lexington, Massachusetts. We are vulnerable to natural disasters, such as severe storms and other events that could disrupt our business operations. We do not carry insurance for natural disasters and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our business operations.

OurRocket’s business and operations would suffer in the event of system failures.financial condition.

Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed.

Our employees, independent contractors, principal investigators, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading, which could significantly harm our business.

We are exposed to the risk of fraud or other misconduct by employees and independent contractors, such as principal investigators, consultants, commercial partners and vendors. Misconduct by these parties could include failures to comply with the regulations of the FDA and comparable non-U.S. regulatory authorities, provide accurate information to the FDA and comparable non-U.S. regulatory authorities, comply with fraud and abuse and other healthcare laws in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and other business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws may restrict or prohibit a wide range of business activities, including, but not limited to, research, manufacturing, distribution, pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We adopted a code of ethics, but it is not always possible to identify and deter employee and other third-party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws. If any such actions are instituted against us resulting from such misconduct those actions could have a significant impact on our business, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate.

We and our development partners, third-party manufacturers and suppliers use biological materials and may use hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming or costly.

We and our development partners, third-party manufacturers and suppliers may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. Our operations and the operations of our third-party manufacturers and suppliers also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.

The availability of our common stock and securities linked to our common stock for sale in the future could reduce the market price of our common stock.

In the future, we may issue equity and equity-linked securities to raise cash for acquisitions or otherwise. We may also acquire interests in other companies by using a combination of cash and our common stock or just our common stock. We may also issue preferred stock or additional securities convertible into our common stock or preferred stock. Any of these events may dilute your ownership interest in our company and have an adverse effect on the price of our common stock.

Risks Related to Ownership of Our Common Stock

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the offering price.

Our initial public offering was completed in February 2015. Therefore, there has only been a public market for our common stock for a short period of time. Although our common stock is listed on NASDAQ. Since shares of our common stock were sold in our initial public offering in February 2015 at $6.00 per share, our closing stock price has reached a high of $19.45 and a low of $4.68 through March 22, 2016.

The trading price of our common stock is likely to continue to be volatile, and you can lose all or part of your investment in us. The following factors, in addition to other factors described in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2015, may have a significant impact on the market price of our common stock:

announcements of regulatory approval or a complete response letter, or specific label indications or patient populations for its use, or changes or delays in the regulatory review process;

announcements of therapeutic innovations or new products by us or our competitors;

adverse actions taken by regulatory agencies with respect to our clinical trials, manufacturing supply chain or sales and marketing activities;

any adverse changes to our relationship with manufacturers or suppliers;

the results of our testing and clinical trials;

the results of our efforts to acquire or license additional product candidates;

variations in the level of expenses related to our existing product candidates or preclinical and clinical development programs;

any intellectual property infringement actions in which we may become involved;

announcements concerning our competitors or the pharmaceutical industry in general;

achievement of expected product sales and profitability;

manufacture, supply or distribution shortages;

actual or anticipated fluctuations in our quarterly or annual operating results;

changes in financial estimates or recommendations by securities analysts;

trading volume of our common stock;

sales of our common stock by us, our executive officers and directors or our stockholders in the future;

sales by us of securities linked to our common stock, such as the 2020 Convertible Notes;

general economic and market conditions and overall fluctuations in the U.S. equity markets;

changes in accounting principles; and

the loss of any of our key scientific or management personnel.

In addition, the stock market, in general, and small pharmaceutical and biotechnology companies have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. Further, a significant decline in the financial markets and other related factors beyond our control may cause our stock price to decline rapidly and unexpectedly.

WeRocket may be subject to securities litigation, which is expensive and could divert management attention.

Our share price has been and may continue to be volatile, and in the past companiesclaims that its employees, consultants or independent contractors have experienced volatility in the market pricewrongfully used or disclosed confidential information of third parties or that its employees have wrongfully used or disclosed alleged trade secrets of their stock have beenformer employers.

Rocket employs individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including Rocket’s competitors or potential competitors. Although Rocket tries to ensure that its employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for Rocket, Rocket may be subject to securities class action litigation. Weclaims that Rocket or its employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of its employee’s former employer or other third parties. Litigation may be the target of this type ofnecessary to defend against these claims. If Rocket fails in defending any such claims, in addition to paying monetary damages, Rocket may lose valuable intellectual property rights or personnel, which could adversely impact Rocket’s business. Even if Rocket is successful in defending against such claims, litigation in the future. Litigation of this type could result in substantial costs and diversionbe a distraction to management and other employees.

Rocket may be subject to claims challenging the inventorship or ownership of management’s attentionits patents and resources, which could adversely impact our business. Any adverse determinationother intellectual property.

Rocket may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in litigation could also subject us to significant liabilities.

Our existing principal stockholders, executive officers and directors own a significant percentage of our common stock and will be able to exert a significant control over matters submitted to our stockholders for approval.

As of December 31, 2015, our officers and directors, and stockholders who own more than 5% of our outstanding common stock,its patents or other intellectual property. Rocket has had in the aggregate, beneficially owned approximately 71%past, and it may also have to in the future, ownership disputes arising, for example, from conflicting obligations of our common stock.

This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantagesconsultants or others who are involved in owning stock in companies with controlling stockholders. As a result, these stockholders, if they acted together, could significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. These stockholdersdeveloping Rocket’s product candidates. Litigation may be ablenecessary to determine all matters requiring stockholder approval. The interestsdefend against these and other claims challenging inventorship or ownership. If Rocket fails in defending any such claims, in addition to paying monetary damages, it may lose valuable intellectual property rights, such as exclusive ownership of, these stockholders may not always coincide with our interests or the interests of other stockholders. This may also prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock priceright to fall.

Sales of a substantial number of shares of our common stock or any of our securities linked to our common stock, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities or equity-linked securities. As of December 31, 2015, we have 26,423,394 outstanding shares of common stock, which excludes 1,631,677 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2015, at a weighted-average exercise price of $5.19 per share.

At December 31, 2015, holders ofuse, valuable intellectual property. Such an aggregate of 8.6 million shares of our common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Registration of these shares under the Securities Act of 1933, as amended, or the Securities Act, would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholdersoutcome could have a material adverse effect on the trading price of our common stock.

Rocket’s business. Even if Rocket is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

If securitiesObtaining and maintaining Rocket’s patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and Rocket’s patent protection could be reduced or industry analysts do not publish eliminated for non-compliance with these requirements.

47


Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations or publish negative reports regarding our business or our stock, our stock price and trading volume could decline.

The trading market for our common stockapplications will be influenceddue to be paid to the U.S. PTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. Rocket and, to its knowledge, its licensors have systems in place to remind them to pay these fees, and Rocket and, to its knowledge, its licensors employ outside firms and rely on their respective outside counsel to pay these fees due to non-U.S. patent agencies. The U.S. PTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. Rocket and, to its knowledge, its licensors employ reputable law firms and other professionals to help them comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the researchapplicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, Rocket’s competitors might be able to enter the market and reportsthis circumstance would have a material adverse effect on Rocket’s business.

Issued patents covering Rocket’s product candidates could be found invalid or unenforceable if challenged in court.

If Rocket or one of Rocket’s licensing partners initiated legal proceedings against a third-party to enforce a patent covering one of Rocket’s product candidates, the defendant could counterclaim that industry the patent covering Rocket’s product candidate is invalid and/or securities analysts may publish about us, our business, our market unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. Ifunenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including patent eligible subject matter, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the analysts whopatent withheld relevant information from the U.S. PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in revocation or amendment to Rocket’s or its licensing partners’ patents in such a way that they no longer cover us adversely change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price could decline.Rocket’s product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, Rocket cannot be certain that there is no invalidating prior art, of which Rocket and the patent examiner were unaware during prosecution. If any analyst who may cover usa defendant were to cease coverageprevail on a legal assertion of our company invalidity and/or fail to regularly publish reportsunenforceability, Rocket would lose at least part, and perhaps all, of the patent protection on us, weits product candidates. Such a loss of patent protection would have a material adverse impact on Rocket’s business.

Changes in U.S. patent law could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Because we do not intend to declare cash dividends on our shares of common stock in the foreseeable future, stockholders must rely on appreciation ofdiminish the value of our common stock for any returnpatents in general, thereby impairing Rocket’s ability to protect its products.

As is the case with other biotechnology companies, Rocket’s success is heavily dependent on their investment.

We currently anticipate that we will retain future earnings for the development, operationintellectual property, particularly patents. Obtaining and expansion of our business and do not anticipate declaring or paying any cash dividendsenforcing patents in the foreseeable future.biotechnology industry involve both technological and legal complexity, and therefore obtaining and enforcing biotechnology patents is costly, time-consuming and inherently uncertain. In addition, the termsUnited States has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of any future debt agreements may preclude us from paying dividends. As a result, we expect that only appreciationpatent protection available in certain circumstances and weakened the rights of the price of our common stock, if any, will provide a returnpatent owners in certain situations. In addition to holders of our common stock for the foreseeable future.

If we are unableincreasing uncertainty with regard to substantially utilize our net operating loss (“NOL”) carryforward, our financial results will be adversely affected.

As of December 31, 2015 we had federal and state net operating losses of approximately $88 million and $47 million, respectively, which may be utilized against future federal and state income taxes, respectively. In general, a corporation that undergoes an “ownership change” is subject to limitations on itsRocket’s ability to utilize its pre-change net operating losses, or NOLs,obtain patents in the future, this combination of events has created uncertainty with respect to offset future taxable income. In general, an ownershipthe value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the U.S. PTO, the laws and regulations governing patents could change occurs if the aggregate stock ownership of certain stockholders (generally 5% stockholders, applying certain look-through and aggregation rules) increases by more than fifty percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). Purchases of our common stock in amounts greater than specified levels, which are beyond our control, or prior issuances of our common stock, could create a limitation on ourunpredictable ways that would weaken Rocket’s ability to utilize our NOLs for tax purposesobtain new patents or to enforce its existing patents and patents that it might obtain in the future. Limitations imposed on our ability to utilize NOLs could cause federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Furthermore, we

Rocket may not be able to generate sufficient taxable income to utilize our NOLs before they expire. If any of these events occur, or have occurredprotect its intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and Rocket’s intellectual property rights in some countries outside the United States can be less extensive than those in the past, we may not derive some or all of the expected benefits from our NOLs. We have determined that we have experienced prior ownership changes occurring in 2005, 2007, and 2015. NOLs generated prior to these changes, although subject to an annual limitation, can be utilized in future years as well as any post change NOLs.United States. In addition, at the state level there may be periods during which the uselaws of NOLs is suspended or otherwise limited, which would accelerate or may permanently increase state taxes owed.

The requirements associated with being a public company require significant company resources and management attention.

We are subjectsome foreign countries do not protect intellectual property rights to the reporting requirements ofsame extent as federal and state laws in the Exchange Act, the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, the listing requirements of the securities exchange on which our common stock is traded and other applicable securities rules and regulations. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition and maintain effective disclosure controls and procedures and internal control over financial reporting. In addition, subsequent rules

implemented by the SEC and NASDAQ may also impose various additional requirements on public companies. As a result, we incur substantial legal, accounting and other expenses. Further, the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy. We have made, and will continue to make, changes to our corporate governance standards, disclosure controls and financial reporting and accounting systems to meet our reporting obligations. However, the measures we takeUnited States. Consequently, Rocket may not be able to prevent third parties from practicing its inventions in all countries outside the United States, or from selling or importing products made using Rocket’s inventions in and into the United States or other jurisdictions. Competitors may use Rocket’s technologies in jurisdictions where it has not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where Rocket has patent protection, but enforcement is not as strong as that in the United States. These products may compete with Rocket’s products and its patents or other intellectual property rights may not be effective or sufficient to satisfy our obligations as a public company,prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could subject usmake it difficult for Rocket to delistingstop the infringement of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

We will incur increased costs as a resultits patents or marketing of operating as a public company, and our management team will be requiredcompeting products in violation of its proprietary rights generally. Proceedings to devote substantial time to new compliance initiatives.

Now that we are a public company, and particularly after we are no longer considered an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC and The NASDAQ Stock Market have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engagedenforce Rocket’s patent rights in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude that our internal control over financial reporting is effective as required by Section 404. Thisforeign jurisdictions could result in an adverse reactionsubstantial costs and divert its efforts

48


and attention from other aspects of its business, could put its patents at risk of being invalidated or interpreted narrowly and its patent applications at risk of not issuing and could provoke third parties to assert claims against it. Rocket may not prevail in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements.

The JOBS Act will allow us to postpone the date by which we must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in our company and adversely affect the market price of our common stock.

For so long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various requirementsany lawsuits that are applicable to public companies that are not “emerging growth companies” including:

the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;

the “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers)it initiates and the “say on golden parachute” provisions (requiring a non-binding stockholder votedamages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, Rocket’s efforts to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) ofenforce its intellectual property rights around the Dodd-Frank Wall Street Reform and

Consumer Protection Act, or Dodd-Frank Act, and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of its chief executive officer;

the requirement to provide detailed compensation discussion and analysis in proxy statements and reports filed under the Exchange Act, and instead provide a reduced level of disclosure concerning executive compensation; and

any rules thatworld may be adopted byinadequate to obtain a significant commercial advantage from the Public Company Accounting Oversight Board requiring mandatory audit firm rotationintellectual property that Rocket develops or a supplement to the auditor’s report on the financial statements.

We may take advantage of these exemptions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest of: (i) December 31, 2020; (ii) the last day of the first fiscal year in which our annual gross revenues are $1 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

Although we are still evaluating the JOBS Act, we currently intend to take advantage of some, but not all, of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” For example, we have irrevocably elected under Section 107 of the JOBS Act not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile and may decline.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and our bylaws as well as provisions of the Delaware General Corporation Law, or DGCL, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:

licenses.

establishing a classified Board of Directors such that not all members of the board are elected at one time;

allowing the authorized number of our directors to be changed only by resolution of our Board of Directors;

limiting the removal of directors by the stockholders;

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

eliminating the ability of stockholders to call a special meeting of stockholders;

establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholder meetings; and

requiring the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal our bylaws.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our Board of Directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

Item 1B. Unresolved Staff Comments

None.

Item 2.

Properties

Item 2. PropertiesCorporate Headquarters

Our corporate headquarters isare located in Lexington, Massachusetts,New York, New York, and consistsconsist of approximately 15,0004,400 square feet of leased office and laboratory space under a lease that expires in July 2021.

Facility in Lexington, Massachusetts

We currently lease approximately 15,000 square feet of office space in Lexington, Massachusetts under a lease that expires in February 2023. We will require additional space and facilities as our business expands.

Item 3.

Legal Proceedings

Item 3. Legal ProceedingsOn January 6, 2017, a purported stockholder of Inotek filed a putative class action in the U.S. District Court for the District of Massachusetts, captioned Whitehead v. Inotek Pharmaceuticals Corporation, et al., No. 1:17-cv-10025. An amended complaint was filed on July 10, 2017, and a second amended complaint was filed on September 5, 2017. The second amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 against Inotek, David Southwell, and Rudolf Baumgartner based on allegedly false and misleading statements and omissions regarding its phase 2 and phase 3 clinical trials of trabodenoson. The lawsuit seeks, among other things, unspecified compensatory damages for purchasers of Inotek’s common stock between July 23, 2015 and July 10, 2017, as well as interest and attorneys’ fees and costs. The defendants filed a motion to dismiss the second amended complaint on October 6, 2017, the plaintiffs opposed the motion on December 5, 2017, and the defendants filed a reply on January 16, 2018. The Company continues to vigorously defend itself against this claim.

We are not a party to any material legal proceedings at this time. From time to time, we may be subject to other various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to any other claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures

Not applicable.

49


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

On February 18, 2015,January 4, 2018, Inotek and Private Rocket completed the Reverse Merger. Immediately prior to the Reverse Merger, Inotek completed a 1-for-4 reverse stock split. Following the Reverse Merger, we changed the name of the combined company to “Rocket Pharmaceuticals, Inc.” and changed the symbol under which our stock trades on Nasdaq to “RCKT.” Our common stock originally began trading on the Nasdaq Global Select Market on February 18, 2015 under the symbol “ITEK”. Prior to that time, there was no public market for our common stock. Shares sold in our initial public offering were priced at $6.00 per share. The following table shows the high and low closing sale prices per share of our common stock as reported on the Nasdaq Global Select Market for the period indicated:indicated, adjusted for the 1-for-4 reverse stock split:

 

2015

  High   Low 

February 18, 2015 to March 31, 2015 (First Quarter)

  $6.20    $  5.05  

2016

 

High

 

 

Low

 

First Quarter

 

$

46.36

 

 

$

24.36

 

Second Quarter

  $6.14    $4.75  

 

$

42.56

 

 

$

26.92

 

Third Quarter

  $19.45    $4.82  

 

$

39.04

 

 

$

26.56

 

Fourth Quarter

  $13.36    $9.01  

 

$

37.92

 

 

$

24.00

 

2017

 

High

 

 

Low

 

First Quarter

 

$

8.60

 

 

$

6.10

 

Second Quarter

 

$

8.80

 

 

$

6.60

 

Third Quarter

 

$

7.30

 

 

$

3.60

 

Fourth Quarter

 

$

12.12

 

 

$

7.76

 

On March 4, 2016,1, 2018, the closing price for our common stock as reported on the NASDAQNasdaq Global Market was $6.73.$16.78.

Stockholders

As of March 4, 2016,1, 2018, there were 4350 stockholders of record, which excludes stockholders whose shares were held in nominee or street name by brokers.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of our board of directors. In addition, the terms of our outstanding indebtedness restrict our ability to pay cash dividends, and any future indebtedness that we may incur could preclude us from paying cash dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends.

Securities authorizedAuthorized for issuance underIssuance Under Equity Compensation Plans

The following sets for the aggregate information of Inotek’s equity compensation plans in effect as of December 31, 2017. Inotek’s equity plans consist of the Amended and Restated 2014 Stock Option and Incentive Plan (the “2014 Plan”), the 2004 Stock Option and Incentive Plan (the “2004 Plan”), and the 2014 Employee Stock Purchase Plan (“ESPP”).

Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form 10-K.

Plan Category

 

Number of

securities to be

issued upon

exercise of

outstanding

options, warrants

and rights

 

 

Weighted-

average exercise

price of

outstanding

options, warrants

and rights

 

 

Number of

securities remaining

available for future

issuance under equity

compensation plans

(excluding securities

reflected in column

(a))

 

 

 

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans approved by security

   holders (1) (2)

 

 

795,239

 

 

$

21.40

 

 

 

269,073

 

Equity compensation plans not approved by security

   holders

 

 

 

 

 

 

 

 

 

Total

 

 

795,239

 

 

$

21.40

 

 

 

269,073

 

50


(1)

No additional awards will be made under the 2004 Plan.

(2)

Includes 271,719 restricted stock units (“RSUs”) issued and outstanding pursuant to the 2014 Plan. There is no exercise price associated with these RSUs and therefore the weighted average price of outstanding options, warrants and rights reflect only the weighted average exercise price of the 523,520 options outstanding at December 31, 2017, issued pursuant to the 2004 Plan and 2014 Plan.

Recent Sales of Unregistered Securities

Set forth below is information regarding securities sold by us during the year ended December 31, 2015 that were not registered under the Securities Act. Also included is the consideration, if any, received by us for the securities and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

We deemed the offers, sales and issuances of the 2014 Bridge Notes described above to be exempt from registration under the Securities Act, in reliance on Section 4(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder, relating to transactions by an issuer not involving a public offering. All purchasers of securities in transactions exempt from registration pursuant to Regulation D represented to us that they were accredited investors and were acquiring the shares for investment purposes only and not with a view

to, or for sale in connection with, any distribution thereof and that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or an available exemption from such registration.

We deemed the grants and exercises of stock options described above to be exempt from registration under the Securities Act in reliance on Rule 701 of the Securities Act as offers and sales of securities under compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. Each of the recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business or other relationships, to information about us.

Use of Proceeds from Registered Securities

In February 2015, we completed our (i) Initial Public Offering (the “IPO”) of 6,667,000 shares of our common stock at a price of $6.00 per share and (ii) the concurrent offering of $20.0 million aggregate principal amount of our 5.0% Convertible Senior Notes due 2020 (the “2020 Notes”). In March 2015 the underwriters purchased 299,333 shares of common stock at $6.00 per share and $1.0 million of the 2020 Notes upon exercise of their overallotment options. We received net proceeds of approximately $36.5 million, after deducting underwriting discounts and offering-related costs, from our equity issuances and approximately $18.9 million in net proceeds, after deducting underwriting discounts and offering-related costs, from our debt issuances. In July and August 2015, holders of $21,000 principal amount of the 2020 Convertible Notes elected to convert the principal into 3,333,319 shares of common stock. In addition, the Interest Make-Whole Payment (as defined in the notes to the consolidated financial statements) was settled with shares of common stock, at the election of the Company, resulting in the issuance of 530,072 additional shares of common stock. There has been no material change in the use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

In August 2015, the Company completed an underwritten public offering of its common stock (the “Follow-on Offering”). The Company issued 6,210,000 shares of its common stock at a price of $12.75 per share, including 810,000 shares from the underwriters’ full exercise of their overallotment option, and received net proceeds of $74.0 million, after deducting underwriting discounts and offering-related costs. There has been no material change in the use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).None.

Issuer Purchases of Equity Securities

There were no repurchases of shares of our common stock made during the year ended December 31, 2015.2017.

Item 6. Selected Financial Data

We derived the selected statements of operations data for the years ended December 31, 2015 and 2014 and the balance sheet data as of December 31, 2015 and 2014 from our audited financial statements appearing elsewhere in this annual report on Form 10-K.

Selected Financial Data

The following selected consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this report. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of our future results.

The financial information included in this Selected Financial Data is that of Inotek prior to the Reverse Merger, because the Reverse Merger was consummated after the period covered by the financial statements included in this Annual Report on Form 10-K. Accordingly, the historical financial information included in this Annual Report on Form 10-K, unless otherwise indicated or as the context otherwise requires, is that of Inotek and its subsidiaries prior to the Reverse Merger.

   Year Ended December 31, 
(in thousands, except share and per share data)  2015  2014 

Statements of Operations Data:

   

Operating expenses:

   

Research and development

  $(12,554 $(5,592

General and administrative

   (7,842  (2,112
  

 

 

  

 

 

 

Loss from operations

  $(20,396 $(7,704

Interest income

   89   —    

Interest expense

   (1,230  (980

Loss on extinguishment of debt

   (4,399  —    

Change in fair value of warrant liabilities

   267    (845

Change in fair value of Convertible Bridge Notes redemption rights derivative

   480    (2

Change in fair value of 2020 Convertible Bridge Notes derivative liability

   (42,793  —    
  

 

 

  

 

 

 

Net loss

  $(67,982 $(9,531
  

 

 

  

 

 

 

Net loss per common share—basic and diluted

  $(3.72 $(13.52
  

 

 

  

 

 

 

Weighted-average common shares outstanding—basic and diluted

   18,311,333    1,020,088  
  

 

 

  

 

 

 

 

   Year Ended December 31, 
(in thousands)  2015  2014 

Balance Sheet Data:

   

Cash and cash equivalents

  $80,042   $3,618  

Short-term investments

   31,238    —    

Total assets

   113,321    5,520  

Convertible notes payable

   —      1,541  

Notes payable—current portion

   —      3,063  

Notes payable, net of current portion

   —      2,550  

Warrant liabilities and convertible notes redemption rights derivative

   —      962  

Total liabilities

   4,508    10,278  

Series AA redeemable convertible preferred stock

   —      46,253  

Accumulated deficit

   (196,023  (128,041

Total stockholders’ equity (deficit)

   108,813    (51,559

 

 

For the Years Ended December 31,

 

(in thousands, except share and per share data)

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

(14,193

)

 

$

(31,985

)

 

$

(12,554

)

 

$

(5,592

)

 

$

(5,330

)

General and administrative

 

 

(12,544

)

 

 

(9,894

)

 

 

(7,842

)

 

 

(2,112

)

 

 

(1,324

)

Loss from operations

 

 

(26,737

)

 

 

(41,879

)

 

 

(20,396

)

 

 

(7,704

)

 

 

(6,654

)

Interest expense

 

 

(3,579

)

 

 

(1,418

)

 

 

(1,230

)

 

 

(980

)

 

 

(884

)

Other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Interest income

 

 

819

 

 

 

443

 

 

 

89

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(4,399

)

 

 

 

 

 

 

Change in fair value of warrant liabilities

 

 

 

 

 

 

 

 

267

 

 

 

(845

)

 

 

(81

)

Change in fair value of Convertible Bridge

     Notes redemption rights derivative

 

 

 

 

 

 

 

 

480

 

 

 

(2

)

 

 

 

Change in fair value of 2020 Convertible

     Notes derivative liability

 

 

 

 

 

 

 

 

(42,793

)

 

 

 

 

 

 

Net loss

 

$

(29,497

)

 

$

(42,854

)

 

$

(67,982

)

 

$

(9,531

)

 

$

(7,616

)

Net loss per common share—basic and diluted

 

$

(4.36

)

 

$

(6.41

)

 

$

(14.88

)

 

$

(54.08

)

 

$

(40.20

)

Weighted-average common shares

     outstanding—basic and diluted

 

 

6,765,451

 

 

 

6,683,794

 

 

 

4,577,833

 

 

 

255,022

 

 

 

254,545

 

51


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

December 31,

 

(in thousands)

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

78,720

 

 

$

29,798

 

 

$

80,042

 

 

$

3,618

 

 

$

12,793

 

Short-term investments

 

 

21,294

 

 

 

96,675

 

 

 

31,238

 

 

 

 

 

 

 

Total assets

 

 

101,778

 

 

 

129,647

 

 

 

113,321

 

 

 

5,520

 

 

 

12,863

 

Convertible notes payable

 

 

49,541

 

 

 

48,960

 

 

 

 

 

 

1,541

 

 

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

5,613

 

 

 

6,805

 

Total liabilities

 

 

54,014

 

 

 

56,479

 

 

 

4,508

 

 

 

10,278

 

 

 

10,525

 

Accumulated deficit

 

 

(268,374

)

 

 

(238,877

)

 

 

(196,023

)

 

 

(128,041

)

 

 

(118,510

)

Total stockholders’ equity (deficit)

 

 

47,764

 

 

 

73,168

 

 

 

108,813

 

 

 

(51,559

)

 

 

(38,895

)

52


Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Financial Data” and our consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K .10-K. This discussion contains forward-looking statements that involve risks and uncertainties such as our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this prospectus.Annual Report on Form 10-K.

OverviewUnless otherwise indicated, references to the terms the “combined company,” “Rocket,” the “Company,” “we,” “our” and “us” refer to Rocket Pharmaceuticals, Inc. (formerly known as Inotek Pharmaceuticals Corporation) and its subsidiaries after the reverse merger described herein. The term “Private Rocket” refers to privately-held Rocket Pharmaceuticals, Ltd. prior to its merger with Rome Merger Sub, a wholly owned subsidiary of Inotek Pharmaceuticals Corporation. The term “Inotek” refers to Inotek Pharmaceuticals Corporation and its subsidiaries prior to the reverse merger.

The financial information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is that of Inotek prior to the reverse merger because the reverse merger was consummated after the period covered by the financial statements included in this Annual Report on Form 10-K. Accordingly, the historical financial information included in this Annual Report on Form 10-K, unless otherwise indicated or as the context otherwise requires, is that of Inotek and its subsidiaries prior to the reverse merger.

Introduction

We are a multi-platform biotechnology company focused on the development of first-in-class gene therapies for rare and devastating pediatric diseases. We have two LVV programs currently undergoing clinical trials targeting Fanconi Anemia (“FA”), a genetic defect in the bone marrow that reduces production of blood cells, and three additional LVV programs targeting other rare genetic diseases, two of which we expect to file a rolling IMPD for in the next 12 months. In addition, we have an AAV program for which we expect to file an IND application in the next 12 months, which will permit the commencement of human clinical studies shortly thereafter. We have full global commercialization and development rights to all of our product candidates under royalty-bearing license agreements, with the exception of the CRISPR/Cas9 development program for which we currently have development rights.

Our two leading LVV and AAV technology platforms are each being designed in collaboration with leading academic and industry partners. Through our gene therapy platforms, we aim to restore normal cellular function by modifying the defective genes that cause each of the targeted disorders.

Recent Developments

On January 4, 2018, Inotek and Private Rocket completed a business combination in accordance with the terms of the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated as of September 12, 2017, by and among Inotek, Rome Merger Sub, a wholly owned subsidiary of Inotek (“Merger Sub”), and Private Rocket, pursuant to which Merger Sub merged with and into Private Rocket, with Private Rocket surviving as a wholly owned subsidiary of Inotek. This transaction is referred to as the “Reverse Merger.”

Immediately prior to the Reverse Merger, on January 4, 2018, Inotek effected a 1-for-4 reverse stock split on its issued and outstanding common stock. Upon the closing of the Reverse Merger, each outstanding share of Private Rocket’s common stock converted into approximately 76.185 shares of Inotek’s common stock. In addition, each outstanding option to purchase Private Rocket’s stock options prior to the effective time of the Reverse Merger was converted into an option to purchase Inotek’s common stock. No fractional shares of Inotek’s common stock were issued in connection with the Reverse Merger.  Instead, Private Rocket’s stockholders received cash in lieu of any fractional shares of Rocket’s common stock such stockholders would have otherwise been entitled to receive in accordance with the Merger Agreement.  Immediately following the Reverse Merger, the combined company changed its name from “Inotek Pharmaceuticals Corporation” to “Rocket Pharmaceuticals, Inc.” The Reverse Merger will be accounted for as a reverse merger under the acquisition method of accounting. After reviewing the relative voting rights, the composition of the board of directors and the composition of senior management of the combined company after the Reverse Merger, it was determined that Private Rocket will be treated as the accounting acquirer and Inotek will be treated as the “acquired” company for financial reporting purposes under the acquisition method of accounting. (Also see Notes 1 and 12 in the accompanying notes to consolidated financial statements.)

Inotek Overview

Prior to the Reverse Merger, Inotek was a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of therapies for ocular diseases, including glaucoma. Glaucoma is a diseaseAfter failing to meet the primary endpoints in its first pivotal

53


Phase 3 trial of the eye that is typically characterized by structural evidencetrabodenoson monotherapy (“MATrX-1”) and its Phase 2 trial of optic nerve damage, vision loss and consistently elevated intraocular pressure (“IOP”). Our lead product candidate,trabodenoson, is a first-in-class selective adenosine mimetic that we rationally designed to lower IOP by restoring the eye’s natural pressure control mechanism. Our product pipeline includestrabodenoson monotherapy delivered in an eye drop formulation, as well as a fixed-dose combination therapy with latanoprost(“FDC”)

oftrabodenoson withlatanoprost, a prostaglandin analogue (“PGA”), given once-daily. Our completed Phase 2 trial oftrabodenosonco-administered withlatanoprost demonstrated IOP-lowering in patients who have previously had inadequate response tolatanoprost. These patients represent PGA poor-responders, as evidenced by persistently elevated IOP at levels that typically require the addition of a second drug to further lower IOP.

We had an End-of-Phase 2 meeting with the U.S. Food and Drug Administration (“FDA”) in the first half of 2015 to discuss our Phase 3 program fortrabodenoson monotherapy and to confirm the design and endpoints for the Phase 3 pivotal trials. Our End-of-Phase 2 meeting was a critical milestone for advancing theInotek voluntarily discontinued its development oftrabodenoson. At in 2017.

In September 2017, in order to reduce operating expenses and conserve cash resources, Inotek entered into separation agreements with ten of its employees. Pursuant to the meeting, we reached agreement on the design of our initial Phase 3 trial, as well as the overall regulatory path fortrabodenoson. For our first Phase 3 trial, weseparation agreements, Inotek agreed to three dosesprovide severance payments and continued medical, dental and vision coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act oftrabodenoson, 1000 mcg once daily, 1500 mcg twice daily, and 2000 mcg once daily, to be tested against placebo as 1986 (“COBRA”) (of the primary comparator for statistical purposes. Dosing of patients in this trial fortrabodenoson monotherapy commenced in October 2015.

In February 2015, we completed our initial public offering (the “IPO”) of (i) 6,667,000 shares of common stock at a price of $6.00 per share and (ii) $20.0 million aggregate principal amount of 5.0% Convertible Senior Notes due 2020 (the “2020 Convertible Notes”). In March 2015 the underwriters purchased 299,333 shares of common stock at $6.00 per share and $1.0 millionemployer’s portion of the 2020 Convertible Notes pursuantpremium cost) for up to exercisessix months, primarily depending on duration of their overallotment options. We received net proceedseach individual employee’s service. Inotek recorded a charge to operations for an aggregate of $36.5 million after deducting underwriting discounts$748 in 2017 for these terminations, of which $711 and offering-related costs, from our equity issuances$37 was reflected in research and $18.9 million in net proceeds, after deducting underwriting discountsdevelopment and offering-related costs, from our debt issuances (Seegeneral and administrative expenses, respectively (see Note 58 in the accompanying notes to the consolidated financial statements). Prior to this we funded our operations primarily through the sale of preferred stock and issuance of convertible promissory notes and notes payable. In connection with the IPO, all of our outstanding 25,949,333 shares of Series AA and Series X preferred stock, including all accrued and unpaid dividends thereon, automatically converted into 8,002,650 shares of common stock.

In July and August 2015, the $21.0 million principal amountaddition, for each of the 2020 Convertible Notes fully converted into 3,863,391 sharesten terminated employees, Inotek accelerated the vesting of commonall unvested Restricted Stock Units and stock options held by the employee and recorded an incremental charge of $158 in 2017, of which $142 and $16 was reflected in research and development and general and administrative expenses, respectively (see Note 58 in the accompanying notes to the consolidated financial statements).

Historically, Inotek devoted substantially all of its resources to research and development efforts relating to its product candidates, including conducting clinical trials, providing general and administrative support for these operations and protecting its intellectual property. Inotek did not have any products approved for sale and did not generate any revenue from product sales or other sources. From Inotek’s inception through December 31, 2017, it funded its operations primarily through the sales of equity and debt securities. In February 2015, Inotek completed an initial public offering (“IPO”) of its common stock and a concurrent offering of convertible senior notes, raising an aggregate of $55.5 million in net proceeds. In August 2015, weInotek completed an underwritten publica follow-on offering of ourits common stock, (the “Follow-on Offering”). We issued 6,210,000 shares of common stock at a price of $12.75 per share, including 810,000 shares from the underwriters’ full exercise of their overallotment option, and received net proceedsraising an aggregate of $74.0 million after deducting underwriting discounts and offering-related costs.in net proceeds. In August 2016, Inotek completed a second offering of convertible senior notes, raising an aggregate of $48.7 million in net proceeds.

Inotek incurred net losses in each year since its inception. As of December 31, 2015, we2017, Inotek had an accumulated deficit of $196.0$268.4 million and cash and cash equivalents and short-term investments aggregating $111.3$100.0 million. We estimate we have sufficient funding

Financial Overview

Research and Development Expenses

Prior to sustain operations through 2017. See “Liquidity and Capital Resources.”

Since our inception on July 7, 1999, we have devoted substantially allthe suspension of our resources to business planning, raising capital, productfurther research and development applying for and obtaining government and private grants, recruiting management, research and technical staff and other personnel, acquiring operating assets, and undertaking preclinical studies and clinical trials of our lead product candidates.

We have not completed development of any product candidate and we have therefore not generated any revenues from product sales. Prior to 2012, we generated revenues primarily from research grants received from governmental agencies and private companies as well as revenue earned under licensing and research collaboration contracts. All previously recognized revenue was unrelated to our current development efforts focused on our lead product candidate,trabodenoson,for the treatment of glaucoma and other diseases of the eye.

Factors Affecting our Results of Operations

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we continue to invest inInotek’s research and development and continue our Phase 3 program oftrabodenoson, which we commenced in October 2015. We also expect our expenses to increase as we complete formulation and manufacturing activities of our FDC product candidate which is expected to commence clinical trials in 2016. In addition, if we successfully launchtrabodenoson as a monotherapy or any other product candidates, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution of our products.

Furthermore, we expect to incur additional costs associated with operating as a public company. Operating expenses have increased substantially to support our increased infrastructure and expanded operations. Accordingly, we will need to obtain additional funding in connection with our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any potential future commercialization efforts. We will need to generate significant revenues to achieve profitability, and we may never do so. As a result, we expect to incur significant expenses and increasing operating losses for the foreseeable future.

Financial Overview

Revenue

We have not generated any revenue from product sales since our inception and do not expect to generate any revenue from the sale of products in the near future. Our ability to generate revenues will depend on the successful development, regulatory approval and commercialization oftrabodenoson and any other future product candidates. Historically, we generated revenues primarily from research grants received from governmental agencies and private companies as well as revenue earned under licensing and research collaboration contracts that were unrelated to our current research and development programs.

Research and Development Expenses

Research and development expenses consistconsisted primarily of the costs associated with ourits research and development activities, conducting preclinical studies and clinical trials and activities related to regulatory filings. OurInotek’s research and development expenses consistconsisted of:

direct clinical and non-clinical expenses which include expenses incurred under agreements with contract research organizations (“CROs”), contract manufacturing organizations, clinical sites and costs associated with preclinical activities and development activities and costs associated with regulatory activities;

employee and consultant-related expenses, including compensation, benefits, travel and stock-based compensation expense for research and development personnel as well as consultants that conduct and support clinical trials and preclinical studies; and

facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in research and development activities.

We expenseInotek recognized research and development costs as incurred. We recordincurred and recorded costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or other information our vendors provide to us.

provided by its vendors.

54


The following table summarizes ourInotek’s research and development expenses by type of activity for the yearstwelve months ended December 31, 20152017 and 2014:2016 :

 

  Year Ended
December 31,
 

 

For the Years Ended December 31,

 

(in thousands)  2015   2014 

 

2017

 

 

2016

 

Trabodenoson—direct clinical and non-clinical

  $8,653    $4,383  

 

$

8,269

 

 

$

22,598

 

Personnel and other expenses:

    

 

 

 

 

 

 

 

 

Employee and consultant-related expenses

   3,483     1,075  

 

 

4,777

 

 

 

7,763

 

Target validation expenses

 

 

614

 

 

 

802

 

Facility expenses

   336     121  

 

 

418

 

 

 

533

 

Other expenses

   82     13  

 

 

115

 

 

 

289

 

  

 

   

 

 

Total personnel and other expenses

   3,901     1,209  

 

 

5,924

 

 

 

9,387

 

  

 

   

 

 

Total research and development expenses

  $12,554    $5,592  

 

$

14,193

 

 

$

31,985

 

  

 

   

 

 

All research and development efforts and expenses for the years ended December 31, 2015 and 2014 relate to the development oftrabodenoson. We do

Inotek does not tracktrabodenoson-related expenses by product candidate. All expenses related totrabodenoson as a monotherapy also benefitbenefited the FDC product candidatetrabodenoson withlatanoprost. We haveInotek has expended approximately $50$83 million for external development costs related totrabodenoson from inception through December 31, 2015.2017. No further trabodenoson-related development expenses are expected due to Inotek’s decision to voluntarily discontinue further research and development of trabodenoson.

Private Rocket Research and Development Expenses

Private Rocket’s research and development costs include salaries and staff costs, licensing costs, regulatory and scientific consulting fees, as well as contract research, and share-based compensation expense.  Private Rocket does not currently have any commercial biopharmaceutical products and does not expect to have any for several years, if at all. Accordingly, research and development costs are expensed as incurred. While certain of Private Rocket’s research and development costs may have future benefits, the policy of expensing all research and development expenditures is predicated on the fact that the Company has no history of successful commercialization of product candidates to base any estimate of the number of future periods that would be benefited.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time consuming and the successful development of our product candidates is highly uncertain. Our future research and development expenses will depend on the clinical success of our product candidates, as well as ongoing assessments of the commercial potential of such product candidates. In addition, we cannot forecast with any degree of certainty which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect our research and development expenses to increase in future periods for the foreseeable future as we seek to complete development of our lead product candidate,trabodenoson, further develop our other product candidates and expand our research and development personnel to focus on these product candidate development activities.candidates.

The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

the scope, progress, outcome and costs of our clinical trials and other research and development activities;

the efficacy and potential advantages of our product candidates compared to alternative treatments, including any standard of care;

the market acceptance of our product candidates;

obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

significant and changing government regulation; and

the timing, receipt and terms of any marketing approvals.

A change in the outcome of any of these variables with respect to the development oftrabodenoson or any other our product candidatecandidates that we may develop could mean a significant change in the costs and timing associated with the development of thatour product candidate.candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate for the completion of clinical development oftrabodenoson or any otherof our product candidatecandidates that we may develop or if we

experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

55


General and Administrative Expenses

General and administrative expenses consistconsisted of salaries and related benefit costs, including stock-based compensation for administrative personnel. Other significant general and administrative expenses include professional fees for legal, patents, consulting, investor and public relations, auditing and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in general and administrative activities. In 2017, included in general and administrative expenses were approximately $2.3 million of costs related to the Reverse Merger.

Private Rocket General and Administrative Expenses

Private Rocket’s general and administrative expenses consist of salaries and related benefit costs, including stock-based compensation for administrative personnel. In addition, other significant general and administrative expenses include professional fees for legal, patents, consulting, investor and public relations, auditing and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in general and administrative activities.  We anticipate that our general and administrative expenses will increase in future periods to support increases in our research and development activities and as a result of increased headcount, increased stock-based compensation charges, expanded infrastructure, increased costs for insurance, and increased legal, compliance, accounting and investor and public relations expenses associated with being a public company.

Interest Expense

Interest expense consists primarily of interest on our 2020related to Inotek’s 2021 Convertible Notes, notes payable, convertible promissory notes, amortization of loan discounts as well as interest calculated based on the amortization of the beneficial conversion feature of the convertible promissory notes. In February 2015, we repaid our borrowings under our existing notes payable agreements with Horizon Technology Finance Corporation and Fortress Credit Co. LLC with the proceeds from our IPO and the convertible promissory notes converted into common stock pursuant to the IPO. In July andwhich are due in August of 2015 our 2020 Convertible Notes fully converted into common stock.2021.

Interest Income

Interest income relatesrelated to interest earned from invested funds.

Results of Operations

Comparison of the Years Ended December 31, 20152017 and 20142016

The following table summarizes theInotek’s results of our operations for the years ended December 31, 20152017 and 2014:2016:

 

 

For the Years Ended December 31,

 

 

Increase

 

  Year Ended
December 31,
   Increase
(Decrease)
 
  2015   2014   

(in thousands)

 

2017

 

 

2016

 

 

(Decrease)

 

Operating expenses:

      

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

  $(12,554  $(5,592  $6,962  

 

$

(14,193

)

 

$

(31,985

)

 

$

(17,792

)

General and administrative

   (7,842   (2,112   5,730  

 

 

(12,544

)

 

 

(9,894

)

 

 

2,650

 

  

 

   

 

   

 

 

Total operating expenses

  $(20,396   (7,704  $12,692  

Loss from operations

 

 

(26,737

)

 

 

(41,879

)

 

 

(15,142

)

Interest expense

   (1,230   (980   250  

 

 

(3,579

)

 

 

(1,418

)

 

 

2,161

 

Interest income

   89     —       (89

 

 

819

 

 

 

443

 

 

 

(376

)

Loss on extinguishment of debt

   (4,399   —       4,399  

Change in fair value of warrant liabilities

   267     (847   (1,114

Change in fair value of derivative liabilities

   (42,313   —       42,313  
  

 

   

 

   

 

 

Net loss

  $(67,982  $(9,531  $58,451  

 

$

(29,497

)

 

$

(42,854

)

 

$

(13,357

)

  

 

   

 

   

 

 

Research and development expensesLoss from operations

Research and development expenses increased $7.0Loss from operations decreased $15.1 million to $12.6$26.7 million for the year ended December 31, 2015, from $5.62017, as compared to $41.9 million for the year ended December 31, 2014. This increase was2016, and related primarily to higher pre-clinicalthe $17.8 million decrease in research and development expenses of $4.7 million primarily relateddue to work preparing drug product for ourtrabodenoson clinical trials, along with ongoing pre-clinical studies, higher payroll-related and stock-based compensation expense of $1.9 million related to increased staffing and higher consulting expenses of $0.6 million. This increase wasreduced development activities partially offset by a $0.3the $2.6 million net reductionincrease in direct clinical trialgeneral and administration expenses as a result ofprimarily resulting from costs related to the completion of our Phase 2 trial in October 2014 over increased costs of our Phase 3 trial that commenced in October 2015.Reverse Merger.

GeneralResearch and administrativedevelopment expenses

GeneralResearch and administrativedevelopment expenses increased $5.7decreased $17.8 million to $7.8$14.2 million for the year ended December 31, 2015,2017, as compared to $2.1$32.0 million for the year ended December 31, 2014. This increase included $1.62016. Clinical trial expenses decreased $9.9 million primarily due to the completion of Inotek’s MATrX-1 trial in stock-based compensationearly 2017. As a result of whichthe failure of the MATrX-1 and the Phase 2 FDC clinical trials with trabodenoson to meet their primary endpoints, Inotek ceased preclinical activities resulting in a $5.1 million decrease in preclinical expenses and eliminated consultants resulting in a $1.0 million relateddecrease in consulting fees. Additionally, employee-related expenses decreased $1.9 million due to the eliminationreduction of the our repurchase rightsheadcount.

56


General and final vesting related to the Series X preferred shares held by our former CEOadministrative expenses

General and CFO pursuant to our IPO. The remaining increase was due primarily to higher compensation-relatedadministrative expenses of $2.0 million primarily related to increased staffing, including our current CEO and VP of Finance, higher insurance expenses and other public-company related expenses of $0.9 million, higher professional fees of $0.7 million, and higher consulting fees of $0.3 million.

Interest expense

Interest expense increased $0.2$2.6 million to $1.2$12.5 million for the year ended December 31, 2015,2017, as compared to $1.0$9.9 million for the year ended December 31, 2014. Interest expense2016. This increase primarily reflects $2.3 million of expenses related to the Reverse Merger. Increased stock-based compensation of $1.2 million, primarily due to option modifications in 2015 was comprised2017, and increased legal costs of $1.0$0.7 million, for coupon interest and amortization of debt discount and deferred financing costsprimarily related to our 2020 Convertible Notes, $0.1D&O suit defense costs, were offset primarily by decreased consulting costs of $0.8 million, relateddecreased employee-related costs due to our Convertible Bridge Notesreduced headcount and $0.1recruiting expenses of $0.6 million related to our notes payable. Interest expense in 2014 related primarily to our Notes Payable.

Loss on extinguishment of debt

The loss on extinguishment of debt of $4.4 million in the year ended December 31, 2015, consisted of $3.7 million related to the July and August 2015 conversion of all of the 2020 Convertible Notes into common stock (see Note 5 in the accompanying notes to the financial statements), and $0.7 million, comprised of $0.4 million of unamortized debt discount and issuance costs related to our Convertible Bridge Notes and $0.3 million related to unamortized debt discount and issuance costs and prepayment fees related to our Notes Payable.

Change in fair value of warrant liabilities

Change in fair value of warrant liabilities for the year ended December 31, 2015, was a gainreduced outside services of $0.3 million primarily related to a decrease in our warrant liabilities related to warrants to purchase shares of Series AA Preferred Stock that became warrants to purchase shares of common stock upon our IPO. The $0.8 million loss in the year ended December 31, 2014, related to an increase in the value of the warrant liabilities related to our Series AA Preferred Stock.reduced investor relations and business development activities.

Change in fair value of derivative liabilitiesInterest expense

Change in fair value of derivative liabilities for the year ended December 31, 2015, was a net loss of $42.3 million. We recorded a loss of $42.8 million in the year ended December 31, 2015, related to the final mark-to market of the 2020 Convertible Notes derivative liability in connection with the July and August 2015 full conversion of the 2020 Convertible Notes into common stock (see Note 5 in the accompanying notes to the financial statements), and a gain of $0.5 million related to the decrease in the value of the Convertible Bridge Notes redemption rights derivative.

Comparison of the Years Ended December 31, 2014 and 2013

The following table summarizes the results of our operations for the years ended December 31, 2014 and 2013:

   Year Ended
December 31,
   Increase
(Decrease)
 
(in thousands)  2014   2013   

Operating expenses:

      

Research and development

  $(5,592  $(5,330  $262  

General and administrative

   (2,112   (1,324   788  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

   (7,704   (6,654   1,050  

Interest expense

   (980   (884   96  

Interest income

   —       3     3  

Loss on extinguishment of debt

   —       —       —    

Change in fair value of warrant liabilities

   (847   (81   766  

Change in fair value of derivative liabilities

   —       —       —    
  

 

 

   

 

 

   

 

 

 

Net loss

  $(9,531  $(7,616  $1,915  
  

 

 

   

 

 

   

 

 

 

Research and development expenses

Research and development expensesInterest expense increased by $0.3$2.2 million to $5.6$3.6 million for the year ended December 31, 2014,2017, as compared to $5.3$1.4 million for the year ended December 31, 2013. The increase resulted primarily from higher CRO2016. Interest expense consists of coupon interest and other direct clinical trial expensesamortization of debt issuance costs related to the Phase 2 trial oftrabodenosonFDC, forInotek’s 2021 Convertible Notes which we received top line resultswere issued in October 2014. This increase was partially offset by decreasesAugust 2016 and which are due in expenses related to manufacturing and testing of the active pharmaceutical ingredient needed to conduct the Phase 2 trial, as well as decreases in expenses related to consultants and stock-based compensation for research development personnel.

General and administrative expenses

General and administrative expenses increased $0.8 million, to $2.1 million, for the yearAugust 2021. The twelve months ended December 31, 2014, as compared to $1.3 million for2017 reflect a full year of interest expense, whereas the yeartwelve months ended December 31, 2013. Included in the2016 reflect a partial year ended December 31, 2013 is approximately $0.8 million of executive severance and payroll-related costs that are related to the termination of our former CEO and CFO in May 2013 as well as a reversal of approximately $0.3 million of stock based compensation also related to these terminations. This decrease of $0.5 million was offset by higher outside consultant expenses of $0.5 million related primarily to financial and accounting support, payroll-related expenses of $0.4 million related to the hiring of our CEO and VP of Finance, higher travel, professional fees and other expenses of $0.3 million in support of our initial public offering and stock-based compensation of $0.2 million related to the 2014 option grants.

Interest expenseinterest expense.

Interest expenseincome

Interest income increased $0.1 million, to $1.0 million, for the year ended December 31, 2014, as compared to $0.9 million for the year ended December 31, 2013. The majority of interest expense, both coupon and discount amortization, for the year ended December 31, 2014, was related to the notes payable that we issued to two financial entities in June 2013. In addition, interest expense was recorded on the 2014 Bridge Notes issued in December 2014. Interest expense for the year ended December 31, 2013 includes approximately $0.4 million related to our convertible promissory notes which converted to equity in June 2013 plus approximately $0.5 million of both coupon and discount amortization related to the notes payable that we issued to two financial entities in June 2013.

Change in fair value of warrant liabilities

Change in fair value of warrant liabilities increased $0.8 million to $0.8 million for the year ended December 31, 2014,2017, as compared to a $0.1$0.4 million for the year ended December 31, 2013. The2016. As average invested balances remained essentially the same in 2017 and 2016, this increase resulted primarily from the noncash expense related to changes in the fair value of our warrant liabilities arising from the warrants to purchase shares of Series AA Preferred Stock.reflects higher interest rates.

Liquidity and Capital Resources

Since inception, we haveInotek has incurred accumulated net losses and negative cash flows from our operations. Weits operations each year since inception. Inotek incurred net losses of  $68.0$29.5 million and  $9.5$42.9 million for the years ended December 31, 20152017 and 2014,2016, respectively. OurInotek’s operating activities used $17.4$26.1  million and  $9.7$37.3 million of cash during the years ended December 201531, 2017 and 2014,2016, respectively. Since Inotek’s inception through December 31, 2017, Inotek funded its operations primarily through the sale of its equity and debt securities. As of December 31, 2015, the Company2017, Inotek had  $111.3$100.0 million of cash and cash equivalents and short term securities.short-term investments.

In August 2015, we completed the Follow-on Offering, issuing 6,210,000 shares of our common stock resulting in aggregate net proceeds to us of approximately $74.0 million.

In July and August 2015, holders of $21.0 million principal amount of our 2020 Convertible Notes elected to convert the principal into 3,333,319 shares of common stock. In addition, the Interest Make-Whole Payment was settled with shares of common stock, at our election, resulting in the issuance of 530,072 additional shares of common stock. As a result of these conversions, we no longer have an obligation to repay the principal or make cash interest payments on the 2020 Convertible Notes.

In February 2015, we completed our IPO and concurrent note offering and in March 2015, the underwriters exercised common stock and notes overallotment options resulting in aggregate net proceeds to us of approximately $55.4 million.

In December 2014, we sold an aggregate of $2.0 million of the Convertible Bridge Notes. In addition to other terms, the Convertible Bridge Notes had a maturity of June 30, 2015, accrued interest at the rate of 8% per annum and were subordinate to all other senior indebtedness. Upon the closing of our IPO, the Convertible Bridge Notes, including accrued interest, automatically converted into 337,932 shares of our common stock.

On June 28, 2013, we entered into notes payable agreements with two financial entities pursuant to which we issued a $3.5 million note to each lender and received net proceeds of $6.9 million. The notes bore interest at a rate of 11.0% per annum and had a maturity date of October 1, 2016. In February 2015, we paid the lenders with proceeds from our IPO, a total of $5.7 million, which included $5.3 million for the remaining principal and $0.4 million for end of term and prepayment amounts and accrued interest. These notes payable agreements were then terminated. The following table summarizes ourInotek’s sources and uses of cash for each of the periods presented:

 

  Year Ended
December 31,
 

 

For the Years Ended December 31,

 

(in thousands)  2015   2014 

 

2017

 

 

2016

 

Cash used in operating activities

  $(17,416  $(9,743

 

$

(26,112

)

 

$

(37,266

)

Cash used in investing activities

   (31,675   —   

Cash provided by (used in) investing activities

 

 

75,015

 

 

 

(66,059

)

Cash provided by financing activities

   125,515     568  

 

 

19

 

 

 

53,081

 

  

 

   

 

 

Net increase (decrease) in cash and equivalents

  $76,424    $(9,175

 

$

48,922

 

 

$

(50,244

)

  

 

   

 

 

Net cash used in operating activities

Net cash used in operating activities was  $17.4$26.1 million for the year ended December 31, 20152017, and $9.7principally resulted from Inotek’s net loss of  $29.5 million and a $2.0 million net decrease in operating assets and liabilities, partially offset by $4.0 million in noncash stock-based compensation.

Net cash used in operating activities was  $37.3 million for the year ended December 31, 2014. Net cash used in operating activities for the year ended

December 31, 20152016, and principally resulted from ourInotek’s net loss of  $68.0$42.9 million, increases of prepaid expenses and other assets of $1.3 million and decreases in non-cash expenses related changes in fair value of warrant liabilities and Convertible Bridge Notes redemption rights derivative of $0.7 million. These amounts were partially offset by increases$2.9 million in non-cash expenses related to changes in the fair value of our 2020 Convertible Notes derivative liability of $42.8 million, loss on extinguishment of debt of $4.2 million,noncash stock-based compensation of $2.4and a $2.1 million increasesnet increase in accounts payablesoperating assets and accrued expenses of $1.9 million and non-cash interest expense of $1.1 million. liabilities.

Net cash used in operatingprovided by (used in) investing activities

Net cash provided by investing activities was  $75.0 million for the year ended December 31, 2014 principally resulted2017, and related primarily to $102.3 million of proceeds from our net lossthe maturity of $9.5 million and increased prepaid expenses and other assets primarily related to $1.8 million in deferred public offering costs. These amounts wereshort-term investments, partially offset by increases in non-cash expenses related to changes in the fair valuepurchase of our warrant liabilities$27.2 million of $0.8 million, increases in accounts payables and accrued expenses of $0.3 million, non-cash interest expenses of $0.2 million as well as non-cash stock-based compensation expense of $0.2 million.

Net cash used in investing activitiesshort-term investments.

Net cash used in investing activities was  $31.7$66.1 million for the year ended December 31, 2015,2016, and related primarily to the purchase of $33.7$122.3 million of short-term investments, $2.4$56.7 million of proceeds from the maturity of short-term investments, and $0.4$0.5 million of purchases of property and equipment.

57


Net cash provided by financing activities

Net cash provided by financing activities was  $125.5$53.1 million for the year ended December 31, 2015, 2016, and primarily reflects the net proceeds of $48.7 million from (i)the issuance of Inotek’s 2021 Convertible Notes and net proceeds of $4.0 million from the issuance of common stock pursuant to Inotek’s ATM.

Private Rocket’s Liquidity and Capital Resources

Private Rocket has not generated any revenue and has incurred losses since inception. Operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of drug candidate development, technological uncertainty, uncertainty regarding patents and proprietary rights, having no commercial manufacturing experience, marketing or sales capability or experience, dependency on key personnel, compliance with government regulations and the need to obtain additional financing. Drug candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance-reporting capabilities.

The Company’s drug candidates are in our IPOthe development stage. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of $38.1 million, (ii) our offeringrapid change in technology and substantial competition from pharmaceutical and biotechnology companies.

Private Rocket has experienced negative cash flows and had an accumulated deficit of 2020 Convertible Notes of $19.1$31.3 million and (iii)$11.7 million as of December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, Private Rocket had $18.1 million and $9.5 million of cash on hand, respectively. On January 26, 2018, the issuancecombined company closed a public offering of common stock and received net proceeds of approximately $78.8 million (See Note 12 in the Follow-on Offering of $74.0 million. These net proceeds from our common stock and 2020 Convertible Notes in 2015 do not reflect an aggregate of $1.8 million of IPO-related costs incurred in 2014. Additionally, in 2015, we made $5.8 million of payments relatedaccompanying notes to the principal and terminationconsolidated financial statements). Rocket expects that cash on hand as of our notes payable. Net cash provided by financing activities was $0.6 million for the year ended December 31, 2014 and reflects2017 plus the net proceeds of $78.8 million received from issuancethe public offering will be sufficient to fund its operating expenses and capital expenditure requirements through at least March 2019. The future viability of our $2.0 million convertible notes partially offset by principal paymentsthe combined company is dependent on our notes payable of $1.4 million.its ability to generate cash from operating activities or to raise additional capital to finance its operations. The combined company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.

Operating Capital Requirements

To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one of our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Since the closing of our IPO in February 2015, we are incurring additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing and manufacturing. Accordingly, we anticipate that we will need substantial additional funding in connection with our continuing operations.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we are able to raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could cause potential dilution. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or research programs or to grant licenses on terms that

may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

58


Contractual Obligations and Commitments

The following summarizes ourInotek’s significant contractual obligations as of December 31, 2015:2017:

 

(in thousands)  Total   Less than
1 year
   1 to 3
years
   3 to 5
years
   More
than
5 years
 

 

Total

 

 

Less than

1 year

 

 

1 to 3

years

 

 

3 to 5

years

 

 

More than

5 years

 

Operating lease obligations (1)

  $2,122    $209    $587    $620    $706  
  

 

   

 

   

 

   

 

   

 

 

Operating facilities lease (1)

 

$

2,220

 

 

$

411

 

 

$

850

 

 

$

885

 

 

$

74

 

2021 Convertible Notes (2)

 

 

63,960

 

 

 

2,990

 

 

 

5,980

 

 

 

54,990

 

 

 

-

 

Total

  $2,122    $209    $587    $620    $706  

 

$

66,180

 

 

$

3,401

 

 

$

6,830

 

 

$

55,875

 

 

$

74

 

  

 

   

 

   

 

   

 

   

 

 

 

(1)

In May 2015, weInotek entered into a lease agreement for our new headquarters in Lexington, Massachusetts. WeInotek occupied this space in September 2015 and the lease term commenced in the same month. In February 2016, weInotek amended this lease by leasing an additional 3,888 square feet which we expect to occupyit then occupied in July 2016.2016, and the lease term commenced in the same month.

(2)

Amounts represent principal and interest on Inotek’s 2021 Convertible Notes.

We enterInotek entered into contracts in the normal course of business with CROs and contract manufacturers to assist in the performance of ourits research and development activities and other services and products for operating purposes. To the extent that theseThese contracts generally provide for termination on notice, and therefore are cancelable contracts theyand are not included in the table of contractual obligations and commitments.

Off-Balance Sheet Arrangements

WeInotek did not have during the periods presented, and we dodoes not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations. We had cash and cash equivalents of $111.3 million at December 31, 2015, consisting of funds in operating cash accounts, money market and short-term securities. The primary objective of our investment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of our investment portfolio, we do not believe an immediate 1.0% increase in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect a sudden change in market interest rates to affect materially our operating results or cash flows.

JOBS Act

Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012 or the JOBS Act,(the “JOBS Act”), an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as a result, we will adopt new or revised accounting standards at the same time as other public companies that are not emerging growth companies. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an emerging growth company, we are exempt from Sections 14A(a) and (b) of the Exchange Act which would otherwise require us to (i) submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “golden parachutes” and (ii) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our Chief Executive Officer’s

compensation to our median employee compensation. We also intend to rely on an exemption from the rule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and the rule requiring us to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board or PCAOB,(“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements as the auditor discussion and analysis. We will continue to remain an “emerging growth company” until the earliest of the following: December 31, 2020; the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1$1.07 billion; the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Critical Accounting Policies and Estimates

Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:

CROs in connection with performing research and development services on our behalf;

investigative sites or other providers in connection with clinical trials;

59


vendors in connection with non-clinical development activities; and

vendors related to product manufacturing, development and distribution of clinical supplies.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage non-clinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting expenses that are too high or too low in any particular period.

Fair Value Measurements

We are required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. Accounting Standard Codification or ASC,(“ASC”) Topic 820, Fair Value Measurements and Disclosures, establishes a hierarchy of inputs used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of our company. Unobservable inputs are inputs that reflect our

assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;

Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly;

Level 3—Valuations that require inputs that reflect our own assumptions that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

OurInotek’s material financial instruments at December 31, 2015,2017 and 2016, consisted of cash and cash equivalents, short-term investments, accounts payable and the 2021 Notes. The fair value of Inotek’s cash and cash equivalents and accounts payable approximate their respective carrying values due to the short-term investments. We havenature of these instruments and amounts. Inotek has determined that ourits United States Treasury securities are subject tocategorized as Level 1 assets under the fair value measurementshierarchy, as these assets are valued using quoted market prices in active markets without any valuation adjustments. We have determined that ouradjustments, its certificates of deposit are categorized as Level 2 assets, under the fair value hierarchy, as there are no quoted market prices in active markets, and ourits agency bonds are characterized as Level 2 assets, under the fair value hierarchy, as these assets are not always valued daily using quoted market prices in active markets. Our material financial instruments at December 31, 2014, consisted of preferred stock warrant liabilities and a convertible debt redemption rights derivative. The preferred stock warrant liabilities and convertible debt redemption rights derivative were subject to Level 3Inotek estimates the fair value measurements. We accounted for them as liabilities based upon the characteristics and provisions of the underlying instruments. These liabilities were recorded at their fair value on the date of issuance and were re-measured on each subsequent balance sheet date, with fair value changes recognized2021 Notes using quoted market prices obtained from third-party pricing services, which is classified as income (decreases in fair value) or expense (increases in fair value) in the statements of operations in the accompanying financial statements.a Level 2 input due to limited market trading.

60


Stock-Based Compensation

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the award. The fair value of options on the date of grant is calculated using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility and expected term. The fair value of restricted stock awards is based on the intrinsic value of such awards on the date of grant. Compensation cost for stock purchase rights under our employee stock purchase plan is measured and recognized on the date that we become obligated to issue shares of our common stock and is based on the difference between the fair value of our common stock and the purchase price on such date. Our estimates of these assumptions are primarily based on third-party valuations, historical data, peer company data and judgment regarding future trends and factors.

We account for stock options issued to non-employees in accordance with the provisions of the Financial Accounting Standards Board, or FASB, ASC Subtopic 505-50,Equity-Based Payments to Non-employees, which requires valuing the stock options using the Black-Scholes option pricing model and re-measuring such stock options at their current fair value as they vest.

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

Determining the fair value of our convertible preferred stock warrants, convertible debt derivative and stock-based awards requires the use of subjective assumptions. In the absence of a publicly traded market for our securities, we conducted periodic valuations of our securities.

Valuations conducted in 2015 and 2014

A third-party valuation consultant was engaged to advise and assist us in connection with the valuations of our (i) Series AA preferred stock warrants outstanding at December 31, 2014, (ii) our convertible debt redemption rights derivative at issuance and at December 31, 2014, (iii) our common stock options issued in August 2014 and (iv) our 2020 Convertible Notes derivative liability at issuance and at the time of the conversions of the 2020 Convertible Notes during 2015. Because our previously outstanding Series X preferred stock was entitled to a contingent liquidation preference which varies based on the total value of our equity, we were precluded from using a closed-form model, such as the Black-Scholes option pricing method, to value the Series AA preferred stock warrants. Therefore, we employed a Monte Carlo simulation methodology to determine the fair value of securities in our capital structure during the period during the period prior to the February 2015 IPO.

Common Stock and Preferred Stock Warrant Valuations

Our initial equity value (“EV”) was determined by utilizing a risk-adjusted discounted cash flow model based upon market research and management’s assessment thereof, which is an income approach and was corroborated with market data, coupled with a series of Monte Carlo simulations which projected various equity values under different possible liquidity events including (i) initial public offering (“IPO”), (ii) merger and acquisition (“M&A”), and (iii) stay-private (“SP”) scenarios. The first two scenarios assumed positive results from our recent Phase 2 clinical trial, while the third scenario considered unfavorable results for valuations performed prior to December 31, 2014 and, at December 31, 2014, no IPO or M&A transaction.

Key assumptions underlying the discounted cash flow model are described below:

Based on the research and industry knowledge of our officers and consultants, we developed projections of market penetration, product selling prices and required infrastructure to estimate our future revenues and operating expenses to determine projected free cash flows from our two current product candidates containingtrabodenoson, through patent expiration.

Probability of Success. To determine the probability of success for the various phases of development required for submission in an NDA, we utilized the clinical trial success rates as published in certain reports.

Time to Liquidity. All 2014 valuations assumed liquidity events occurring between December 31, 2014 and April 1, 2015.

Risk Free rates. Risk free rates are based on published or imputed government treasury rates as of each valuation date.

Volatilities. Volatilities were derived from historical data from guideline publicly traded comparable companies. We used volatilities of 60% to 70% for the 2014 valuations.

The Monte Carlo-simulated total equity values were then allocated to each type of security using a current value (waterfall) method under each scenario and were then probability-adjusted using probability weights by scenario.

As of date:

  IPO  M&A  SP 

December 31, 2014

   70  25  5

Valuation models require the input of highly subjective assumptions. Because our shares had characteristics significantly different from that of publicly traded common stock and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models did not necessarily provide a reliable, single measure of the fair value of our previously outstanding Series AA preferred stock or Series X preferred stock. The foregoing valuation methodologies were not the only valuation methodologies available and will not be expected to be used to value our securities after our IPO. We cannot make complete assurances as to any particular valuation for our securities.

Convertible Debt Redemption Rights Derivative

The Convertible Bridge Notes redemption rights derivative required separate accounting and was valued using a single income valuation approach. We estimated the fair value of the redemption rights derivative using a ‘‘with and without’’ income valuation approach. Under this approach, we estimated the present value of the fixed interest rate debt based on the fair value of similar debt instruments excluding the embedded feature. This amount was then compared to the fair value of the debt instrument including the embedded feature using a probability weighted approach by assigning each embedded derivative feature a probability of occurrence, with consideration provided for the settlement amount including conversion discounts, prepayment penalties, the expected life of the liability and the applicable discount rate.

As of the issuance of the Convertible Bridge Notes on December 22, 2014 and on December 31, 2014, the Company ascribed a probability of occurrence of 25% to the change in control redemption feature of the Convertible Bridge Notes. The expected life of the feature was the remaining term of the debt and the discount rate was 18.9%. The Company classified the liability within Level 3 of the fair value hierarchy as the probability factor and the discount rate are unobservable inputs and significant to the valuation model.

2020 Convertible Notes derivative liability

Based on the characteristics of the (i) conversion option including make-whole provision, (ii) the Additional Interest, and (iii) the notes, we estimated the fair value of the conversion option including make-whole and the Additional Interest using the “with” and “without” method. Using this methodology, we first valued the notes with the conversion option including make-whole provision but excluding the Additional Interest (the “with” scenario) and subsequently valued the notes without the conversion option including make-whole provision and excluding the Additional Interest (the “without” scenario). The difference between the fair values of the notes in the “with” and “without” scenarios was the concluded fair value of the conversion option including make-whole provision as of the measurement date. We developed an estimate of fair value for the notes excluding the Additional Interest using a binomial lattice model. We modeled the decision to convert or hold by considering the maximum of the conversion or hold value at every node of the lattice in which the notes are convertible and choosing the action that maximizes the return to the notes’ holders. The significant assumptions used in the binomial model were: the market yield and the expected volatility.

We estimated the fair value of the Additional Interest using an income approach, specifically, the risk-neutral debt valuation method that is used to derive the value of a debt instrument using the expected cash flows and the risk-free rate. The significant assumptions used in estimating the expected cash flows were the market yield used to determine the risk-neutral probability of default and the expected recovery rate upon default.

Recent Accounting Pronouncements

In AugustMay 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in accounting principles generally accepted in the United States (“GAAP”) when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will be effective for annual and interim periods beginning after December 15, 2017. The Company does not currently generate revenue or have any arrangements that are subject to this guidance.

In February 2016, the FASB issued ASU 2014-15,2016-02, Leases (Topic 842), which providessupersedes the current leasing guidance about management’s responsibilityand upon adoption, will require lessees to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concernrecognize right-of-use assets and to provide related footnote disclosures.lease liabilities on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for the annual period endingbeginning after December 15, 2018 and can be early adopted by applying a modified retrospective approach for leases existing at, and entered into after, the beginning of the earliest comparable period presented in the financial statements. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”) and includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new standard is effective for Inotek for the annual period beginning after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. WeInotek adopted this standard on January 1, 2017. The update revises requirements in the following areas: minimum statutory withholding, accounting for income taxes, and forfeitures. Prior to adoption, Inotek applied a 0% forfeiture rate to share-based compensation, resulting in no cumulative effect adjustment to the opening period. Upon adoption of ASU 2016-09, Inotek’s accounting policy is to recognize forfeitures as they occur. The update also requires Inotek to recognize the income tax effect of awards in the income statement when the awards vest or are settled. Finally, the update allows Inotek to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering a liability. The income tax related items had no effect on the current period presentation and Inotek maintains a full valuation allowance against its deferred tax assets.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which clarifies the scope under which modification accounting should be applied to a share-based payment award under ASC 718. The standard will be effective for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2017, and early adoption is permitted for interim or annual period beginning after January 1, 2017. The Company is currently evaluating the impact of this accounting standard update on ourits consolidated financial statements.

Item 7A.

Quantitative and Qualitative Disclosures about Market Risks

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

We are exposed toAs of December 31, 2017, Inotek had market risks in the ordinary course of our business. These market risks are principally limitedrisk exposure related to interest rate fluctuations. WeInotek had cash and cash equivalents of $80.0$78.7 million at December 31, 2015,2017, consisting primarily of funds in money market accounts. WeInotek also had $31.2$21.3 million in short-term investments consisting of certificates of deposit agency bonds and United States Treasury securities. TheHistorically, the primary objective of ourInotek’s investment activities iswas to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the short-term

nature of ourits investment portfolio, we do not believe an immediate 1.0% increasea sudden change in market interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect a sudden change in market interest rates to affect materially our operating results orportfolio. As of December 31, 2017, Private Rocket had cash flows.of $18.1 million.

Until the 2020Our 2021 Convertible Notes were converted in July and August 2015, they borebear interest at a fixed rate and therefore a change in interest rates would not impact the amount of interest we would have paid on ourthis indebtedness.

Item 8. Financial Statements and Supplementary Data61


Item 8.

Financial Statements and Supplementary Data

The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures. Based on that evaluation of our disclosure controls and procedures as of December 31, 2015,2017, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective at the reasonable assurance level. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial and accounting officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (“GAAP”).GAAP. Our internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015.2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013Internal Control — Integrated Framework. Based on this assessment, our management has concluded that, as of December 31, 2015,2017, our internal control over financial reporting is effective based on those criteria.

This annual report onForm 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to an exemption under Section 989G of theDodd-Frank Wall Street Reform and Consumer Protection Act made available to us under the Jumpstart Our Business Startups Act of 2012.JOBS Act.

Inherent Limitations of Internal Controls

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

62


Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Other Information

Not applicable.

63


PART III. — OTHEROTHER INFORMATION

Item 10.

Item 10. Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

The following table sets forth information regarding our executive officers and directors, including their respective ages and positions as of the date hereof:

Name

Age

Position

Executive Officers:

David P. Southwell

55President, Chief Executive Officer and Director

Rudolf Baumgartner, M.D.

56Executive Vice President and Chief Medical Officer

William K. McVicar, Ph.D.

58Executive Vice President and Chief Scientific Officer

Dale Ritter

65Vice President—Finance

Non-Management Directors:

Carsten Boess (1)

49Director

Ittai Harel (1)(2)(3)

48Director

Paul G Howes

61Director

A.N. “Jerry” Karabelas, Ph.D.

63Director

Isai Peimer (1)(2)(3)

38Director

Gary Phillips, M.D. (2)

50Director

Richard N. Spivey, PharmD, PhD (3)

66Director

Martin Vogelbaum (1)(2)

52Director

(1)Member of the Audit Committee.
(2)Member of the Compensation Committee.
(3)Member of the Nominating and Corporate Governance Committee.

The following is a biographical summary of the experience of our executive officers and directors:

Executive Officers

David P. Southwell has served as our President and Chief Executive Officer since July 2014, and as one of our directors since August 2014. Mr. Southwell received a B.A. from Rice University and an M.B.A. from Dartmouth College. From March 2010 to October 2012, Mr. Southwell served as Executive Vice President, Chief Financial Officer of Human Genome Sciences, Inc., or Human Genome Sciences, which is owned by GlaxoSmithKline plc. Prior to his time at Human Genome Sciences, Mr. Southwell served as Executive Vice President and Chief Financial Officer of Sepracor Inc. from July 1994 to July 2008. Mr. Southwell has also served on the Board of Directors of PTC Therapeutics Inc. since December 2005 and THL Credit, Inc. since June 2007. We believe that Mr. Southwell’s qualifications to sit on our Board include his broad experience serving on the boards of directors of public companies, his specific experienceInformation with public therapeutics companies and his executive leadership, managerial and business experience.

Rudolf Baumgartner, M.D. has served as our Executive Vice President and Chief Medical Officer since June 2007. Dr. Baumgartner received a B.S. and an M.D. from Pennsylvania State University and completed post-doctoral training at the University of Michigan, Johns Hopkins University and the National Institutes of Health.

William K. McVicar, Ph.D. joined us in September 2007 as Executive Vice President, Pharmaceutical Development and has served as our Executive Vice President and Chief Scientific Officer since January 2009. Dr. McVicar also served as our interim President from May 2013 until August 2014. Dr. McVicar received a B.S. from the State University of New York College at Oneonta and a Ph.D. in Chemistry from the University of Vermont.

Dale Ritter joined us as a financial consultant in June 2014 and has served as our Vice President—Finance and Principal Financial and Accounting Officer, Treasurer and Secretary since August 2014. From May 2011 to November 2013, Mr. Ritter served Senior Vice President, Finance and Chief Accounting Officer at Coronado Biosciences, Inc. From January 2011 to May 2011, Mr. Ritter served as an Independent Financial Consultant and from 1994 to 2009 Mr. Ritter served in various roles and most recently as Senior Vice President and Chief Accounting Officer at Indevus Pharmaceuticals, Inc. Mr. Ritter received a B.A. from Syracuse University and an M.B.A. from Babson College.

Non-Management Directors

Carsten Boess has served as one of our directors since January 2016. He is currently the Chief Business Officer at Kiniksa Pharmaceuticals, a privately held biotechnology company. He previously served as Senior Vice President and Chief Financial Officer at Synageva Biopharma Corporation from 2011 until the company’s acquisition by Alexion Pharmaceuticals in 2015. Prior to his role at Synageva, Mr. Boess served in multiple roles with increasing responsibility for Insulet Corporation, including Chief Financial Officer from 2006 to 2009 and Vice President of International Operations from 2009 to 2011. Prior to that, Mr. Boess served as Executive Vice President of Finance for Serono Inc. from 2005 to 2006. In addition, he was a member of the Geneva based World Wide Executive Finance Management Team while at Serono. Mr. Boess was also Chief Financial Officer at Alexion Pharmaceuticals, and was a finance executive at Novozymes of North America and Novo Nordisk in France, Switzerland and China. Mr. Boess received a Bachelor’s degree and Master’s degree in Economics and Finance, specializing in Accounting and Finance from the University of Odense, Denmark.

Ittai Harel has served as one of our directors since March 2010. Since July 2006, Mr. Harel has served in various roles, most recently as Managing General Partner, at Pitango Venture Capital, a provider of seed, growth and late-stage capital for core life sciences and technology companies. In connection with these positions, Mr. Harel currently serves on numerous boards of directors, including Vertos Medical, Inc., Lifebond Ltd., Medisafe Project, Ltd. and EarlySense Ltd., also serving as Chairman of the boards of directors of Lifebond Ltd. and EarlySense Ltd. Additionally, Mr. Harel serves on the Compensation Committees of Lifebond Ltd. and EarlySense Ltd. From February 2002 to June 2006, Mr. Harel held pharmaceutical product development strategy and business development roles at Nektar Therapeutics, including serving as Director of Corporate Development. Mr. Harel received a B.S. from Ben Gurion University and an M.B.A. from the Massachusetts Institute of Technology. We believe that Mr. Harel’s qualifications to sit on our Board include his extensive board and management experience, including with development stage life sciences companies.

Paul G. Howes has served as one of our directors since September 2008. From January 2016 to present, Mr. Howes has been President of ThromboGenics Inc. Mr. Howes also served as our President and Chief Executive Officer from September 2008 to May 2013. Prior to his time with us, Mr. Howes served as President of the Americas Region of Bausch + Lomb Incorporated, which is now owned by Valeant Pharmaceuticals International, Inc., from July 2003 to February 2007. Priorrespect to this time, Mr. Howes serveditem will be set forth in a variety of senior roles at Merck & Co., Inc. for sixteen years. Since May 2013, Mr. Howes has served as a member of the Board of Directors of various companies including: since May 2013, Kish Bancorp and Kish Bank, a financial conglomerate parent company and its community bank subsidiary; since November 2008, Prevent Blindness America, a vision-related charity for which Mr. Howes has served as Chairman since November 2013; since August 2014, ThromboGenics NV and ThromboGenics Inc., a global integrated biopharmaceutical company and its U.S.-based operating subsidiary. Mr. Howes received an A.B. from Harvard University and an M.B.A. from York University. We believe that Mr. Howes’ qualifications to sit on our Board include the intimate knowledge of our operations he developed as our President and Chief Executive Officer, his experience working with a public biopharmaceutical company and his executive leadership, managerial and business experience.

A.N. “Jerry” Karabelas, Ph.D. has served as one of our directors since July 2012 and previously served as one of our directors from February 2004 to January 2012, during which time he was the Chairperson of our board. Since December 2001, Mr. Karabelas has been a managing member at Care Capital II, LLC and Care

Capital III, LLC, or Care Capital, a provider of capital for entrepreneurial private and public companies developing pharmaceuticals. Prior to his work at Care Capital, from July 2000 to September 2001, Mr. Karabelas was the founder and Chairman at Novartis BioVentures, which is owned by Novartis AG, or Novartis, a provider of capital for life sciences companies across the biotech, medical devices and diagnostics industries, prior to which Mr. Karabelas was the Chief Executive Officer of Novartis Pharma AG, which is owned by Novartis. In connection with his work at Care Capital, Mr. Karabelas has served on numerous boards of directors of pharmaceutical and therapeutics companies, including Renovo, plc, Vanda Pharmaceuticals, Inc. and NitroMed, Inc. Since June 2013, Mr. Karabelas served as Chairman of Polyphor AG and since May 2015 has served as a member of the board of REGENEXBIO Inc. Mr. Karabelas also served as a member of the boards of directors of SkyePharma, plc from May 2001 to May 2009 and Human Genome Sciences from 2003 to 2013. Mr. Karabelas received a B.S. from the University of New Hampshire and a Ph.D. from the Massachusetts College of Pharmacy. We believe that Mr. Karabelas’ qualifications to sit on our Board include his extensive experience in working with publicly held pharmaceuticals companies, advising developing life sciences, therapeutics and pharmaceuticals companies and his executive leadership, managerial and business experience.

Isai Peimer has served as one of our directors since May 2013. He was a Managing Director at MedImmune Ventures Inc., an investment company, from August 2010 to February 2016. From September 2009 to August 2010, Mr. Peimer was an associate analyst at AllianceBernstein LP, a global asset management firm. From April 2008 to January 2009, he was a senior associate at Visium Asset Management, LP, a healthcare-focused investment fund. From June 2005 to April 2008, Mr. Peimer worked as an investment banker at J.P. Morgan & Co. and was a management consultantProxy Statement for the pharmaceutical2018 Annual Meeting of Stockholders (“Proxy Statement”) or an amendment to this Annual Report on Form 10-K (“Form 10-K/A”) under the headings “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and biotech sectors. In connection with his work at MedImmune Ventures, Inc., Mr. Peimer has served on numerous boards of directors of pharmaceutical and therapeutics companies, including Ambit Biosciences Corp., where he is a member of the Audit and Nominating and Corporate Governance Committees, Adheron Therapeutics Inc., where he was a member of the Compensation and Nominating and Corporate Governance Committees, Corridor Pharmaceuticals, Inc., where he was a member of the Audit Committee, and Amaron Biosciences Ltd. Mr. Peimer received a B.A. from Emory University and an M.B.A. from Dartmouth College. We believe that Mr. Peimer’s qualifications to sit on our Board include his experience on numerous committees of boards of directors of pharmaceutical companies and his work in advising developing life sciences companies.

Gary Phillips, M.D. has served as one of our directors since October 2015. From October 2013 and to the present, Dr. Phillips has been Senior Vice President, Chief Strategy Officer at Mallinckrodt Pharmaceuticals plc. He was also Senior Vice President and President of Autoimmune and Rare Diseases at Mallinckrodt from August to January 2015. Gary was Head of Global Health & Healthcare Industries at the World Economic Forum in Geneva from January 2012 to September 2013. He was President of Reckitt Benckiser Pharmaceuticals, Inc. (now Indivior) from 2011 to 2012. He served as President of U.S. Surgical and Pharmaceuticals at Bausch & Lomb from 2002 to 2008. Dr. Phillips has also held executive roles at Merck Serono SA (a division of Merck KGaA) from 2008 to 2011, Novartis Corporation from 2000 to 2002, and Wyeth Pharmaceuticals, Inc. (now Pfizer, Inc.) from 1999 to 2000. Dr. Phillips was a healthcare strategy managing consultant at Towers Perrin (now Towers Watson & Co) from 1997 to 1999, and practiced as a general medicine clinician/officer in the US Navy, from which he was honorably discharged as a lieutenant commander. Dr. Phillips was educated at the University of Pennsylvania, where he received an M.D. (Alpha Omega Alpha) from the School of Medicine, an MBA from the Wharton School, and B.A. (summa cum laude, Phi Beta Kappa) in biochemistry with distinction from the School of Arts and Sciences. He completed postgraduate medical education at United States Naval Medical Center and maintains an active medical license. Currently, he serves on the boards of Aldeyra Therapeutics (NASDAQ: ALDX), Envisia Therapeutics, and Rheon Medical SA.

Richard N. Spivey, PharmD, PhD has served as one of our directors since July 2015. Dr. Spivey currently serves as a scientific advisor to the pharmaceutical industry and as a member of the Board of Councilors, University of Southern California, and School of Pharmacy. From 2010 to 2015, he was the Senior Vice President, Global Regulatory Affairs at Allergan, plc. From 2002 to 2010, Dr. Spivey served various roles at Meda AB (previously MedPointe Inc.), most recently as the Chief Scientific Officer (Head of R&D). Dr. Spivey

has also held positions at Pharmacia Corporation (now Pfizer Inc.), Schering-Plough Corporation (now Merck & Co.), Parke-Davis Pharmaceutical Research Division, and Boots Pharmaceuticals, Inc. Dr. Spivey received his PharmD from the University of Southern California and his PhD from the College of Pharmacy, University of Minnesota. We believe that Dr. Spivey’s qualifications to sit on our Board include his distinguished background in drug development and regulatory affairs spanning thirty-years of experience working at leading pharmaceutical companies.

Martin Vogelbaum has served as one of our directors since April 2010. From December 2015 to the present, Mr. Vogelbaum has been Corporate Vice President, Business Development at Celgene Corporation. From May 2005 to December 2015, Mr. Vogelbaum was a Partner at Rho Ventures, or Rho, a venture capital investment firm focused on companies in the healthcare, information technology, new media and multiple other sectors. Mr. Vogelbaum has served on numerous boards of directors private and public of biopharmaceutical companies, including Cara Therapeutics, Inc., where he has been a director since July 2010 through the present date, and NephroGenex, Inc., where he served as director from October 2013 to May 2014. Mr. Vogelbaum has more than twenty years of experience investing in life sciences companies at various stages of development and has co-founded more than a half dozen companies. Mr. Vogelbaum received an A.B. from Columbia University. We believe that Mr. Vogelbaum’s qualifications to sit on our Board include his experience in investing in and service on boards of directors of public and private biopharmaceuticals and therapeutics companies.

Composition of Our Board of Directors

Our Board of Directors currently consists of nine members. Our nominating and governance committee and Board of Directors may consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity“Corporate Governance” and is not limited to race, genderincorporated herein by reference. The Proxy Statement or national origin. We have no formal policy regarding board diversity. Our nominating and governance committee’s and Board of Directors’ priority in selecting board members is identification of persons whoForm 10-K/A will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business, understanding of the competitive landscape and professional and personal experiences and expertise relevant to our growth strategy. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.

Our amended and restated certificate of incorporation and amended and restated bylaws also provide that our directors may be removed only for cause by the affirmative vote of the holders of at least 75% of the votes that all our stockholders would be entitled to cast in an annual election of directors, and that any vacancy on our Board of Directors, including a vacancy resulting from an enlargement of our Board of Directors, may be filled only by vote of a majority of our directors then in office.

Director independence. Our Board of Directors has determined that all members of the Board of Directors, except Messrs. Howes and Southwell, are independent, as determined in accordance with the rules of The NASDAQ Global Market, or NASDAQ. In making such independence determination, the Board of Directors considered the relationships that each such non-employee director has with us and all other facts and circumstances that the Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. In considering the independence of the directors listed above, our Board of Directors considered the association of our directors with the holders of more than 5% of our common stock. The composition and functioning of our Board of Directors and each of our committees complies with all applicable requirements of NASDAQ and the rules and regulations of the SEC. There are no family relationships among any of our directors or executive officers.

Staggered board. In accordance with the terms of our amended and restated certificate of incorporation and amended and restated bylaws, our Board of Directors is divided into three classes, class I, class II and class III,

with each class serving staggered three-year terms. Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires. The following persons have been designated to serve as directors in the following classes until the term specified below or until his earlier death, resignation or removal:

Our Class I directors are David P. Southwell and Richard N. Spivey, PharmD, PhD (term expires on date of annual meeting of stockholders following the year ending December 31, 2017);

Our Class II directors are Isai Peimer, Martin Vogelbaum Gary M. Phillips, Carsten Boess and Ittai Harel (term expires on date of annual meeting of stockholders following the year ending December 31, 2015); and

Our Class III directors are Paul G. Howes and A.N. “Jerry” Karabelas, Ph.D. (term expires on date of annual meeting of stockholders following the year ending December 31, 2016).

Our amended and restated certificate of incorporation and amended and restated bylaws provide that the authorized number of directors may be changed only by resolution of the Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class shall consist of one third of the Board of Directors.

The division of our Board of Directors into three classes with staggered three-year terms may delay or prevent stockholder efforts to effect a change of our management or a change in control.

Board Leadership Structure and Board’s Role in Risk Oversight

The positions of our Chairperson of the board and Chief Executive Officer are presently separated. Separating these positions allows our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairperson of the board to lead the Board of Directors in its fundamental role of providing advice to and independent oversight of management. Our Board of Directors recognizes the time, effort and energy that the Chief Executive Officer must devote to his position in the current business environment, as well as the commitment required to serve as our Chairperson, particularly as the Board of Directors’ oversight responsibilities continue to grow. Our Board of Directors also believes that this structure ensures a greater role for the independent directors in the oversight of our company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of our Board of Directors. Our Board of Directors believes its administration of its risk oversight function has not affected its leadership structure. Although our amended and restated bylaws do not require our Chairperson and Chief Executive Officer positions to be separate, our Board of Directors believes that having separate positions is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.

Our Board of Directors oversees the management of risks inherent in the operation of our business and the implementation of our business strategies. Our Board of Directors performs this oversight role by using several different levels of review. In connection with its reviews of our operations and corporate functions, our Board of Directors addresses the primary risks associated with those operations and corporate functions. In addition, our Board of Directors reviews the risks associated with our business strategies periodically throughout the year as part of its consideration of undertaking any such business strategies.

Director Nomination Process

There have been no material changes to the process by which stockholders may submit nominees for election to the Board of Directors to the Nominating and Corporate Governance Committee since that process was described in the Company’s Proxy Statement filed with the SEC on April 29, 2015.

Board Committees

Our Board of Directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which operates pursuant to a separate charter adopted by our Board of Directors. The composition and functioning of all of our committees will comply with all applicable requirementswithin 120 days after the end of the Sarbanes-Oxley Act, the Dodd-Frank Act, NASDAQ and SEC rules and regulations.fiscal year covered by this Annual Report.

Audit Committee

Isai Peimer, Carsten Boess, Ittai Harel and Martin Vogelbaum currently serve on the audit committee, which is chaired by Isai Peimer. Our Board of Directors has determined that each member of the audit committee is “independent” for audit committee purposes as that term is defined in the rules of the SEC and the applicable rules of NASDAQ. Our Board of Directors has designated Isai Peimer as an “audit committee financial expert,” as defined under the applicable rules of the SEC. The audit committee’s responsibilities include:

appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;

approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

reviewing the internal audit plan with the independent registered public accounting firm and members of management responsible for preparing our financial statements;

reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by us;

reviewing the adequacy of our internal control over financial reporting;

establishing policies and procedures for the receipt, retention and treatment of complaints received regarding ethics-related issues or potential violations of our code of business conduct and ethics and accounting and auditing-related complaints and concerns;

recommending, based upon the audit committee’s review and discussions with management and the independent registered public accounting firm, whether our audited financial statements shall be included in our Annual Report on Form 10-K;

monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters;

preparing the audit committee report required by SEC rules to be included in our annual proxy statement;

reviewing all related party transactions for potential conflict of interest situations and approving all such transactions; and

reviewing quarterly earnings releases.

Compensation Committee

Martin Vogelbaum, Isai Peimer, Gary Phillips, and Ittai Harel currently serve on the compensation committee, which is chaired by Martin Vogelbaum. Our Board of Directors has determined that each member of the compensation committee is “independent” as that term is defined in the applicable rules of NASDAQ. The compensation committee’s responsibilities include:

annually reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer;

evaluating the performance of our Chief Executive Officer in light of such corporate goals and objectives and determining the compensation of our Chief Executive Officer;

reviewing and approving the compensation of our other executive officers;

reviewing and establishing our overall management compensation, philosophy and policy;

overseeing and administering our compensation and similar plans;

evaluating and assessing potential current compensation advisors in accordance with the independence standards identified in the applicable rules of NASDAQ;

retaining and approving the compensation of any compensation advisors;

reviewing and approving our policies and procedures for the grant of equity-based awards;

reviewing and making recommendations to the Board of Directors with respect to director compensation;

preparing the compensation committee report required by SEC rules to be included in our annual proxy statement;

reviewing and discussing with management the compensation discussion and analysis to be included in our annual proxy statement or Annual Report on Form 10-K; and

reviewing and discussing with the Board of Directors corporate succession plans for the Chief Executive Officer and other key officers.

Nominating and Corporate Governance Committee

Ittai Harel, Richard N. Spivey, PharmD, PhD and Isai Peimer currently serve on the nominating and corporate governance committee, which is chaired Ittai Harel. Our Board of Directors has determined that each member of the nominating and corporate governance committee is “independent” as that term is defined in the applicable rules of NASDAQ. The nominating and corporate governance committee’s responsibilities include:

developing and recommending to the Board of Directors criteria for board and committee membership;

establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders;

identifying individuals qualified to become members of the Board of Directors;

recommending to the Board of Directors the persons to be nominated for election as directors and to each of the board’s committees;

developing and recommending to the Board of Directors a set of corporate governance guidelines; and

overseeing the evaluation of the Board of Directors and management.

Corporate Governance

Our Board of Directors hasWe have adopted a written codeCode of business conductBusiness Conduct and ethicsEthics that applies to all of our directors, officers and employees, including our principal executive, officer, principal financial officer,and principal accounting officer or controllerofficers or persons performing similar functions. A current copyOur Code of the codeBusiness Conduct and Ethics is posted on the Corporate Governance section of our website which is located at www.inotekpharma.com. If we makewww.rocketpharma.com. We intend to disclose any substantivefuture amendments to or grantcertain provisions of the Code of Business Conduct and Ethics, and any waivers from,of the codeCode of business conductBusiness Conduct and ethics for any officer, we will disclose the nature of such amendment or waiverEthics granted to executive officers and directors, on our website within four business days following the date of amendment or in a current report on Form 8-K.waiver.

Item 11.

Executive Compensation

Item 11. Executive Compensation

The following table sets forth the portion of compensation paidInformation with respect to the named executive officers that is attributable to services performed during the fiscal year ended December 31, 2015 and 2014.

Name and principal position

  Fiscal
Year
   Salary
$
   Bonus
$
  Option
Awards
$ (5)
  All other
compensation
$ (6)
  Total
$
 

David P. Southwell

   2015     440,152     257,000 (1)   602,912    138    1,043,202  

President and Chief Executive Officer

   2014     115,385     38,712 (5)   1,326,000    —      1,441,385  

Rudolf Baumgartner, M.D.

   2015     387,124     152,000 (1)   301,456    8,208    696,788  

Executive Vice President and Chief Medical Officer

   2014     337,816     109,454 (2)   663,000    7,800    1,118,070  

William K. McVicar, Ph.D.

   2015     372,523     148,000 (1)   301,456    8,208    682,187  

Executive Vice President and Chief Scientific Officer

   2014     304,562     85,912 (3)   663,000    7,800    1,061,274  

Dale Ritter

   2015     273,385     107,000 (1)   100,485    6,779    380,649  

Vice President—Finance

   2014     75,519     26,608 (4)   146,000     248,127  

(1)Represents bonus amounts earned in 2015 and paid in 2016.
(2)Represents $25,000 bonus for the achievement of a clinical milestone and $84,454 related to 2014 performance which was earned in 2014 and paid to Dr. Baumgartner in 2015.
(3)Represents $25,000 related to the achievement of a clinical milestone and $60,912 related to 2014 performance which was earned in 2014 and paid to Dr. McVicar in 2015.
(4)Represents bonus amounts earned in 2014 and paid in 2015.
(5)Reflects the grant date fair value of option awards, calculated in accordance with ASC Topic 718, disregarding the estimate on forfeitures. The assumptions we used for calculating grant date fair values are set forth in Note 8 in this Form 10-K.
(6)For 2015 consists of: for Mr. Southwell, cost of the benefits of company-provided group-term life insurance in excess of $50,000; for Dr. Baumgartner, $7,950 of matching contributions pursuant to the Company’s 401(k) Plan and $258 for the cost of the benefits of company-provided group-term life insurance in excess of $50,000; for Dr. McVicar, $7,950 of matching contributions pursuant to the Company’s 401(k) Plan and $258 for the cost of the benefits of company-provided group-term life insurance in excess of $50,000; for Mr. Ritter, $6,383 of matching contributions pursuant to the Company’s 401(k) Plan and $396 for the cost of the benefits of company-provided group-term life insurance in excess of $50,000. For 2014 consists of matching contributions pursuant to the Company’s 401(k) Plan.

Executive Agreements

We have entered into employment agreements with certain of our named executive officers. These employment agreements provide for “at will” employment and contain the additional terms summarized below:

David P. Southwell. On August 11, 2014, we entered into an employment agreement with Mr. Southwell, our President and Chief Executive Officer. In 2015, Mr. Southwell received a base salary of $450,000, which is subject to review and adjustment in accordance with our corporate policy. In 2015, Mr. Southwell was eligible for an annual performance bonus with a target amount of 50% of his base salary. In 2015, the Compensation Committee awarded Mr. Southwell a bonus of $257,000, representing 57% of his 2015 base salary. Mr. Southwell is eligible to participate in our employee benefit plans in effect from time to time, subject to the terms of those plans. Subject to the execution and effectiveness of a separation agreement, including, among other things, a general release of claims, Mr. Southwellthis item will be eligible to receive the following payments and benefitsset forth in the event that his employmentProxy Statement or Form 10-K/A under the headings “Executive Compensation” and “Director Compensation” and is terminatedincorporated herein by us without causereference. The Proxy Statement or he terminates his employment with us for good reason: base salary continuation for 12 months; if Mr. Southwell is participating in our group health

plan immediately prior to the date of termination and elects COBRA health continuation, we will pay him a monthly cash payment equal to the monthly employer contribution we would have made to provide him health insurance if he had remained employed by us until twelve months following the date of termination; and the portion of the stock options and othertime-based equity awards held by Mr. Southwell as of the date of termination that would have vested in the 12 months following termination of his employment had he remained employed by us through such date shall immediately accelerate and become fully vested as of the date of termination.

Rudolf Baumgartner, M.D. On May 2, 2007, we entered into an employment agreement with Dr. Baumgartner, our Executive Vice President and Chief Medical Officer, which we amended on December 23, 2008 and October 9, 2009. In 2015, Dr. Baumgartner received a base salary of $380,000, which is subject to review and adjustment in accordance with our corporate policy. In 2015, Dr. Baumgartner was eligible for an annual performance bonus with a target amount of 35% of his base salary. In 2015, the Compensation Committee awarded Dr. Baumgartner a bonus of $152,000, representing 40% of his 2015 base salary. Dr. Baumgartner is eligible to participate in our employee benefit plans in effect from time to time, subject to the terms of those plans. Subject to the execution and effectiveness of a separation agreement, including, among other things, a general release of claims, Dr. BaumgartnerForm 10-K/A will be eligible to receivefiled with the following payments and benefits in the event that his employment is terminated by us without cause: base salary continuation for twelve months; and a monthly cash payment equal to the monthly employer contribution to provide him health and dental insurance coverage if he had remained employed by us until 12 months following the date of termination. The receipt of the severance payments and benefits set forth above shall be conditioned upon Dr. Baumgartner not violating the terms of a restrictive covenant agreement between Dr. Baumgartner and Inotek.

William K. McVicar, Ph.D. On August 23, 2007, we entered into an employment agreement with Dr. McVicar, our Executive Vice President and Chief Scientific Officer, which we amended on December 23, 2008 and October 9, 2009. In 2015, Dr. McVicar received a base salary of $370,000, which is subject to review and adjustment in accordance with our corporate policy. In 2015, Dr. McVicar was eligible for an annual performance bonus with a target amount of 35% of his base salary, payable at the discretion of our Board. In 2015, the Compensation Committee awarded Dr. McVicar a bonus of $148,000, representing 40% of his 2015 base salary. Dr. McVicar is eligible to participate in our employee benefit plans in effect from time to time, subject to the terms of those plans. Subject to the execution and effectiveness of a separation agreement, including, among other things, a general release of claims, Dr. McVicar will be eligible to receive base salary continuation for 12 months in the event that his employment is terminated by us without cause. The receipt of the severance payments and benefits set forth above shall be conditioned upon Dr. McVicar not violating the terms of a restrictive covenant agreement between Dr. McVicar and Inotek.

Dale Ritter. On August 28, 2014, we entered into an employment agreement with Mr. Ritter, our Vice President—Finance. In 2015, Mr. Ritter received an annual base salary of $265,000. Mr. Ritter is eligible for an annual performance bonus with a target amount of 30% of his annualized base salary. In 2015, the Compensation Committee awarded Mr. Ritter a bonus of $107,000, representing 40% of his 2015 base salary. Mr. Ritter is eligible to participate in our employee benefit plans in effect from time to time, subject to the terms of those plans. Subject to the execution and effectiveness of a separation agreement, including, among other things, a general release of claims, Mr. Ritter will be eligible to receive base salary continuation for six months in the event that his employment is terminated by us without cause. The receipt of the severance payments and benefits set forth above shall be conditioned upon Mr. Ritter not violating the terms of a restrictive covenant agreement between Mr. Ritter and Inotek.

Subject to the execution and effectiveness of a separation agreement, including, among other things, a general release of claims, and such named executive officer not violating the terms of a restrictive covenant agreement, each named executive officer will be eligible to receive the payments and benefits set forth below in the event that such executive officer’s employment is terminated by us without cause or the named executive officer terminates his or her employment with us for good reason, in either caseSEC within twelve months120 days after a “change in

control.” The payments and benefits described below and due to each named executive officer other than Mr. Southwell are in addition to, not in lieu of, the payments set forth above next to such named executive officer’s name. With respect to Mr. Southwell, the payments and benefits described below are in lieu of the payments set forth above next to Mr. Southwell’s name.

With respect to all named executive officers other than Mr. Southwell, all unvested stock options and other stock-based awards held by such named executive officer as of the date of the termination of such named executive officer’s employment shall immediately accelerate and become fully vested as of the date of termination of such named executive officer.

With respect to Mr. Southwell, a one-time lump payment equal to 18 months base salary within 45 days of termination.

Equity Incentive Awards

Outstanding Equity Awards at FiscalYear-End

The following table provides information concerning outstanding equity awards for each of our named executive officers as of December 31, 2015.

   Option Awards 

Name

  Number of
securities
underlying
unexercised
options exercisable
  Number of
securities
underlying
unexercised
options
unexercisable
  Per share
option
exercise price
($)
   Option
expiration
date
 

David P. Southwell

   132,832 (1)   265,665 (1)   4.342     8/28/2024  
    150,000 (2)   5.03     6/23/2025  

Rudolf Baumgartner, M.D.

   2,170 (3)    40.578     6/3/2017  
   197 (3)    40.578     3/20/2018  
   66,416 (1)   132,832 (1)   4.342     8/28/2024  
    75,000 (2)   5.03     6/23/2025  

William K. McVicar, Ph.D.

   1,269 (3)    40.578     9/18/2017  
   462 (3)    40.578     12/31/2018  
   115 (3)    40.578     3/20/2018  
   66,416 (1)   132,832 (1)   4.342     8/28/2024  
    75,000 (2)   5.03     6/23/2025  

Dale Ritter

   10,996 (1)   32,987 (1)   4.342     8/28/2024  
    25,000 (2)   5.03     6/23/2025  

(1)These stock options were granted pursuant to the 2014 Stock Option and Incentive Plan on August 28, 2014, have a ten-year term and will vest 25% on the one-year anniversary of that grant date and the remaining 75% will vest equally over the following 36 monthly anniversaries. However, these stock options became valid and issued pursuant to the consummation of the Company’s initial public offering which occurred on February 17, 2015.
(2)These stock options were granted pursuant to the 2014 Stock Option and Incentive Plan on June 24, 2015, have a ten-year term, and will vest 25% on the one-year anniversary of the Company’s initial public offering which occurred on February 17, 2015 and the remaining 75% will vest equally over the following 36 monthly anniversaries.
(3)These stock options were granted pursuant to the 2004 Stock Option and Incentive Plan and are fully vested.

Employee Stock Purchase Plan

In November 2014, the Company’s Board of Directors adopted and the stockholders approved the 2014 Employee Stock Purchase Plan (“ESPP”). The ESPP permits eligible employees to purchase shares of the Company’s common stock through payroll withholdings and pursuant to specific offerings of common stock. An

eligible employee may contribute up to 10%, in full percentages, of gross wages, which are withheld from each payroll, to the ESPP. At the end of each offering, an ESPP participant employee will purchase shares at 85% of the lower of the fair value of the Company’s common stock on the first and last day of the offering with aggregate withholdings as of the end of the offering. The offerings commence on June 1 and December 1 and are six months in duration. A participant may reduce his or her withholdings as many times as he or she wishes and may increase his or her withholdings two times during an offering. The Company’s Board of Directors has authorized the issuance of a number of shares of common stock issuable under the ESPP to the number that represents 1% of the Company’s outstanding common stock outstanding immediately after the IPO, or 160,276 shares. The ESPP provides that the number of shares reserved and available for issuance under the ESPP shall be cumulatively increased each January 1, beginning on January 1, 2016, by the lesser of (i) 600,000 shares of common stock or (ii) the number of shares necessary to set the number of shares of Common Stock under the Plan at 1% percent of the outstanding number of shares as of January 1 of the applicable year. However, the Board of Directors reserves the right to determine that there will be no increase for anyfiscal year or that any increase will be for a lesser number of shares. On January 1, 2016, the number of shares reserved and available for issuance under the ESPP was increased by 97,000 to 244,133 shares. As of December 31, 2015, 13,143 shares of common stock were purchased by plan participants and issued by the Company pursuant to the ESPP at a purchase price of $4.83 per share. Dr. Baumgartner, Dr. McVicar and Mr. Ritter each purchased 4,143 shares, 4,156 shares and 2,591 shares, respectively.

Inotek Pharmaceuticals Corporation 401(k) Profit-Sharing Plan (“401(k) Plan”)

The Company maintains the 401(k) Plan through which its employees who are not covered by a collective bargaining agreement and are not non-resident aliens may contribute a portion of their earnings on a tax-deferred basis, up to certain limitations specified by federal law. The Company may, in its sole discretion, make a matching contribution on behalf of a contributing employee. The Company has elected to match 100% of the first 3% of compensation contributed by an employee. All employee contributions are immediately vested. Matching contributions made by the Company vest based on years of service according to the following vesting schedule: less than one year, 0%; one year but less than two years, 25%; two years but less than three years, 50%; three years or more, 100%.

EQUITY COMPENSATION PLAN INFORMATION

The following sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2015. Our equity plans consist of the 2014 Plan, our 2004 Stock Option and Incentive Plan and our 2014 Employee Stock Purchase Plan.

Plan Category  Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
   Weighted-
average exercise
price of
outstanding
options, warrants
and rights
   Number of
securities remaining
available for future
issuance under
equity
compensation plans
(excluding securities
reflected in column
(a))
 
   (a)   (b)   (c) 

Equity compensation plans approved by security holders(1):

   1,644,820    $5.19     691,732  

Equity compensation plans not approved by security holders

   —      —      —   
  

 

 

     

 

 

 

Total

   1,644,820    $5.19     691,732  
  

 

 

     

 

 

 

(1)No additional awards will be made under the 2004 Stock Option and Incentive Plan.

DIRECTOR COMPENSATION

Director Compensation Table

The following table presents the total compensation for each person who served as a member of our Board during 2015. Other than as set forth in the table and described more fully below, we did not pay any compensation, make any equity awards ornon-equity awards to, or pay any other compensation to any of thenon-employee members of our Board in 2015. David P. Southwell, who is also our President and Chief Executive Officer, receives no compensation for his service as a director, and, consequently, is not included in this table.

Our Board adopted a formal director compensation policy for all of ournon-employee directors that became effective upon the closing of our initial public offering.

2015 Director Compensation Table

Director name

  Fees earned
or paid in cash
$
   Option
awards
$(5)
  All other
compensation
($)
  Total
($)
 

Ittai Harel

   42,533     46,019 (1)   —      88,552  

Paul G. Howes

   30,431     46,019 (1)   —      76,450  

Devang V. Kantesaria, M.D.

   17,648     —      —      17,648  

A.N. “Jerry” Karabelas, Ph.D.

   56,514     46,019 (1)   —      102,533  

Isai Peimer

   50,428     46,019 (1)   —      96,447  

Gary Phillips

   8,682     158,992 (2)   —      167,674  

Richard Spivey

   18,490     100,852 (3)   7,500 (4)   126,842  

Martin Vogelbaum

   45,646     46,019 (1)   —      91,665  

(1)Represents the grant date fair value of an option to purchase 12,000 shares of our common stock granted to each then-current non-employee director on June 24, 2015 with an exercise price of $5.03 per share.
(2)

Represents the grant date fair value of an initial grant of an option to purchase 24,000 shares of our common stock with an exercise price of $9.50 per share to Dr. Phillips upon his becoming a director on October 13, 2015.

(3)Represents the grant date fair value of an initial grant of an option to purchase 24,000 shares of our common stock with an exercise price of $5.32 per share to Dr. Spivey upon his becoming a director on July 16, 2015.
(4)Represents a consulting fee paid to Dr. Spivey prior to his becoming a director.
(5)Reflects the grant date fair value of option awards, calculated in accordance with ASC Topic 718, disregarding the estimate on forfeitures. The assumptions we used for calculating grant date fair values are set forth in Note 8 in this Form 10-K.

As of December 31, 2015, total options shares held by board members are as follows: 28,017 shares for Mr. Howes; 24,000 shares for Dr. Phillips and Dr. Spivey; and 21,857 shares for Mr. Harel, Mr. Peimer, Dr. Karabelas and Mr. Vogelbaum.

Post IPO Non-Employee Director Compensation

The Company adopted a non-employee director compensation policy that became effective upon the Company’s IPO in February 2015. The purpose of this policy is to provide a total compensation package that enables the Company to attract and retain, on a long-term basis, high-caliber directors who are not employees or officers of the Company. For service on the board of directors, annual cash retainers will be paid as follows: for board members, $35,000, for the non-executive chairperson, $65,000. In addition to cash retainers for service ion the board of directors, additional cash retainers will be paid for service on committees of the board of directors. For service on the Audit Committee, annual cash retainers will be paid as follows: for committee members, $7,500, for the chairperson, $15,000. For service on the Compensation Committee, annual cash retainers will be paid as follows: for committee members, $5,000, for the chairperson, $10,000. For service on the Nominating and Corporate Governance Committee, annual cash retainers will be paid as follows: for committee members, $3,000, for the chairperson, $7,500.

In addition, each new non-employee director upon his/her election to the Board will receive a one-time option grant to purchase shares of the Company’s common stock, par value $0.01 per share in such amount and on such terms as authorized by the Board, or by a committee appointed by the Board. On the date of each Annual Meeting of Stockholders, an annual option will be granted to each non-employee director serving on the Board immediately following the Company’s annual meeting of stockholders to purchase shares of common stock in such amount and on such terms as authorized by the Board, or by a committee appointed by the Board.Report.

All of the foregoing option grants will have an exercise price equal to the fair market value of a share of common stock on the date of grant.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to us regarding beneficial ownership of our capital stock as of February 16, 2016 for:

each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our capital stock;

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

our named executive officers;

each of our other directors; and

all executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC. A person is deemed to be a beneficial holder of our common stock if that person has or shares voting power, which includes the power to vote or direct the voting of our common stock, or investment power, which includes the power to dispose of or to direct the disposition of such capital stock. Except as noted by footnote, and subject to community property laws where applicable, we believe based on the information provided to us that the persons and entities named in the table below have sole voting and investment powerInformation with respect to all common stock shown as beneficially ownedthis item will be set forth in the Proxy Statement or Form 10-K/A and is incorporated herein by them.

reference. The table lists applicable percentage ownership based on 26,423,394 sharesProxy Statement or Form 10-K/A will be filed with the SEC within 120 days after the end of common stock outstanding as of February 16, 2016 and excludes (i) 1,631,677 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2015, at a weighted-average exercise price of $4.64 per share; and (ii) 56,408 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2015, which have an exercise price of $6.204 per share. Shares of common stock that may be acquiredfiscal year covered by an individual or group within 60 days of February 16, 2016, pursuant to the exercise of options, warrants or other rights, are deemed to be beneficially owned by the persons holding these options for the purpose of computing percentage ownership of that person, but are not treated as outstanding for the purpose of computing any other person’s ownership percentage.this Annual Report.

Unless otherwise noted below, the address of each person listed on the table is c/o Inotek Pharmaceuticals Corporation, 91 Hartwell Avenue, Second Floor, Lexington, MA 02421.

Name and address of beneficial owner

  Number of
Shares
Beneficially
Owned
   Percent
of
Class
 

5% Stockholders

    

Devon Park Associates Entities (1)

   3,253,566     12.3

Rho Ventures Entities (2)

   2,627,790     9.9

Care Capital Entities (3)

   2,277,139     8.6

MedImmune Ventures, Inc. (4)

   1,917,906     7.3

Point72 Asset Management, L.P. (5)

   1,840,980     7.0

RS Investment Management Co. LLC (6)

   1,585,006     6.0

Prudential Financial, Inc. (7)

   1,919,852     7.3

BlackRock, Inc. (8)

   1,714,204     6.5

Named executive officers and directors

    

David P. Southwell (9)

   198,363     *  

Rudolf Baumgartner, M.D. (10)

   227,190     *  

William K. McVicar, Ph.D. (11)

   207,347     *  

Dale Ritter (12)

   25,094     *  

Ittai Harel (13)

   18,857     *  

Paul G Howes (14)

   126,506     *  

A.N. “Jerry” Karabelas, Ph.D. (15)

   2,295,996     8.7

Isai Peimer (16)

   18,857     *  

Richard N. Spivey, Pharm.D., Ph.D.

        *  

Martin Vogelbaum (17)

   18,857     *  

Gary Phillips, M.D.

        *  

Carsten Boess

        *  
  

 

 

   

All directors and executive officers as a group (12 persons) (18)

   3,137,067     11.6
  

 

 

   

*Represents beneficial ownership of less than one percent.
(1)Based on Schedule 13D filed with the SEC on March 5, 2015, consists of (a) 3,243,709 shares beneficially owned by Devon Park Bioventures, L.P. and (b) 9,857 shares of common stock issuable upon the exercise of options exercisable within 60 days after June 30, 2015 beneficially owned by Devon Park Associates, L.P. The general partner of Devon Park Bioventures, L.P. is Devon Park Associates, L.P. and Devon Park Associates, LLC is the general partner of Devon Park Associates, L.P. Messrs. Devang V. Kantesaria, Christopher Moller and Marc Ostro are the managing members of Devon Park Associates, LLC. Each such managing director may be deemed to have shared voting and investment power over the shares held by Devon Park Associates Entities as described above. The address for Devon Park Associates Entities is 1400 Liberty Ridge Drive, Suite 103, Wayne, Pennsylvania, 19087.
(2)

Item 13.

Based on Schedule 13G filed with the SEC on February 12, 2016, consists of (a) 892,415 shares beneficially owned by Rho Ventures IV (QP), L.P. (“Rho QP”), (b) 930,029 shares beneficially owned by Rho Ventures IV GmbH & Co. BETEILIGUNGS KG (“Rho GmbH”), (c) 636,496 shares beneficially owned by Rho Ventures IV Holdings LLC (“Rho Holdings”),Certain Relationships and (d) 168,850 shares beneficially owned by Rho Ventures IV, L.P. (“Rho IV”). (“Rho IV-A”). The votingRelated Party Transactions, and dispositive decisions with respect to the shares held by Rho IV, Rho Holdings, Rho IV-A, and Rho QP are made by the following managingDirector Independence

members of their general partner or managing member, Rho Management Ventures IV, L.L.C.: Mark Leschly, Habib Kairouz and Joshua Ruch. The voting and dispositive decisions with respect to the shares held by Rho GmbH are made by the following managing directors of its general partner, Rho Capital Partners Verwaltungs GmbH: Mark Leschly, Habib Kairouz and Joshua Ruch. The address for the Rho Venture Entities is 152 West 57th Street, 23rd Floor, New York, New York 10019.
(3)Based on Schedule 13G filed with the SEC on March 5, 2015, consists of (a) 713,077 shares beneficially owned by Care Capital Investments II, LP. (“Investments II”), (b) 1,490,240 shares beneficially owned by Care Capital Investments III, L.P (“Investments III”), (c) 48,938 shares beneficially owned by Care Capital Offshore Investments II, L.P. (“Offshore II”) and (d) 24,884 shares beneficially owned by Care Capital Offshore Investments III, LP. (“Offshore III”) The voting and disposition of the shares held by Investments II and Offshore II is determined by the following managing members of their general partner, Care Capital II, LLC: A.N. “Jerry” Karabelas, Ph.D., a member of our Board of Directors, Jan Leschly and David R. Ramsay. The voting and disposition of the shares held by Investments III and Offshore III is determined by the following managing members of their general partner, Care Capital III, LLC: A.N. “Jerry” Karabelas, Ph.D., a member of our Board of Directors, Jan Leschly, Richard Markham and David R. Ramsay. The address of the Care Capital Entities is 47 Hull Street, Suite 310, Princeton, New Jersey 08540.
(4)Based on Schedule 13G filed with the SEC on February 16, 2916, consists of 1,917,906 shares beneficially owned by MedImmune Ventures, Inc. The voting and investment power of the shares held by MedImmune Ventures, Inc. is determined by Ron Laufer, Senior Managing Director of MedImmune Ventures, Inc. Isai Peimer, a member of our Board of Directors, is a Managing Director at MedImmune Ventures, Inc. The address of MedImmune Ventures, Inc. is 1 MedImmune Way, Gaithersburg, Maryland 20878.
(5)Based on Schedule 13G/A filed with the SEC on February 16, 2916, consists of (a) 1,148,100 shares over which may be deemed to be beneficially owned by Point72 Asset Management Point72 Capital Advisors Inc. and Mr. Steven Cohen, (ii) 700 shares which may be deemed to be beneficially owned by Cubist Systematic Strategies and Mr. Cohen, (iii) 692,180, which may be deemed to be beneficially owned by EverPoint Asset Management and Mr. Cohen. Each of the reporting persons disclaims beneficial ownership of such shares, except to the extent of their proportionate pecuniary interest therein, if any. The principal business address of Point72 Asset Management, Point72 Capital Advisors and Mr. Cohen is 72 Cummings Point Road, Stamford, CT 06902. The principal business address for Cubist Systematic Strategies and EverPoint Asset Management is 510 Madison Avenue, New York, NY 100122.
(6)Based on Schedule 13G filed with the SEC on February 9, 2016, consists of 1,585,006 shares over which RS Investment has sole dispositive power, of which RS Investment Management Co. LLC has sole voting power over 1,530,496 shares. The principal business address of RS Investment Management Co. LLC is One Bush Street, Suite 900, San Francisco, CA 94104.
(7)Based on Schedule 13G filed with the SEC on February 3, 2016, consists shares held directly by Jennison Associates LLC, a wholly-owned subsidiary of Prudential Financial, Inc., and over which Prudential Financial, Inc. has sole voting and dispositive power The principal business address of the beneficial owner is 751 Broad Street, Newark, NJ 07102-3777.
(8)Based on Schedule 13G filed with the SEC on January 28, 2016, consists shares held by subsidiaries of BlackRock, Inc., and over which BlackRock, Inc. has sole voting and dispositive power. The principal business address of the beneficial owner is 55 East 52nd Street, New York, NY 10055.
(9)Includes 198,363 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.
(10)Includes 101,548 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.
(11)Consists of 101,027 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.
(12)Includes 25,094 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.
(13)

Consists of 18,857 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.

(14)Includes 25,017 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.
(15)In addition to the shares described in note (3) above, includes 8,857 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.
(16)In addition to the shares described in note (4) above, includes 8,857 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.
(17)Consists of 18,857 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.
(18)Includes 516,104 shares of common stock issuable upon the exercise of options exercisable within 60 days after February 16, 2016.

Item 13. CertainInformation with respect to this item will be set forth in the Proxy Statement or Form 10-K/A under the headings “Certain Relationships and Related Party Transactions,Transactions” and Director Independence2

Other than compensation arrangements, we describe below transactions“Corporate Governance” and series of similar transactions, since January 1, 2013, which includes our last three full fiscal years, to which we were a partyis incorporated herein by reference. The Proxy Statement or Form 10-K/A will be a party, in which:

filed with the amounts involved exceeded or will exceed $120,000; and

any of our directors, executive officers or holders of more than 5% of our capital stock, or any memberSEC within 120 days after the end of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.

Compensation arrangements for our directors and named executive officers are described elsewhere infiscal year covered by this prospectus and other documents incorporated by reference herein.Annual Report.

Sales and Purchases of Securities

Equity Financings

In June 2010, we entered into a securities purchase agreement pursuant to which we issued to certain investors shares an aggregate of 9,477,907 of our Series AA Preferred Stock in two separate closings at a price of approximately $1.529 per share, as amended, or the 2010 Series AA Purchase Agreement. In May 2011, we issued to certain investors an additional aggregate of 2,329,464 shares of our Series AA Preferred Stock as a result of our attainment of certain milestones under the 2010 Series AA Purchase Agreement. In June 2011, we issued to certain investors an additional aggregate of 3,651,425 shares of our Series AA Preferred Stock pursuant to an elective extension of the 2010 Series AA Purchase Agreement.

The following table summarizes the participation in the 2010 Series AA Preferred Stock financing by any of our directors, executive officers, holders of more than 5% of our voting securities, or any member of the immediate family of the foregoing persons, since January 1, 2011.

Name  Shares of Series
AA Preferred
Stock
   Aggregate Purchase
Price Paid
 

Devon Park Bioventures, L.P. (1)

   1,677,097    $2,565,746  

Pitango Venture Capital Fund IV L.P. (2)

   984,987    $1,506,907  

Pitango Venture Capital Fund Principals L.P. (2)

   21,271    $32,541  

Care Capital Investments III, LP (3)

   989,729    $1,514,160  

Care Capital Offshore Investments III, LP (3)

   16,529    $25,297  

Rho Management Trust I (4)

   294,404    $450,400  

Rho Ventures IV, L.P. (4)

   135,120    $206,716  

Rho Ventures IV (QP), L.P. (4)

   318,105    $486,661  

Rho Ventures IV GmbH & Co. BETEILIGUNGS KG (4)

   331,513    $507,172  

MedImmune Ventures, Inc. (5)

   905,633    $1,385,503  

(1)Devang V. Kantesaria, a former member of our Board of Directors, is a managing member of Devon Park Associates, LLC, of which Devon Park Bioventures, L.P. is an affiliated fund.
(2)Ittai Harel, a member of our Board of Directors, is a general partner with Pitango Venture Capital, of which Pitango Venture Capital Fund IV L.P. and Pitango Venture Capital Fund Principals L.P. are affiliated funds.
(3)A.N. “Jerry” Karabelas, a member of our Board of Directors, is a managing member at Care Capital II, LLC and Care Capital III, LLC, of which Care Capital Investments III, LP and Care Capital Offshore Investments III, LP are affiliated funds.
(4)Martin Vogelbaum, a member of our Board of Directors, is a Partner at Rho, of which Rho Management Trust I, Rho Ventures IV, L.P, Rho Ventures IV (QP), L.P., and Rho Ventures IV GmbH & Co. BETEILIGUNGS KG are affiliated funds.
(5)Isai Peimer, a member of our Board of Directors, is a Managing Director at MedImmune Ventures, Inc.

In July 2012, we issued unsecured convertible promissory notes in a private placement for aggregate proceeds of $1.5 million. In November 2012, we issued unsecured convertible promissory notes in a private placement for aggregate proceeds of $1.0 million. In February 2013, we issued unsecured convertible promissory notes in a private placement for aggregate proceeds of $1.0 million. In June 2013, we entered into a securities purchase agreement pursuant to which the promissory notes were converted into 2,677,731 shares of Series AA Preferred Stock in accordance with their terms at a price of $1.3761 per share and we issued to certain investors an additional aggregate of 5,687,991 shares of our Series AA Preferred Stock at a price of $1.529 per share, or the 2013 Series AA Purchase Agreement. In July 2013, we issued an additional aggregate of 852,230 shares of our Series AA Preferred Stock to certain investors and warrants to purchase 852,230 shares of our Series AA Preferred Stock at an exercise price of $0.01 per share, which were exercised in full during 2014.

The following table summarizes the participation in the 2013 Series AA Preferred Stock financing by any of our directors, executive officers, holders of more than 5% of our voting securities, or any member of the immediate family of the foregoing persons.

Name

  Principal Amount of
Convertible
Promissory Notes
   Shares of
Series AA
Preferred Stock
   Warrants to
Purchase Series
AA Preferred
Stock
   Aggregate
Purchase Price
Paid
 

Devon Park Bioventures, L.P. (1)

   968,789     2,852,631     301,141    $4,248,346.76  

Pitango Venture Capital Fund IV L.P. (2)

   568,986     988,183         $1,444,372.91  

Pitango Venture Capital Fund Principals L.P. (2)

   12,287     21,319         $31,161.02  

Care Capital Investments III, LP (3)

   571,726     1,683,490     177,717    $2,507,174.01  

Care Capital Offshore Investments III, LP (3)

   9,548     28,115     2,968    $41,870.35  

Rho Ventures IV Holdings LLC (4)

   182,366     536,983     56,687    $799,713.93  

Rho Ventures IV, L.P. (4)

   83,699     246,453     26,017    $367,036.97  

Rho Ventures IV (QP), L.P. (4)

   197,047     580,211     61,251    $864,093.40  

Rho Ventures IV GmbH & Co. BETEILIGUNGS KG (4)

   205,353     604,668     63,833    $900,515.95  

MedImmune Ventures, Inc. (5)

   523,146     1,540,444     162,616    $2,294,139.87  

(1)Devang V. Kantesaria, a former member of our Board of Directors, is a managing member of Devon Park Associates, LLC, of which Devon Park Bioventures, L.P. is an affiliated fund.
(2)Ittai Harel, a member of our Board of Directors, is a general partner with Pitango Venture Capital, of which Pitango Venture Capital Fund IV L.P. and Pitango Venture Capital Fund Principals L.P. are affiliated funds.
(3)

A.N. “Jerry” Karabelas, a member of our Board of Directors, is a managing member at Care Capital II, LLC and Care Capital III, LLC, of which Care Capital Investments III, LP and Care Capital Offshore Investments III, LP are affiliated funds.

(4)Martin Vogelbaum, a member of our Board of Directors, is a Partner at Rho, of which Rho Ventures IV, L.P, Rho Ventures IV (QP), L.P., Rho Ventures IV GmbH & Co. BETEILIGUNGS KG and Rho Ventures IV Holdings LLC are affiliated funds.
(5)Isai Peimer, a member of our Board of Directors, is a Managing Director at MedImmune Ventures, Inc.

Debt Financings

In December 2014, we sold subordinated convertible promissory notes, or the 2014 bridge notes, in the aggregate original principal amount of $2.0 million to existing stockholders. As consideration for our issuance of the 2014 bridge notes, each investor paid us an amount equal to the original principal amount of the note issued to the investor. The 2014 bridge notes mature on June 30, 2015, accrue interest at the rate of 8% per annum and are subordinate to all other senior indebtedness of the Company. As of the date of this prospectus, the aggregate outstanding principal and accrued interest under the 2014 bridge notes is approximately $2.0 million. Upon the closing of our initial public offering, all outstanding principal and accrued interest of the 2014 bridge notes, automatically converted into common stock at the initial public offering price. The following table summarizes the participation in the 2014 bridge notes financing by any of our directors, executive officers, holders of more than 5% of our voting securities, or any member of the immediate family of the foregoing persons.

Name

  Principal Amount of
Subordinated
Convertible
Promissory Note
 

Devon Park Bioventures, L.P. (1)

  $626,942.90  

Rho Ventures IV, L.P. (2)

  $27,797.11  

Rho Ventures IV (QP), L.P. (2)

  $146,910.56  

Rho Ventures IV GmbH & Co. Beteiligungs KG (2)

  $153,102.29  

Rho Ventures IV Holdings LLC (2)

  $104,780.66  

Care Capital Investments III, LP (3)

  $369,989.00  

Care Capital Offshore Investments III, LP (3)

  $6,178.93  

MedImmune Ventures, Inc. (4)

  $338,551.12  

Pitango Venture Capital Fund IV, L.P. (5)

  $220,975.53  

Pitango Venture Capital Principals Fund IV, L.P. (5)

  $4,771.90  

(1)Devang V. Kantesaria, a former member of our Board of Directors, is a managing member of Devon Park Associates, LLC, of which Devon Park Bioventures, L.P. is an affiliated fund.
(2)Martin Vogelbaum, a member of our Board of Directors, is a Partner at Rho, of which the Rho Venture Entities are affiliated funds.
(3)A.N. “Jerry” Karabelas, a member of our Board of Directors, is a managing member at Care Capital II, LLC and Care Capital III, LLC, of which the Care Capital Entities are affiliated funds.
(4)Isai Peimer, a member of our Board of Directors, is a Managing Director at MedImmune Ventures, Inc.
(5)Ittai Harel, a member of our Board of Directors, is a general partner with Pitango Venture Capital, of which the Pitango Venture Capital Fund Entities are affiliated funds.

Agreements With Our Stockholders

In connection with our preferred stock financings, we entered into a third amended and restated investor rights agreement, or Investor Rights Agreement, and a third amended and restated stockholders agreement, as amended, or Stockholders Agreement, in each case, with the purchasers of our preferred stock and, in the case of the stockholders agreement, certain holders of our common stock.

The rights under each of the Investor Rights Agreement and the Stockholders Agreement terminated upon the closing of our initial public offering, other than certain registration rights for certain holders of our preferred stock described below under “Description of Capital Stock.”

Indemnification Agreements

Our Seventh Amended and Restated Certificate of Incorporation and our bylaws, as amended, provide that we shall indemnify our directors and officers to the fullest extent permitted by law. In addition, we have previously entered into and intend to enter into new agreements to indemnify our directors and executive officers. These agreements will, among other things, indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts reasonably incurred by such person in any action or proceeding, including any action by or in our right, on account of any services undertaken by such person on behalf of us or that person’s status as a member of our Board of Directors.

Item 14.

Principal Accountant Fees and Services

Item 14. Principal Accountant Fees and Services

Our audit committeepre-approves all audit and permissiblenon-audit services provided by RSM US LLP (formerly McGladrey LLP). These services may include audit services,audit-related services, tax services and other services.Pre-approval mayInformation with respect to this item will be given as partset forth in the Proxy Statement or Form 10-K/A under the heading “Ratification of the audit committee’s approvalSelection of Independent Registered Public Accounting Firm” and is incorporated herein by reference. The Proxy Statement or Form 10-K/A will be filed with the SEC within 120 days after the end of the scope of the engagement of the independent registered public accounting firm or on an individualcase-by-case basis. All of the services described below were approvedfiscal year covered by our audit committee.

In 2014, we retained RSM US LLP (formerly McGladrey LLP) to provide audit services for the fiscal years ended December 31, 2014, 2013, and 2012, and for services in connection with our IPO which took place in February 2015. In the table below, audit fees reflects fees for audit services for the years ended December 31, 2015 and December 31, 2014. Audit-Related Fees reflects fees from our IPO-related and Follow-On offering services performed in 2015 and 2014.this Annual Report.

 

   2015   2014 

Audit Fees

  $162,900    $221,500  

Audit-Related Fees

   148,000     409,000  

Tax Fees

   —       —    

All Other Fees

   —       —    
  

 

 

   

 

 

 

Total

  $310,900    $630,500  
  

 

 

   

 

 

 

64


PART IV

Item 15.

Exhibits, Financial Statements and Schedules

(a)

Item 15. Exhibits, Financial Statements and Schedules

(a) The following documents are filed as part of this report:

(1)Financial Statements:

 

(2)

(2)

Financial Statement Schedules:

All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.

(3) Exhibits. The exhibits filed as part of this Annual Report

(3)

Exhibits:

Exhibit Index

Exhibit
Number

Description of Exhibit

2.1

Agreement and Plan of Merger and Reorganization, dated as of September 12, 2017, by and among Inotek Pharmaceuticals Corporation, Rocket Pharmaceuticals, Ltd. and Rome Merger Sub (11)

  3.1

Seventh Amended and Restated Certificate of Incorporation of Rocket Pharmaceuticals, Inc., effective as of February 23, 2015 (1)

3.2

Certificate of Amendment (Reverse Stock Split) to the Seventh Amended and Restated Certificate of Incorporation of the Registrant, effective as of January 4, 2018 (2)

3.3

Certificate of Amendment (Name Change) to the Seventh Amended and Restated Certificate of Incorporation of the Registrant, effective January 4, 2018 (2)

  3.4

Amended and Restated By-Laws of Rocket Pharmaceuticals, Inc., effective as of January 4, 2018 (3)

  4.1

Form of Common Stock Certificate of Rocket Pharmaceuticals, Inc. (2)

     4.2

Base Indenture, dated as of August 5, 2016, by and between Inotek Pharmaceuticals Corporation and Wilmington Trust, National Association (9)

     4.3

First Supplemental Indenture, dated as of August 5, 2016, by and between Inotek Pharmaceuticals Corporation and Wilmington Trust, National Association (9)

     4.4

Form of 5.75% Convertible Senior Note due 2021 (9)

10.1

2004 Stock Option and Incentive Plan (4)

10.2*

Amended and Restated 2014 Stock Option and Incentive Plan and forms of agreements thereunder

10.3*

Rocket Pharmaceuticals, Ltd. 2015 Share Option Plan

10.4

Letter Agreement, dated as of July 28, 2014, by and between the Registrant and David P. Southwell (4)

10.5

Letter Agreement, dated as of May 2, 2007, by and between the Registrant and Dr. Rudolf A. Baumgartner, M.D., as amended and currently in effect (4)

10.6

Letter Agreement, dated as of August 23, 2007, by and between the Registrant and Dr. William K. McVicar, Ph.D., as amended and currently in effect (4)

65


Exhibit
Number

Description of Exhibit

10.7

Transition Agreement, dated as of October 4, 2016, by and between Inotek Pharmaceuticals Corporation and Dr. William

K. McVicar, Ph.D. (10)

10.8

Letter Agreement, dated as of August 28, 2014, by and between Inotek Pharmaceuticals Corporation and Dale Ritter (4)

10.9*

Letter Agreement, dated as of January 4, 2018, by and between Inotek Pharmaceuticals Corporation and Dale Ritter

10.10*

Rocket Pharmaceuticals, Inc. Amended and Restated 2014 Employee Stock Purchase Plan

10.10.1

Form of Indemnification Agreement, to be entered into between the Registrant and its directors (2)

10.10.2

Form of Indemnification Agreement, to be entered into between the Registrant and its officers (2)

10.11.1

Lease, dated as of May 29, 2015, by and between Inotek Pharmaceuticals Corporation and 91 Hartwell Avenue Trust, as amended and currently in effect (5)

10.11.2

First Amendment to Lease, dated as of February 24, 2016, by and between Inotek Pharmaceuticals Corporation and 91 Hartwell Avenue Trust (6)

10.12*

Lease Agreement, dated as of March 31, 2016, by and between Rocket Pharmaceuticals, Ltd. and ARE-East River Science Park, LLC.

10.13

Warrant to Purchase Shares of Series Preferred Stock dated as of June 28, 2013, by and between Inotek Pharmaceuticals Corporation and Horizon Technology Finance Corporation (1)

10.14

Warrant to Purchase Shares of Series Preferred Stock dated as of June 28, 2013, by and between Inotek Pharmaceuticals Corporation and Fortress Credit Co LLC (1)

10.15

Sales Agreement, dated as of April 4, 2016, by and between Inotek Pharmaceuticals Corporation and Cowen and Company, LLC (7)

21.1*

List of Subsidiaries

23.1*

Consent of RSM US LLP

24.1*

Power of Attorney (included in the signature page)

31.1*

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

  XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Link Document.

*

Filed herewith.

(1)

Filed as an Exhibit to the Company’s annual report on Form 10-K (001-36829), filed with the SEC on March 31, 2015, and incorporated herein by reference.

(2)

Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on January 5, 2018, and incorporated herein by reference.

(3)

Filed as an Exhibit to the Company’s registration statement on Form 8-A, as amended (001-36829), filed with the SEC on January 11, 2018, and incorporated herein by reference.

(4)

Filed as an Exhibit to the Company’s registration statement on Form S-1 (333-199859), filed with the SEC on November 5, 2014, as amended, and incorporated herein by reference.

66


(5)

Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on June 1, 2015, and incorporated herein by reference.

(6)

Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on February 26, 2016, and incorporated herein by reference.

(7)

Filed as an Exhibit to the Company’s registration statement on Form S-3 (333-210585), filed with the SEC on April 4, 2016, as amended, and incorporated herein by reference.

(8)

Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on August 3, 2016, and incorporated herein by reference.

(9)

Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on August 5, 2016, and incorporated herein by reference.

(10)

Filed as an Exhibit to the Company’s quarterly report on Form 10-Q (001-36829), filed with the SEC on November 9, 2016, as amended, and incorporated herein by reference.

(11)

Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on September 13, 2017, and incorporated herein by reference.

Item 16. Form 10-K are set forth on the Exhibit Index immediately following our consolidated financial statements. The Exhibit Index is incorporated herein by reference.

Summary

None.

67


SIGNATURESSIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the RegistrantRocket Pharmaceuticals, Inc. (the Registrant) has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lexington, CommonwealthNew York, State of Massachusetts,New York, on March 23, 2016.7, 2018.

 

Inotek

Rocket Pharmaceuticals, CorporationInc.

By:

/s/ David P. SouthwellGaurav Shah, MD

David P. Southwell

Gaurav Shah, MD

President, Chief Executive Officer and Director

POWER OF ATTORNEY

Each person whose individual signature appears below hereby constitutes and appoints David P. SouthwellGaurav Shah, MD and Dale Ritter,John Militello, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantRegistrant and in the capacities and on the dates indicated.

 

Name

Title

Date

/s/ Gaurav Shah, MD

President, Chief Executive Officer and Director

March 7, 2018

Gaurav Shah, MD

(Principal Executive Officer)

/s/ John Militello

Controller

March 7, 2018

John Militello

(Principal Financial and Accounting Officer)

/s/ Carsten Boess

Director

March 7, 2018

Carsten Boess

/s/ Pedro Granadillo

Director

March 7, 2018

Pedro Granadillo

/s/ Gotham Makker, MD

Director

March 7, 2018

Gotham Makker, MD

/s/ David P. Southwell

Director

March 7, 2018

David P. Southwell

President, Chief Executive Officer and Director

(Principal Executive Officer)

March 23, 2016

/s/ Dale Ritter

Dale RitterRoderick Wong, MD

Vice President–Finance

(Principal Financial and Accounting Officer)Director

March 23, 20167, 2018

Roderick Wong, MD

/s/ A.N. “Jerry” Karabelas, Ph.D.

A.N. “Jerry” Karabelas, Ph.D.Naveen Yalamanchi, MD

Director

March 23, 2016

7, 2018

/s/ Ittai Harel

Ittai HarelNaveen Yalamanchi, MD

Director

March 23, 2016

/s/ Carsten Boess

Carsten Boess

Director

March 23, 2016

/s/ Paul G. Howes

Paul G. Howes

DirectorMarch 23, 2016

/s/ Isai Peimer

Isai Peimer

DirectorMarch 23, 2016

/s/ Gary Phillips, M.D.

Gary Phillips, M.D.

DirectorMarch 23, 2016

/s/ Richard N. Spivey, PharmD, PhD

Richard N. Spivey, PharmD, PhD

DirectorMarch 23, 2016

/s/ Martin Vogelbaum

Martin Vogelbaum

DirectorMarch 23, 2016

68


Inotek Pharmaceuticals Corporation

Index to Financial Statements

Contents

 


F-1


Report of Independent

Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors and Stockholders of

Rocket Pharmaceuticals, Inc.

(formerly Inotek Pharmaceuticals CorporationCorporation)

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Inotek Pharmaceuticals Corporation and its subsidiaries, (the Company) as of December 31, 20152017 and 2014, and2016, the related consolidated statements of operations, comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended. ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inotek Pharmaceuticals Corporation as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ RSM US LLP

We have served as the Company's auditor since 2014.

Boston, Massachusetts

March 23, 2016

7, 2018

F-2


Inotek Pharmaceuticals Corporation

Consolidated Balance Sheets

(in thousands, except share and per share data)

   December 31, 
   2015  2014 

Assets

   

Current assets:

   

Cash and cash equivalents

  $80,042   $3,618  

Short-term investments

   31,238    —    

Prepaid expenses and other current assets

   1,086    52  
  

 

 

  

 

 

 

Total current assets

   112,366    3,670  

Property and equipment, net

   812    —    

Other assets

   143    1,850  
  

 

 

  

 

 

 

Total assets

  $113,321   $5,520  
  

 

 

  

 

 

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

   

Current liabilities:

   

Accounts payable

  $1,633   $1,146  

Accrued expenses and other current liabilities

   2,508    992  

Notes payable, current portion

   —      3,063  

Convertible Bridge Notes

   —      1,541  

Convertible Bridge Notes redemption rights derivative

   —      480  
  

 

 

  

 

 

 

Total current liabilities

   4,141    7,222  

Notes payable, net of current portion

   —      2,550  

Warrant liabilities

   —      482  

Other long-term liabilities

   367    24  
  

 

 

  

 

 

 

Total liabilities

   4,508    10,278  
  

 

 

  

 

 

 

Series AA redeemable convertible preferred stock, $0.001 par value; no shares authorized, issued and outstanding at December 31, 2015; 25,757,874 shares authorized and 24,057,013 shares issued and outstanding at December 31, 2014

   —      46,253  

Series X redeemable convertible preferred stock, $0.001 par value; no shares authorized, issued and outstanding at December 31, 2015; 2,902,050 shares authorized and 1,892,320 shares issued and outstanding at December 31, 2014

   —      548  
  

 

 

  

 

 

 

Total redeemable convertible preferred stock

   —      46,801  
  

 

 

  

 

 

 

Commitments and Contingencies (Note 9)

   

Stockholders’ equity (deficit):

   

Preferred Stock, $0.001 par value: 5,000,000 shares authorized and no shares issued or outstanding

   —      —    

Common stock, $0.01 par value: 120,000,000 shares and 43,509,727 shares authorized at December 31, 2015 and December 31, 2014, respectively; 26,423,394 shares and 1,020,088 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively

   264    10  

Additional paid-in capital

   304,583    76,472  

Accumulated deficit

   (196,023  (128,041

Other comprehensive loss

   (11  —    
  

 

 

  

 

 

 

Total stockholders’ equity (deficit)

   108,813    (51,559
  

 

 

  

 

 

 

Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

  $113,321   $5,520  
  

 

 

  

 

 

 

The accompanying notes are an integral part of these financial statements.

Inotek Pharmaceuticals Corporation

Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

   Years Ended December 31, 
  2015  2014 

Operating expenses:

   

Research and development

  $(12,554 $(5,592

General and administrative

   (7,842  (2,112
  

 

 

  

 

 

 

Loss from operations

   (20,396  (7,704

Interest expense

   (1,230  (980

Interest income

   89    —    

Loss on extinguishment of debt

   (4,399  —    

Change in fair value of warrant liabilities

   267    (845

Change in fair value of Convertible Bridge Notes redemption rights derivative

   480    (2

Change in fair value of 2020 Convertible Notes derivative liability

   (42,793  —    
  

 

 

  

 

 

 

Net loss

  $(67,982 $(9,531
  

 

 

  

 

 

 

Net loss per share attributable to common stockholders—basic and diluted

  $(3.72 $(13.52
  

 

 

  

 

 

 

Weighted-average number of shares outstanding—basic and diluted

   18,311,333    1,020,088  
  

 

 

  

 

 

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

78,720

 

 

$

29,798

 

Short-term investments

 

 

21,294

 

 

 

96,675

 

Prepaid expenses and other current assets

 

 

1,033

 

 

 

1,876

 

Total current assets

 

 

101,047

 

 

 

128,349

 

Property and equipment, net

 

 

563

 

 

 

1,130

 

Other assets

 

 

168

 

 

 

168

 

Total assets

 

$

101,778

 

 

$

129,647

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

451

 

 

$

1,592

 

Accrued expenses and other current liabilities

 

 

2,373

 

 

 

4,246

 

Accrued interest

 

 

1,246

 

 

 

1,204

 

Total current liabilities

 

 

4,070

 

 

 

7,042

 

2021 Convertible Notes, net of issuance costs

 

 

49,541

 

 

 

48,960

 

Other long-term liabilities

 

 

403

 

 

 

477

 

Total liabilities

 

 

54,014

 

 

 

56,479

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred Stock, $0.001 par value: 5,000,000 shares authorized and no shares issued or

   outstanding

 

 

 

 

 

 

Common stock, $0.01 par value: 120,000,000 shares authorized at December 31, 2017

   and December 31, 2016; 6,805,686 shares and 6,746,579 shares issued and

   outstanding at December 31, 2017 and December 31, 2016, respectively

 

 

68

 

 

 

67

 

Additional paid-in capital

 

 

316,086

 

 

 

312,032

 

Accumulated deficit

 

 

(268,374

)

 

 

(238,877

)

Accumulated other comprehensive loss

 

 

(16

)

 

 

(54

)

Total stockholders’ equity

 

 

47,764

 

 

 

73,168

 

Total liabilities and stockholders’ equity

 

$

101,778

 

 

$

129,647

 

The accompanying notes are an integral part of these consolidated financial statements.

F-3


Inotek Pharmaceuticals Corporation

Consolidated Statements of Comprehensive LossOperations

(in thousands, except share and per share amounts)

 

   Years Ended December 31, 
       2015           2014     

Net loss

  $(67,982  $(9,531

Other comprehensive loss :

    

Net unrealized loss on marketable securities

   (11   —    
  

 

 

   

 

 

 

Total comprehensive loss

  $(67,993  $(9,531
  

 

 

   

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

(14,193

)

 

$

(31,985

)

General and administrative

 

 

(12,544

)

 

 

(9,894

)

Loss from operations

 

 

(26,737

)

 

 

(41,879

)

Interest expense

 

 

(3,579

)

 

 

(1,418

)

Interest income

 

 

819

 

 

 

443

 

Net loss

 

$

(29,497

)

 

$

(42,854

)

Net loss per share attributable to common stockholders—basic and diluted

 

$

(4.36

)

 

$

(6.41

)

Weighted-average number of shares outstanding—basic and diluted

 

 

6,765,451

 

 

 

6,683,794

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-4


Inotek Pharmaceuticals Corporation

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)Comprehensive Loss

(in thousands, except share and per share data)thousands)

 

  Series AA
Redeemable
Convertible

Stock
  Series X
Redeemable
Convertible

Stock
  

 

 Common Stock  Treasury Stock  Additional
Paid in

Capital
  Accumulated
Deficit
  Accumulated
Other
Comprehensive

Loss
  Total 
 Shares  Amount  Shares  Amount  

 

 Shares  Par value  Shares  Par value     

Balances at December 31, 2013

  23,204,783   $40,685    1,892,320   $548      1,021,972   $10    (1,884 $(176 $79,781   $(118,510 $—     $(38,895

Stock-based compensation

  —      —      —      —        —      —      —      —      177    —      —      177  

Accretion of Series AA preferred stock to redemption value

  —      864    —      —        —      —      —      —      (864  —      —      (864

Accrual of Series AA preferred stock dividends

  —      3,401    —      —        —      —      —      —      (3,401  —      —      (3,401

Exercise of Series AA preferred stock warrants

  852,230    1,303    —      —        —      —      —      —      955    —      —      955  

Retirement of treasury stock

  —      —      —      —        (1,884  —      1,884    176    (176  —      —      —    

Net loss

  —      —      —      —        —      —      —      —      —      (9,531  —      (9,531
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances at December 31, 2014

  24,057,013    46,253    1,892,320    548      1,020,088    10    —      —      76,472    (128,041  —      (51,559

Stock-based compensation

  —      —      —      —        —      —      —      —      2,380    —      —      2,380  

Accretion of Series AA preferred stock to redemption value

  —      131    —      —        —      —      —      —      (131  —      —      (131

Issuance of common stock upon initial public offering, net of $5,303 in offering costs

  —      —      —      —        6,966,333    70    —      —      36,425    —      —      36,495  

Conversion of Series AA preferred stock into common stock upon initial public offering

  (24,057,013  (46,384  —      —        7,536,331    75    —      —      46,309    —      —      46,384  

Conversion of Series X preferred stock into common stock upon initial public offering

  —      —      (1,892,320  (548    466,319    5    —      —      543    —      —      548  

Conversion of Convertible Bridge Notes into common stock upon initial public offering

  —      —      —      —        337,932    3    —      —      2,024    —      —      2,027  

Reclassification of fair value of warrant liability to equity upon initial public offering

  —      —      —      —        —      —      —      —      215    —      —      215  

Common stock issued pursuant to stock option plans

  —      —      —      —        9,857    —      —      —      43    —      —      43  

Common stock issued pursuant to employee stock purchase plan

  —      —      —      —        
13,143
  
  —      —      —      63    —      —      63  

Conversion of 2020 Convertible Notes into common stock

  —      —      —      —        3,863,391    39    —      —      66,337    —      —      66,376  

Issuance of common stock upon secondary public offering

  —      —      —      —        6,210,000    62    —      —      73,903    —      —      73,965  

Unrealized comprehensive loss on marketable securities

  —      —      —      —        —      —      —      —      —      —      (11  (11

Net loss

  —      —      —      —        —      —      —      —      —      (67,982  —      (67,982
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances at December 31, 2015

  —     $—      —     $—        26,423,394   $264    —     $—     $304,583   $ (196,023)   $(11 $ 108,813  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

Net loss

 

$

(29,497

)

 

$

(42,854

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on marketable securities

 

 

38

 

 

 

(43

)

Total comprehensive loss

 

$

(29,459

)

 

$

(42,897

)

The accompanying notes are an integral part of these consolidated financial statements.

F-5


Inotek Pharmaceuticals Corporation

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share amounts)

 

 

Common Stock

 

 

Additional

Paid in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Par value

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Total

 

Balances at December 31, 2015

 

 

6,605,849

 

 

$

66

 

 

$

304,781

 

 

$

(196,023

)

 

$

(11

)

 

$

108,813

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,909

 

 

 

 

 

 

 

 

 

2,909

 

Stock options exercised

 

 

13,577

 

 

 

 

 

 

191

 

 

 

 

 

 

 

 

 

191

 

Common stock issued pursuant to employee stock

   purchase plan

 

 

6,481

 

 

 

 

 

 

155

 

 

 

 

 

 

 

 

 

155

 

Issuance of common stock, net of $403 in

   offering costs

 

 

120,672

 

 

 

1

 

 

 

3,996

 

 

 

 

 

 

 

 

 

3,997

 

Unrealized comprehensive loss on marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43

)

 

 

(43

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(42,854

)

 

 

 

 

 

(42,854

)

Balances at December 31, 2016

 

 

6,746,579

 

 

 

67

 

 

 

312,032

 

 

 

(238,877

)

 

 

(54

)

 

 

73,168

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,036

 

 

 

 

 

 

 

 

 

4,036

 

Common stock issued pursuant to employee stock

   purchase plan

 

 

5,971

 

 

 

 

 

 

35

 

 

 

 

 

 

 

 

 

35

 

Issuance of common stock pursuant to settlement

   of restricted stock units

 

 

56,406

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Shares surrendered by employees to pay taxes

   related to settlement of restricted stock

 

 

(3,270

)

 

 

 

 

 

(16

)

 

 

 

 

 

 

 

 

(16

)

Unrealized comprehensive gain on marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38

 

 

 

38

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(29,497

)

 

 

 

 

 

(29,497

)

Balances at December 31, 2017

 

 

6,805,686

 

 

$

68

 

 

$

316,086

 

 

$

(268,374

)

 

$

(16

)

 

$

47,764

 

The accompanying notes are an integral part of these consolidated financial statements.


Inotek Pharmaceuticals Corporation

Consolidated Statements of Cash Flows

(in thousands)

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(29,497

)

 

$

(42,854

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Noncash interest expense

 

 

581

 

 

 

222

 

Noncash rent

 

 

(59

)

 

 

(60

)

Noncash asset impairment charge

 

 

437

 

 

 

 

Amortization of premium on marketable securities

 

 

217

 

 

 

225

 

Depreciation

 

 

200

 

 

 

169

 

Stock-based compensation

 

 

4,036

 

 

 

2,909

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

960

 

 

 

(948

)

Accounts payable

 

 

(1,141

)

 

 

(41

)

Accrued expenses and other liabilities

 

 

(1,846

)

 

 

3,112

 

Net cash used in operating activities

 

 

(26,112

)

 

 

(37,266

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(27,204

)

 

 

(122,277

)

Proceeds from the maturities of short-term investments

 

 

102,289

 

 

 

56,705

 

Purchase of property and equipment

 

 

(70

)

 

 

(487

)

Net cash provided by (used in) investing activities

 

 

75,015

 

 

 

(66,059

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of 2021 Convertible Notes

 

 

 

 

 

52,000

 

Payments of 2021 Convertible Notes issuance costs

 

 

 

 

 

(3,262

)

Net proceeds from issuance of common stock

 

 

 

 

 

3,997

 

Proceeds from the issuance of common stock pursuant to stock option plans

 

 

 

 

 

191

 

Proceeds from the issuance of common stock pursuant to employee stock purchase plan

 

 

35

 

 

 

155

 

Payments made for taxes of employees who surrendered shares related to settlement of restricted stock

 

 

(16

)

 

 

 

Net cash provided by financing activities:

 

 

19

 

 

 

53,081

 

Net change in cash and cash equivalents

 

 

48,922

 

 

 

(50,244

)

Cash and cash equivalents, beginning of period

 

 

29,798

 

 

 

80,042

 

Cash and cash equivalents, end of period

 

$

78,720

 

 

$

29,798

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,957

 

 

$

 

Cash paid for income taxes

 

$

 

 

$

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on marketable securities

 

$

38

 

 

$

(43

)

The accompanying notes are an integral part of these consolidated financial statements.


Inotek Pharmaceuticals Corporation

Notes to Consolidated Financial Statements

(in thousands, except share and per share amounts)

   Years Ended
December 31,
 
   2015  2014 

Cash flows from operating activities:

   

Net loss

  $(67,982 $(9,531

Adjustments to reconcile net loss to cash used by operating activities:

   

Noncash interest expense

   1,132    238  

Deferred rent and lease incentives

   (20  —    

Loss on extinguishment of debt

   4,239    —    

Amortization of premium on marketable securities

   75    —    

Depreciation

   45    —   

Change in fair value of warrant liabilities

   (267  845  

Change in fair value of Convertible Bridge Notes redemption rights derivative

   (480  2  

Change in fair value of 2020 Convertible Notes derivative liability

   42,793    —    

Stock-based compensation

   2,380    177  

Changes in operating assets and liabilities:

   

Prepaid expenses and other assets

   (1,256  (1,804

Accounts payable

   487    917  

Accrued expenses and other current liabilities

   1,438    (587
  

 

 

  

 

 

 

Net cash used in operating activities

   (17,416  (9,743
  

 

 

  

 

 

 

Cash flows from investing activities:

   

Purchase of short-term investments

   (33,693  —    

Proceeds from the maturities of short-term investments

   2,430    —   

Purchase of property and equipment

   (412)  —   
  

 

 

  

 

 

 

Net cash provided by investing activities:

   (31,675)  —   
  

 

 

  

 

 

 

Cash flows from financing activities:

   

Net proceeds from issuance of convertible notes

   —      1,970  

Net proceeds from issuance of common stock in initial public offering

   38,085   —   

Proceeds from issuance of 2020 Convertible Notes in initial public offering

   21,000    —   

Payments of 2020 Convertible Notes Issuance Costs

   (1,841  —   

Net proceeds from issuance of common stock in follow-on public offering

   73,965    —   

Proceeds from the issuance of shares pursuant to stock option plans

   43    —   

Proceeds from the issuance of shares pursuant to employee stock purchase plan

   63    —    

Proceeds from exercise of warrants for Series AA Preferred Stock

   —      8  

Principal payments on notes payable

   (5,800  (1,410
  

 

 

  

 

 

 

Net cash provided by financing activities:

   125,515    568  
  

 

 

  

 

 

 

Net change in cash and cash equivalents

   76,424    (9,175

Cash and cash equivalents, beginning of period

   3,618    12,793  
  

 

 

  

 

 

 

Cash and cash equivalents, end of period

  $80,042   $3,618  
  

 

 

  

 

 

 

Supplemental disclosure of cash flow information:

   

Cash paid for interest

  $89   $738  
  

 

 

  

 

 

 

Supplemental disclosure of noncash investing and financing activities:

   

Accrual of Series AA preferred stock dividends

  $—    $3,401  
  

 

 

  

 

 

 

Acquisition of leasehold improvements

  $445  $—   
  

 

 

  

 

 

 

Conversion of Series AA preferred stock into common stock upon initial public offering

  $46,384   $—   
  

 

 

  

 

 

 

Conversion of Series X preferred stock into common stock upon initial public offering

  $548   $—   
  

 

 

  

 

 

 

Conversion of Convertible Bridge Notes into common stock upon initial public offering

  $2,027   $—   
  

 

 

  

 

 

 

Conversion of 2020 Convertible Notes into common stock

  $66,376   $—   
  

 

 

  

 

 

 

Accretion of Series AA preferred stock to redemption value

  $131   $864  
  

 

 

  

 

 

 

Reclassification of fair value of warrant liability to equity upon initial public offering

  $215   $—   
  

 

 

  

 

 

 

Reclassification of fair value of warrant liability related to exercise of preferred stock warrants

  $—    $2,250  
  

 

 

  

 

 

 

Reclassification of deferred public offering costs to stockholders’ equity

  $1,590   $—   
  

 

 

  

 

 

 

Reclassification of deferred public offering costs to other assets

  $256   $—   
  

 

 

  

 

 

 

Retirement of treasury stock

  $—     $176  
  

 

 

  

 

 

 

Unrealized comprehensive loss on marketable securities

  $11   $—   
  

 

 

  

 

 

 

The accompanying notes are an integral part of these financial statements.

Inotek Pharmaceuticals Corporation

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

1. Organization and Operations

On January 4, 2018, Rome Merger Sub (“Merger Sub”), a wholly owned subsidiary of Inotek Pharmaceuticals Corporation (“Inotek”), completed its merger with and into Rocket Pharmaceuticals, Ltd., a privately held, multi-platform biotechnology company focused on the development of first-in-class gene therapies for rare and devastating pediatric diseases (“Private Rocket”), with Private Rocket surviving as a wholly owned subsidiary of Inotek. This transaction is referred to as the “Reverse Merger.” The Reverse Merger was effected pursuant to an Agreement and Plan of Merger and Reorganization (the “Company”“Merger Agreement”) is, dated as of September 12, 2017, by and among Inotek, Private Rocket and Rome Merger Sub. Immediately prior to the Reverse Merger, on January 4, 2018, Inotek effected a 1-for-4 reverse stock split on its issued and outstanding common stock. The accompanying consolidated financial statements and notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

Upon the closing of the Reverse Merger, each outstanding share of Private Rocket’s common stock converted into approximately 76.185 shares of Inotek’s common stock. In addition, each outstanding option to purchase Private Rocket’s common stock prior to the effective time of the Reverse Merger was converted into an option to purchase Inotek’s common stock. No fractional shares of Inotek’s common stock were issued in connection with the Reverse Merger. Instead, Private Rocket’s stockholders received cash in lieu of any fractional shares of Rocket’s common stock such stockholders would have otherwise been entitled to receive in accordance with the Merger Agreement.

Immediately following the Reverse Merger, the combined company changed its name from “Inotek Pharmaceuticals Corporation” to “Rocket Pharmaceuticals, Inc.” The combined company following the Reverse Merger may be referred to herein as “the combined company,” “Rocket,” or “the Company.”

The accompanying consolidated financial statements do not give effect to the Reverse Merger. The financial statements have been labeled “Inotek Pharmaceuticals Corporation” for the purposes of this filing, which was the entity name in effect for the historical periods presented. The Reverse Merger will be accounted for as a reverse merger under the acquisition method of accounting. After reviewing the relative voting rights, the composition of the board of directors and the composition of senior management of the combined company after the Reverse Merger, it was determined that Private Rocket will be treated as the accounting acquirer and Inotek will be treated as the “acquired” company for financial reporting purposes under the acquisition method of accounting. See Note 12.

Prior to the Reverse Merger, Inotek was a clinical-stage biopharmaceutical company advancing moleculesfocused on the discovery, development and commercialization of therapies for ocular diseases, including glaucoma. After failing to meet the primary endpoints in its first pivotal Phase 3 trial of trabodenoson monotherapy (“MATrX-1”) and its Phase 2 trial of trabodenoson in a fixed-dose combination therapy with novel mechanismslatanoprost (“FDC”), Inotek voluntarily discontinued its development of action to address significant diseases of the eye. The Company’s business strategy is to develop and progress its product candidates through human clinical trials. The Company’s headquarters are locatedtrabodenoson in Lexington, Massachusetts.2017.

The Company hasHistorically, Inotek devoted substantially all of its effortsresources to research and development efforts relating to its product candidates, including conducting clinical trials, ofproviding general and administrative support for these operations and protecting its intellectual property. Inotek did not have any products approved for sale and did not generate any revenue from product candidates. The Company has not completed the development of any product candidates. The Company has no current source of revenue to sustain present activities and does not expect to generate revenue until and unless the Company receives regulatory approval of and successfully commercializes its product candidates. The Company is subject to a number of risks and uncertainties similar to those ofsales or other life science companies developing new products, including, among others, the risks related to the necessity to obtain adequate additional financing, to successfully develop product candidates, to obtain regulatory approval of products candidates, to comply with government regulations, to successfully commercialize its potential products, to the protection of proprietary technology and to the dependence on key individuals.

In February 2015, the Company completed its initial public offering (the “IPO”) of (i) 6,667,000 shares of common stock at a price of $6.00 per share and (ii) $20,000 aggregate principal amount of 5% Convertible Senior Notes due 2020 (the “2020 Convertible Notes”). Existing stockholders and their affiliated entities purchased approximately 3,005,000 shares of common stock issued in the IPO at the same terms previously described. In March 2015 the underwriters purchased 299,333 shares of common stock at $6.00 per share and $1,000 of the 2020 Convertible Notes pursuant to exercises of their overallotment options. The Company received net proceeds of $36,495, after deducting underwriting discounts and offering-related costs, from its equity issuances and $18,903 in net proceeds, after deducting underwriting discounts and offering-related costs, from its debt issuances (See Note 7).

In July and August 2015, holders of $21,000 principal amount of the 2020 Convertible Notes elected to convert the principal into 3,333,319 shares of common stock. In addition, the Interest Make-Whole Payment (as defined below) was settled with shares of common stock, at the election of the Company, resulting in the issuance of 530,072 additional shares of common stock.

In August 2015, the Company completed an underwritten public offering of its common stock (the “Follow-on Offering”). The Company issued 6,210,000 shares of its common stock at a price of $12.75 per share, including 810,000 shares from the underwriters’ full exercise of their overallotment option, and received net proceeds of $73,965, after deducting underwriting discounts and offering-related costs.

Prior to this the Company hassources. From Inotek’s inception through December 31, 2017, it funded its operations primarily through the salesales of preferredequity and debt securities. In February 2015, Inotek completed an initial public offering (“IPO”) of its common stock and issuancea concurrent offering of convertible promissorysenior notes, andraising an aggregate of $55,398 in net proceeds. In August 2015, Inotek completed a follow-on offering of its common stock, raising an aggregate of $73,965 in net proceeds. In August 2016, Inotek completed a second offering of convertible senior notes, payable.raising an aggregate of $48,738 in net proceeds.

Inotek incurred net losses in each year since its inception. As of December 31, 2015, the Company2017, Inotek had an accumulated deficit of $196,023$268,374 and $111,280 of cash and cash equivalents and short-term investments.

The Company will need to expend substantial resources for research and development, including costs associated with the clinical testing of its product candidates and will need to obtain additional financing to fund its operations and to conduct trials for its product candidates. If such products were to receive regulatory approval, the Company would need to prepare for the potential commercialization of its product candidates and fund the commercial launch and continued marketing of its products. The Company expects operating expenses will substantially increase in the future related to additional clinical testing and to support an increased infrastructure to support expanded operations and being a public company

The Company will require additional funding in the future and may not be able to raise such additional funds. The Company expects losses will continue as it conducts research and development activities. The Company will seek to finance future cash needs through public or private equity offerings, license agreements, debt financings, collaborations, strategic alliances, or any combination thereof. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt, limitations on the Company’s ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact the ability of the Company to conduct its business. If adequate funds are not available, the Company would delay, reduce or eliminate research and development programs and reduce administrative expenses. The Company may seek to access the public or private capital markets whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. In addition, if the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, it may have to relinquish valuable rights to its technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to it. If the Company is unable to raise sufficient funding, it may be unable to continue to operate. There is no assurance that the Company will be successful in obtaining sufficient financing on acceptable terms and conditions to fund continuing operations, if at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition.investments aggregating $100,014.  

2. Significant Accounting Policies

Basis of Presentation—The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements reflect the operations of the CompanyInotek and its wholly-owned subsidiary,wholly owned subsidiaries, Inotek Securities Corporation.Corporation, Inotek Ltd and Rome Merger Sub. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.


Segment Reporting—Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The CompanyInotek views its operations and manages its business in one operating segment.

Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the valuation of stock options used for the calculation of stock-based compensation fair value of warrant liabilities and other derivative instruments, and determinationthe calculation of accruals related to research and clinical development.

Comprehensive loss—Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources, and currently consists of net loss and changes in unrealized gains and losses on short-term investments. Accumulated other comprehensive loss consists entirely of unrealized gains and losses from short-term investments as of December 31, 2017 and 2016.

Cash and Cash Equivalents—Cash and cash equivalents consist of bank deposits, certificates of deposit and money market accounts. Cash equivalents are carried at cost which approximates fair value due to their short-term nature. The Companynature and which Inotek believes do not have a material exposure to credit risk. Inotek considers all highly liquid investments with maturities of 90 daysthree months or less atfrom the date of purchase to be cash equivalents.

The CompanyInotek maintains its cash and cash equivalent balances in the form of money market, savings or operating accounts with financial institutions that management believes are creditworthy. The Company’sInotek’s cash and cash equivalent accounts, and certificates of deposit, at times, may exceed federally insured limits. The CompanyInotek has not experienced any losses in such accounts. The CompanyInotek believes it is not exposed to any significant credit risk on cash and cash equivalents.

Short-term investmentsBeginning in 2015, short-termShort-term investments consist of investments in certificates of deposit, agency bonds and United States Treasury securities. Management determines the appropriate

classification of these securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The CompanyInotek classifies its short-term investments as available-for-sale pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 320,Investments—Debt and Equity Securities. Short-term investments are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive income (loss)loss in stockholders’ equity and a component of total comprehensive loss in the consolidated statements of comprehensive loss, until realized. Realized gains and losses are included in investment income on a specific-identification basis. There were no realized gains or losses on short-term investments for the yeartwelve months ended December 31, 2015,2017 and $11 in2016. There were $38 of net unrealized gains and $43 of net unrealized losses on short-term investments for the year endedas of December 31, 2015.2017 and 2016, respectively.

The CompanyInotek reviews short-term investments for other-than-temporary impairment whenever the fair value of a short-term investment is less than the amortized cost and evidence indicates that a short-term investment’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the statements of operations if the CompanyInotek has experienced a credit loss, has the intent to sell the short-term investment, or if it is more likely than not that the CompanyInotek will be required to sell the short-term investment before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’sInotek’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period.

Short-term investments at December 31, 20152017 consist of the following (in thousands):following:

 

  Cost
Basis
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

 

Cost

Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

  (in thousands) 

 

(in thousands)

 

Current:

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

  $16,160    $   $  $16,160  

 

$

3,667

 

 

$

 

 

$

 

 

$

3,667

 

Agency bonds

   10,036         (5 10,031  

United States Treasury securities

   5,053          (6) 5,047  

 

 

17,643

 

 

 

 

 

 

(16

)

 

 

17,627

 

  

 

   

 

   

 

  

 

 

 

$

21,310

 

 

$

 

 

$

(16

)

 

$

21,294

 

  $31,249    $    $(11 $31,238  
  

 

   

 

   

 

  

 

 


Short-term investments at December 31, 2016 consist of the following:

 

 

Cost

Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

22,046

 

 

$

 

 

$

 

 

$

22,046

 

Agency bonds

 

 

5,917

 

 

 

 

 

 

(4

)

 

 

5,913

 

United States Treasury securities

 

 

68,766

 

 

 

1

 

 

 

(51

)

 

 

68,716

 

 

 

$

96,729

 

 

$

1

 

 

$

(55

)

 

$

96,675

 

At December 31, 2015,2017 and 2016, all short-term investments held by the CompanyInotek had contractual maturities of less than one year. The CompanyInotek evaluated its securities for other-than-temporary impairment and determined that no such impairment existed at December 31, 2015.2017 and 2016.

Property and Equipment—Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statement of operations. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:

 

Asset Classification

Estimated Useful Life

Computer hardware and software

3 - 5 years

Laboratory Equipmentequipment

5 years

Office equipment

5 years

Leasehold improvements

Shorter of useful life or remaining life of lease

Deferred Public Offering Costs

Impairment of Long-Lived AssetsDeferred public offering costs,Inotek assesses the recoverability of its long-lived assets, which consist primarilyinclude property and equipment, whenever significant events or changes in circumstances indicate impairment may have occurred. If indicators of direct, incremental legal, accounting, Securities and Exchange Commission and NASDAQ Global Market fees relatingimpairment exist, projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whether the IPO and issuanceasset’s value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the 2020 Convertible Notes, were capitalized as a componentrelated asset in excess of other assets on the balance sheet as offair value and charged to operating results (See Note 3).

Debt Issuance Costs—Debt issuance costs at December 31, 2014. At December 31, 2014, the Company had $1,8462017 and 2016 consist of deferred public offering costs. In the year ended ended December 31, 2015, the Companyunderwriting discounts and offering-related costs incurred an additional $1,620 of public offering costs and allocated (i) $2,377 of the aggregate public offering costs to the IPO and $627 to the 2020

Convertible Notes offering, which were recorded as deferred financing costs and were amortized to interest expense from the issuance of the 2020 Convertible Notes, through the conversion of the 2020 Convertible Notes in July and August 2015; and (ii) $462 to the Follow-on Offering.

Deferred Financing Costs— Financing costs incurredby Inotek in connection with the Company’s notes payable,closing of the 2021 Convertible Bridge Notes and 2020are included as a direct deduction from the carrying amount of the 2021 Convertible Notes were capitalized aton Inotek’s consolidated balance sheets. Inotek amortizes debt issuance costs to interest expense over the inceptionlife of the notes and were amortized over the term of the respective notes2021 Convertible Notes using the effective interest method. (See Note 5). Amortization of deferred financingdebt issuance costs were $107was $581 and $219 in$222 for the yearstwelve months ended December 31, 20152017 and 2014, respectively (see Note 5).2016, respectively.

Research and Development Costs—Research and development costs are charged to expense as incurred and include, but are not limited to:

employee-related expenses including salaries, benefits, travel and stock-based compensation expense for research and development personnel;

expenses incurred under agreements with contract research organizations that conduct clinical and preclinical studies, contract manufacturing organizations and consultants;

costs associated with preclinical and development activities; and

costs associated with regulatory operations.

Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and information provided to the CompanyInotek by its vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the patterns of costs incurred, and are reflected in the financial statements as accrued expenses, or prepaid expenses and other current assets, if the related services have not been provided.

Stock-Based Compensation—The Company —Inotek measures the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized on a straight-line basis over the period


during which the employee is required to provide service in exchange for the award. The fair value of options on the date of grant is calculated using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility and expected term. The Company’sInotek’s estimates of these assumptions are primarily based on the trading price of Inotek’s stock, historical data, peer company data and judgment regarding future trends and factors. The fair value of restricted stock awards is based on the intrinsic value of such awards on the date of grant. Compensation cost for stock purchase rights under the employee stock purchase plan is measured and recognized on the date the CompanyInotek becomes obligated to issue shares of our common stock and is based on the difference between the fair value of the Company’sInotek’s common stock and the purchase price on such date.

The Company accounts for stock options issued to non-employees in accordance with the provisions of ASC 505-50,Equity-Based Payments to Non-employees, which requires valuing the stock options on their grant date and remeasuring such stock options at their current fair value as they vest.

Fair Value MeasurementsThe CompanyInotek is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. FASB ASC 820,Fair Value Measurements and Disclosures (“ASC 820”), establishes a hierarchy of inputs used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.Inotek. Unobservable inputs are inputs that reflect the Company’sInotek’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the CompanyInotek has the ability to access at the measurement date.

Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations that require inputs that reflect the Company’sInotek’s own assumptions that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the CompanyInotek in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Inotek’s material financial instruments at December 31, 2017 and 2016, consisted of cash and cash equivalents, short-term investments, accounts payable and the 2021 Notes. The fair value of the Company’s financial instruments, includingInotek’s cash and cash equivalents prepaid expenses and other current assets, accounts payable and accrued expenses approximate their respective carrying values due to the short-term nature of these instruments. The Company’sinstruments and amounts. Inotek estimates the fair value of the 2021 Notes using quoted market prices obtained from third-party pricing services, which is classified as a Level 2 input due to limited market trading. As of December 31, 2017 and 2016, the fair value of the 2021 Notes was approximately $38,610 and $55,640, respectively, which differed from the 2021 Notes’ carrying value at each such date. Inotek’s assets and liabilities measured at fair value on a recurring basis include its short-term investments, warrantinvestments. There were no material liability-classified warrants, derivatives or derivative liabilities convertible notes redemption rights derivative and 2020 Convertible Notes derivative liability (see Note 10).outstanding in 2017 or 2016.

Derivative Financial Instruments—All derivatives are recorded as assets or liabilities at fair value, and the changes in fair value are immediately included in earnings. The Company’s derivative financial instruments include bifurcated embedded derivatives that were identified within the 2020 Convertible Notes and the Convertible Bridge Notes (see Notes 5, 7 and 10).

Income taxesThe CompanyInotek uses the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded if it is more likely than not that a deferred tax asset will not be realized. The CompanyInotek has provided a full valuation allowance on its deferred tax assets.

The CompanyInotek recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The Company will recognizeInotek recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 20152017 and 2014, the Company2016, Inotek had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’sInotek’s statements of operations.

Net loss per shareThe CompanyInotek calculates net loss per share in accordance with FASB ASC 260,Earnings per Share. Basic earnings (loss) per share (“EPS”) is calculated by dividing the net income or loss applicable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration of unissued common stock equivalents. The net loss applicable to common stockholders is determined by the reported net loss for the period and deducting dividends accrued and


accretion of preferred stock. Diluted EPS is calculated by adjusting the weighted average common shares outstanding for the dilutive effect of common stock options, warrants, and convertible preferred stock and accrued but unpaid convertible preferred stock dividends. In periods where a net loss is recorded, no effect is given to potentially dilutive securities, as their effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted EPS attributable to the Company’sInotek’s common stockholders:

 

   2015  2014 

Numerator:

   

Net loss

  $(67,982 $(9,531

Accretion and dividends on convertible preferred stock

   (131  (4,265
  

 

 

  

 

 

 

Net loss applicable to common stockholders

  $(68,113 $(13,796

Denominator:

   

Weighted average common shares outstanding—basic and diluted

   18,311,333    1,020,088  
  

 

 

  

 

 

 

Net loss per share applicable to common stockholders—basic and diluted

  $(3.72 $(13.52
  

 

 

  

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands, except share and per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(29,497

)

 

$

(42,854

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic

   and diluted

 

 

6,765,451

 

 

 

6,683,794

 

Net loss per share applicable to common

   stockholders—basic and diluted

 

$

(4.36

)

 

$

(6.41

)

The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated as including them would have an anti-dilutive effect:

 

 

For the Years Ended December 31,

 

  December 31,
2015
   December 31,
2014
 

 

2017

 

 

2016

 

Series AA preferred stock

   —       7,356,331  

Series X preferred stock

   —       466,319  

Warrants for Series AA preferred stock

   —       56,408  

Shares issuable upon conversion of the 2021

Convertible Notes

 

 

1,620,947

 

 

 

1,620,947

 

Warrants for common stock

   56,408     —    

 

 

14,102

 

 

 

14,102

 

Stock options

   1,631,677     911,075  

 

 

523,520

 

 

 

668,864

 

  

 

   

 

 

Restricted Stock Units

 

 

271,719

 

 

 

117,500

 

Total

   1,688,085     8,790,133  

 

 

2,430,288

 

 

 

2,421,413

 

  

 

   

 

 

Subsequent EventsThe CompanyInotek considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The CompanyInotek has completed an evaluation of all subsequent events through the date the financial statements were issued (Seeissued. See Note 12).12.

Recent Accounting Pronouncements

In AugustMay 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will be effective for annual and interim periods beginning after December 15, 2017. Inotek does not currently generate revenue or have any arrangements that are subject to this guidance.

In February 2016, the FASB issued ASU 2014-15,2016-02, Leases (Topic 842), which providessupersedes the current leasing guidance about management’s responsibilityand upon adoption, will require lessees to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concernrecognize right-of-use assets and to provide related footnote disclosures.lease liabilities on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for the CompanyInotek for the annual period endingbeginning after December 15, 2018, and can be early adopted by applying a modified retrospective approach for leases existing at, and entered into after, the beginning of the earliest comparable period presented in the financial statements. Inotek is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), and includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new standard is effective for Inotek for the annual period beginning after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. Inotek adopted this standard on January 1, 2017. The Companyupdate revises requirements in the following areas: minimum statutory withholding, accounting for income taxes, and forfeitures. Prior to adoption, Inotek applied a 0% forfeiture rate to share-based compensation, resulting in no cumulative effect adjustment to the opening period. Upon adoption of ASU 2016-09, Inotek’s accounting policy is to recognize forfeitures as they occur. The update also requires Inotek to recognize the income tax effect of


awards in the income statement when the awards vest or are settled. Finally, the update allows Inotek to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering a liability. The income tax related items had no effect on the current period presentation and Inotek maintains a full valuation allowance against its deferred tax assets.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which clarifies the scope under which modification accounting should be applied to a share-based payment award under ASC 718. The standard will be effective for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2017, and early adoption is permitted for interim or annual period beginning after January 1, 2017. Inotek is currently evaluating the impact of this accounting standard update on the Company’sits consolidated financial statements.

3. Property and Equipment

At December 31, 20152017 and 2014, the Company’s2016, Inotek’s property and equipment consisted of the following:

 

 

December 31,

 

  December 31, 

 

2017

 

 

2016

 

  2015   2014 

 

(in thousands)

 

Office equipment

  $334    $50  

 

$

357

 

 

$

407

 

Computer hardware and software

   252     167  

 

 

96

 

 

 

263

 

Laboratory equipment

   43     —    

 

 

 

 

 

446

 

Leasehold improvements

   445     —    

 

 

445

 

 

 

445

 

  

 

   

 

 

Total

   1,074     217  

 

 

898

 

 

 

1,561

 

Less accumulated depreciation

   (262   (217
  

 

   

 

 

Less: accumulated depreciation

 

 

(335

)

 

 

(431

)

Property and equipment, net

  $812    $ 

 

$

563

 

 

$

1,130

 

  

 

   

 

 

During the years ended December 31, 20152017 and 2014, the Company2016, Inotek recognized $45$200 and $0$169 of depreciation expense, respectively.respectively, and wrote off $217 of fully depreciated net assets in the year ended December 31, 2017.

In 2017, Inotek voluntarily discontinued its development of trabodenoson and classified its equipment used in the production of trabodenoson as held for sale. Inotek performed an impairment assessment of this equipment by comparing the equipment’s carrying value to its estimated fair value, which was based on prices obtained for similar assets. The analysis resulted in an impairment of Inotek’s laboratory equipment of $437 which was charged to research and development expenses in 2017.

4. Accrued Expenses and Other Current Liabilities

Accrued expenses atAt December 31, 20152017 and 20142016, Inotek’s accrued expenses and other current liabilities consisted of the following:

 

 

December 31,

 

  December 31, 

 

2017

 

 

2016

 

  2015   2014 

 

(in thousands)

 

Research and development

  $375    $116  

Government payable

   450     421  

Compensation and benefits

   999     293  

 

$

793

 

 

$

1,627

 

Professional fees

   347     155  

 

 

528

 

 

 

311

 

Government payable

 

 

506

 

 

 

478

 

Severance and benefits

 

 

270

 

 

 

544

 

Research and development

 

 

151

 

 

 

1,148

 

Other

   337     7  

 

 

125

 

 

 

138

 

  

 

   

 

 

Total

  $2,508    $992  

 

$

2,373

 

 

$

4,246

 

  

 

   

 

 

5. Debt

20202021 Convertible Notes

On February 23, 2015, the CompanyAugust 5, 2016, Inotek issued an aggregate of $20,000$50,000 of the 20202021 Convertible Notes pursuant to its IPO.Notes. On March 24, 2015, the CompanyAugust 30, 2016, Inotek issued an additional $1,000$2,000 of 20202021 Convertible Notes pursuant to the exercise of the underwriters’ overallotment option. The 20202021 Convertible Notes hadhave a maturity date of February 15, 2020August 1, 2021 (“Maturity Date”), wereare unsecured and accruedaccrue interest at a rate of 5.0%5.75% per annum, payable semi-annually on February 151 and August 151 of each year.year, beginning February 1, 2017. In connection with the issuance of the 2020


2021 Convertible Notes, the Company incurred $2,097$3,262 of financingdebt issuance costs which were recorded in other assetsas a discount on the balance sheet.2021 Convertible Notes.

Each holder of a 20202021 Convertible Note (the “Holder”), had has the option until the close of business on the second business day immediately preceding the Maturity Date to convert all, or any portion, of such notethe 2021 Convertible Notes held by it at an initiala conversion rate of 158.730231.1876 shares of the Company’sInotek’s common stock per $1 principal amount of 20202021 Convertible Notes (the “Conversion Rate”). The Conversion Rate wasis subject to adjustment from time to time upon the occurrence of certain events, including the issuance of stock dividends and payment of cash dividends. For anyIn addition, in certain circumstances, the Conversion Rate will be increased in respect of a Holder’s conversion that occurred on or after July 23, 2015, the Company would, in addition to the other consideration payable, make an interest make-whole payment (the “Interest Make-Whole Payment”) to such converting Holder equal to the sum of the present values of the scheduled payments of interest that would have been made on the 20202021 Convertible Notes to be converted hadin connection with the occurrence of one or more corporate events specified in the indenture (as supplemented, the “Indenture”) governing the 2021 Convertible Notes (each such notes remained outstanding from the date of the conversion (the “Conversion Date”specified corporate event, a “Make-Whole Fundamental Change”) through the earlier of (i) the date that is three years after the Conversion Date and (ii)occurs prior to the Maturity Date if the 2020(a “Make-Whole Fundamental Change Conversion”) or in respect of a Holder’s voluntary conversion of 2021 Convertible Notes had not been so converted or otherwise repurchased. Present values for the Interestother than in connection with a Make-Whole Payment would be calculated usingFundamental Change (a “Voluntary Conversion”). In connection with a discount rate equal to 2%. The Company could satisfy its obligation to pay any Interest Make-Whole Payment, at its election, in cash, shares of common stockFundamental Change Conversion or a combination thereof.

The 2020 Convertible Notes were convertible, at the holder’s option, upon a fundamental change (“Fundamental Change”), as defined in the Indenture (“Indenture”). If a holder elected to convert its notes upon a Fundamental Change, the Company wouldVoluntary Conversion, Inotek will increase the Conversion Rate for the 20202021 Convertible Notes so surrendered for conversion by a number of additional shares of Inotek’s common stock by whichset forth in the Additional Shares Make-Whole Table in the Indenture, based on the applicable Stock Price (as defined in the Indenture) and Effective Date (as defined in the Indenture) for such conversion. The additional shares potentially issuable in connection with a Make-Whole Fundamental Change Conversion Rate would have increasedor a Voluntary Conversion range from 0 to 6.2375 per $1 principal amount of notes for each stock price and make-whole2021 Convertible Notes, subject to adjustment. If the Stock Price applicable to any conversion is greater than $160.00 per share, the Conversion Rate will not be increased. If the Stock Price applicable to any conversion is less than $26.72 per share, the Conversion Rate in connection with a Make-Whole Fundamental Change effective date as set forthConversion will not be increased but it will be increased by 6.2375 shares in connection with a Voluntary Conversion. Upon conversion, Holders of the Indenture. The additional2021 Convertible Notes will receive shares ranged from 7.9364 to 0.of Inotek’s common stock and cash in lieu of fractional shares.

Upon the occurrence of a Fundamental Change, the occurrence of certain change of control transactions or delisting events (as defined in the Indenture), each Holder would have the right tomay require the CompanyInotek to repurchase for cash all of such Holder’s notes, or any portion thereof that isof the 2021 Convertible Notes held by such Holder at a repurchase price equal to $1 or an integral multiple of $1. The repurchase price of the 2020 Convertible Notes would equal 100% of the principal amount thereof, plus accrued and unpaid interest thereon. However,

Inotek, at its option, may redeem for cash all or any portion of the 2021 Convertible Notes if the repurchase occurred afterlast reported sale price of a regular recordshare of Inotek’s common stock is equal to or greater than 200% of the conversion price for the 2021 Convertible Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the five trading days immediately preceding the date for an interest payment, but before the distribution dateon which Inotek provides notice of that interest payment, the Holder receive the regular interest payment and the repurchaseredemption, at a redemption price would equal to 100% of the principal amount of the 20202021 Convertible Notes to be repurchased.

redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

The 2020 Convertible Notes were redeemable at the holder’s option upon an event of default (“Event of Default”). If an Event of Default (other(as defined in the Indenture), other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurredInotek, occurs and wasis continuing, the Trustee by notice totrustee under the Company,Indenture (the “Trustee”) or the holdersHolders of at least 25% in principal amount of the outstanding notes by written notice to the Company and the Trustee, could2021 Convertible Notes may declare 100% of the principal of and accrued and unpaid interest, if any, on all of the 20202021 Convertible Notes to be due and payable immediately. Upon the occurrence of certain Eventsan Event of Default relating to bankruptcy, insolvency or reorganization involving the Company,Inotek, 100% of the principal of and accrued and unpaid interest, if any, on all of the 20202021 Convertible Notes would become due and payable automatically.

TheNotwithstanding the foregoing, the Indenture providedprovides that, to the extent the Company elected and for up to 180 days,Inotek elects, the sole remedy for an Event of Default relating to certain failures by the CompanyInotek to comply with certain reporting covenants in the Indenture, consistedwill (i) for the first 90 days after the occurrence of such an Event of Default, consist exclusively of the right to receive additional interest (“Additional Interest”) on the 20202021 Convertible Notes. The Additional Interest consisted of interestNotes at an additionala rate ofequal to 0.25% per annum of the principal amount of the 2021 Convertible Notes outstanding for each day during such 90-day period on which such an Event of Default is continuing and (ii) for the first 90 daysperiod from, and including, the 91st day after the occurrence of such an Event of Default. ForDefault to, and including, the 91st to 180th day after the occurrence of such an Event of Default, consist exclusively of the Additional Interest would consist ofright to receive additional interest on the 2021 Convertible Notes at an additionala rate ofequal to 0.50% per annum.annum of the principal amount of the 2021 Convertible Notes outstanding for each day during such additional 90-day period on which such an Event of Default is continuing (such additional interest, “Additional Interest”). After 180 days, if thesuch Event of Default wasis not cured or waived, the 20202021 Convertible Notes werewould be subject to acceleration in accordance with the Indenture.

The 2021 Convertible Notes are considered a hybrid financial instrument consisting of a fixed interest rate “host” and various embedded features that required evaluation as provided in Section 6.02potential embedded derivatives under FASB ASC 815, Derivatives and Hedging (“ASC 815”). Based on the nature of the Indenture.

The Companyhost instrument and the embedded features, management concluded that none of the conversion, put and redemption features required bifurcation and separate accounting from the host instrument. Inotek determined that the conversion option,Additional Interest Make-Whole Payments andwas an embedded derivative that contains non-credit related events of default.  As a result, the Additional Interest were embedded derivatives thatfeature required bifurcation and separate accounting under ASC 815, Derivativesand Hedging.815. Based on the characteristicsamount of the (i) conversion option including make-whole provision, (ii) the Additional Interest and (iii) the 2020 Convertible Notes, the Company estimated the fair value of the conversion option including the Interest Make-Whole provisionthat would be owed and the Additional Interest using the “with” and “without” method. Using this methodology, the Company first valued the 2020 Convertible Notes with the conversion option including make-whole provision but excluding the Additional Interest (the “with” scenario) and subsequently valued the 2020 Convertible Notes without the conversion option including make-whole provision and excluding the Additional Interest (the “without” scenario). The difference between the fair values


likelihood of the 2020 Convertible Notes in the “with” and “without” scenarios was the concluded fair value of the conversion option including make-whole provision as of the measurement date. The Company developed an estimate of fair value for the 2020 Convertible Notes excluding the Additional Interest using a binomial lattice model. The Company modeled the decision to convert or hold by considering the maximum of the conversion or hold value at every node of the lattice in which the 2020 Convertible Notes were convertible and choosing the action that would maximize the return to the 2020 Convertible Notes’ holders. The significant assumptions used in the binomial model were: the market yield and the expected volatility.

The Companyoccurrence, Inotek estimated the fair value of the Additional Interest using an income approach, specifically, the risk-neutral debt valuation method that is usedfeature to derive the valuebe insignificant upon issuance and as of a debt instrument using the expected cash flowsDecember 31, 2017 and the risk-free rate. The significant assumptions used in estimating the expected cash flows were: the market yield used to determine the risk-neutral probability of default and the expected recovery rate upon default.2016.

The Company recorded $11,850 as the fair value of the combined embedded derivative liability on February 23, 2015, with a corresponding amountissuance costs which were recorded as a discount to the 2020 Convertible Notes, related to the initial issuance of the 2020 Convertible Notes. The Company recorded approximately $573 of additional derivative liability and discount to the 2020 Convertible Notes as the fair value of the combined embedded derivative on March 24, 2015, upon the issuance of additional 2020 Convertible Notes for the exercise of the underwriters’ overallotment option. The deferred financing costs and the debt discount were recorded in other assets and wereare being amortized to interest expense over the life of the 20202021 Convertible Notes using the effective interest method. Changes in the fair value of the combined embedded derivative liability were recorded in earnings in the period in which the changes occurred.

In July and August 2015, holders of all $21,000 principal amount of the 2020 Convertible Notes elected to convert the principal into 3,333,319 shares of common stock in accordance with the terms of the 2020 Convertible Notes. In addition, the Interest Make-Whole Payment was settled with shares of common stock, at

the election of the Company, resulting in the issuance of 530,072 additional shares of common stock. As of December 31, 2017, the conversion dates,stated interest rate was 5.75%, and the fair value of the combined embedded derivative liabilityeffective interest rate was determined to be $55,216. The change in the estimated fair value of the combined embedded derivative liability from the recognition dates to the conversion dates and for7.3%. For the year ended December 31, 2015,2017, interest expense related to the 2021 Convertible Notes, was $42,793. In addition,$3,579, including $581 related to amortization of the Company recorded a charge of $3,716 indebt discount. For the year ended December 31, 2015, related to extinguishment of the 2020 Convertible Notes. As of December 31, 2015, all $21,000 of the 2020 Convertible Notes were extinguished.

Interest2016, interest expense related to the 20202021 Convertible Notes, for the year ended December 31, 2015, was $963,$1,418, including $74 related to amortization of the issuance costs and $440$222 related to amortization of the debt discount.

Convertible Bridge Notes

In December 2014, the Company sold an aggregate of $2,000 of subordinated convertible promissory notes to existing stockholders (the “2014 Convertible Bridge Notes”). The 2014 Convertible Bridge Notes were to mature on June 30, 2015 and accrued interest at the rate of 8% per annum and were subordinate to all other senior indebtedness of the Company. Upon the closing of an IPO of common stock of at least $40,000 in gross proceeds (“a qualifying public offering”), all outstanding principal and accrued interest thereon would automatically convert into common stock at the IPO price. In addition, the 2014 Convertible Bridge Notes had the following features: (i) in the event the Company sold new notes prior to a qualifying public offering, the noteholders would convert the 2014 Convertible Bridge Notes into the new notes; (ii) if at any time prior to repayment of the 2014 Convertible Bridge Notes or a qualifying public offering the Company had a change in control transaction, the noteholders would receive either (a) cash in the amount of twice the principal and interest due as of the effective date of the change in control transaction or (b) shares of Series AA preferred stock based upon the conversion of the principal and interest due as of the effective date of the change in control transaction, whichever yields the greatest return (the ‘Change in Control Redemption Feature”); (iii) at any time after maturity, the noteholders could elect to convert all principal and accrued interest into Series AA Preferred stock at the current Series AA preferred stock conversion price; (v) the maturity date of the 2014 Convertible Bridge Notes could be extended two times for additional six-month periods; (vi) upon an event of default, as defined in the notes, the noteholders could declare the 2014 Convertible Bridge Notes immediately payable; and (vii) the Company would not prepay the 2014 Convertible Bridge Notes without the consent of noteholders owning at least two thirds of the outstanding principal. Interest accrued on the 2014 Convertible Bridge Notes was $4 at December 31, 2014 and was reflected in accrued expenses and other current liabilities.

The Company determined that the automatic conversion into common stock upon an IPO was the predominant feature of the 2014 Convertible Bridge Notes. Based on this the Company deemed the 2014 Convertible Bridge Notes to be share-settled debt and accreted the debt discounts recorded (see below) to the redemption value over the term of the 2014 Convertible Bridge Notes. The Company evaluated the various features of the 2014 Convertible Bridge Notes and determined that the Change in Control Redemption Feature met the definition of a derivative and required bifurcation from the 2014 Convertible Bridge Notes. At the issuance of the 2014 Convertible Bridge Notes, the Company valued this derivative at $478 and allocated that value from the proceeds of the 2014 Convertible Bridge Notes and recorded a convertible notes redemption rights derivative liability on the balance sheet. The Company marked this liability to market at each reporting date and reflected the change in fair value in change in fair value of Convertible Bridge Notes redemption rights derivative in the statement of operations. In addition, the Company incurred $30 of costs associated with the issuance of the 2014 Convertible Bridge Notes and recorded this amount as deferred financing costs which were reflected in prepaid expenses and other current assets. The Company amortized (i) the debt discount recorded from the allocation of value to the redemption rights derivative and (ii) deferred financing costs, into interest expense using the effective interest method. During the year ended December 31, 2014, the Company reflected as interest expense related to the 2014 Convertible Bridge Notes (i) $4 related to the 8% coupon rate and (ii) $20 of amortization of the initial redemption rights derivative liability and issuance costs. In addition, the Company reflected a $2 increase in fair value of the derivative liability at December 31, 2014 as loss on change in fair value of convertible notes redemption rights derivative. At December 31, 2014, the principal balance of the 2014 Convertible Bridge Notes was $2,000.

Pursuant to the IPO in February 2015, the Convertible Bridge Notes were converted into 337,932 shares of common stock based upon the IPO common share offering price of $6.00 per share. For the year ended December 31, 2015, the Company reflected interest expense related to the Convertible Bridge Notes as follows: (i) $23 related to the 8% coupon rate and (ii) $128 of amortization of the initial fair value of the redemption rights derivative and issuance costs. In the year ended December 31, 2015, in connection with the conversion of the Convertible Bridge Notes into common stock, the Company reflected (i) a $480 gain in change in fair value of the Convertible Bridge Notes redemption rights derivative on conversion and (ii) a loss on extinguishment of debt of $360 from the acceleration of the unamortized balance of the debt discount and issuance costs.

Notes Payable

On June 28, 2013, the Company entered into two Loan and Security Agreements (the “Loan Agreements” or “Loans”) with two financial entities (the “Lenders”) pursuant to which the Company issued Loans for $3,500 to each lender and received proceeds of $6,915 net of costs and fees payable to the lenders. The Loans were to bear interest at a rate per annum of 11.0%. The Loans were to mature on October 1, 2016 and required interest-only payments for the initial 12 months and thereafter required repayment of the principal balance with interest in 27 monthly installments. Also, upon full repayment or maturity of the Loans, the Lenders were due a termination payment of 3.0% of the initial principal amount of the Loans, or $210 (the “Loan Termination Payment”). In connection with the Loan Agreements, the Company granted first priority liens and the Loans were collateralized by the Company’s personal property, including cash and cash equivalents. The Loan Agreements contained representations and warranties by the Company and certain indemnification provisions, non-financial covenants and default provisions. The Loan Agreements also included certain provisions allowing for prepayment of the debt by the Company, exercisable at the Company’s option, which required payment of additional interest to the Lenders based upon a stated rate and the balance outstanding at repayment. The Company determined that the various embedded features did not require bifurcation from the Loan Agreements.

In connection with the Loan Agreements, the Company issued to the Lenders fully-vested warrants to purchase either, at the election of the warrant holder, (i) 228,906 shares of the Company’s Series AA preferred stock at an exercise price of $1.529 per share, or (ii) $350 of stock in the next round stock, as defined in the Loan Agreements, at a price that was the lowest effective price per share that is offered in the next round. The warrants were to expire on the earlier of (i) ten years after the date of grant, or (ii) immediately prior to an acquisition transaction, as defined in the warrants.

The Company determined that the warrants should be classified as a liability based upon the nature of the underlying Series AA preferred stock. The Company recorded the fair value of the warrants of approximately $222 (Note 10) as a discount totable below summarizes the carrying value of the Loans and2021 Convertible Notes as a liability. The Company recognized any change in the value of the warrant liability each reporting period in the statement of operations. Additionally, the Company incurred fees related to the Loan Agreements and reimbursed Lenders for costs incurred by them aggregating $85 and reflected these fees as a discount to the carrying value of the Loan. The Company amortized these loan discounts and the Loan Termination Payment, together totaling $517, to interest expense over the term of the Loan using the effective interest rate method. For the year ended December 31, 2014, interest expense related to the Loan Agreements was $956, including $218 related to accretion of the debt discount2017 and termination payment. At December 31, 2014, the principal balance on the Loan Agreements was $5,800, including the Loan Termination Payment and the unamortized debt discount and termination payment balance was $188. Principal payments on the Loans were $1,410 during the year ended December 31, 2014.2016:

In connection with the Company’s IPO in February 2015, the Company exercised its right to terminate the Loan Agreements by paying the $5,347 principal balance due, the $210 Loan Termination Payment, a $160 prepayment fee calculated as 3% of the principal balance due at the time of the termination, plus $23 of interest accrued from February 1, 2015 through the payoff date. The Company made a scheduled principal payment of $243 in January 2015. For the year ended December 31, 2015, interest expense related to the Loan Agreements was $115, including $26 related to accretion of the debt discount and termination payment. Additionally, for the

 

 

(in thousands)

 

Gross proceeds

 

$

52,000

 

Initial value of issuance costs recorded as debt discount

 

 

(3,262

)

Amortization of debt discount

 

 

222

 

Carrying value as of December 31, 2016

 

 

48,960

 

Amortization of debt discount

 

 

581

 

Carrying value as of December 31, 2017

 

$

49,541

 

year ended December 31, 2015, the Company recorded a loss on extinguishment of the Loan Agreement of $323 related to the write-off of unamortized debt discount.

Subsequent to the Company’s IPO, the warrants issued to the lenders became exercisable for 56,408 shares of common stock at $6.204 per share. The Company calculated the fair value of the warrants at the IPO date using a Black Scholes model using the following assumptions: a fair value of $6.00 per share (the IPO price of the Company’s common stock), 8.4 years to maturity, 1.70% risk-free rate, and 60% volatility. The Company determined the fair value of the warrant liability at the IPO date to be $215 and recorded a gain on change in fair value of warrant liabilities of $267 in the statement of operations for the year ended December 31, 2015. The Company determined that subsequent to this change, the warrants were exercisable at a fixed price for a fixed number of shares of common stock and qualified for equity classification under the accounting guidance, and the fair value of $215 was reclassified to additional paid-in capital as of the IPO date in the year ended December 31, 2015.

6. Income Taxes

No provision for federal or state income taxes was recorded during the years ended December 31, 20152017 and 2014,2016, as the CompanyInotek incurred operating losses for each of these years.

Net loss by jurisdiction consists of the following:

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Domestic

 

$

28,281

 

 

$

41,821

 

Foreign

 

 

1,216

 

 

 

1,033

 

Total

 

$

29,497

 

 

$

42,854

 

A reconciliation between the effective tax rates and statutory rates for the years ended December 31, 20152017 and 20142016 is as follows:

 

 

For the Years Ended December 31,

  2015 2014 

 

2017

 

 

 

2016

 

 

Computed at statutory rate

   34.00 34.00

 

 

34.00

 

%

 

 

34.00

 

%

State income taxes

   1.20   4.93  

 

 

4.34

 

 

 

 

4.76

 

 

Expiration of capital loss carryforward

   (2.13 0.00  

Expiration of state net operating loss carryforward

   0.00   (9.35

Tax credits

   0.73   2.43  

 

 

1.76

 

 

 

 

3.38

 

 

Other

   (3.35 (4.28

 

 

(6.04

)

 

 

 

(1.74

)

 

Change in value of convertible notes derivatives and warrant liabilities

   (21.16  —    

Federal rate change

 

 

(79.56

)

 

 

 

 

 

Valuation allowance

   (9.29 (27.73

 

 

45.50

 

 

 

 

(40.40

)

 

  

 

  

 

 

 

 

 

%

 

 

 

%

   —   —  
  

 

  

 

 

The tax effect of significant temporary differences representing deferred tax assets and liabilities as of December 31, 20152017 and 20142016 is as follows:

 

 

December 31,

 

  December 31, 

 

2017

 

 

2016

 

  2015   2014 

 

(in thousands)

 

Net operating loss (“NOL”) and credit carryforwards

  $35,858    $30,896  

 

$

37,252

 

 

$

43,765

 

Capitalized research and development costs

   14,406     12,041  

 

 

16,115

 

 

 

22,775

 

Capital loss carryover

   —       1,672  

Other

   927     269  

 

 

1,722

 

 

 

1,963

 

Valuation allowance

   (51,191   (44,878

 

 

(55,089

)

 

 

(68,503

)

  

 

   

 

 

 

$

 

 

$

 

  $—     $—   
  

 

   

 

 

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted and significantly revised the U.S. income tax law. The TCJA includes changes which reduce the corporate income tax rate from 35% to 21% for years beginning after December 31, 2017, and establish a territorial-style system for taxing foreign-source income of domestic multinational companies.

GAAP requires re-measurement of US deferred tax assets and liabilities to reflect the impact of a tax rate reduction in the period that includes enactment date. As a result, Inotek has revalued its deferred taxes assets and liabilities to 21% in the December 31, 2017 financial statements and the impact was offset by Inotek’s valuation allowance. Inotek has reflected the associated impact in the reconciliation of its effective tax rate above.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued and allows a company to recognize provisional amounts when it does not have the necessary information available, prepared or analyzed, including computations, in reasonable detail to complete its accounting for the change in tax law. SAB 118 provides for a measurement of up to one year from the date of enactment. Inotek has not yet fully completed its analysis of the TCJA, however based on the total unrepatriated accumulated foreign earnings, Inotek does not believe any additional income taxes are due as any income, if determined, will be fully offset by Inotek’s NOL carryforwards.

As required by ASC 740,Income Taxes, management of the CompanyInotek has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of NOL carryforwards and capitalized research and development costs. As a result of the fact that the CompanyInotek has incurred tax losses from inception, management has determined that it is more likely than not that the CompanyInotek will not recognize the benefits of federal and state net deferred tax assets and, as a result, a full valuation

allowance has been established against its net deferred tax assets as of December 31, 20152017 and 2014. The Company2016. Inotek has offset certain deferred tax liabilities with deferred tax assets that are expected to generate offsetting deductions within the same period. During the years ended December 31, 20152017 and 2014,2016, the valuation allowance changeddecreased by $6,313$13,414 and $2,643,increased by $17,312, respectively. Realization of deferred tax assets is dependent upon the generation of future taxable income.

As of December 31, 2015, the Company2017, Inotek had federal NOL carryforwards for income tax purposes of $88,436$127,132 that expire at various dates through 2035,2037, and state NOL carryforwards of $47,369$83,428 that expire at various dates through 2035,2037, available to reduce future federal and state income taxes, if any. As of December 31, 2015, the Company2017, Inotek had federal research and development tax credits of $3,196,$5,171, and state research and development tax credits of $637.$819. If substantial changes in the Company’sInotek’s ownership should occur, as defined in Section 382 of the Internal Revenue Code of 1986, as amended, (the “Code”), there could be annual limitations on the amount of loss carryforwards which can be realized in future periods. The CompanyInotek has determined that it has experienced prior ownership changes occurring in 2005, 2007 and 2015. The pre-change NOLs,NOL carryforwards, although subject to an annual limitation, as well as any post-change NOL carryforwards, can be utilized in future years, as well as any post change NOLs, provided that sufficient income is generated and no future ownership changes occur that may limit the Company’s NOLs.Inotek’s NOL carryforwards.

As of December 31, 20152017 and 2014, the Company’s2016, Inotek’s total unrecognized tax benefits totaled $333$535 and $284,$488, respectively, which if recognized would affect the effective tax rate prior to the adjustment for the Company’sInotek’s valuation allowance. The CompanyInotek files income tax returns in the U.S. federal and Massachusetts tax jurisdictions. Starting in tax year 2016, Inotek filed tax returns in the New Jersey tax jurisdiction. Tax years 20122014 through 20152017 remain open to examination by the tax jurisdictions in which the CompanyInotek is subject to tax. Since the CompanyInotek is in a loss carryforward position, the Internal Revenue Service (“IRS”) and state taxing authorities are permitted to audit the earlier tax years and propose adjustments up to the amount of the NOLsNOL carryforwards generated. The CompanyInotek is not currently under examination by the IRS or any other jurisdiction for any tax years.

The change in unrecognized tax benefits for each of the years ended December 31, 20152017 and 2014 are2016 is as follows:

 

 

For the Years Ended December 31,

 

 

2017

 

 

2016

 

  2015   2014 

 

(in thousands)

 

Balance at January 1,

  $284    $258  

 

$

488

 

 

$

333

 

Additions for prior year tax positions

 

 

(4

)

 

 

6

 

Additions for current year tax positions

   49     26  

 

 

51

 

 

 

149

 

Reductions for expirations of statute of limitations or settlements

   —      —   
  

 

   

 

 

 

$

535

 

 

$

488

 

  $333    $284  
  

 

   

 

 

The Company does not expect significant changesReverse Merger is expected to result in itsa substantial reduction to Inotek’s NOL carryforwards and unrecognized tax benefits over the next twelve months.benefits.


7. Equity

Authorized Shares

As of December 31, 2015, the Company’s2017, Inotek’s authorized capital stock consisted of 120,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of undesignated preferred stock, par value $0.001 per share.

Reverse Stock SplitsSplit

In November 2014,On January 4, 2018, in connection with the board of directors and the stockholders of the Company approvedReverse Merger, Inotek effected a 1-for-3.391-for-4 reverse stock split of the Company’s outstanding common stockon its issued and in January 2015, the board of directors and the stockholders of the Company approved a 1-for-1.197 reverse stock split of the Company’s outstanding common stock. Shares of common stock underlying outstanding stock options were proportionally reduced and

the respective exercise prices were proportionally increased in accordance with the terms of the option agreements. The Company’sInotek’s historical share and per share information has been retroactively adjusted in the financial statements presented to give effect to thesethis reverse stock splits, including reclassifying an amount equal to the reduction in par value to additional paid-in capital.split.

Common Stock

All preferences, voting powers, relative, participating, optional, or other specific rights and privileges, limitations, or restrictions of the common stock are expressly subject to those that may be fixed with respect to any shares of preferred stock. Common stockholders are entitled to one vote per share, and to receive dividends, when and if declared by the Board. There were 26,423,3946,805,686 and 1,020,0886,746,579 shares of common stock outstanding at December 31, 20152017 and 2014,2016, respectively.

Preferred Stock

The Company has evaluated the traunched natureAs of its Preferred Stock offerings, its investor registration rights, as well as the rights, preferencesDecember 31, 2017 and privileges of each series of Preferred Stock and has concluded that there are no freestanding derivative instruments or any embedded derivatives requiring bifurcation. Additionally, the Company assessed the conversion terms associated with its Preferred Stock and concluded that2016, there were no beneficial conversion features.

Series AA Redeemable Convertible Preferred Stock

In connection with the saleshares of Series AA preferred stock in 2013, the Company issued warrants to purchase 852,230 shares of Series AA preferred stock at a price of $0.01 per share, with an expiration date on the earliest of (i) July 11, 2023, (ii) the closing of the Company’s IPO, or (iii) the closing of a sale event, as defined in the warrant. The Company allocated $1,585 of the proceeds received to the warrants issued, representing the grant date fair value of the warrants, and accounts for these warrants as liabilities. The Company recognized any change in the fair value of the warrant liabilities each reporting period in the consolidated statements of operations (Note 10). These warrants were exercised in full during the year ended December 31, 2014 for total proceeds of $8 which was recorded as Series AA preferred carrying value. The aggregate $2,250 fair value of the warrants as of the date of each exercise was reclassified partially to Series AA preferred stock carrying value and the remainder to accumulated paid-in capital.

Due to the optional redemption feature of the Series AA preferred stock, the Company classified the Series AA preferred stock as temporary equity in the mezzanine section of the balance sheet and accreted the value to the redemption amount. The carrying amount of the Series AA preferred stock at December 31, 2014 was $46,253, including $9,976 of accrued but unpaid and undeclared dividends. All shares of Series AA preferred stock converted to shares of common stock upon the IPO in February 2015. Pursuant to these conversions, the $46,384 carrying value of the Series AA preferred stock at the time of the IPO was reclassified as $75 to common stock par value and $46,309 additional paid-in capital.

Rights, Preferences, and Privileges

Voting:

Series AA preferred stock voted together with all other classes and series of stock as a single class on all actions to be taken by the stockholders of the Company. Each share of Series AA preferred stock shall entitle the holder to such number of votes per share on each such action were equal the number of shares of common stock (including fractions of a share) into which each share of Series AA preferred stock was then convertible.

Dividends:

Series AA preferred stock accrued dividends quarterly at the rate of eight percent (8%) per annum, based upon the Series AA original issue price, whether or not declared, are cumulative and compounded annually. The Series AA original issue price was $1.529 per share (“Series AA Original Issue Price”).

Liquidation Preference:

Upon any liquidation, dissolution or winding up of the Company (a “Liquidation Event”), whether voluntary or involuntary, the holders of the shares of Series AA preferred stock would be paid out of the assets of the Company available for distribution to its stockholders before any payment would be made to the holders of Series X preferred stock or common stock, an amount per share equal to two times the Series AA Original Issue Price plus any accrued or declared but unpaid dividends ( the “Series AA Initial Preference”). If upon any Liquidation Event, the assets to be distributed to the holders of Series AA preferred stock would have been insufficient to permit payment to the stockholders of the Series AA Initial Preference, then the holders of the Series AA preferred stock would share ratably in any distribution of the remaining assets of the Company available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

Upon any Liquidation Event, immediately after the holders of Series AA preferred stock have been paid in full the Series AA Initial Preference and after the holders of Series X preferred stock have been paid full the Series X preference (see Series X preferred stock below), the holders of the shares of Series AA preferred stock would be paid out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of common stock, a per share amount equal to one-half times the Series AA Original Issue Price (the “Series AA Secondary Preference”). If upon any Liquidation Event, the assets to be distributed to the holders of Series AA preferred stock would be insufficient to permit payment to such stockholders of the Series AA Secondary Preference, then the holders of the Series AA preferred stock would share ratably in any distribution of the remaining assets of the Company available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

Optional Conversion:

The holder of any share or shares of Series AA preferred stock would have the right, at its option at any time, to convert any such shares of Series AA preferred stock (except that upon any liquidation of the Company the right of conversion would terminate at the close of business on the business day fixed for payment of the amounts distributable on the Series AA preferred stock), each such share of Series AA preferred stock being converted into such number of fully paid and nonassessable shares of common stock as is obtained by dividing (1) the Series AA Original Issue Price plus any accrued or declared but unpaid dividends by (2 ) the Series AA Conversion Price in effect at the date any share or shares of Series AA preferred stock are surrendered for conversion. The “Series AA Conversion Price” was $1.529 and was subject to adjustment as discussed under the section “Anti-Dilution” below.

Mandatory Conversion:

All outstanding shares of Series AA Convertible Preferred Stock (including all accrued or declared but unpaid dividends thereon) would automatically convert to shares of Common Stock (i) upon the vote or written consent of the holders of at least sixty six and two-thirds percent (66 and 2/3%) of the issued and outstanding Series AA Convertible Preferred Stock, or (ii) upon the closing of a firm commitment underwritten public offering of shares of Common Stock pursuant to an effective registration statement under the Securities Act of 1933, as amended, that is underwritten by an investment bank approved by the Board of Directors and by a vote or written consent of the holders of at least sixty six and two-thirds percent (66 and 2/3%) of the issued and

outstanding Series AA Convertible Preferred Stock, with aggregate proceeds from such offering to the Corporation in excess of $40,000,000, before deduction of the underwriting discounts and commissions (a “Qualifying Public Offering”).

Special Mandatory Conversion:

In the event that any investor did not participate in a qualified financing by purchasing in the aggregate, in such qualified financing and within the time period specified by the Company its pro rata amount of the qualified financing (such Investor’s “Pro Rata Amount”), then the applicable portion of the shares of Series AA preferred stock held by such investor immediately prior to the initial closing of the qualified financing would automatically, and without any further action on the part of such Investor, be converted into common stock at a conversion ratio of one hundred-to-one (100:1) (such that every one hundred shares of Series AA preferred Stock are converted into one share of common stock), effective upon, subject to, and concurrently with, the consummation of the final closing. For purposes of determining the number of shares of Series AA preferred stock owned by an investor, and for determining the number of offered securities an investor has purchased in a qualified financing, all shares of Series AA preferred stock held by affiliates of such investor would be aggregated with such investor’s shares and all offered securities purchased by affiliates of such investor would be aggregated with the offered securities purchased by such Investor (provided that no shares or securities shall be attributed to more than one entity or person within any such group of affiliated entities or persons).

Anti-dilution:

The conversion price of the Series AA preferred stock was subject to adjustment to reduce dilution in the event that the Company issued additional equity securities at a purchase price less than the applicable conversion price. The conversion price would also be subject to proportional adjustment for events such as stock splits, stock dividends, and recapitalization. As a result of the reverse stock splits in November 2014 and January 2015, the Series AA conversion price was adjusted to $6.204.

Redemption:

Shares of Series AA preferred stock would be redeemed by the Company out of funds lawfully available there for at a price equal to the Series AA Original Issue Price per share, plus all accrued or declared but unpaid dividends thereon (the “Redemption Price”), in three annual installments commencing not more than 60 days after receipt by the Company at any time on or after the fifth anniversary of June 9, 2010, from the holders of at least sixty-six and two-thirds percent (66 and 2/3%) of the then outstanding shares of Series AA preferred stock of written notice requesting redemption of all shares of Series AA preferred stock. The date of each such installment would be referred to as a “Redemption Date.” If the Company did not have sufficient funds legally available to redeem on any Redemption Date all shares of Series AA preferred stock to be redeemed on such Redemption Date, the Company would redeem a pro rata portion of each holder’s redeemable shares of such capital stock out of funds legally available.

Certain “change in control” events, as defined in the Company’s certificate of incorporation, were considered to be liquidation events upon which the holders of Series AA preferred stock have had the option to require the Company redeem the shares held, at their liquidation value, as discussed above.

Series X Redeemable Convertible Preferred Stock

In June 2010, the Company sold 2,451,184 shares of Series X redeemable convertible preferred stock (“Series X preferred stock”) to employees and consultants to the Company at a purchase price of $0.001 per share, subject to stock purchase and restriction agreements. Pursuant to these agreements, the shares vest upon the third anniversary of the issuance if the purchaser of the Series X preferred shares remained an employee or maintained a business relationship with the Company. The Series X preferred stockholder could not sell, assign,

transfer, pledge, encumber or dispose of all or any of the unvested shares except to the Company. The Company determined that the issuance of these restricted shares was compensatory in nature and accounted for the issuance as stock-based compensation. The excess grant date value, over the proceeds received from each purchase was determined to be compensation expense.

Simultaneous with the issuance of Series X preferred stock, the Company entered into termination and separation agreements with certain employees and consultants who purchased 392,189 shares of Series X preferred stock. The Company determined that there was no substantive future services required of these employees and consultants and recognized all of the associated compensation expense upon issuance.

The remaining 2,058,995 shares were issued to continuing employees of the Company and the Company recognized the compensation expense on a straight-line basis over the requisite service period, net of an estimated forfeiture rate which concluded in 2013.

Two of the employees that purchased Series X preferred stock were terminated by the Company in May 2013. Upon termination, the Company repurchased an aggregate of 558,864 shares of Series X preferred stock and modified the vesting terms on the remaining 558,862 shares of Series X preferred stock held by these employees. The modified vesting terms provide that the shares will vest upon the occurrence of a liquidation event, if such liquidation event occurs within two years of the date of the modifications. The Company retains the right to repurchase the unvested shares at the purchase price of $0.01 per share if a liquidation event does not occur within two years of the date of the modification. During the year ended December 31, 2014, the Company further modified the vesting terms of these 558,862 shares of Series X preferred stock such that the Company’s repurchase right will expire upon consummation of an IPO of its common stock occurring prior to June 30, 2015. The Company estimated the fair value of the modified award at the modification date and at December 31, 2014 to be $950 and recognized this amount as stock-based compensation expense in 2015 as a result of the Company’s February 2015 IPO.

The following table is a rollforward of unvested Series X preferred stock shares:

Unvested—December 31, 2014

558,862

Vested

(558,862

Repurchased

—  

Unvested—December 31, 2015

—  

Due to the redemption feature of the Series X preferred stock, discussed further below, the Company classified the Series X preferred stock as temporary equity in the mezzanine section of the balance sheet at December 31, 2014. Pursuant to the IPO, all Series X preferred stock became vested and converted into common stock. Pursuant to these conversions, the $548 carrying value of the Series X preferred stock at the time of the IPO was reclassified as $5 to common stock par value and $543 additional paid-in capital.

Rights, Preferences, and Privileges

Voting Rights:

The Series X preferred stock did not have any voting rights, except as related to the election of certain directors. When the Series X preferred stock had voting rights, each share of Series X preferred stock entitled the holder to such number of votes per share on each such action as shall equal the number of shares of common stock into which each share of Series X preferred stock was then convertible.

Liquidation Preference:

Upon any liquidation event, such as a liquidation, dissolution or winding up of the Company, immediately after the holders of Series AA preferred stock would have been paid in full, the Series AA preferred stock initial preference as described above and before any payment is made to the holders of common stock, the holders of

the shares of Series X preferred stock would be paid out of assets of the Company available for distribution to its stockholders a per share amount determined by taking the product of (1) the percentage calculated as (i) the total number of issued and outstanding shares of common stock owned by the holders of Series X preferred stock determined on an as converted fully-diluted basis divided by (ii) the total number of issued and outstanding shares of common stock of the Company on an as-converted fully diluted basis, and (2) the remaining assets of the Company available for distribution to its stockholders, and dividing such product by the number of issued and outstanding shares of Series X preferred stock (the “Series X Preference”).

Certain change in control events, as defined in the Company’s certificate of incorporation, were to be considered to be liquidation events upon which the holders of Series X preferred stock had the option to require the Company redeem the shares held, at their liquidation value, as discussed above.

Right to Convert:

The holder of any share of Series X preferred stock had the right, at any time to convert any such share (except that upon any liquidation of the Company the right of conversion shall terminate at the close of business on the business day fixed for payment of the amounts distributable on the Series X preferred stock), into fully paid and nonassessable shares of common stock based on the Series X Conversion Ratio. The Series X Conversion Ratio was initially 1:1, and subject to adjustment as discussed under the section “Anti-Dilution” below.

Mandatory Conversion:

The Series X preferred stock would be automatically converted into common stock, at the then applicable conversion price (i) in the event that the holders of at least two-thirds of the outstanding Series AA preferred stock, voting as a single class, consent to such conversion, or (ii) upon the closing of a qualified public offering, as defined.

Anti-Dilution:

The conversion price of the Series X preferred stock was subject to adjustment to reduce dilution in the event that the Company issues additional equity securities at a price less than the applicable conversion price. The conversion price would also be subject to proportional adjustment for events such as stock splits, stock dividends, and recapitalization. As a result of the reverse stock splits in November 2014 and January 2015, the Series X conversion ratio was adjusted to approximately 1-for-4.06.outstanding.

8. Stock Plans

The Company has historically granted common stock options pursuant toInotek maintains three equity compensation plans: the 2004Amended and Restated 2014 Plans (as defined below) at an exercise price that is not less than the fair market value of the Company’s stock as determined by the board of directors, with input from management. The board of directors has historically determined the estimated fair value of the Company’s common stock on the date of grant based on a number of objective and subjective factors, including external market conditions, rights and preferences of securities senior to the common stock at the time of each grant, the likelihood of achieving a liquidity event such as an IPO or the sale of the Company, and third party valuations. For stock option grants prior to the IPO, the computation of expected volatility was based on the historical volatilities of peer companies. The peer companies include organizations that are in the same industry, with similar size and stage of growth. The Company estimates that the expected life of the options granted using the simplified method allowable under Staff Accounting Bulletin No. 107,Share Based Payments. The expected life is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post vesting termination behavior among its employee population. The interest rate for grants pursuant to the 2004 and 2014 Plans are based on the U.S. treasury bills rate for U.S. treasury bills with terms commensurate with the expected term of the option grants on the grant date of the option.

2004 Stock Option and Incentive Plan

In July 2004, the Company’s board of directors adopted (the “2014 Plan”), the 2004 Stock Option and Incentive Plan (the “2004 Plan”) for, and the issuance of incentive stock options, restricted stock, and other equity awards, all for common stock, as determined by the board of directors to employees, officers, directors, consultants, and advisors of the Company and its subsidiaries. Only stock options were granted under the 2004 Plan. The 20042014 Employee Stock Purchase Plan expired in February 2014 but remains effective for all outstanding options.

The following table summarizes the option activity for the years ended December 31, 2015 and 2014 under the 2004 Plan:(“ESPP”).

  

   Number
of Shares
   Weighted-Average
Exercise Price

Per Share
   Aggregate
Intrinsic
Value
 

Options outstanding at December 31, 2013

   11,835    $40.58     —    

Granted

   —       —       —    

Exercised

   —       —       —    

Expired

   (877)   40.58     —    
  

 

 

     

Options outstanding at December 31, 2014

   10,958     40.58     —    

Granted

   —       —       —    

Exercised

   —       —       —    

Expired

   (41   40.58     —    
  

 

 

     

Options outstanding at December 31, 2015

   10,917    $40.58     —    
  

 

 

   

 

 

   

 

 

 

Options exercisable at December 31, 2015

   10,917    $40.58           —    
  

 

 

   

 

 

   

 

 

 

Weighted-average years remaining on contractual life

   2.50      

Unrecognized compensation cost related to non-vested stock options

  $—        

The Company recorded no stock compensation expense in the years ended December 31, 2015Amended and 2014, respectively relating to stock options granted pursuant to the 2004 Plan. At December 31, 2015, all options were fully vested and there was no unrecognized stock-based compensation expense relating to stock options granted pursuant to the 2004 Plan. Options outstanding as of December 31, 2015 had no intrinsic value, as the option price exceeded the fair value of the underlying shares.

Restated 2014 Stock Option and Incentive Plan

In August 2014, the Company’sInotek’s board of directors adopted the 2014 Stock Option and Incentive Plan (the “2014 Plan”) for the issuance of incentive and non-qualified stock options, restricted stock, and other equity awards, all for common stock, as determined by the board of directors to employees, officers, directors, consultants, and advisors of the CompanyInotek and its subsidiaries. Subsequent to the IPO in February 2015, there were 2,175,216 shares available for grant under the 2014 Plan. There were 544,599 shares issuable under the 2014 Plan as of December 31, 2015. Pursuant to the provisions of the 2014 Plan and approval by the board of directors, on January 1, 20162018 an additional 1,056,936272,227 shares were added to the 2014 Plan representing 4% of total common shares issued and outstanding at December 31, 2015.2017. There were 207,579 shares available for issuance under the 2014 Plan as of December 31, 2017. The 2014 Plan expires in August 2024.

On August 28, 2014,In December 2016, the Board of Directorsboard granted 840,975, ten-year term, stock options to certain executive officers of the Company at an exercise price of $4.342 per share, the fair market value of the common stock as determined by the Board of Directors, on the condition that the options would be of no further force and effect if the Company did not consummate an IPO prior to the one-year anniversary of the grant date (the “IPO Condition”). The IPO Condition was met upon the Company’s February 2015 IPO. These stock options vested 25% on the one-year anniversary of the grant date and the remaining 75% will vest in equal monthly installments over the following 36 months. Additionally on August 28, 2014, the Board of Directors granted an aggregate of 59,142117,500 restricted stock options to the directors that were fully vested on the date of the grant.

The fair value of the stock options granted during 2014 was estimated on the grant date using a Black-Scholes stock option pricing model based on the following assumptions: an expected term of 5 to 6.25 years; expected stock price volatility of 83.3% to 92.5%; a risk free rate of 1.63% to 1.84%; and a dividend yield of 0%. The Company is recognizing $2,798 of stock-based compensation expense for these stock options on a straight-line basis commencing upon the grant date in August 2014 through the final vesting date in August 2018. As a result of the resolution of the IPO Condition, the year ended December 31, 2015 reflects stock compensation expense calculated from the grant date in August 2014 through December 31, 2015.

The Company recorded stock compensation expense of $170 in general and administrative expense in the year ended December 31, 2014 related to the 59,142 stock options that were grantedunits (“RSUs”) pursuant to the 2014 Plan and fully vestedPlan. Each restricted stock unit represents a contingent right to receive one share of Inotek’s common stock. Vesting for these RSUs was based equally on the achievement of two performance-based conditions, subject to continued service through such achievement dates. The intrinsic fair value of these RSUs as of the date of grant. The Companygrant was $3,055 and no stock-based compensation expense was recorded in 2016 as Inotek determined that the vesting conditions were not probable of occurring. In January 2017, these RSUs were modified such that instead of vesting based on the achievement of certain performance-based conditions, they would vest in equal annual installments over four years from the December 2016 date of grant, subject to continued service through such dates. This change in vesting criteria was accounted for as a modification under ASC 718 whereby Inotek is recognizing $2,798the $717 fair value of stock compensation expense related to the remaining 840,975 stock options on a straight-line basisgrants as of the date of modification over the vesting period commencing uponterm.

In September 2017, Inotek accelerated the consummationvesting of all unvested RSUs and stock options held by the ten terminated employees and recorded an incremental charge related to these modifications of $158, of which $142 and $16 was reflected in research and development and general and administrative expenses, respectively. Inotek also modified the employment agreements with certain of its remaining employees such that in the event of a change in control, if the employee experiences a qualifying termination by Inotek any time prior to or within 12 months of the IPOchange in February 2015.

During 2015, the Board of Directors granted a total of 730,500 ten-year termcontrol, all such employee’s outstanding stock options and RSUs will vest in full and the stock options will become exercisable. Inotek determined that the original awards were expected to employeesvest under their original terms both prior to and directorsafter the modification. A comparison of the Company. The fair value of the outstanding stock awards immediately before and after the modification resulted in no incremental expense.

In October 2017, Inotek extended the exercise period for stock options held by each stock option granted was estimated on the grant date using a Black-Scholes stock option pricing model based on the following assumptions: anof its then remaining employees and directors. This change in expected term criteria was accounted for as a modification under ASC 718 whereby Inotek recorded an


incremental charge of 5.31 to 6.08 years; expected stock price volatility$856, of 80.9% to 101.1%, a risk free rate of 1.55% to 1.85%,which $196 and a dividend yield of 0%. The Company will recognize $3,209 of stock-based compensation expense for these stock options on a straight-line basis commencing upon the grant dates through the final vesting dates.

As of December 31, 2015, the Company had $4,621 of unrecognized compensation expense related to options granted under its 2014 Equity Plan. This cost is expected to be recognized over a weighted average period of 2.9 years from December 31, 2015.

The Company recognizes compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. The Company reduces compensation expense for expected forfeitures, as estimated by management.$660 was reflected in research and development and general and administrative expenses, respectively.

The following table summarizes the 2014 Plan option activity for each of the two years ended December 31, 2015:2017 and 2016 under the 2014 Plan:

 

 

Number of

Shares

 

 

Weighted-

Average Exercise

Price Per

Share

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Outstanding as of December 31, 2015

 

 

405,190

 

 

$

19.80

 

 

 

 

 

Granted

 

 

289,125

 

 

$

31.08

 

 

 

 

 

Exercised

 

 

(21,107

)

 

$

18.84

 

 

 

 

 

Cancelled

 

 

(7,000

)

 

$

27.16

 

 

 

 

 

Outstanding as of December 31, 2016

 

 

666,208

 

 

$

24.64

 

 

$

2,064

 

Granted

 

 

78,750

 

 

$

7.20

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(223,062

)

 

$

27.04

 

 

 

 

 

Outstanding as of December 31, 2017

 

 

521,896

 

 

$

20.96

 

 

$

255

 

Vested and exercisable as of December 31, 2017

 

 

335,230

 

 

$

20.36

 

 

$

128

 

Weighted-average years remaining on contractual life

 

 

7.80

 

 

 

 

 

 

 

 

 

Unrecognized compensation cost related to non-vested stock

   options

 

$

3,459

 

 

 

 

 

 

 

 

 

 

   Number of
Shares
   Weighted-
Average
Exercise
Price Per
Share
   Aggregate
Intrinsic
Value
 

Options outstanding at December 31, 2013

   —      $—       —    

Granted

   900,117    4.34     —    

Exercised

   —       —       —    

Expired

   —       —       —    
  

 

 

     

Options outstanding at December 31, 2014

   900,117     4.34     —    

Granted

   730,500     5.69     —    

Exercised

   (9,857   4.34     —    

Expired

   —       —       —    
  

 

 

     

Options outstanding at December 31, 2015

   1,620,760    $4.95    $10,339  
  

 

 

   

 

 

   

 

 

 

Options exercisable at December 31, 2015

   359,610    $4.40    $2,492  
  

 

 

   

 

 

   

 

 

 

Weighted-average years remaining on contractual life

   9.05      

Unrecognized compensation cost related to non-vested stock options

  $4,621      

The weighted-average fair value of all stock options granted for the years ending December 31, 20152017 and 20142016 was $4.39$5.72 and $3.30,$20.92, respectively. Intrinsic value at December 31, 20152017 and 2016 is based on the closing price of the Company’sInotek’s common stock of $11.33$10.44 and $24.40 per share.

share, respectively. As of December 31, 2017, all options granted are expected to vest.

In 2016, 7,530 shares of the 21,107 total options exercised were surrendered to Inotek pursuant to a net exercise right.

Unrecognized compensation cost related to non-vested stock options at December 31, 2017 includes $462 related to the October 2017 modification to extend the exercise period for certain unvested stock options.

The following table summarizes the RSU activity for each of the years ended December 31, 2017 and 2016 under the 2014 Plan:

 

 

Number of

Shares

 

 

Weighted-

Average Grant Date Fair Value Per

Share

 

Outstanding as of December 31, 2015

 

 

-

 

 

 

 

 

Granted

 

 

117,500

 

 

$

26.00

 

Vested

 

 

-

 

 

 

 

 

Cancelled

 

 

-

 

 

 

 

 

Outstanding as of December 31, 2016

 

 

117,500

 

 

$

26.00

 

Granted

 

 

232,750

 

 

$

6.40

 

Vested and settled

 

 

(56,406

)

 

$

6.76

 

Cancelled

 

 

(22,125

)

 

$

6.80

 

Outstanding as of December 31, 2017

 

 

271,719

 

 

$

4.20

 

As noted above, all outstanding RSUs were modified in the year ended December 31, 2017. Therefore, the weighted average grant date fair value per share of outstanding RSUs as of December 31, 2017, reflects the $4.20 per share fair value of the outstanding RSUs as of the date of modification.

Shares issued for RSUs that vested and settled in the year ended December 31, 2017, included 3,270 shares of common stock surrendered by employees for payment of $16 of withholding taxes due, resulting in a net issuance of 53,136 shares. Also, there were


29,375 RSUs that vested but remained unsettled as of December 31, 2017, per the terms of the Restricted Stock Unit Agreements. These RSUs are expected to settle no later than March 15, 2018.

2004 Stock Option and Incentive Plan

In July 2004, Inotek’s board of directors adopted the 2004 Plan for the issuance of incentive stock options, restricted stock, and other equity awards, all for common stock, as determined by the board of directors to employees, officers, directors, consultants, and advisors of Inotek and its subsidiaries. Only stock options were granted under the 2004 Plan. The 2004 Plan expired in February 2014 but remains effective for all outstanding options.

The following table summarizes stock option activity for each of the years ended December 31, 2017 and 2016 under the 2004 Plan:

 

 

Number

of Shares

 

 

Weighted-

Average Exercise Price Per

Share

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Outstanding as of December 31, 2015

 

 

2,729

 

 

$

162.32

 

 

 

 

 

Exercised

 

 

 

 

$

 

 

 

 

 

Expired

 

 

 

 

$

 

 

 

 

 

Cancelled

 

 

(73

)

 

$

162.32

 

 

 

 

 

Outstanding as of December 31, 2016

 

 

2,656

 

 

$

162.32

 

 

 

 

 

Exercised

 

 

 

 

$

 

 

 

 

 

Expired

 

 

(570

)

 

$

162.32

 

 

 

 

 

Cancelled

 

 

(462

)

 

$

162.32

 

 

 

 

 

Outstanding as of December 31, 2017

 

 

1,624

 

 

$

162.32

 

 

$

 

Vested and exercisable as of December 31, 2017

 

 

1,624

 

 

$

162.32

 

 

$

 

Weighted-average years remaining on contractual life

 

 

0.66

 

 

 

 

 

 

 

 

 

Unrecognized compensation cost related to non-vested stock

   options

 

$

 

 

 

 

 

 

 

 

 

Inotek recorded no stock compensation expense in the years ended December 31, 2017 and 2016 relating to stock options granted pursuant to the 2004 Plan. At December 31, 2017, all 2004 Plan options were fully vested and there was no unrecognized stock-based compensation expense relating to stock options granted pursuant to the 2004 Plan. Options outstanding as of December 31, 2017 had no intrinsic value, as the option price exceeded the fair value of the underlying shares.

Employee Stock Purchase Plan

In November 2014, the Company’sInotek’s board of directors adopted and the stockholders approved the 2014 Employee Stock Purchase Plan (“ESPP”). The Company’s board of directors has authorized the issuance of a number of shares of common stock issuable under the ESPP to the number that represents 1% of our outstanding common stock outstanding after the IPO, or 160,276 shares.ESPP. The ESPP provides that the number of shares reserved and available for issuance under the ESPP shall be cumulatively increased each January 1, beginning on January 1, 2016, by the lesser of (i) 600,000 shares of common stock or (ii) the number of shares necessary to set the number of shares of Common Stockcommon stock under the PlanESPP at 1% percent of the outstanding number of shares as of January 1 of the applicable year. However, the board of directors reserves the right to determine that there will be no increase for any year or that any increase will be for a lesser number of shares. The numberAs of January 1, 2018, 6,562 shares reserved andwere added to the ESPP. As of December 31, 2017, there were 61,494 shares available for issuance under the ESPP is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. The ESPP may be terminated or amended by the board of directors at any time, but will automatically terminate upon the tenth anniversary of the date the ESPP is approved by the stockholders. An amendment that increases the number of shares of common stock that are authorized under the ESPP and certain other amendments require the approval of the stockholders.ESPP.

All employees who are whose customary employment is for more than 20 hours a week are eligible to participate in the ESPP. Any employee who owns 5% or more of the voting power or value of the Company’sInotek’s shares of common stock is not eligible to purchase shares under the ESPP. Each employee who is a participant in the ESPP may purchase shares by authorizing payroll deductions of up to 10% of his or her base compensation during an offering period. Unless the participating employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase shares of common stock on the last business day of the offering period at a price equal to 85% of the fair market value of the ordinary shares on the first business day or the last business day of the offering period, whichever is lower, provided that no more than 5,000 shares of common stock may be purchased by any one employee during each offering period. Under applicable tax rules, an employee may purchase no more than $25,000 worth of stock, valued at the start of the purchase period, under the ESPP in any calendar year.

No offeringsIn 2017, 5,971 shares of common stock were purchased pursuant to the ESPP, commenced asresulting in proceeds to Inotek of $35. Inotek recorded $6 of stock-based compensation expense pursuant to the ESPP during the year ended December 31, 2014.2017. In 2015, $632016, $155 was


withheld and used to purchase 13,1436,481 shares of common stock and the CompanyInotek recorded $43$66 of stock-based compensation expense pursuant to the ESPP.

Restricted Common StockStock-Based Compensation

In 2011, the Company issued 24,280 restricted common shares pursuant to a stock purchase and restriction agreement for a price of $0.0406 per share. The Company received $1 from the grantee. These shares vested 25% on each of the first four anniversaries of the date of grant. During the year ended December 31, 2014, the board of directors accelerated the vesting of the last tranche resulting in 12,140 shares vesting in such period. The Company recorded the excess grant date fair value over the proceeds received as compensation expense. The Company recorded $7 of stock-basedStock-based compensation expense related to this awardfor options, RSUs and the ESPP is reflected in the year ended December 31, 2014. At December 31, 2015 there were no restricted common shares outstanding.consolidated statements of operations as follows:

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Research and development

 

$

1,287

 

 

$

1,362

 

General and administrative

 

 

2,749

 

 

 

1,547

 

Total

 

$

4,036

 

 

$

2,909

 

9. Commitments and Contingencies

Operating Leases

The Company leased office space in Lexington, Massachusetts under a lease agreement that expired in September 2015. In May 2015, the CompanyInotek entered into a lease agreement (the “Office Lease”) for its new headquarters in Lexington, Massachusetts. The CompanyInotek occupied this space in September 2015, at which time its rental obligations commenced. The lease term is 90 months and the Company has the right to extend the term for one period of five years. The lease also provides that the Company will be responsible for the operating expenses and real estate taxes, to the extent in excess of base-year amounts, and electricity attributable to the premises. The CompanyInotek recorded $445 as leasehold improvements for costs incurred to build out the buildoutspace, and is amortizing those costs allowed and will amortize these to facilities expense over the term of the lease. Rent expense is recognized on a straight-line basis

at the average monthly rent over the term of the lease. Deferred rent is included in other current and long-term liabilities on Inotek’s consolidated balance sheets.

In 2016, Inotek signed an amendment to the balance sheet. Office Lease, whereby it agreed to rent additional space (the “Lease Amendment”). Inotek occupied the additional space on July 1, 2016. The terms of the Lease Amendment follow the terms of the Office Lease. The lease term is 90 months and Inotek has the right to extend the term for one period of five years.

Rent expense related to this facility was $85 for the year ended December 31, 2015. Aggregate rent expense$337 and $275 for the years ended December 31, 20152017 and 2014 was $143 and $54,2016, respectively. The below table presentsAs of December 31, 2017, the remaining aggregate annual cash commitments pursuant to the Office Lease:Lease and the Lease Amendment are as follows:

 

Year

  Amount 

 

(in thousands)

 

2016

  $209  

2017

   289  

2018

   298  

 

$

411

 

2019

   306  

 

 

421

 

2020

   314  

 

 

430

 

2021

 

 

439

 

2022

 

 

445

 

Thereafter

   706  

 

 

74

 

  

 

 

Total

  $2,122  

 

$

2,220

 

  

 

 

Employee Agreements

In September 2017, Inotek modified the employment agreements with certain of its remaining employees such that in the event of termination in connection with a change in control (“CIC”), Inotek will provide these employees severance payments at each employee’s current monthly salary rate, and continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost) for up to six months primarily depending on duration of each individual employee’s service. Inotek also modified the employment agreements with certain of its named executive officers. In the event of a qualifying termination in connection with a CIC, for each of Inotek’s Chief Medical Officer and Vice President, Finance, Inotek will pay (i) twelve and six months’ severance, respectively, at each person’s current monthly salary rate, and (ii) continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost), for twelve and six months, respectively. In the event of a qualifying termination in connection with a CIC, in addition to the severance benefits previously provided to Inotek’s Chief Executive Officer (consisting of a lump-sum payment equal to 18 months’ base salary), Inotek agreed to provide continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost), for eighteen months. In addition, Inotek committed to paying to all seven remaining employees, if they were employees on the date of a CIC, a retention bonus, with the aggregate of all such retention bonuses equal to approximately $642.

Also, upon a CIC, Inotek would owe Perella Weinberg a fee of $2,000.

All payments described above became due and payable upon the consummation of the Reverse Merger in January 2018.


Securities Litigation

On January 6, 2017, a purported stockholder of Inotek filed a putative class action in the U.S. District Court for the District of Massachusetts, captioned Whitehead v. Inotek Pharmaceuticals Corporation, et al., No. 1:17-cv-10025. An amended complaint was filed on July 10, 2017, and a second amended complaint was filed on September 5, 2017. The second amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 against the Company, David Southwell, and Rudolf Baumgartner based on allegedly false and misleading statements and omissions regarding Inotek’s phase 2 and phase 3 clinical trials of trabodenoson. The lawsuit seeks, among other things, unspecified compensatory damages for purchasers of Inotek’s common stock between July 23, 2015 and July 10, 2017, as well as interest and attorneys’ fees and costs. The defendants filed a motion to dismiss the second amended complaint on October 6, 2017, the plaintiffs opposed the motion on December 5, 2017, and the defendants filed a reply on January 16, 2018. Inotek continues to vigorously defend itself against this claim.

From time to time, Inotek may be subject to other various legal proceedings and claims that arise in the ordinary course of its business activities. Although the results of litigation and claims cannot be predicted with certainty, Inotek does not believe it is party to any other claim or litigation the outcome of which, if determined adversely to Inotek, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on Inotek because of defense and settlement costs, diversion of management resources and other factors.

Termination of Chief Scientific Officer

In October 2016, Inotek entered into a Transition Agreement with its former Chief Scientific Officer, William K. McVicar, Ph.D. (the “Transition Agreement”). Pursuant to the terms of the Transition Agreement, Dr. McVicar remained an employee of the Company as a Senior Advisor for a six-month period ending April 4, 2017 (the “Transition Period”) and for twelve months thereafter will receive his salary and medical benefits at the same rate in effect as of the date of the Transition Agreement. Inotek recorded a charge in research and development expense of approximately $862 in 2016 related to the Transition Agreement, including approximately $215 related to stock options expected to vest during the Transition Period. Through December 31, 2017, Inotek has made payments of approximately $591 to Dr. McVicar, including $102 related to his 2016 bonus payment which was accrued prior to his termination. As of December 31, 2017, Inotek had $106 in accrued severance related to Dr. McVicar.

Indemnification Arrangements

As permitted under Delaware law, the Company’sInotek’s bylaws provide that the CompanyInotek will indemnify any director, officer, employee or agent of the CompanyInotek or anyone serving in these capacities. The maximum potential amount of future payments the CompanyInotek could be required to pay is unlimited. The CompanyInotek has insurance that reduces its monetary exposure and would enable it to recover a portion of any future amounts paid. As a result, the CompanyInotek believes that the estimated fair value of these indemnification commitments is minimal.

Throughout the normal course of business, the CompanyInotek has agreements with vendors that provide goods and services required by the CompanyInotek to run its business. In some instances, vendor agreements include language that requires the CompanyInotek to indemnify the vendor from certain damages caused by the Company’sInotek’s use of the vendor’s goods and/or services. The CompanyInotek has insurance that would allow it to recover a portion of any future amounts that could arise from these indemnifications. As a result, the CompanyInotek believes that the estimated fair value of these indemnification commitments is minimal.

10. Fair Value of Financial Measurements

Items measured at fair value on a recurring basis includeare short term investments, derivative instruments and warrant liabilities.

investments. The following table sets forth the Company’sInotek’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:

 

 

Fair Value Measurements at

 

 

December 31, 2017

 

  Fair Value Measurements at
December 31, 2015
 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

  Total   Level 1   Level 2   Level 3 

 

(in thousands)

 

Assets:

        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (included in cash and cash equivalents)

 

$

76,949

 

 

$

76,949

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

  $16,160    $—     $16,160    $—   

 

$

3,667

 

 

$

 

 

$

3,667

 

 

$

 

Agency bonds

   10,031     —      10,031     —   

United States Treasury securities

   5,047     5,047     —      —   

 

 

17,627

 

 

 

17,627

 

 

 

 

 

 

 

  

 

   

 

   

 

   

 

 

Short-term investments

  $31,238    $5,047    $26,191    $—   

 

$

21,294

 

 

$

17,627

 

 

$

3,667

 

 

$

 

  

 

   

 

   

 

   

 

 
  Fair Value Measurements at
December 31, 2014
 
  Total   Level 1   Level 2   Level 3 

Liabilities

  

Convertible preferred stock warrant liability

  $482    $—     $—     $482  
  

 

   

 

   

 

   

 

 

Convertible notes redemption rights derivative

  $480    $—     $—     $480  
  

 

   

 

   

 

   

 

 

 

 

Fair Value Measurements at

 

 

 

December 31, 2016

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (included in cash and cash equivalents)

 

$

20,698

 

 

$

20,698

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

22,046

 

 

$

 

 

$

22,046

 

 

$

 

Agency bonds

 

 

5,913

 

 

 

 

 

 

5,913

 

 

 

 

United States Treasury securities

 

 

68,716

 

 

 

68,716

 

 

 

 

 

 

 

Short-term investments

 

$

96,675

 

 

$

68,716

 

 

$

27,959

 

 

$

 

Money market mutual funds

Inotek classifies its money market mutual funds as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets without any valuation adjustment.

Short-term investments

The CompanyInotek classifies its United States Treasury securities as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets without any valuation adjustment. The CompanyInotek classifies its certificates of deposit as Level 2 assets under the fair value hierarchy, as there are no quoted market prices in active markets, and its agency bonds as Level 2 assets under the fair value hierarchy, as these assets are not always valued daily using quoted market prices in active markets.

Convertible preferred stock warrant liability

As previously discussed (see Notes 5 and 7), the Company issued warrants to purchase Series AA preferred stock in connection with the 2013 Series AA preferred stock issuance and Loan Agreements. The Series AA warrant liabilities were recorded at their fair value on the date of issuance and were remeasured on each subsequent balance sheet date and as of the warrant exercise date, with fair value changes recognized as income (decrease in fair value) or expense (increase in fair value) in other income (expense) in the statements of operations.

Prior to the IPO, in addition to the assumptions above, the Company’s estimated fair value of the Series AA preferred stock warrant liabilities is calculated using other key assumptions including the probability of an exit event, the enterprise value as determined on an income approach, and a discount for lack of marketability. Management, with the assistance of an independent valuation firm, made these subjective determinations based on available current information.

The Company used a hybrid valuation model in which a Monte Carlo simulation was used to calculate the fair value of the Company’s equity securities under three scenarios including: i) an IPO scenario, ii) a merger or acquisition scenario or iii) a stay private scenario. The Company then probability-weighted each equity value derived from the Monte Carlo simulation based upon the Company’s estimate of the likelihood of the exit scenario occurring.

The assumptions used in calculating the estimated fair value of the warrants represent the Company’s best estimates and include probabilities of settlement scenarios, enterprise value, time to liquidity, risk-free interest rates, discount for lack of marketability and volatility. The estimates are based, in part, on subjective assumptions and could differ materially in the future. Generally, increases or decreases in the fair value of the underlying convertible preferred stock would result in a directionally similar impact in the fair value measurement of the warrant liability. The following table details the assumptions used in the Black-Scholes option pricing model used to estimate the fair value of the Series AA preferred stock warrants as of February 17, 2015, the date upon which the Series AA preferred stock warrants became exercisable for common stock, and the Monte Carlo simulation model used to estimate the fair value of the Series AA preferred stock warrants at December 31, 2014:

   February 17,  December 31, 
   2015  2014 

Volatility

   60  65% –70

Expected term (years)

   8.4    0.17 – 0.50  

Expected dividend yield

   0.0  0.0

Risk-free rate

   1.7  0.02% –0.03

Convertible debt redemption rights derivative

The 2014 Convertible Bridge Notes redemption rights derivative required separate accounting and was valued using a single income valuation approach. The Company estimated the fair value of the redemption rights derivative using a ‘‘with and without’’ income valuation approach. Under this approach, the Company estimated the present value of the fixed interest rate debt based on the fair value of similar debt instruments excluding the

embedded feature. This amount was then compared to the fair value of the debt instrument including the embedded feature using a probability weighted approach by assigning each embedded derivative feature a probability of occurrence, with consideration provided for the settlement amount including conversion discounts, prepayment penalties, the expected life of the liability and the applicable discount rate.

As of the issuance of the 2014 Convertible Bridge Notes on December 22, 2014 and on December 31, 2014, the Company ascribed a probability of occurrence to the Change in Control Redemption Feature of 25%. The expected life of the feature was the remaining term of the debt and the discount rate was 18.9%. The Company classified the liability within Level 3 of the fair value hierarchy as the probability factor and the discount rate are unobservable inputs and significant to the valuation model. As of December 31, 2014, the fair value of the embedded derivative was $480, respectively. Pursuant to the IPO, the Convertible Bridge Notes were converted into 337,932 shares of common stock.

2020 Convertible Notes derivative liability

The fair value methodologies related to the 2020 Convertible Notes derivative liability are discussed in Note 5.

During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during any of the years presented.

The following table reflects the change in the Company’s Level 3 liabilities for the years ended December 31, 2015 and 2014:

   Convertible
preferred
stock
warrant
liabilities
  Convertible
Bridge
Notes
redemption
rights
derivative
  2020
Convertible
Notes
derivative
liability
 

Balance at December 31, 2013

  $1,888   $—    $—   

Issuance of 2014 Convertible Bridge Notes

   —     478   —   

Change in fair value

   844    2    —   

Warrant exercises

   (2,250  —      —   
  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2014

   482   480    —   

Issuance of 2020 Convertible Notes

   —     —     12,423  

Change in fair value

   (267  (480  42,793  

Reclassification to stockholders’ equity

   (215  —     —   

Conversion to common stock

   —     —     (55,216
  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2015

  $—    $—    $—   
  

 

 

  

 

 

  

 

 

 

11. Benefit Plans

Retirement Plan

The CompanyInotek sponsors a 401(k) savings plan (the “Savings Plan”) for all eligible U.S. employees. The CompanyInotek reserves the right to modify, amend, or terminate the Savings Plan. Employees may contribute up to the maximum allowed by the IRS, while the CompanyInotek contributes to the plan at the discretion of the board of directors. The Company’sInotek’s contributions to the plan for the years ended December 31, 20152017 and 20142016 were $35$154 and $16,$168, respectively.

Management Incentive On January 3, 2018, the Savings Plan

In August 2014, the Company adopted the Amended and Restated 2014 Management Incentive Plan (the “MIP”) in which certain of our named executive officers participated. Pursuant to the MIP, upon a “change in control” (as defined in the MIP), a bonus pool will be created from the proceeds received in connection with such change in control (ranging from 7 percent to 9.75 percent of transaction proceeds, depending upon the level of transaction proceeds received in the transaction), and each participant is entitled to receive a bonus equal to a certain percentage of such bonus pool. The MIP terminates automatically upon the earliest of (i) March 31, 2015 (unless a change in control has occurred prior to such date), (ii) the closing of our IPO, (iii) the closing of a qualified financing, as defined in the MIP, and (iv) the date all amounts to be paid under the MIP following a change in control have been paid. The MIP terminated upon the closing of our IPO in February 2015. was terminated.

12. Subsequent EventEvents

In February 2016,Completion of the Company signed an amendmentReverse Merger

On January 4, 2018, Inotek completed the Reverse Merger with Private Rocket merging with Merger Sub. The Reverse Merger was effected pursuant to the Office Lease, whereby it agreed to rent additional space (the “Lease Amendment”).Merger Agreement. Private Rocket is a multi-platform biotechnology company focused on the development of first-in-class gene therapies for rare and devastating pediatric diseases. The Company expects to occupyReverse Merger will be accounted for as a reverse merger under the additional space in July 2016. The termsacquisition method of accounting. Under the acquisition method of accounting, Private Rocket will be treated as the accounting acquirer and Inotek will be treated as the “acquired” company for financial reporting purposes because, immediately upon completion of the Lease Amendment followReverse Merger, Private Rocket stockholders held a majority of the voting interest of the combined company.

Immediately prior to the Reverse Merger, on January 4, 2018, Inotek effected a 1-for-4 reverse stock split on its issued and outstanding common stock. Pursuant to the terms of the Office Lease. If occupancy occursMerger Agreement, each outstanding share of Private Rocket common stock converted into approximately 76.185 shares of Inotek’s common stock (the “Exchange Ratio”). As a result of the reverse stock split, the per share exercise price of, and the number of shares of common stock underlying, Inotek’s stock options and warrants outstanding prior to the reverse stock split were automatically proportionally adjusted based on July 1, 2016, the annual commitments4-to-1 reverse stock split ratio in accordance with the terms of such options and warrants. The reverse stock split did not alter the par value of Inotek’s common stock or modify any voting rights or other terms of the common stock.

Also in connection with the completion of the Reverse Merger, Inotek changed its name from “Inotek Pharmaceuticals Corporation” to “Rocket Pharmaceuticals, Inc.”


Offering of Common Stock

On January 24, 2018, Rocket entered into an underwriting agreement (the “Underwriting Agreement”) with Cowen and Company, LLC and Evercore Group L.L.C., as representatives (the “Representatives”) of the several underwriters (collectively with the Representatives, the “Underwriters”), pursuant to which the Lease Amendment are as follows:Company agreed to issue and sell up to 6,325,000 shares of common stock (the “Shares”), which includes 825,000 shares that were sold pursuant to an option granted to the Underwriters (the “Offering”). The Shares were offered and sold in the Offering at a public offering price of $13.25 per share and were purchased by the Underwriters from Rocket at a price of $12.455 per share. On January 26, 2018, Rocket received net proceeds from the Offering of $78,778, after deducting underwriting discounts and commissions. All the shares in the offering were sold by Rocket.

 

Year

  Amount 

2016

  $28  

2017

   113  

2018

   113  

2019

   115  

2020

   115  

Thereafter

   254  
  

 

 

 

Total

  $738  
  

 

 

 

Exhibit Index

 

Exhibit
Number
Description of Exhibit
  3.1Seventh Amended and Restated Certificate of Incorporation of Inotek Pharmaceuticals Corporation, effective as of February 23, 2015 (1)
  3.2Amended and Restated By-Laws of Inotek Pharmaceuticals Corporation, effective as of February 17, 2015 (1)
  4.1Form of Common Stock Certificate of Inotek Pharmaceuticals Corporation (1)
  4.2Third Amended and Restated Investor Rights Agreement, dated as of June 9, 2010, by and among the Registrant and each of the parties listed on Schedule A thereto (2)
  4.3Indenture between Inotek Pharmaceuticals Corporation, and Wilmington Trust, National Association, as the trustee, relating to the 5.0% Convertible Senior Notes due 2020 (3)
10.12004 Stock Option and Incentive Plan (2)
10.22014 Stock Option and Incentive Plan and forms of agreements thereunder, as amended (1)
10.3Letter Agreement, dated as of July 28, 2014, by and between the Registrant and David P. Southwell (2)
10.4Letter Agreement, dated as of May 2, 2007, by and between the Registrant and Dr. Rudolf A. Baumgartner, M.D., as amended and currently in effect (2)
10.5Letter Agreement, dated as of August 23, 2007, by and between the Registrant and Dr. William K. McVicar, Ph.D., as amended and currently in effect (2)
10.6Letter Agreement, dated as of August 28, 2014, by and between the Registrant and Dale Ritter (2)
10.7Inotek Pharmaceuticals Corporation 2014 Employee Stock Purchase Plan, dated as of November 18, 2014 (1)
10.8.1Form of Indemnification Agreement, to be entered into between the Registrant and its directors (2)
10.8.2Form of Indemnification Agreement, to be entered into between the Registrant and its officers (2)
10.9.1Lease, dated as of May 29, 2015, by and between the Registrant and 91 Hartwell Avenue Trust, as amended and currently in effect (4)
10.9.2First Amendment to Lease, dated as of February 24, 2016, by and between the Registrant and 91 Hartwell Avenue Trust (5)
10.10Warrant to Purchase Shares of Series Preferred Stock dated as of June 28, 2013, by and among the Inotek Pharmaceuticals Corporation and Horizon Technology Finance Corporation (1)
10.11Warrant to Purchase Shares of Series Preferred Stock dated as of June 28, 2013, by and among the Inotek Pharmaceuticals Corporation and Fortress Credit Co LLC (1)
23.1*Consent of RSM US LLP
24.1*Power of Attorney (included in the signature page)
31.1*Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSXBRL Instance Document.
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Document.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.
101.LABXBRL Taxonomy Extension Labels Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Link Document.

F-23

*Filed herewith.
(1)Filed as an Exhibit to the Company’s annual report on Form 10-K (001-36829), filed with the SEC on March 31, 2015, as amended, and incorporated herein by reference.


(2)Filed as an Exhibit to the Company’s registration statement on Form S-1 (333-199859), filed with the SEC on November 5, 2014, as amended, and incorporated herein by reference.
(3)Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on February 26, 2015, and incorporated herein by reference.
(4)Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on June 1, 2015, and incorporated herein by reference.
(5)Filed as an Exhibit to the Company’s current report on Form 8-K (001-36829), filed with the SEC on February 26, and incorporated herein by reference.