PREM14A 1 d407163dprem14a.htm PREM14A PREM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material under §240.14a-12

INOTEK PHARMACEUTICALS CORPORATION

(Exact name of registrant as specified in its charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies

 

Ordinary Shares of Rocket Pharmaceuticals, Ltd., par value $0.01

  (2)  

Aggregate number of securities to which transaction applies:

 

130,998,789 shares of common stock of Inotek Pharmaceuticals Corporation (“Inotek”) to be issued or issuable upon the exercise of options, pursuant to that certain Agreement and Plan of Merger and Reorganization, dated as of September 12, 2017, by and among Inotek, Rome Merger Sub, a wholly-owned subsidiary of Inotek, and Rocket Pharmaceuticals, Ltd. (“Rocket”), assuming the exchange ratio determined based on information as to equity ownership as of September 19, 2017 and other assumptions discussed in this proxy statement, including the assumption that Rocket shareholders will own approximately 81% of the combined company, on a fully-diluted basis and that Inotek stockholders will own approximately 19% of the combined company, on a fully-diluted basis.

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

The maximum aggregate value was determined based upon 130,998,789 shares of Inotek common stock being issued in the transaction to Rocket shareholders, multiplied by $2.05, which is the average of high and low trading prices as reported on The NASDAQ Global Market within five business days prior to October 12, 2017. The filing fee was determined by multiplying $0.0001245 by the maximum aggregate value of the transaction as determined in accordance with the preceding sentence.

  (4)  

Proposed maximum aggregate value of transaction:

 

$268,547,517.45

  (5)  

Total fee paid:

 

$33,434.17

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

$0

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

 

     

 

 

 


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PRELIMINARY PROXY STATEMENT DATED OCTOBER 12, 2017—SUBJECT TO COMPLETION

 

 

LOGO

Dear Inotek Stockholder:

You are cordially invited to attend the special meeting of the stockholders of Inotek Pharmaceuticals Corporation, a Delaware corporation, which we refer to as Inotek, which will be held at [●], local time, on [●], at [●], unless postponed or adjourned to a later date. This is an important special meeting that affects your investment in Inotek.

On September 12, 2017, Inotek and Rocket Pharmaceuticals, Ltd., which we refer to as Rocket, entered into an Agreement and Plan of Merger and Reorganization, which we refer to as the merger agreement, pursuant to which a wholly-owned subsidiary of Inotek will merge with and into Rocket with Rocket surviving as a wholly -owned subsidiary of Inotek. Immediately following the effective time (as defined herein) of the merger, Rocket’s shareholders will own approximately 81% of the combined company, on a fully-diluted basis and Inotek’s stockholders will own approximately 19% of the combined company, on a fully-diluted basis, if Inotek has a valuation $47 million, which is based on a projected net cash balance (or cash and cash equivalents minus outstanding liabilities) at the closing of $42 million, plus an additional $5 million of enterprise value. Following the merger, Inotek will change its name to “Rocket Pharmaceuticals, Inc.,” which we refer to as New Rocket or the combined company.

Inotek is holding a special meeting of its stockholders in order to obtain the stockholder approvals necessary to complete the merger. At the special meeting, Inotek will ask its stockholders to approve the issuance of Inotek’s common stock pursuant to the merger agreement. Pursuant to NASDAQ rules, the issuance of Inotek’s common stock requires Inotek’s stockholders approval because it exceeds 20% of the number of shares of Inotek common stock outstanding prior to the issuance. Furthermore, the issuance of the shares requires Inotek’s approval under NASDAQ’s rules because it will result in a “change of control” of Inotek. Inotek will also ask its stockholders to approve an amendment to Inotek’s seventh amended and restated certificate of incorporation to effect a reverse stock split of Inotek’s common stock, which we refer to as the reverse stock split. Upon the effectiveness of the amendment to Inotek’s seventh amended and restated certificate of incorporation effecting the reverse stock split, the outstanding shares of Inotek’s common stock will be combined into a lesser number of shares to be determined by Inotek’s board of directors prior to the effective time of such amendment and public announcement by Inotek.

After careful consideration, Inotek’s board of directors has approved the merger agreement and the proposals referred to above, and has determined that they are advisable, fair and in the best interests of Inotek’s stockholders. Accordingly, Inotek’s board of directors unanimously recommends that stockholders vote “FOR” the issuance of Inotek’s common stock pursuant to the merger agreement and the resulting “change of control” of Inotek under NASDAQ rules, “FOR” the amendment to Inotek’s seventh amended and restated certificate of incorporation to effect the reverse stock split to maintain the listing of Inotek common stock on the NASDAQ Global Market and “FOR” the adjournment of the special meeting if necessary to solicit additional proxies if there are not sufficient votes to approve the issuance of Inotek’s common stock pursuant to the merger agreement and the transactions contemplated therein or to approve an amendment to Inotek’s seventh amended and restated certificate of incorporation to effect a reverse stock split of Inotek’s common stock at the time of the special meeting.

More information about Inotek, Rocket and the proposed transactions are contained in the accompanying proxy statement. Inotek urges you to read the proxy statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 14.


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Your vote is important. Whether or not you expect to attend the special meeting in person, please complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the special meeting. You can also vote your shares via the internet or by telephone as provided in the instructions set forth in the enclosed proxy card. If you hold your shares in “street name” through a broker, you should follow the procedures provided by your broker.

Inotek is excited about the opportunities the merger brings to its stockholders, and we thank you for your consideration and continued support.

 

Yours sincerely,
 

 

David P. Southwell

President, and Chief Executive Officer and Director

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the merger described in this proxy statement or the Inotek common stock to be issued in connection with the merger or determined if this proxy statement is accurate or adequate. Any representation to the contrary is a criminal offense.

This proxy statement is dated [●], and is first being mailed to stockholders on or about [●], 2017.


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LOGO

91 HARTWELL AVENUE, LEXINGTON, MA 02421

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON [], 2017.

To the Stockholders of Inotek Pharmaceuticals Corporation:

A special meeting of stockholders of Inotek Pharmaceuticals Corporation, which we refer to as Inotek, will be held at [●], local time, on [●], 2017, at [●], to consider and act upon the following matters:

 

  1. To approve the issuance of Inotek’s common stock pursuant to the Agreement and Plan of Merger and Reorganization, dated as of September 12, 2017, by and among Inotek, Rome Merger Sub, a wholly-owned subsidiary of Inotek, and Rocket Pharmaceuticals, Ltd., which we refer to as Rocket, and the resulting “change of control” of Inotek under NASDAQ rules.

 

  2. To approve an amendment to Inotek’s seventh amended and restated certificate of incorporation to effect a reverse stock split of Inotek’s common stock.

 

  3. To consider and vote upon an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and 2.

If Inotek is to complete the merger with Rocket, stockholders must approve Proposal 1. The approval of Proposal 2 is not a condition to the completion of the merger with Rocket.

Stockholders also will consider and act on any other matters as may properly come before the special meeting or any adjournment or postponement thereof, including any procedural matters incident to the conduct of the special meeting.

Inotek’s common stock is the only type of security entitled to vote at the special meeting. The board of directors has fixed [●], 2017 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of Inotek’s common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, Inotek had [●] shares of common stock outstanding and entitled to vote at the special meeting. Each holder of record of shares of common stock on the record date will be entitled to one vote for each share held on all matters to be voted upon at the special meeting.

Your vote is important. The affirmative vote of the holders of a majority of the shares of Inotek’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting is required for approval of Proposal 1. The affirmative vote of holders of a majority of the outstanding shares of Inotek’s common stock as of the record date for the special meeting is required for approval of Proposal 2. Whether or not you plan to attend the special meeting in person, please submit your proxy promptly by telephone or via the internet in accordance with the instructions on the enclosed proxy card or complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the special meeting. If you date, sign and return your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of Proposals 1 through 3. If you fail either to return your proxy card or to vote in person at the special meeting, your shares will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote against Proposal 2. If you attend the special meeting, you may, upon your written request, withdraw your proxy and vote in person. You may revoke your proxy at any time before the polls close at the special meeting by sending a written notice to the Corporate Secretary of Inotek, by providing a duly executed proxy card bearing a later date than the proxy being revoked, by submitting a proxy on a later date by telephone or via the internet


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(only your last telephone or internet proxy will be counted), before [●] Eastern Time on [●] or by attending the special meeting and voting in person.

 

By Order of the Board of Directors of Inotek Pharmaceuticals Corporation
 

 

David P. Southwell

President, and Chief Executive Officer and Director

[●], 2017

Lexington, Massachusetts

INOTEK’S BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE, FAIR AND IN THE BEST INTERESTS OF INOTEK AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED EACH SUCH PROPOSAL. INOTEK’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT INOTEK’S STOCKHOLDERS VOTE “FOR” EACH SUCH PROPOSAL.


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and the rules thereunder, contains a notice of meeting with respect to the special meeting of stockholders at which Inotek’s stockholders will consider and vote on the proposals to approve the issuance of Inotek’s common stock issuable to the holders of Rocket’s ordinary shares pursuant to the merger agreement described in this proxy statement and the resulting “change of control” of Inotek under NASDAQ rules and an amendment to Inotek’s seventh amended and restated certificate of incorporation to effect a reverse stock split of Inotek’s common stock to maintain the listing of Inotek common stock on the NASDAQ Global Market.

Additional business and financial information about Inotek can be found in documents previously filed by Inotek with the U.S. Securities and Exchange Commission, which we refer to as the SEC. This information is available to you without charge on the SEC’s website, Inotek stockholders will also be able to obtain the proxy statement, free of charge, from Inotek by requesting copies in writing using the following contact information:

INOTEK PHARMACEUTICALS CORPORATION

Attn: Corporate Secretary

91 Hartwell Avenue

Lexington, MA 02421

Tel: (781) 676-2100

You may also request additional copies from Inotek’s proxy solicitor, The Proxy Advisory Group, LLC, using the following contact information:

18 East 41st Street, Suite 2000

New York, NY 10017-6219

Stockholders Call Toll-Free: (888) 337-7699

See “Where You Can Find More Information” beginning on page 152.


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

     iv  

SUMMARY

     1  

The Companies

     1  

Summary of the Merger

     2  

Reasons for the Merger

     2  

Opinion of Inotek’s Financial Advisor

     2  

Overview of the Merger Agreement

     3  

Voting Agreements

     5  

Lock-up Agreements

     5  

Management Following the Merger

     5  

The Board of Directors Following the Merger

     5  

Interests of Inotek’s Directors and Executive Officers

     6  

Federal Securities Law Consequences; Resale Restrictions

     6  

Risk Factors

     6  

Regulatory Approvals

     6  

Anticipated Accounting Treatment

     7  

Appraisal Rights

     7  

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA

     8  

Selected Historical Consolidated Financial Data of Inotek

     8  

Selected Historical Financial Data of Rocket

     9  

Selected Unaudited Pro Forma Combined Financial Data of Inotek and Rocket

     10  

Comparative Historical And Unaudited Pro Forma Per Share Data

     11  

MARKET PRICE AND DIVIDEND INFORMATION

     13  

RISK FACTORS

     14  

Risks Related to the Merger

     14  

Risks Related to the Reverse Stock Split

     18  

Risks Related to Inotek

     19  

Risks Related to Rocket

     19  

Risks Related To Product Regulatory Matters

     19  

Risks Related To Manufacturing, Development and Commercialization Of Rocket’s Product Candidates

     25  

Risks Related To Third Parties

     28  

Risks Related To Personnel and Other Risks Related To Rocket’s Business

     31  

Risks Related To Rocket’s Intellectual Property

     33  

Risks Related To Rocket’s Financial Position

     37  

Risks Related to the Combined Company

     40  

CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     44  

THE MERGER

     46  

Background of the Merger

     46  

Inotek’s Reasons for the Merger; Recommendations of the Inotek Board of Directors

     52  

Opinion of Inotek’s Financial Advisor

     55  

Certain Prospective Financial Information of Inotek

     62  

Interests of Inotek’s Directors and Executive Officers in the Merger

     63  

Federal Securities Law Consequences; Resale Restrictions

     67  

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split and the Merger

     67  

Reverse Stock Split

     68  

Merger

     68  

Anticipated Accounting Treatment

     69  

 

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THE SPECIAL MEETING

     70  

Date, Time and Place

     70  

Purpose of the Special Meeting

     70  

Record Date; Shares Outstanding and Entitled to Vote

     70  

How to Vote Your Shares

     70  

How to Change Your Vote

     71  

Proxies; Counting Your Vote

     71  

Appraisal Rights

     71  

Voting by Inotek’s Directors, Executive Officers and Certain Stockholders

     72  

Solicitation of Proxies

     72  

THE MERGER AGREEMENT

     73  

Form of the Merger

     73  

Effective Time of the Merger

     73  

Merger Consideration

     73  

Stock Options

     75  

Regulatory Approvals

     75  

NASDAQ Listing

     76  

Amendments to Inotek’s Certificate of Incorporation; Memorandum and Articles of Association of the Surviving Corporation

     76  

Conditions to the Completion of the Merger

     76  

No Solicitation

     78  

Meeting of Inotek’s Stockholders and Rocket Shareholder Approval

     80  

Directors and Officers Following the Merger

     80  

Indemnification of Officers and Directors

     80  

Covenants; Conduct of Business Pending the Merger

     81  

Convertible Notes

     82  

Other Agreements

     82  

Termination

     84  

Termination Fee

     85  

Representations and Warranties

     85  

Amendment

     86  

AGREEMENTS RELATED TO THE MERGER

     87  

MATTERS BEING SUBMITTED TO A VOTE OF INOTEK’S STOCKHOLDERS

     88  

Proposal 1: Approval of the Issuance of Common Stock in the Merger

     88  

Proposal 2: Approval of the Reverse Stock Split

     88  

Proposal 3: Approval of Possible Adjournment of the Special Meeting

     93  

INOTEK’S BUSINESS

     94  

INOTEK’S PROPERTY

     95  

ROCKET’S BUSINESS

     96  

Overview

     96  

Gene Therapy Background

     99  

Rocket Development Programs

     101  

INOTEK’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     114  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT INOTEK’S MARKET RISK

     115  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT ROCKET’S MARKET RISK

     116  

 

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ROCKET’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     117  

Overview

     117  

Financial Operations Overview

     118  

Critical Accounting Policies and Significant Judgments and Estimates

     120  

Results of Operations

     123  

Liquidity, Capital Resources and Plan of Operations

     125  

Contractual Obligations and Commitments

     129  

Off-Balance Sheet Arrangements

     131  

Recently Issued Accounting Pronouncements

     131  

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     132  

EXECUTIVE OFFICERS AND DIRECTORS FOLLOWING THE MERGER

     142  

DESCRIPTION OF INOTEK’S CAPITAL STOCK

     146  

Authorized Capital Stock

     146  

Common Stock

     146  

Listing

     146  

Transfer Agent and Registrar

     146  

Preferred Stock

     146  

Provisions of Inotek’s Certificate of Incorporation and By-Laws and Delaware Anti-Takeover Law

     147  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF INOTEK

     149  

WHERE YOU CAN FIND MORE INFORMATION

     152  

HOUSEHOLDING

     153  

FUTURE STOCKHOLDER PROPOSALS

     154  

INFORMATION INCORPORATED BY REFERENCE

     155  

INDEX TO FINANCIAL STATEMENTS OF ROCKET

     F-1  

 

Annex A    Agreement and Plan of Merger and Reorganization, dated as of September 12, 2017, among Inotek Pharmaceuticals Corporation, Rome Merger Sub and Rocket Pharmaceuticals, Ltd.
Annex B-1    Inotek’s Annual Report on Form 10-K for the year ended December 31, 2016.
Annex B-2    Inotek’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.
Annex B-3    Inotek’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.
Annex C    Opinion of Inotek’s Financial Advisor.
Annex D-1    Form of Voting Agreement with certain of Inotek’s stockholders.
Annex D-2    Form of Voting Agreement with certain of Rocket’s shareholders.
Annex D-3    Form of Lock-up Agreements with certain of Inotek’s stockholders and Rocket’s shareholders.
Annex E    Certificate of Amendment to the Certificate of Incorporation of Inotek Pharmaceutical Corporation (reverse stock split).

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

Except as specifically indicated, the following information and all other information contained in this proxy statement does not give effect to the reverse stock split described in Proposal 2.

The following section provides answers to frequently asked questions about the special meeting of stockholders and the merger. This section, however, only provides summary information. These questions and answers may not address all issues that may be important to you as a stockholder. For a more complete response to these questions and for additional information, please refer to the cross-referenced pages below. You should carefully read this entire proxy statement, including each of the annexes.

 

Q: What is the merger?

 

A: Inotek and Rocket have entered into an Agreement and Plan of Merger and Reorganization, dated as of September 12, 2017, which we refer to as the merger agreement, that contains the terms and conditions of the proposed business combination of Inotek and Rocket. Under the merger agreement, Rome Merger Sub, a Cayman Islands exempted company and wholly-owned subsidiary of Inotek formed by Inotek in connection with the merger, which we refer to as the acquisition subsidiary, will merge with and into Rocket, with Rocket surviving as a wholly-owned subsidiary of Inotek. This transaction is referred to as the merger. Immediately following the effective time of the merger, Rocket’s shareholders will own approximately 81% of the combined company, on a fully-diluted basis and Inotek’s stockholders will own approximately 19% of the combined company, on a fully-diluted basis, if Inotek has a valuation $47 million, which is based on a projected net cash balance (or cash and cash equivalents minus outstanding liabilities) at the closing of $42 million, plus an additional $5 million of enterprise value.

For a more complete description of the merger, please see the section entitled “The Merger Agreement” beginning on page 73 of this proxy statement.

 

Q: What will happen to Inotek if, for any reason, the merger with Rocket does not close?

 

A: Inotek has invested significant time and incurred, and expects to continue to incur, significant expenses related to the proposed merger with Rocket. In the event the merger does not close, Inotek will have a limited ability to continue its current operations without obtaining additional financing. Although Inotek’s board of directors may elect to, among other things, attempt to complete another strategic transaction if the merger with Rocket does not close, Inotek’s board of directors may instead divest all or a portion of Inotek’s business or take steps necessary to liquidate or dissolve Inotek’s business and assets if a viable alternative strategic transaction is not available.

 

Q: Why is Inotek proposing to merge with Rocket?

 

A: Inotek’s board of directors considered a number of factors that supported its decision to approve the merger agreement. In the course of its deliberations, Inotek’s board of directors also considered a variety of risks and other countervailing factors related to entering into the merger agreement.

For a more complete discussion of Inotek’s reasons for the merger, please see the section entitled “The Merger—Inotek’s Reasons for the Merger; Recommendations of the Inotek Board of Directors” beginning on page 52 of this proxy statement.

 

Q: What is required to consummate the merger?

 

A:

To consummate the merger, Inotek’s stockholders must approve the issuance of shares of Inotek’s common stock in the merger and the resulting “change of control” of Inotek under NASDAQ rules, which requires the affirmative vote of the holders of a majority of the shares of Inotek’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting. In addition, Rocket’s

 

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  shareholders must adopt the merger agreement, which requires the affirmative vote (or action by written consent) of holders of (a) either (i) at least two-thirds of the shares of Rocket’s share capital outstanding acting at a general meeting or class meeting of Rocket or (ii) the holders of all of the shares of Rocket share capital outstanding acting by written consent and (b) the holders of a majority of the outstanding shares of each series of Rocket preferred shares. On September 19, 2017 by the requisite vote, the shareholders of Rocket adopted the merger agreement at an extraordinary general meeting of shareholders of Rocket. In addition to obtaining stockholder approval, each of the other closing conditions set forth in the merger agreement must be satisfied or waived in order to consummate the merger. Inotek’s board of directors expects that a reverse stock split of Inotek common stock will increase the market price of Inotek common stock so that Inotek is able to maintain compliance with the relevant NASDAQ listing requirements for the foreseeable future.

For a more complete description of the closing conditions under the merger agreement, please see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 76 of this proxy statement.

 

Q: Are there any federal or state regulatory requirements that must be complied with or federal or state regulatory approvals or clearances that must be obtained in connection with the merger?

 

A: Neither Inotek nor Rocket is required to make any filings or to obtain any approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Inotek must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Inotek’s common stock in the merger, including the filing with the SEC of this proxy statement and the required stockholder approval for the resulting “change of control” of Inotek under NASDAQ rules. Prior to consummation of the merger, Inotek intends to file an initial listing application with the NASDAQ Global Market pursuant to NASDAQ’s “reverse merger” rules and to effect the initial listing of Inotek’s common stock issuable in connection with the merger.

 

Q: What will Rocket’s shareholders receive in the merger?

 

A: Subject to the terms of the merger agreement, the percentage of the combined company that Rocket shareholders will own as of the closing of the merger is subject to adjustment at the closing based on the level of Inotek’s net cash as of a certain determination date. On a pro forma basis, based upon the number of shares of Inotek common stock to be issued in the merger, (i) current Inotek stockholders will own approximately 19% of the combined company, on a fully-diluted basis, and current Rocket shareholders will own approximately 81% of the combined company, on a fully-diluted basis, if Inotek’s net cash is between the range of $40.5 million and $43.5 million as of the determination date.

For a more complete discussion of the exchange ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page 73 of this proxy statement.

 

Q: What are the material federal income tax consequences of the merger to me?

 

A: The merger has been structured to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. Inotek stockholders will not sell, exchange or dispose of any shares of Inotek common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Inotek stockholders as a result of the merger.

For a more complete description of the tax consequences of the merger, please see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 67 of this proxy statement.

 

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Q: Why is Inotek seeking stockholder approval to issue shares of common stock to existing shareholders of Rocket in the merger?

 

A: Because Inotek’s common stock is listed on the NASDAQ Global Market, we are subject to NASDAQ Listing Rules. Rule 5635(a) of NASDAQ Listing Rules requires stockholder approval with respect to issuances of Inotek’s common stock, among other instances, when the shares to be issued are being issued in connection with the acquisition of the stock or assets of another company and are equal to 20% or more of the outstanding shares of Inotek’s common stock before the issuance. Rule 5635(b) of the NASDAQ Listing Rules also requires stockholder approval when any issuance or potential issuance will result in a “change of control” of the issuer. Although NASDAQ has not adopted any rule on what constitutes a “change of control” for purposes of Rule 5635(b), NASDAQ has previously indicated that the acquisition of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common stock (or securities convertible into or exercisable for common stock) or voting power of an issuer could constitute a change of control.

In the case of the merger, Inotek will be issuing approximately 130,998,789 shares of its common stock on a fully diluted basis, and the common stock to be issued pursuant to the merger agreement will represent greater than 20% of its voting stock. Accordingly, Inotek is seeking stockholder of approval of this issuance under NASDAQ Listing Rules.

 

Q: What is the reverse stock split and why is it necessary?

 

A: Immediately prior to the effective time of the merger, the outstanding shares of Inotek’s common stock will be combined into a lesser number of shares to be determined by Inotek’s board of directors prior to the effective time and publicly announced by Inotek. The board of directors of Inotek believes that a reverse stock split may be desirable for a number of reasons. Inotek common stock is currently, and will be following the completion of the merger, listed on The NASDAQ Global Market. According to applicable NASDAQ rules, in order for Inotek common stock to continue to be listed on The NASDAQ Global Market, Inotek must satisfy certain requirements established by The NASDAQ Global Market. The Inotek board of directors expects that a reverse stock split of Inotek common stock will increase the market price of Inotek common stock so that Inotek is able to maintain compliance with the relevant NASDAQ listing requirements for the foreseeable future.

 

Q: Why am I receiving this proxy statement?

 

A: You are receiving this proxy statement because you have been identified as a stockholder of Inotek as of the record date, and thus you are entitled to vote at Inotek’s special meeting. This document serves as a proxy statement used to solicit proxies for the special meeting. This document contains important information about the merger and the special meeting of Inotek, and you should read it carefully.

 

Q: How does Inotek’s board of directors recommend that Inotek’s stockholders vote?

 

A: After careful consideration, Inotek’s board of directors unanimously recommends that Inotek’s stockholders vote:

 

    FOR Proposal 1 to approve the issuance of Inotek’s common stock pursuant to the merger agreement and the resulting “change of control” of Inotek under NASDAQ rules;

 

    FOR Proposal 2 to approve an amendment to Inotek’s seventh amended and restated certificate of incorporation to effect the reverse stock split to maintain the listing of Inotek common stock on the NASDAQ Global Market; and

 

    FOR Proposal 3 to approve an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and 2.

 

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Q: What risks should Inotek’s stockholders consider in deciding whether to vote in favor of the share issuance and the reverse stock split?

 

A: Inotek’s stockholders should carefully read the section of this proxy statement entitled “Risk Factors” beginning on page 14, which sets forth certain risks and uncertainties related to the merger and reverse stock split, risks and uncertainties to which the combined company’s business will be subject, risks and uncertainties to which Inotek, as an independent company, is subject and risks and uncertainties to which Rocket, as an independent company, is subject.

 

Q: When do you expect the merger to be consummated?

 

A: Inotek and Rocket anticipate that the consummation of the merger will occur in the first quarter of 2018 as promptly as practicable after the special meeting and following satisfaction or waiver of all closing conditions. However, the exact timing of the consummation of the merger is not yet known. For a more complete description of the closing conditions under the merger agreement, please see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 76 of this proxy statement.

 

Q: How will the merger affect share options to acquire Rocket ordinary shares?

 

A: Upon the effectiveness of the merger, each outstanding option to purchase Rocket’s ordinary shares, whether vested or unvested will be assumed by Inotek and become options to purchase Inotek’s common stock and each share of Rocket preferred shares outstanding shall be converted to ordinary shares, which shall have the right to receive a number of Inotek’s common stock equal to an exchange ratio. For a more complete discussion of the exchange ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page 73 of this proxy statement.

 

Q: How will the reverse stock split and the merger affect stock options and warrants to acquire Inotek’s common stock and Inotek’s stock option plans?

 

A: As of the effective time of the reverse stock split, Inotek will adjust and proportionately decrease the number of shares of Inotek’s common stock reserved for issuance upon exercise of, and adjust and proportionately increase the exercise price of, all options and warrants to acquire Inotek’s common stock. All stock options and warrants to acquire shares of Inotek’s common stock that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger. In addition, as of the effective time of the reverse stock split, Inotek will adjust and proportionately decrease the total number of shares of Inotek’s common stock that may be the subject of future grants under Inotek’s stock option plans.

 

Q: What do I need to do now?

 

A: You are urged to read this proxy statement carefully, including each of the annexes, and to consider how the merger affects you. If your shares are registered directly in your name, you may submit your proxy promptly by telephone or via the internet in accordance with the instructions on the enclosed proxy card or complete, date and sign the enclosed proxy card and mail return it in the enclosed postage-paid envelope. Alternatively, you can deliver your completed proxy card in person or vote by completing a ballot in person at the special meeting.

 

Q: How many shares must be represented to have a quorum and hold the special meeting?

 

A: A quorum of Inotek’s stockholders is necessary to hold a valid meeting. A quorum will be present if Inotek stockholders of record holding at least a majority of Inotek’s outstanding common stock entitled to vote at the special meeting are present in person or represented by proxy.

 

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Q: What happens if I do not return a proxy card or otherwise provide proxy instructions?

 

A: The failure to return your proxy card or otherwise provide proxy instructions will have the same effect as voting against Proposal 2, and your shares will not be counted for purposes of determining whether a quorum is present at the special meeting.

 

Q: May I vote in person?

 

A: If you are a stockholder of Inotek and your shares of Inotek’s common stock are registered directly in your name with Inotek’s transfer agent, you are considered, with respect to those shares, the stockholder of record, and the proxy materials and proxy card are being sent directly to you by Inotek. If you are a Inotek stockholder of record, you may attend the special meeting to be held on [●], 2017 and vote your shares in person, rather than signing and returning your proxy.

If your shares of Inotek’s common stock are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you together with a voting instruction card. As the beneficial owner, you are also invited to attend the special meeting. Since a beneficial owner is not the stockholder of record, you may not vote these shares in person at the special meeting unless you obtain a proxy from your broker issued in your name giving you the right to vote the shares at the special meeting.

 

Q: If my Inotek shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A: Broker non-votes occur when a beneficial owner of shares held in “street name” does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-discretionary.” Generally, if shares are held in street name, the beneficial owner of the shares is entitled to give voting instructions to the broker or nominee holding the shares. If the beneficial owner does not provide voting instructions, the broker or nominee can still vote the shares with respect to matters that are considered to be “discretionary,” but may not vote the shares with respect to “non-discretionary” matters. Your broker will not be able to vote your shares of Inotek’s common stock without specific instructions from you for “non-discretionary” matters. You should instruct your broker to vote your shares, following the procedures provided by your broker. Under rules applicable to broker-dealers, Proposal 1 is considered a non-discretionary matter. Proposals 2 and 3 qualify as discretionary matters.

 

Q: May I change my vote after I have submitted a proxy by telephone or via the internet or mailed my signed proxy card?

 

A: Any Inotek stockholder of record voting by proxy, other than those Inotek stockholders who have executed a voting agreement and irrevocable proxy, has the right to revoke the proxy at any time before the polls close at the special meeting by sending a written notice stating that he, she or it would like to revoke his, her or its proxy to the Corporate Secretary of Inotek, by providing a duly executed proxy card bearing a later date than the proxy being revoked, by submitting a proxy on a later date by telephone or via the internet (only your last telephone or internet proxy will be counted), before [●] Eastern Time on [●] or by attending the special meeting and voting in person. Attendance alone at the special meeting will not revoke a proxy. If a stockholder of Inotek has instructed a broker to vote its shares of Inotek’s common stock that are held in “street name,” the stockholder must follow directions received from its broker to change those instructions.

 

Q: Who will count the vote?

 

A: Votes will be counted by the inspector of elections appointed for the special meeting, who will separately count “FOR” and “AGAINST” votes and abstentions.

 

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Q: Should Inotek’s stockholders send in their stock certificates now?

 

A: No. After the merger is consummated, Inotek’s stockholders will receive written instructions, as applicable, from Inotek’s transfer agent for exchanging their certificates representing shares of Inotek’s common stock for new certificates giving effect to the reverse stock split.

 

Q: Am I entitled to appraisal rights?

 

A: Inotek’s stockholders are not entitled to appraisal rights in connection with the merger or any of the proposals to be voted on at the special meeting.

 

Q: Have Rocket’s shareholders agreed to adopt the merger agreement?

 

A: Yes. On September 19, 2017, Rocket’s stockholders adopted the merger agreement and approved the merger and related transactions at an extraordinary general meeting of shareholders of Rocket.

 

Q: Have any of Inotek’s stockholders agreed to vote in favor of the issuance of the shares in the merger?

 

A: Yes. In connection with the execution of the merger agreement, holders of approximately 5% of Inotek’s fully-diluted common stock (including common stock which may be issued upon exercise of options and vesting of restricted stock units or settlement of vested restricted stock units) have entered into agreements with Rocket and Inotek that provide, among other things, that the stockholders subject to these agreements will vote in favor of the issuance of shares of Inotek’s common stock in the merger and grant to Rocket an irrevocable proxy to vote all of such stockholders’ shares of Inotek’s common stock in favor of the approval of the issuance of the shares of Inotek’s common stock in the merger and against any proposal made in opposition to, or in competition with, the issuance of shares of Inotek’s common stock in the merger.

For a more complete discussion of the exchange ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page 73 of this proxy statement.

 

Q: Who is paying for this proxy solicitation?

 

A: Inotek will bear the cost of soliciting proxies, including the printing, mailing and filing of this proxy statement, the proxy card and any additional information furnished to Inotek’s stockholders. You will need to obtain your own internet access if you choose to access the proxy materials and/or vote over the internet. Inotek and Rocket may use the services of its directors, officers and other employees to solicit proxies from Inotek’s stockholders without additional compensation. In addition, Inotek has engaged The Proxy Advisory Group, LLC, a proxy solicitation firm, to solicit proxies from Inotek’s stockholders for a success-based fee of $20,000, which is deemed earned and payable upon successfully securing stockholder approval for all proposals referenced herein. Inotek will also reimburse The Proxy Advisory Group, LLC, for reasonable out-of-pocket expenses capped at $2,000. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of Inotek’s common stock for the forwarding of solicitation materials to the beneficial owners of Inotek’s common stock. Inotek will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials

 

Q: Who can provide me with additional information and help answer my questions?

 

A: If you would like additional copies, without charge, of this proxy statement or if you have questions about the merger and the other proposals being considered at the special meeting, including the procedures for voting your shares, you should contact The Proxy Advisory Group, LLC, Inotek’s proxy solicitor, by telephone at (888) 337-7699.

 

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SUMMARY

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To better understand the merger and the other proposals being considered at the special meeting, you should read this entire proxy statement carefully, including the materials attached as annexes, as well as other documents referred to or incorporated by reference herein. See “Where You Can Find More Information” beginning on page 152 of this proxy statement. Page references are included in parentheses to direct you to a more detailed description of the topics presented in this summary.

The Companies

Inotek Pharmaceuticals Corporation

91 Hartwell Avenue

Lexington, MA 02421

(781) 676-2100

Inotek is a clinical-stage biopharmaceutical company which had been focused on the discovery, development and commercialization of therapies for ocular diseases, including glaucoma. The company had been developing trabodenoson in a monotherapy and in a fixed-dose combination therapy, which we refer to as FDC, to treat glaucoma. After failing to meet the primary endpoints in its first pivotal Phase 3 trial of trabodenoson monotherapy for the treatment of primary open-angle glaucoma or ocular hypertension and its Phase 2 FDC clinical trial of trabodenoson and latanoprost for the treatment of glaucoma, Inotek voluntarily discontinued its development of trabodenoson.

Rome Merger Sub

91 Hartwell Avenue

Lexington, MA 02421

(781) 676-2100

The acquisition subsidiary is a wholly-owned subsidiary of Inotek that was recently incorporated in the Cayman Islands for the purpose of the merger. It does not conduct any business and has no material assets.

Rocket Pharmaceuticals, Ltd.

430 East 29th Street, Suite 1040

New York, NY 10016

(646) 440-9100

Rocket Pharmaceuticals, Ltd. is an emerging, clinical-stage biotechnology company focused on developing first-in-class gene therapy treatment options for rare, undertreated diseases. Rocket’s multi-platform development approach applies the well-established lentiviral virus, which we refer to as LVV, adeno-associated virus, which we refer to as AAV, gene therapy platforms. Rocket’s lead clinical program is a LVV-based gene therapy for the treatment of Fanconi Anemia, which we refer to as FA, a difficult to treat genetic disease that leads to bone marrow failure and potentially cancer. Preclinical studies of additional bone marrow-derived disorders are ongoing and target Pyruvate Kinase Deficiency, which we refer to as PKD, Leukocyte Adhesion Deficiency-1, which we refer to as LAD-1 and Infantile Malignant Osteopetrosis. Rocket is also developing an AAV-based gene therapy program for an undisclosed rare pediatric disease.

The Combined Company

At the effective time of the merger, the current stockholders of Inotek and current shareholders of Rocket are expected to own approximately 19% and 81% of the combined company, respectively, on a fully-diluted

 



 

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basis, which is based on Inotek’s estimated net cash balance (or cash and cash equivalents minus outstanding liabilities) at the closing of $42 million, plus an additional $5 million of enterprise value. The ownership percentage is subject to adjustment based on Inotek’s net cash as of a certain determination date, as discussed in “The Merger Agreement—Merger Consideration.” The principal executive office of the combined company is expected to be located in New York, NY.

Summary of the Merger

Upon the terms and subject to the conditions of the merger agreement, the acquisition subsidiary, a wholly-owned subsidiary of Inotek formed by Inotek in connection with the merger, will merge with and into Rocket. The merger agreement provides that upon the consummation of the merger the separate existence of acquisition subsidiary shall cease. Rocket will continue as the surviving corporation and will be a wholly-owned subsidiary of Inotek. Immediately following the effective time of the merger, Rocket’s shareholders will own approximately 81% of the combined company, on a fully-diluted basis and Inotek’s stockholders will own approximately 19% of the combined company, on a fully-diluted basis, if Inotek has a valuation $47 million, which is based on a projected net cash balance (or cash and cash equivalents minus outstanding liabilities) at the closing of $42 million, plus an additional $5 million of enterprise value. Following the merger, Inotek will change its name to “Rocket Pharmaceuticals, Inc.,” which we refer to as New Rocket or the combined company.

Reasons for the Merger (see page 52)

The board of directors of Inotek considered various reasons for the merger, as described herein.

Opinion of Inotek’s Financial Advisor (see page 55)

In connection with the merger, Inotek’s financial advisor, Perella Weinberg Partners LP, which we refer to as Perella Weinberg, delivered its opinion to the board of directors of Inotek that, as of September 12, 2017, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in its opinion, the exchange ratio provided for in the merger agreement was fair, from a financial point of view, to Inotek.

The full text of Perella Weinberg’s written opinion, dated September 12, 2017, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Perella Weinberg in connection with such opinion, is attached hereto as Annex C and is incorporated by reference herein. Perella Weinberg’s opinion does not address Inotek’s underlying business decision to enter into the merger or the relative merits of the merger as compared with any other strategic alternative which may have been available to Inotek. Perella Weinberg’s opinion was not intended to be and does not constitute a recommendation to any holder of Inotek common stock as to how such holder should vote or otherwise act with respect to the merger or any other matter. Perella Weinberg’s opinion does not in any manner address the price at which Inotek common stock will trade at any time. In addition, Perella Weinberg expressed no opinion as to the fairness of the transaction to the holders of any class of securities, creditors or other constituencies of Inotek. Perella Weinberg provided its opinion for the information and assistance of the board of directors of Inotek in connection with, and for the purposes of its evaluation of, the merger.

 



 

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Overview of the Merger Agreement

Merger Consideration (see page 73)

At the effective time of the merger:

 

    any shares of Rocket ordinary shares or preferred shares held as treasury stock or held or owned by Rocket or any of its subsidiaries or acquisition subsidiary shall be cancelled and retired and cease to exist and no consideration shall be delivered in exchange therefor; and

 

    each share of Rocket preferred shares outstanding shall be converted to Rocket ordinary shares, which shall have the right to receive a number of Inotek common stock equal to the “exchange ratio” (as defined in the merger agreement) and each share of Rocket ordinary shares outstanding shall be converted solely into the right to receive a number of shares of Inotek common stock equal to such “exchange ratio.”

No fractional shares of Inotek common stock will be issuable pursuant to the merger to Rocket shareholders. Instead, each Rocket shareholder who would otherwise be entitled to receive a fraction of a share of Inotek common stock will be aggregated and then, if a fraction of a share of Inotek common stock results from that aggregation, be rounded up to the nearest whole share of Inotek common stock.

Stock Options (see page 75)

Each outstanding option to purchase Rocket ordinary shares that is outstanding and unexercised immediately prior to the effective time, whether or not vested, shall be converted into and become an option to purchase Inotek common stock, and Inotek shall assume the Rocket share option plans and each such Rocket option in accordance with its terms (as in effect as of the date of the merger agreement).

Convertible Notes (see page 82)

Each outstanding convertible note of Inotek will remain outstanding after the merger unless converted by the holder thereof or repurchased by Inotek. Inotek and Rocket have agreed to ensure that the merger does not constitute a “Fundamental Change” or “Make-Whole Fundamental Change,” each as defined in the indentures governing the convertible notes.

Conditions to Completion of the Merger (see page 76)

Consummation of the merger is subject to a number of conditions (subject to certain exceptions in the merger agreement), including, among others, the following:

 

    there must not have been issued a temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the merger and there shall not be any legal requirement which has the effect of making the consummation of the merger illegal;

 

    obtaining requisite Rocket and Inotek stockholder approvals;

 

    all representations and warranties in the merger agreement must be true and correct, except in each case where the failure of to be true and correct has not had, and would not reasonably be expected to have, a material adverse effect on the party making the representations and warranties;

 

    the NASDAQ Listing Application must have been approved; and

 

    receipt of all required consents, performance or compliance with in all material respects all covenants and obligations on or before the closing of the merger and delivery of certain certificates and other documents required under the merger agreement for the closing of the merger.

 



 

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In addition, the obligation of Inotek and the acquisition subsidiary to complete the merger is further subject to the satisfaction or waiver of the following conditions:

 

    Rocket must have complied with and performed each of the covenants and obligations in the merger agreement that Rocket is required to comply with or to perform at or prior to the closing; and

 

    there shall have been no effect, change, event, circumstance, or development that is or could reasonably be expected to be materially adverse to, or has or could reasonably be expected to have or result in a material adverse effect on the business, financial condition, assets or operations of Rocket and its subsidiaries taken as a whole; or the ability of Rocket to consummate the merger or any of the other contemplated transactions or to perform any of its covenants or obligations under the merger agreement in all material respects, each referred to as a material adverse effect as it relates to Rocket.

In addition, the obligation of Rocket to complete the merger is further subject to the satisfaction or waiver of the following conditions:

 

    Inotek must have complied with and performed each of the covenants and obligations in the merger agreement that Inotek is required to comply with or to perform at or prior to the closing; and

 

    there shall have been no effect, change, event, circumstance, or development that is or could reasonably be expected to be materially adverse to, or has or could reasonably be expected to have or result in a material adverse effect on the business, financial condition, assets or operations of the Inotek and its subsidiaries taken as a whole; or the ability of Inotek to consummate the merger or any of the other contemplated transactions or to perform any of its covenants or obligations under the merger agreement in all material respects, each referred to as a material adverse effect as it relates to Inotek.

No Solicitation (see page 78)

Each of Rocket and Inotek agreed that, subject to specified exceptions in the merger agreement, Rocket and Inotek shall not, nor shall either of them authorize or permit any of their subsidiaries or any representatives of their subsidiaries to, directly or indirectly:

 

    initiate, solicit, seek or knowingly encourage or support any inquiries, proposals or offers that constitute or may reasonably be expected to lead to, an acquisition proposal;

 

    engage or participate in, or knowingly facilitate, any discussions or negotiations regarding, or furnish any nonpublic information to any person in connection with, any inquiries, proposals or offers that constitute, or may reasonably be expected to lead to, an acquisition approval; or

 

    enter into any letter of intent, agreement in principle or other similar type of agreement relating to an acquisition proposal, or enter into any agreement or agreement in principle requiring either Inotek or Rocket (as applicable) to abandon, terminate or fail to consummate the transactions contemplated hereby or resolve, propose or agree to do any of the foregoing.

Termination of the Merger Agreement (see page 84)

Either Inotek or Rocket can terminate the merger agreement under specified circumstances, which would prevent the merger from being consummated.

Termination Fee (see page 85)

The merger agreement provides for the payment of a termination fee of $2,000,000 by each of Inotek and Rocket to the other party upon termination of the merger agreement under specified circumstances.

 



 

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NASDAQ Listing (see page 76)

Pursuant to the merger agreement, Inotek agreed to use its reasonable best efforts to cause the shares of Inotek common stock being issued in the merger to be approved for listing on NASDAQ at or prior to the effective time of the merger.

Voting Agreements (see page 87)

Concurrently with the execution of the merger agreement, certain Inotek stockholders, owning in the aggregate approximately 5% of Inotek’s fully-diluted common stock (including common stock which may be issued upon exercise of options and vesting of restricted stock units or settlement of vested restricted stock units), and certain Rocket shareholders, owning in the aggregate approximately 67.2% of Rocket’s outstanding share capital (on an as-converted to Rocket ordinary share basis), entered into voting agreements with Inotek and Rocket. The voting agreements provide, among other things, that the parties to the voting agreements will vote the shares of Inotek capital stock and Rocket share capital held by them in favor of the transactions contemplated by the merger agreement and grant a proxy to vote such shares in favor of the transactions. In addition, the voting agreements place restrictions on the transfer of the shares of Inotek capital stock and Rocket share capital held by the respective signatory stockholders or shareholders.

In addition, pursuant to the conditions of the merger agreement, holders of the number of shares of Rocket share capital required to approve the merger have already approved the merger via written consent.

Lock-up Agreements (see page 87)

Concurrently with the execution of the merger agreement, certain Inotek stockholders, owning in the aggregate approximately 5% of Inotek’s fully-diluted common stock (including common stock which may be issued upon exercise of options and vesting of restricted stock units or settlement of vested restricted stock units), and certain Rocket shareholders, owning in the aggregate approximately 67.2% of Rocket’s outstanding share capital (on an as-converted to Rocket ordinary share basis), entered into lock-up agreements, pursuant to which such parties have agreed not to, except in limited circumstances, sell or transfer, or engage in swap or similar transactions with respect to, shares of Inotek’s common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, from the closing of the merger until 180 days from the closing date of the merger.

Management Following the Merger (see page 80)

At the effective time of the merger, the executive management team of the combined company is expected to include the following individuals:

 

Name

  

Position with the Combined Company

  

Current Position

Gaurav Shah, MD

   Chief Executive Officer    Chief Executive Officer of Rocket

Jonathan Schwartz, MD

   Chief Medical Officer    Chief Medical Officer of Rocket

Brian Batchelder

   Vice President of Finance    Vice President of Finance of Rocket

The Board of Directors Following the Merger (see page 80)

At the effective time of the merger, the combined company will initially have a seven member board of directors, comprised of Roderick Wong, MD, as Chairman, David Southwell, Gaurav Shah, MD, Carsten Boess, Naveen Yalamanchi, MD and Pedro Granadillo, as well as one additional member to be designated by Rocket prior to the closing.

 



 

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Interests of Inotek’s Directors and Executive Officers in the Merger (see page 63)

Inotek’s directors and executive officers have economic interests in the merger that are different from, or in addition to, those of Inotek stockholders generally. These interests include:

 

    Inotek’s executive officers are parties to employment agreements or offer letters that provide for severance benefits, including accelerated vesting of outstanding equity awards, in the event of certain qualifying terminations of employment following the merger;

 

    Inotek’s executive officers will receive cash retention awards, subject to continued employment with Inotek through the effective time of the merger; and

 

    Inotek’s directors and executive officers are entitled to continued indemnification and insurance coverage under indemnification agreements and the merger agreement.

These interests are discussed in more detail in the section entitled “The Merger—Interests of Inotek’s Directors and Executive Officers in the Merger” beginning on page [●]. The Inotek board of directors was aware of and considered these interests, among other matters, in reaching its decision to approve and declare advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement.

Federal Securities Law Consequences; Resale Restrictions (see page 67)

The issuance of Inotek’s common stock in the merger to Rocket shareholders will be effected by means of a private placement, which is exempt from registration under the Securities Act of 1933, as amended, which we refer to as the Securities Act, in reliance on Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D or Regulation S promulgated thereunder and such shares will be “restricted securities.” The shares issued in connection with the merger will not be registered under the Securities Act upon issuance and will not be freely transferable. Holders of such shares may not sell their respective shares unless the shares are registered under the Securities Act or an exemption is available under the Securities Act.

Material U.S. Federal Income Tax Consequences of the Merger (see page 67)

The merger has been structured to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. Inotek stockholders will not sell, exchange or dispose of any shares of Inotek common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Inotek or its stockholders as a result of the merger.

Risk Factors (see page 14)

The merger, including the possibility that the merger may not be consummated, poses a number of risks to Inotek and its stockholders. In addition, both Inotek and Rocket are subject to various risks associated with their businesses and their industries, and the combined business will also be subject to those and other risks.

Regulatory Approvals (see page 75)

Neither Inotek nor Rocket is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Inotek must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Inotek’s common stock in the merger and the private placement, including the filing with the SEC of this proxy statement.

 



 

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Anticipated Accounting Treatment (see page 69)

The merger will be treated by Inotek as a reverse merger under the purchase method of accounting in accordance with U.S. generally accepted accounting principles, which we refer to as GAAP. For accounting purposes, Rocket is considered to be acquiring Inotek in this transaction.

Appraisal Rights (see page 71)

Inotek’s stockholders are not entitled to appraisal rights in connection with the merger.

 



 

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SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA

The following tables present summary historical financial data for each of Inotek and Rocket, summary unaudited pro forma condensed combined financial data for Inotek and Rocket and comparative historical and unaudited pro forma per share data for Inotek and Rocket.

Selected Historical Consolidated Financial Data of Inotek

The following table summarizes Inotek’s consolidated financial data. Inotek derived the following consolidated statements of operations data for the years ended December 31, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2016 and 2015 from its audited consolidated financial statements and related notes, included in Inotek’s Annual Report on Form 10-K for the year ended December 31, 2016, which is included as Annex B-1 to this proxy statement, which we refer to as the Inotek 10-K. Inotek derived the following consolidated statements of operations data for the years ended December 31, 2014, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014, 2013 and 2012 from its audited consolidated financial statements and related notes not included in this proxy statement. The consolidated statements of operations data for the six months ended June 30, 2017 and 2016 and the consolidated balance sheet data as of June 30, 2017 are derived from its unaudited consolidated financial statements and related notes, included in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, as filed with the SEC on August 3, 2017 and incorporated by reference herein, which we refer to as the Inotek 10-Q. Inotek’s historical results are not necessarily indicative of the results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year. The following selected financial data have been derived from Inotek’s consolidated financial statements and should be read in conjunction with “Inotek’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto appearing in the Inotek 10-Q, the Inotek 10-K and Inotek’s Registration Statement on Form S-1 (File No. 333-206336).

 

    For the Years Ended December 31,     For the Six Months
Ended June 30,
 
    2016     2015     2014     2013     2012     2017     2016  
          (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

             

Operating expenses:

           

Research and development

  $ (31,985   $ (12,554   $ (5,592   $ (5,330   $ (3,542   $ (10,721   $ (14,080

General and administrative

    (9,894     (7,842     (2,112     (1,324     (2,307     (5,101     (4,837
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (41,879     (20,396     (7,704     (6,654     (5,849     (15,822     (18,917

Interest expense

    (1,418     (1,230     (980     (884     (213     (1,765     —    

Other income

    —         —         —         3       4       —         —    

Interest income

    443       89       —         —         —         355       165  

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

  $ (42,854   $ (67,982   $ (9,531   $ (7,616   $ (6,058   $ (17,232   $ (18,752
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

  $ (1.60   $ (3.72   $ (13.52   $ (10.05   $ (8.04   $ (0.64   $ (0.71
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—basic and diluted

    26,735,175       18,311,333       1,020,088       1,018,183       1,016,467       26,990,409       26,523,337  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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     December 31,     June 30,
2017
 
     2016     2015     2014     2013     2012    
                                   (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

            

Cash and cash equivalents

   $ 29,798     $ 80,042     $ 3,618     $ 12,793     $ 1,372     $ 27,610  

Short-term investments

     96,675       31,238       —         —         —         81,144  

Total assets

     129,647       113,321       5,520       12,863       1,421       111,065  

Convertible notes payable

     48,960       —         1,541       —         2,713       49,242  

Notes payable

     —         —         5,613       6,805       —         —    

Total liabilities

     56,479       4,508       10,278       10,525       3,789       53,535  

Accumulated deficit

     (238,877     (196,023     (128,041     (118,510     (110,894     (256,109

Total stockholders’ equity (deficit)

     73,168       108,813       (51,559     (38,895     (30,930     57,530  

Selected Historical Financial Data of Rocket

The following table summarizes Rocket’s financial data. Rocket has derived the statements of operations data for the year ended December 31, 2016 and the period from July 14, 2015 (Inception) to December 31, 2015 and the balance sheet data as of December 31, 2016 and 2015 from Rocket’s audited financial statements included elsewhere in this proxy statement. The statement of operations data for the six months ended June 30, 2017 and 2016 and the balance sheet data as of June 30, 2017 have been derived from Rocket’s unaudited financial statements included elsewhere in this proxy statement. You should read the following selected financial data together with Rocket’s financial statements and the related notes appearing at the end of this proxy statement and “Rocket’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 117 of this proxy statement. Rocket’s historical results are not necessarily indicative of results that should be expected in the future, and results for the six months ended June 30, 2017 are not necessarily indicative of the results that should be expected for the full year ending December 31, 2017.

 

     Year Ended
December 31,
2016
     Period from
July 14, 2015
(Inception) to
December 31,
2015
     Six Months
Ended June 30,
 
           2017      2016  
            (unaudited)  
     (in thousands, except share and per share data)  

Statement of Operations Data:

           

Operating expenses

           

Research and development

   $ 5,994      $ 3,236      $ 5,104      $ 2,294  

General and administrative

     1,580        184        1,287        493  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     7,574        3,420        6,391        2,787  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (7,574      (3,420      (6,391      (2,787

Loss on debt conversion

     —          (777      —          —    

Interest expense

     —          (7      —          —    

Interest income

     1        —          —          —    

Research and development incentives

     —          —          (192      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (7,573    $ (4,204    $ (6,199    $ (2,787
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (84.43    $ (173.58    $ (69.49    $ (31.07
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used to compute basic and diluted net loss per share attributable to common stockholders

     89,699        24,219        89,202        89,699  
  

 

 

    

 

 

    

 

 

    

 

 

 

 



 

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     December 31,      June 30,
2017
 
     2016      2015     
                   (unaudited)  
     (in thousands)  

Balance Sheet and other Data:

        

Cash

   $ 9,460      $ 15,487      $ 28,297  

Working capital (1)

     7,844        15,379        26,705  

Total assets

     10,187        15,819        30,108  

Total liabilities

     1,816        279        2,230  

Total shareholders’ equity

     8,371        15,540        27,878  

 

(1) Rocket defines working capital as current assets less current liabilities.

Selected Unaudited Pro Forma Combined Financial Data of Inotek and Rocket

The following selected unaudited pro forma combined financial data presents the pro forma financial position and results of operations of the combined business based on the historical financial statements of Inotek and Rocket, after giving effect to the merger. The unaudited pro forma combined balance sheet data as of June 30, 2017 gives effect to the merger as if it took place on June 30, 2017. The unaudited pro forma combined statement of operations data for the six months ended June 30, 2017 and the year ended December 31, 2016 give effect to the merger as if it took place on January 1, 2016. In the unaudited pro forma combined financial data, the merger has been accounted for as a business combination, with Rocket being the accounting acquirer. The allocation of purchase consideration reflected in the unaudited pro forma combined financial data is preliminary and will be adjusted based on the fair value of purchase consideration on the closing date of the merger and upon completion of the final valuations of the fair value of the assets acquired and liabilities assumed of Inotek on the closing date of the merger. Although Rocket management believes that the fair values assigned to the assets to be acquired and liabilities to be assumed reflected in the unaudited pro forma combined financial data are based on reasonable estimates and assumptions using currently available data, the results of the final allocation could be materially different from the preliminary allocation.

The unaudited pro forma combined financial statements were prepared in accordance with Article 11 of SEC Regulation S-X. Accordingly, the historical consolidated financial data of Inotek and Rocket has been adjusted to give pro forma effect to events that are (i) directly attributable to the merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of operations, expected to have a continuing impact on the combined results of operations of the combined company. In addition, the pro forma adjustments reflecting the completion of the merger are based upon the application of the acquisition method of accounting in accordance with U.S. GAAP and upon the assumptions set forth in the unaudited pro forma combined financial statements.

The unaudited pro forma combined financial data is presented for illustrative purposes only and is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been combined during the periods presented.

The following selected unaudited pro forma combined financial data should be read in conjunction with the section entitled “Unaudited Pro Forma Combined Financial Statements,” beginning on page 132, Inotek’s audited and unaudited consolidated financial statements and the notes thereto included as an Annex B-1, B-2 and B-3 to this proxy statement, Rocket’s audited and unaudited financial statements and the notes thereto beginning on page F-1, the sections entitled “Inotek’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 114, and “Rocket’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 117, and the other information contained in this proxy statement.

 



 

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The following information does not give effect to the proposed reverse stock split of Inotek common stock described in the section entitled “Matters Being Submitted to a Vote of Inotek’s Stockholders—Proposal 2: Approval of the Reverse Stock Split,” beginning on page 88 of this proxy statement.

 

     Year Ended
December 31, 2016
    Six Months Ended
June 30, 2017
 
    
     (in thousands, except per share data)  

Statements of Operations Data

    

Loss from operations

   $ (49,309   $ (22,120

Net loss

   $ (49,974   $ (22,964

Net loss attributable to common stockholders

   $ (49,974   $ (22,964

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.38   $ (0.17

 

     As of June 30, 2017  
     (in thousands)  

Balance Sheet Data

  

Cash and cash equivalents

   $ 55,907  

Short-term investments

   $ 81,144  

Working capital (1)

   $ 124,088  

Total assets

   $ 152,238  

Total liabilities

   $ 68,584  

Accumulated deficit

   $ (24,902

Total shareholders’ equity

   $ 83,654  

 

(1) Rocket defines working capital as current assets less current liabilities.

Comparative Historical And Unaudited Pro Forma Per Share Data

The information below reflects historical per share information for Inotek and Rocket and unaudited pro forma per share information of the combined company as if Inotek and Rocket had been combined as of or for the periods presented. The per share amounts below do not give effect to the proposed reverse stock split of Inotek common stock described in the section entitled “Matters Being Submitted to a Vote of Inotek’s Stockholders—Proposal 2: Approval of the Reverse Stock Split,” beginning on page 88 of this proxy statement.

The pro forma amounts in the table below have been derived from the unaudited pro forma combined financial information included in the section entitled “Unaudited Pro Forma Combined Financial Statements,” beginning on page 132 of this proxy statement. The pro forma amounts are presented for illustrative purposes only and are not necessarily indicative of what the financial position or the results of operations of the combined company would have been had Inotek and Rocket been combined as of or for the periods presented.

 



 

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The information below should be read in conjunction with the audited and unaudited consolidated financial statements of Inotek and the related notes, the audited and unaudited consolidated financial statements of Rocket and the related notes, and the unaudited pro forma combined financial information and the related notes, all of which are included elsewhere in this proxy statement or in annexes to this proxy statement.

 

     As of and for
the year ended
December 31, 2016
     As of and for the
six months ended
June 30, 2017
 

Inotek

     

Book value per share—historical (1)

   $ 2.71      $ 2.13  

Basic and diluted net loss per share—historical

   $ (1.60    $ (0.64

Rocket

     

Book value per share—historical (1)

   $ 93.32      $ 312.54  

Basic and diluted net loss per share—historical

   $ (84.43    $ (69.49

Rocket Unaudited Pro Forma Equivalent Data per Share (2)

     

Book value per share—pro forma

   $ 0.31      $ 1.03  

Basic and diluted net loss per share—historical

   $ (0.28    $ (0.23

Unaudited Pro Forma Combined

     

Book value per share—pro forma (3)

     —        $ 0.63  

Basic and diluted net loss per share—pro forma

   $ (0.38    $ (0.17

 

(1) Historical book value per share is calculated by taking total shareholders’ equity divided by total outstanding common shares (Inotek) or total outstanding ordinary shares (Rocket), as of the end of the period.
(2) Rocket Unaudited Pro Forma Equivalent Data per share is calculated by applying the preliminary pro forma share exchange ratio of 302.16497 to the unaudited pro forma per share data.
(3) Combined pro forma book value per share is calculated by taking pro forma combined total shareholder equity divided by pro forma combined total outstanding common shares.

 



 

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MARKET PRICE AND DIVIDEND INFORMATION

Inotek’s common stock began trading on the NASDAQ Global Market under the symbol “ITEK” on February 18, 2015. The following table details the high and low sales prices for the common stock as reported by the NASDAQ Global Market for the periods indicated.

 

     Price Range  
     High      Low  

Fiscal Year 2015

     

First Quarter (beginning February 18, 2015)

   $ 6.10      $ 5.19  

Second Quarter

   $ 6.11      $ 4.75  

Third Quarter

   $ 17.65      $ 4.81  

Fourth Quarter

   $ 13.30      $ 9.42  

Fiscal Year 2016

     

First Quarter

   $ 11.59      $ 6.09  

Second Quarter

   $ 10.64      $ 6.73  

Third Quarter

   $ 9.76      $ 6.64  

Fourth Quarter

   $ 9.48      $ 6.00  

Fiscal Year 2017

     

First Quarter

   $ 2.15      $ 1.53  

Second Quarter

   $ 2.20      $ 1.65  

Third Quarter

   $ 1.83      $ 0.90  

Fourth Quarter (through October 11, 2017)

   $ 3.03      $ 1.94  

Rocket is a private company and its ordinary shares are not publicly traded. There has never been, nor is there expected to be in the future, a public market for Rocket’s ordinary shares.

On September 11, 2017, the last full trading day prior to the public announcement of the proposed merger, the closing price per share of Inotek’s common stock as reported on the NASDAQ Global Market was $1.02 per share. On [●], 2017, the last practicable date before the printing of this proxy statement, the closing price per share of Inotek’s common stock as reported on the NASDAQ Global Market was $[●], per share.

Following the consummation of the merger, and subject to successful application for initial listing with the NASDAQ Global Market, Inotek’s common stock will continue to be listed on the NASDAQ Global Market, but will trade under the symbol “RCKT” and under the combined company’s new name, “Rocket Pharmaceuticals, Inc.,” which we refer to as New Rocket.

As of the record date, Inotek had approximately [●] stockholders of record.

Inotek has never declared or paid cash dividends on its capital stock. Inotek currently intends to retain earnings, if any, to finance the growth and development of its business, and does not expect to pay any cash dividends to its stockholders in the foreseeable future. Payment of future dividends, if any, will be at the discretion of Inotek’s board of directors.

 



 

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RISK FACTORS

You should consider the following factors in evaluating whether to approve the issuance of shares of Inotek common stock in the merger and the resulting “change of control” of Inotek under NASDAQ rules and the amendment to Inotek’s seventh amended and restated certificate of incorporation to effect a reverse stock split of Inotek’s common stock. These factors should be considered in conjunction with the other information included or incorporated by reference by Inotek in this proxy statement.

Risks Related to the Merger

If the proposed merger with Rocket is not consummated, Inotek’s business could suffer materially and Inotek’s stock price could decline.

The consummation of the proposed merger with Rocket is subject to a number of closing conditions, including the approval by Inotek’s stockholders, approval by NASDAQ of Inotek’s application for initial listing of Inotek’s common stock in connection with the merger, and other customary closing conditions. Inotek is targeting a closing of the transaction in the first quarter of 2018.

If the proposed merger is not consummated, Inotek may be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:

 

    Inotek has incurred and expects to continue to incur significant expenses related to the proposed merger with Rocket even if the merger is not consummated.

 

    the merger agreement contains covenants relating to Inotek’s solicitation of competing acquisition proposals and the conduct of Inotek’s business between the date of signing the merger agreement and the closing of the merger. As a result, significant business decisions and transactions before the closing of the merger require the consent of Rocket. Accordingly, Inotek may be unable to pursue business opportunities that would otherwise be in its best interest as a standalone company. If the merger agreement is terminated after Inotek has invested significant time and resources in the transaction process, Inotek will have a limited ability to continue its current operations without obtaining additional financing to fund its operations.

 

    Inotek could be obligated to pay Rocket a $2,000,000 termination fee in connection with the termination of the merger agreement, depending on the reason for the termination.

 

    Inotek’s customers, prospective customers, collaborators and other business partners and investors in general may view the failure to consummate the merger as a poor reflection on its business or prospects.

 

    some of Inotek’s suppliers, distributors, collaborators and other business partners may seek to change or terminate their relationships with Inotek as a result of the proposed merger.

 

    as a result of the proposed merger, current and prospective employees could experience uncertainty about their future roles within the combined company. This uncertainty may adversely affect Inotek’s ability to retain its key employees, who may seek other employment opportunities.

 

    Inotek’s management team may be distracted from day to day operations as a result of the proposed merger.

 

    the market price of Inotek’s common stock may decline to the extent that the current market price reflects a market assumption that the proposed merger will be completed.

In addition, if the merger agreement is terminated and Inotek’s board of directors determines to seek another business combination, it may not be able to find a third party willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the merger. In such circumstances, Inotek’s

 

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board of directors may elect to, among other things, divest all or a portion of Inotek’s business, or take the steps necessary to liquidate all of Inotek’s business and assets, and in either such case, the consideration that Inotek receives may be less attractive than the consideration to be received by Inotek pursuant to the merger agreement.

Some of Inotek’s officers and directors have conflicts of interest that may influence them to support or approve the merger.

Officers and directors of Inotek participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, their continued service as a director of the combined company, retention and severance benefits, the acceleration of restricted stock and option vesting and continued indemnification. These interests, among others, may influence the officers and directors of Inotek to support or approve the merger. For a more detailed discussion see “The Merger—Interests of Inotek’s Directors and Executive Officers in the Merger” beginning on page 63 of this proxy statement.

The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes.

In general, either party can refuse to complete the merger if there is a material adverse change affecting the other party between September 12, 2017, the date of the merger agreement, and the closing. However, some types of changes do not permit either party to refuse to complete the merger, even if such changes would have a material adverse effect on Inotek or Rocket, to the extent they resulted from the following and do not have a materially disproportionate effect on Inotek or Rocket, as the case may be:

 

    changes in general economic, business, financial or market conditions;

 

    changes or events affecting the industries or industry sectors in which the parties operate generally;

 

    changes in generally accepted accounting principles;

 

    changes in laws, rules, regulations, decrees, rulings, ordinances, codes or requirements issued, enacted, adopted or otherwise put into effect by or under the authority of any governmental body;

 

    changes caused by the announcement or pendency of the merger;

 

    changes caused by any action taken by either party with the prior written consent of the other party;

 

    changes caused by any decision, action, or inaction by the U.S. Federal Drug Administration, which we refer to as the FDA or another comparable foreign governmental body, with respect to any product candidate of either party;

 

    changes caused by any act of war, terrorism, national or international calamity or any other similar event;

 

    with respect to Inotek, a decline in Inotek’s stock price; or

 

    with respect to Inotek, a change in the listing status of Inotek’s common stock on the NASDAQ Global Market

If adverse changes occur but Inotek and Rocket must still complete the merger, the combined company’s stock price may suffer.

The market price of the combined company’s common stock may decline as a result of the merger.

The market price of the combined company’s common stock may decline as a result of the merger for a number of reasons including if:

 

    the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts;

 

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    the effect of the merger on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

    investors react negatively to the effect on the combined company’s business and prospects from the merger.

Inotek’s stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

If the combined company is unable to realize the strategic and financial benefits currently anticipated from the merger, Inotek’s stockholders will have experienced substantial dilution of their ownership interest without receiving any commensurate benefit. Significant management attention and resources will be required to integrate the two companies. Delays in this process could adversely affect the combined company’s business, financial results, financial condition and stock price following the merger. Even if the combined company were able to integrate the business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, innovation and operational efficiencies that may be possible from this integration and that these benefits will be achieved within a reasonable period of time.

During the pendency of the merger, Inotek may not be able to enter into a business combination with another party and will be subject to contractual limitations on certain actions because of restrictions in the merger agreement.

Covenants in the merger agreement impede the ability of Inotek or Rocket to make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the merger. As a result, if the merger is not completed, the parties may be at a disadvantage to their competitors. In addition, while the merger agreement is in effect and subject to limited exceptions, each party is prohibited from soliciting, initiating, encouraging or taking actions designed to facilitate any inquiries or the making of any proposal or offer that could lead to the entering into certain extraordinary transactions with any third party, such as a sale of assets, an acquisition of Inotek’s common stock, a tender offer for Inotek’s common stock, a merger or other business combination outside the ordinary course of business. Any such transactions could be favorable to such party’s stockholders.

The amount of merger consideration is dependent on amount of net cash of Inotek as of a certain determination date prior to closing.

Subject to the terms of the merger agreement, the percentage of the combined company that Inotek stockholders will own as of the closing of the merger is subject to adjustment at the closing based on the level of Inotek’s net cash as of a certain determination date prior to closing. The level of net cash as of that determination date will be reduced by certain specified liabilities, as defined further in the merger agreement, including out-of-pocket costs in connection with any stockholder litigation filed against Inotek and related parties related to the merger agreement, including amounts payable to financial advisors and attorneys that are paid, incurred or expected to be incurred, payable or subject to reimbursement by Inotek. Thus, Inotek’s liabilities, including costs in defending against litigation, insofar as these liabilities reduce net cash, may reduce the percentage of the combined company that Inotek stockholders will own as of the closing of the merger. Based on Inotek’s current level of net cash and taking into account Inotek’s projected expenses in connection with the proposed transaction, if the merger were to close today, the stockholders of Inotek would own approximately 19% of the combined company on a fully-diluted basis and current Rocket shareholders would own approximately 81% of the combined company on a fully-diluted basis. However, in addition to the specified liabilities referenced above, any reductions in Inotek’s net cash balance caused by unexpected liabilities may also reduce the ownership percentage held by Inotek stockholders as of the closing of the merger. There can be no assurances as to Inotek’s level of net cash between now and closing.

 

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Because the lack of a public market for Rocket’s ordinary shares makes it difficult to evaluate the fairness of the merger, Rocket’s shareholders may receive consideration in the merger that is greater than or less than the fair market value of Rocket’s ordinary shares.

The outstanding share capital of Rocket is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Rocket. Since the percentage of Inotek’s equity to be issued to Rocket’s shareholders was determined based on negotiations between the parties, it is possible that the value of the Inotek’s common stock to be issued in connection with the merger will be greater than the fair market value of Rocket. Alternatively, it is possible that the value of the shares of Inotek’s common stock to be issued in connection with the merger will be less than the fair market value of Rocket.

The combined company will incur significant transaction costs as a result of the merger, including investment banking, legal and accounting fees. In addition, the combined company will incur significant consolidation and integration expenses which cannot be accurately estimated at this time. These costs could include the possible relocation of certain operations from Massachusetts to other offices of the combined company as well as costs associated with terminating existing office leases and the loss of benefits of certain favorable office leases. Actual transaction costs may substantially exceed Rocket’s estimates and may have an adverse effect on the combined company’s financial condition and operating results.

Failure of the merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code could harm the combined company.

The parties intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, as amended. For a full description of the tax consequences of the merger, see “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 67 of this proxy statement. To comply with the requirements for a Section 368(a) reorganization, certain structural and other requirements for the transaction must be met; if not satisfied, the Rocket shareholders could be subject to tax liability.

The merger is expected to result in a limitation on Inotek’s ability to utilize our net operating loss carryforward.

Under Section 382 of the Code, use of Inotek’s net operating loss carryforwards, which we refer to as NOLs, will be limited if Inotek experiences a cumulative change in ownership of greater than 50% in a moving three year period. Inotek will experience an ownership change as a result of the merger and therefore its ability to utilize its NOLs and certain credit carryforwards remaining at the effective time will be limited. The limitation will be determined by the fair market value of Inotek’s common stock outstanding prior to the ownership change, multiplied by the applicable federal rate. Limitations imposed on Inotek’s ability to utilize NOLs could cause U.S. 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.

The opinion received by Inotek’s board of directors from Perella Weinberg has not been, and is not expected to be, updated to reflect changes in circumstances that may have occurred since the date of the opinion.

Perella Weinberg delivered its opinion to the board of directors of Inotek that, as of September 12, 2017, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in its opinion, the exchange ratio provided for in the merger agreement was fair, from a financial point of view, to Inotek. The opinion does not speak as of the time the merger will be completed or any date other than the date of such opinion. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of Inotek or Rocket, changes in general market and economic conditions or regulatory or other factors. Any such changes may materially alter or affect the relative values of Inotek and Rocket. Perella Weinberg does not have any obligation to update, revise or reaffirm its opinion to reflect subsequent developments and has not done so. See the section entitled “The Merger—Opinion of Inotek’s Financial Advisor” and Annex C to this proxy statement.

 

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Certain stockholders could attempt to influence changes within Inotek which could adversely affect Inotek’s operations, financial condition and the value of Inotek’s common stock.

Inotek’s stockholders may from time-to-time seek to acquire a controlling stake in Inotek, engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes. Campaigns by stockholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, and could disrupt Inotek’s operations and divert the attention of the Inotek board of directors and senior management from the pursuit of the proposed merger transaction. These actions could adversely affect Inotek’s operations, financial condition, Inotek’s ability to consummate the merger and the value of Inotek common stock.

Inotek and Rocket may become involved in securities litigation or stockholder derivative litigation in connection with the merger, and this could divert the attention of Inotek and Rocket management and harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages.

Securities litigation or stockholder derivative litigation frequently follows the announcement of certain significant business transactions, such as the sale of a business division or announcement of a business combination transaction. Inotek and Rocket may become involved in this type of litigation in connection with the merger, and the combined company may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the business of Inotek, Rocket and the combined company.

Risks Related to the Reverse Stock Split

The reverse stock split may not increase Inotek’s stock price over the long-term.

The principal purpose of the reverse stock split is to increase the per-share market price of Inotek’s common stock above the minimum bid price requirement under the NASDAQ Listing Rules so that the listing of the combined company and the shares of Inotek common stock being issued in the merger on either NASDAQ Global Market or NASDAQ Capital Market will be approved. It cannot be assured, however, that the reverse stock split will accomplish this objective for any meaningful period of time. While it is expected that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of Inotek’s common stock, it cannot be assured that the reverse stock split will increase the market price of its common stock by a multiple of the reverse stock split ratio chosen by its board of directors in its sole discretion, or result in any permanent or sustained increase in the market price of Inotek’s common stock, which is dependent upon many factors, including Inotek’s business and financial performance, general market conditions, and prospects for future success. Thus, while the stock price of the combined company might meet the continued listing requirements for the NASDAQ Capital Market or the NASDAQ Global Market initially, it cannot be assured that it will continue to do so.

The reverse stock split may decrease the liquidity of Inotek’s common stock.

Although the board of directors believes that the anticipated increase in the market price of Inotek’s common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Inotek’s common stock.

The reverse stock split may lead to a decrease in Inotek’s overall market capitalization.

Should the market price of Inotek’s common stock decline after the reverse stock split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to the

 

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reverse stock split. A reverse stock split is often viewed negatively by the market and, consequently, can lead to a decrease in Inotek’s overall market capitalization. If the per share market price does not increase in proportion to the reverse stock split ratio, then the value of the combined company, as measured by its stock capitalization, will be reduced. In some cases, the per-share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Inotek’s common stock will remain the same after the reverse stock split is effected, or that the reverse stock split will not have an adverse effect on Inotek’s stock price due to the reduced number of shares outstanding after the reverse stock split.

Risks Related to Inotek

For risks related to the business of Inotek, please refer to the section entitled “Item 1A. Risk Factors” set forth in Inotek’s Annual Report on Form 10-K for the year ended December 31, 2016, included as Annex B-1 to this proxy statement, and the section entitled “Item 1A. Risk Factors” set forth in Inotek’s Quarterly Reports on Form 10-Q as filed with the SEC on May 10, 2017 and August 3, 2017, included as Annex B-2 and Annex B-3 respectively, which sections are incorporated by reference herein.

Risks Related to Rocket

Risks Related To Product Regulatory Matters

Rocket’s gene therapy product candidates are based on novel technology, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval. Currently, no gene therapy products have been approved in the United States and only a few such products have been approved in 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 solved. Rocket may also experience unanticipated problems or delays in expanding 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, which we refer to as 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 uniQure N.V.’s Glybera and GlaxoSmithKline LLC’s Strimvelis. 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 and the European Commission may not be indicative of what the FDA may require for approval. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approvals necessary to bring a potential product to market could decrease Rocket’s ability to generate sufficient product revenue and Rocket’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, the FDA established the Office of Tissues and Advanced Therapies within its Center for Biologics Evaluation and Research, which we refer to as CBER, to consolidate the review of gene therapy and related products, and the Cellular, Tissue and Gene Therapies Advisory Committee to advise the CBER on its

 

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review. These and other regulatory review agencies, committees and advisory groups and the requirements and guidelines they promulgate may lengthen the regulatory review process, require Rocket to perform additional preclinical studies or clinical trials, 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.

Rocket may encounter substantial delays in commencement, enrollment or completion of Rocket’s clinical trials or may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities, which could prevent Rocket from commercializing its current and future product candidates on a timely basis, if at all.

Before obtaining marketing approval from regulatory authorities for the sale of Rocket’s current and future product candidates, Rocket must conduct extensive clinical trials to demonstrate the safety and efficacy of Rocket’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 program to date has been with respect to a lentiviral treatment for Fanconi Anemia, a rare mutation of the FANC-A gene, which is still ongoing, and Rocket 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 is critical to Rocket’s success. Rocket may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics, to complete Rocket’s clinical trials in a timely manner. Patient enrollment and trial completion is affected by numerous factors including:

 

    severity of the disease under investigation;

 

    design of the study protocol;

 

    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 evaluate its current product candidates are rare genetic diseases with limited patient pools from which to draw for clinical studies. Additionally, the process of finding and diagnosing patients may prove costly. Finally, Rocket’s treatment process requires that the procurement of cells from subjects be conducted where the cells can be shipped to a transduction facility within the required timelines, and this can be an unstable process.

Rocket’s current product candidates are being developed to treat severe genetic diseases. Rocket may not be able to initiate or continue clinical studies if Rocket cannot enroll a sufficient number of eligible patients to participate in the clinical studies pursuant to the requirements of the FDA, the EMA or other applicable regulatory agencies.

 

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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 numerous risks unique to conducting business in foreign countries, including:

 

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

 

    different standards for the conduct of clinical trials;

 

    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 patients to conduct its clinical trials as planned, Rocket may need to delay, limit or terminate ongoing or planned clinical trials, any of which would harm its business, financial condition, results of operations and prospects. 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 indicative 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 treatment is currently in clinical testing, and several of Rocket’s other gene therapy programs are in the preclinical stage, which Rocket expects to ultimately enter the clinical stage. Study designs and results from previous or ongoing studies are not necessarily predictive of Rocket’s future clinical study results, and initial or interim results may not continue or be confirmed upon completion of the study. 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 changes 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 appropriate regulatory authorities have reviewed and approved the product candidate. Rocket has not received approval from regulatory authorities in any jurisdiction to market any of its product candidates. Even if Rocket’s product candidates meet their safety and efficacy endpoints in clinical trials, the regulatory authorities may not complete their review processes in a timely manner, issue a complete response letter, or ultimately Rocket may not be able to obtain regulatory approval. In addition, Rocket may experience delays or rejections if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, Rocket may experience delays or

 

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rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory authority policy during the period of product development, clinical trials and the 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 or other studies. In addition, varying interpretations of data obtained from preclinical and clinical testing could delay, limit or prevent the receipt of marketing approval for a product candidate.

Regulatory authorities also may approve a product candidate for more limited indications than requested or they may impose significant limitations in the form of narrow indications, warnings or Risk Evaluation and Mitigation Strategies, which we refer to as 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, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of Rocket’s product candidates. Any of the 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.

Even if Rocket obtains regulatory approval for a product candidate, its products will remain subject to regulatory scrutiny.

Even if Rocket obtains regulatory approval in a jurisdiction, the applicable regulatory authority may still impose significant restrictions on the indicated 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, which we refer to as BLA is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA. The holder of an approved BLA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. FDA guidance advises that patients treated with some types of gene therapy undergo follow-up observations for potential adverse events for as long as 15 years. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with good manufacturing practices, which we refer to as GMP, and adherence to commitments made in the BLA. If Rocket or 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, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

If Rocket fails to comply with applicable regulatory requirements following approval of any of its product candidates, a regulatory agency may take a variety of actions, including:

 

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

 

    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.

 

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Any government investigation of alleged violations of law could require Rocket to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit Rocket’s ability to commercialize its product candidates and generate revenues and could harm its business, financial condition, results of operations and prospects.

In addition, the FDA’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 action, 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 any of its product candidates in the United States, and even 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 accepted by regulatory authorities in other countries, and regulatory 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 costly and time- consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of Rocket’s products in those countries. The foreign regulatory approval process involves 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 Rocket fails to comply with regulatory requirements in international markets or to obtain and maintain 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 immunologic 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

 

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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.

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

 

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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 many other chemical pharmaceuticals. Moreover, unlike chemical pharmaceuticals, the physical and chemical properties of biologics such as Rocket’s generally cannot be fully characterized. As a result, assays of the finished product may not be sufficient to ensure that the product will perform in the intended manner. Accordingly, Rocket employs multiple steps to control its manufacturing process to assure that the process works and the product candidate is made strictly and consistently in compliance with the process. Problems with the manufacturing process, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient inventory. Rocket may encounter problems achieving adequate quantities and quality of clinical-grade materials that meet FDA, EMA or other comparable applicable foreign standards or specifications with consistent and acceptable production yields and costs.

In addition, the FDA, the EMA and other comparable foreign regulatory authorities may require Rocket to submit samples of any lot of any approved product together with the protocols showing the results of applicable tests at any time. Under some circumstances, the FDA, the EMA or other comparable foreign regulatory authorities may require that Rocket not distribute a lot until the competent authority authorizes its release. Slight

 

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deviations in the manufacturing process, including those affecting quality attributes and stability, may result in unacceptable changes in the product that could result in lot failures or product recalls. Lot failures or product recalls could cause Rocket to delay clinical trials or product launches which could be costly to Rocket and otherwise harm Rocket’s business, financial condition, results of operations and prospects.

Rocket also 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.

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 the costs of the resulting drugs and related treatments.

Market acceptance and sales of Rocket’s product candidates may depend on coverage and reimbursement policies and health care reform measures. Decisions 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 guarantee that reimbursement will be available for any 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 reimbursed by government or third party payors. If coverage and reimbursement are not available or are available only at limited levels, Rocket may not be able to successfully commercialize its products. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA, was signed into law, and in recent years, numerous proposals to change the

 

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health care system in the U.S. have been made. These reform proposals include measures that would limit or prohibit payments for certain medical treatments or subject the pricing of drugs 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 limits or prohibits payment for Rocket’s products, or that subjects the price of Rocket’s products to governmental control, Rocket may not be able to generate 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 medical 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, Rocket’s ability to successfully market and sell 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 its 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. Rocket has competitors both in the United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions.

Many of Rocket’s competitors may have substantially greater financial, technical and other resources, such as larger research and development staff, manufacturing capabilities, experienced marketing and manufacturing organizations. Rocket’s competitors may succeed in developing, acquiring or licensing on an exclusive basis products that are more effective or less costly than any product candidate that Rocket may develop, or achieve earlier patent protection, regulatory approval, product commercialization and market penetration than Rocket. Additionally, technologies developed by Rocket’s competitors may render its potential product candidates uneconomical or obsolete, and Rocket may not be successful in marketing 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 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 not be able to continue to identify and 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 identify 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 likely would result in significant harm to Rocket’s financial position and results of operations.

 

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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, 2016. 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 demands, unexpected adverse side effects or insufficient therapeutic efficacy will prevent or substantially slow Rocket’s research and development effort and Rocket’s business could ultimately suffer. Rocket anticipates that it will remain principally engaged in research and development activities for an indeterminate, but substantial, period of time.

Risks Related To Third Parties

Rocket relies on third parties to conduct its preclinical studies and clinical trials and perform other tasks for 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 practices, 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. If Rocket’s CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to Rocket’s protocols, regulatory requirements, or for other reasons, Rocket’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 Rocket’s

 

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product candidates could be materially and adversely affected, Rocket’s costs could increase, and its ability to generate revenue could be delayed.

Switching or adding additional CROs, medical institutions, clinical investigators or contract laboratories involves additional cost and requires 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 timelines. Though Rocket carefully manages its relationships with its CROs, Rocket cannot guarantee that Rocket will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse effect on its business, financial condition or results of operations.

Rocket 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 settings.

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 its 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 submissions and approval of its product candidates.

Generally these third parties may terminate their engagements with Rocket at will upon notice. If Rocket needs to enter 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:

 

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

 

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

 

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

 

    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 these events could be the basis for FDA action, including an injunction, recall, seizure or total or partial suspension of production.

Rocket may not be successful in finding 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,

 

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manufacturing constraints or other reasons. Rocket may not be successful in its efforts to establish such strategic partnerships or other alternative arrangements for its product candidates for several reasons, including because its research and development pipeline may be insufficient, Rocket’s product candidates may be deemed to be at too early of a stage of development for collaborative effort or third parties may not view Rocket’s product candidates as having the requisite potential to demonstrate efficacy or market opportunity. In addition, Rocket may be restricted under existing agreements from entering into future agreements with potential collaborators.

If Rocket is unable to reach agreements with suitable licensees or collaborators on a timely basis, on acceptable terms or at all, Rocket may have to curtail the development of a product candidate, reduce or delay its development program, delay its potential commercialization, reduce the scope of any sales or marketing activities or increase Rocket’s expenditures and undertake development or commercialization activities at its own expense. If Rocket elects to independently fund development or commercialization activities, Rocket may need to obtain additional expertise and additional capital, which may not be available on acceptable terms or at all. If Rocket fails to enter into collaboration arrangements and do not have sufficient funds or expertise to undertake necessary development and commercialization activities, Rocket may not be able to further develop its 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 prohibiting 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;

 

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    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 prospects.

Risks Related To Personnel and Other Risks Related To Rocket’s Business

Rocket’s business could suffer if it loses the services of, or fail 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; and Rocket’s Chief Medical Officer and Head of Development, Jonathan Schwartz, MD; and Rocket’s Vice President of Finance, Brian Batchelder. 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 September 1, 2017, Rocket had less than 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 effectively 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

 

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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.

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 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 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 State. In many foreign countries it is common for

 

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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.

Risks Related To Rocket’s Intellectual Property

Rocket’s rights to license intellectual property for the development and commercialization of its product candidates are subject, in part, 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 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.

Licenses 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 commercially 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,

 

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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 successfully commercialize its products may be harmed.

Rocket’s success depends, in large part, on its ability to obtain and maintain patent protection in the U.S. and other countries with respect to its product candidates and its manufacturing technology. Rocket’s licensors have sought and Rocket may intend to seek to protect its proprietary position by filing patent applications in the U.S. and abroad related to many of its novel technologies and product candidates that are important to is business.

The patent prosecution process is expensive, time-consuming and complex, and Rocket may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at 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 certain 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 obtain 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 development 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 existing license 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 the licenses, including that Rocket may not be able to market products covered by the license.

The patent position of biotechnology and pharmaceutical companies 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 highly uncertain. Pending and future patent applications may not result in patents being issued which protect Rocket’s technology or product candidates or which effectively prevent others from commercializing competitive technologies and

 

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product candidates. Changes in either the patent laws or interpretation of the patent laws in the U.S. and other countries may diminish the value of Rocket’s patents or narrow the scope of Rocket’s patent protection.

Rocket may not be aware of all third party intellectual property rights potentially relating to its technology and product candidates. Publications of discoveries in the scientific literature often lag the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing or, in some cases, not at all. Therefore, Rocket cannot be certain that Rocket was the first to make the inventions claimed in any owned or any licensed patents or pending patent applications, or that Rocket was the first to file for patent protection of such inventions.

Even if the patent applications Rocket licenses or may own in the future do issue as patents, they may not issue in a form that will provide Rocket with any meaningful protection, prevent competitors or other third parties from competing with Rocket or otherwise provide Rocket with any competitive advantage. Rocket’s competitors or other third parties may avail themselves of safe harbor under the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Amendments) to conduct research and clinical trials and may be able to circumvent Rocket’s patents by developing similar or alternative technologies or products in a non-infringing manner.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and Rocket’s patents may be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit Rocket’s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of is technology and product candidates. Given 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. As a result, Rocket’s intellectual property may 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

 

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

 

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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 rights may be jeopardized. If Rocket or its licensors fail to adequately protect this intellectual property, Rocket’s ability to commercialize its products could suffer.

Rocket may incur substantial costs as a result of litigation or other proceedings relating to patent 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 these patents. In addition, there is a risk that the court will decide that these patents are not valid and that Rocket does not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe Rocket’s rights to these patents.

Furthermore, a third party may claim that Rocket is using inventions covered by the third party’s patent rights and may go to court to stop Rocket from engaging in tits normal operations and activities, including making or selling its product candidates. These lawsuits are costly and could affect Rocket’s results of operations and divert the attention of managerial and technical 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 Rocket is sued for patent infringement, Rocket would need to demonstrate that its products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Rocket’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 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 could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of Rocket’s United States patent position with respect to such inventions.

Some of Rocket’s competitors may be able to sustain the costs of complex patent litigation more effectively than Rocket can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on Rocket’s ability to raise the funds necessary to continue its operations.

If Rocket is unable to protect the confidentiality of its trade secrets, its business and competitive position may be 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

 

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to prevent the unauthorized disclosure or use of its technical know-how or other trade 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 contractors, 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 rights, design around Rocket’s protected technology or develop 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 Rocket. 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.

Risks Related To Rocket’s Financial Position

Rocket has a history of operating losses, and Rocket may not achieve or sustain profitability. Rocket anticipates that it will continue to incur losses for the 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.

Rocket 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 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.

Rocket has incurred net losses since its inception. Rocket incurred a net loss of $7.6 million for the year ended December 31, 2016, and a net loss of $4.2 million for the period from July 14, 2015 (Rocket’s inception) to December 31, 2015. As of December 31, 2016, Rocket had an accumulated deficit of $11.8 million. Substantially all of its operating losses has 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.

 

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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.

Rocket’s operations have consumed significant amounts of cash since inception. As of December 31, 2016, Rocket’s cash was $9.5 million. As of June 30, 2017 Rocket’s cash was $28.3 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.

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.

 

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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 is a clinical stage company formed in 2015. 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.

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 carryforwards, or NOLs, 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. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. At December 31, 2016, Rocket had net operating losses of approximately $7.0 million for New York City tax purposes. As of December 31, 2016, 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, 2016 did not report any income effectively connected with a U.S. trade or business.

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

Rocket’s ability to generate revenue and achieve profitability depends on Rocket’s ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the regulatory, pricing and reimbursement approvals necessary to commercialize its product candidates. Rocket 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;

 

    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;

 

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    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, Rocket anticipates incurring significant costs associated with commercializing any approved product candidate. Rocket’s expenses could increase beyond expectations if Rocket is required by the FDA, the EMA, or other regulatory agencies, domestic or foreign, to perform clinical and other studies in addition to those that Rocket currently anticipates. Even if Rocket is able to generate revenues from the sale of any approved products, Rocket may not become profitable and may need to obtain additional funding to continue operations.

Risks Related to the Combined Company

If any of the events described in “Risks Related to Inotek” or “Risks Related to Rocket” occur, those events could cause potential benefits of the merger not to be realized.

Following completion of the merger, the combined company will be susceptible to many of the risks described in the sections herein entitled “Risks Related to Inotek” and “Risks Related to Rocket.” To the extent any of the events in the risks described in those sections occur, those events could cause the potential benefits of the merger not to be realized and the market price of the combined company’s common stock to decline.

The historical financial information of Inotek and Rocket presented herein may not be representative of their respective results or financial condition if they had been operated as a combined company, and as a result may not be representative of the combined company’s results or financial condition after the merger.

The historical financial information of Inotek and Rocket included elsewhere in this proxy statement reflect assumptions and allocations made by Inotek and Rocket, respectively. The historical results and financial condition of Inotek and Rocket presented herein may be different from those that would have resulted had Inotek and Rocket been operated together as a combined company during the applicable periods or at the applicable dates. As a result the historical financial information of Inotek and Rocket is not indicative of future operating results or financial position of the combined company.

The unaudited pro forma condensed combined financial information presented herein may not be representative of the combined companies’ results after the merger.

The unaudited pro forma condensed combined financial information included elsewhere in this proxy statement has been presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that actually would have occurred had the merger been completed as of the date indicated, nor is it indicative of future operating results or financial position. The unaudited pro forma consented

 

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combined financial information has been derived from the historical financial statements of Inotek and Rocket and adjustments and assumptions have been made regarding the combined company after giving effect to the merger. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with accuracy. Moreover, the unaudited pro forma condensed combined financial information does not reflect all costs that are expected to be incurred by the combined company in connection with the merger. The assumptions used in preparing the unaudited pro forma condensed combined financial information may not ultimately be accurate, and other factors may affect the combined company’s results and financial condition following consummation of the merger. The unaudited pro forma condensed combined financial information does not reflect the costs of integration activities or transaction-related costs or incremental expenditures associated with the transaction. Accordingly, the unaudited pro forma condensed combined financial information included elsewhere in this proxy statement does not reflect what Inotek’s or Rocket’s results or financial condition would have been had Inotek and Rocket been a consolidated entity during all periods presented.

Failure by the combined company upon completion of the merger to comply with the initial listing standards of NASDAQ will prevent its stock from being listed on NASDAQ.

Upon completion of the merger, Inotek, under the new name “Rocket Pharmaceuticals, Inc.,” will be required to meet the initial listing requirements to maintain the listing and continued trading of its shares on NASDAQ. These initial listing requirements are more difficult to achieve than the continued listing requirements. Pursuant to the merger agreement, Inotek agreed to use its reasonable best efforts to cause the shares of Inotek common stock being issued in the merger to be approved for listing on NASDAQ at or prior to the effective time of the merger. Based on information currently available to Inotek, Inotek anticipates that its stock will be unable to meet the $4.00 (or, to the extent applicable, $3.00) minimum bid price initial listing requirement at the closing of the merger unless it effects a reverse stock split. The board of directors of Inotek intends to effect a reverse stock split of the shares of Inotek common stock at a ratio of between one-for-two to one-for-ten. In addition, often times a reverse stock split will not result in a trading price for the affected common stock that is proportional to the ratio of the split. Following the merger, if Inotek is unable to satisfy NASDAQ listing requirements, NASDAQ may notify Inotek, which we refer to as New Rocket, that its shares of common stock will not be listed on NASDAQ.

Upon a potential delisting from NASDAQ, if New Rocket common stock is not then eligible for quotation on another market or exchange, trading of the shares could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it is likely that there would be significantly less liquidity in the trading of New Rocket’s common stock; decreases in institutional and other investor demand for the shares, coverage by securities analysts, market making activity and information available concerning trading prices and volume; and fewer broker dealers willing to execute trades in New Rocket common stock. Also, it may be difficult for New Rocket to raise additional capital if New Rocket’s common stock is not listed on a major exchange. The occurrence of any of these events could result in a further decline in the market price of New Rocket’s common stock and could have a material adverse effect on New Rocket.

The merger will result in changes to Inotek’s board of directors and the combined company may pursue different strategies than either Inotek or Rocket may have pursued independently.

If Inotek and Rocket complete the merger, the composition of Inotek’s board of directors will change in accordance with the merger agreement. Following completion of the merger, the combined company’s board of directors will consist of seven members, two of whom shall be designed by Inotek and the other five of whom shall be designated by Rocket. Currently, it is anticipated that the combined company will continue to advance the product and development efforts and business strategies of Rocket primarily. However, because the composition of the board of directors of the combined company will consist of directors from both Inotek and Rocket, the combined company may determine to pursue certain business strategies that neither Inotek nor Rocket would have pursued independently.

 

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Ownership of the combined company’s common stock may be highly concentrated, and it may prevent you and other stockholders from influencing significant corporate decisions.

Upon completion of the merger, Rocket shareholders are estimated to beneficially own or control approximately 81% of the combined company, on a fully-diluted basis. Accordingly Rocket shareholders will have substantial influence over the outcome of a corporate action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. These shareholders also may exert influence in delaying or preventing a change in control of the combined company, even if such change in control would benefit the other stockholders of the combined company.

The combined company’s management will be required to devote a substantial time to comply with public company regulations.

As a public company, the combined company will incur significant legal, accounting and other expenses that Rocket did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as rules implemented by the SEC and The NASDAQ Global Market, impose various requirements on public companies, including those related to corporate governance practices. The combined company’s management and other personnel will need to devote a substantial amount of time to these requirements. Certain members of Rocket’s management, which will continue as the management of the combined company, do not have significant experience in addressing these requirements. Moreover, these rules and regulations will increase the combined company’s legal and financial compliance costs relative to those of Rocket and will make some activities more time consuming and costly.

The Sarbanes-Oxley Act requires, among other things, that the combined company maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, the combined company must perform system and process evaluation and testing of its internal control over financial reporting to allow management and the combined company’s independent registered public accounting firm to report on the effectiveness of its internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. The combined company’s compliance with these requirements will require that it incur substantial accounting and related expenses and expend significant management efforts. The combined company will need to hire additional accounting and financial staff to satisfy the ongoing requirements of Section 404 of the Sarbanes-Oxley Act. The costs of hiring such staff may be material and there can be no assurance that such staff will be immediately available to the combined company. Moreover, if the combined company is not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if the combined company or its independent registered public accounting firm identifies deficiencies in its internal control over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the accuracy and completeness of the combined company’s financial reports, the market price of the combined company’s common stock could decline and the combined company could be subject to sanctions or investigations by The NASDAQ Global Market, the SEC or other regulatory authorities.

The sale or availability for sale of a substantial number of shares of common stock of the combined company after the merger and after expiration of the lock-up period could adversely affect the market price of such shares after the merger.

Sales of a substantial number of shares of common stock of the combined company in the public market after the merger or after expiration of the lock-up period and other legal restrictions on resale, or the perception that these sales could occur, could adversely affect the market price of such shares and could materially impair the combined company’s ability to raise capital through equity offerings in the future. Inotek and Rocket are unable to predict what effect, if any, market sales of securities held by significant stockholders, directors or officers of the combined company or the availability of these securities for future sale will have on the market price of the combined company’s common stock after the merger.

 

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Some provisions of the combined company’s charter document, Delaware law and the indenture that governs the convertible notes may have antitakeover effects that could discourage an acquisition of the combined company by others, even if an acquisition would be beneficial to the combined company’s stockholders, and may prevent attempts by the combined company’s stockholders to replace or remove the combined company’s management.

Provisions in New Rocket’s amended and restated certificate of incorporation and bylaws as well as provisions of the DGCL, could make it more difficult for a third party to acquire New Rocket or increase the cost of acquiring New Rocket, even if doing so would benefit stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:

 

    establishing a classified board of directors such that not all members of the board are elected at one time;

 

    allowing the authorized number of New Rocket’s directors to be changed only by resolution of the 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 New Rocket 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 New Rocket stockholders would be entitled to cast to amend or repeal New Rocket’s bylaws.

These provisions may frustrate or prevent any attempts by New Rocket stockholders to replace or remove management by making it more difficult for stockholders to replace members of New Rocket’s board of directors, which will be responsible for appointing the members of New Rocket management. In addition, New Rocket will be 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 the 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 New Rocket stockholders.

 

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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. These statements, as they relate to Inotek or Rocket, the management of either such company or the proposed transaction between Inotek and Rocket, involve risks and uncertainties that may cause results to differ materially from those set forth in the statements. These statements are based on current plans, estimates and projections, and therefore, you are cautioned not to place undue reliance on them. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. Inotek and Rocket undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by law. Forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the business and future financial results of the pharmaceutical industry, and other legal, regulatory and economic developments. We use words such as “anticipates,” “believes,” “plans,” “expects,” “projects,” “future,” “intends,” “may,” “will,” “should,” “could,” “estimates,” “predicts,” “potential,” “continue,” “guidance,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including, but not limited to, those described in the documents Inotek has filed with the SEC as well as the possibility that (1) the parties may be unable to obtain stockholder or regulatory approvals required for the proposed transaction or may be required to accept conditions that could reduce the anticipated benefits of the merger as a condition to obtaining regulatory approvals; (2) the length of time necessary to consummate the proposed transaction may be longer than anticipated; (3) the parties may not be able to satisfy the conditions precedent to consummate the proposed transaction; (4) the proposed transaction may divert management’s attention from Inotek’s ongoing business operations; (5) the anticipated benefits of the proposed transaction might not be achieved; (6) Rocket’s clinical programs and pre-clinical studies may not be successful or completed on time; (7) Rocket may not be able to successfully demonstrate safety and efficacy of its clinical programs or pre-clinical studies; (8) Rocket’s expectations regarding the future development of its clinical programs and pre-clinical studies may not materialize; (9) Rocket’s clinical programs may not obtain necessary regulatory or other approvals; (10) Rocket’s clinical programs may not meet proof of concept; (11) Rocket may not be able to raise the necessary capital to conduct Rocket’s clinical programs and pre-clinical studies or such capital may not be available; (12) the prospective market size of Rocket’s drug candidates may be different than currently anticipated; (13) the proposed transaction may involve unexpected costs; (14) the business may suffer as a result of uncertainty surrounding the proposed transaction, including difficulties in maintaining relationships with third parties or retaining key employees; (15) the parties may be unable to meet expectations regarding the timing, completion and accounting and tax treatments of the transaction; (16) the parties may be subject to risks related to the proposed transaction, including any legal proceedings related to the proposed transaction and the general risks associated with the respective businesses of Inotek and Rocket, including the general volatility of the capital markets, terms and deployment of capital, volatility of Inotek share prices, changes in the biotechnology industry, interest rates or the general economy, underperformance of Inotek’s or Rocket’s assets and investments, decreased ability to raise funds and the degree and nature of Inotek’s and Rocket’s competition, as well as the risk that unexpected reductions in Inotek’s cash balance could adversely affect the portion of the combined company that the Inotek stockholders retain; (17) activist investors might not approve of the proposed transaction; or (18) the risks that are more fully described in the section titled “Risk Factors” in Inotek’s most recent Quarterly Report on Form 10-Q filed with the SEC, as well as subsequent and other documents filed from time to time with the SEC by Inotek could materialize. Additionally, forward-looking statements related to Rocket’s future expectations are subject to numerous risks and uncertainties, including risks that planned development milestones and timelines will not be met. Neither Inotek nor Rocket gives any assurance that either Inotek or Rocket will achieve its expectations.

 

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The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that affect the businesses of Inotek described in the “Risk Factors” section of this proxy statement, Inotek’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other documents filed by Inotek from time to time with the SEC. All forward-looking statements included in this proxy statement are based upon information available to Inotek and Rocket the date hereof, and neither Inotek nor Rocket assumes any obligation to update or revise any such forward-looking statements.

 

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THE MERGER

This section and the section entitled “The Merger Agreement” beginning on page 73 of this proxy statement describe the material aspects of the merger, including the merger agreement. While Inotek believes that this description covers the material terms of the merger and the merger agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement, including the merger agreement, which is attached as Annex A to this proxy statement, and the other documents to which Inotek has referred to or incorporated by reference herein. For a more detailed description of where you can find those other documents, please see the section entitled “Where You Can Find More Information” beginning on page 155 of this proxy statement.

Background of the Merger

The following chronology summarizes the key meetings and events that led to the signing of the merger agreement. The following chronology does not purport to catalogue every conversation among the Board, the Transaction Committee, members of Inotek management or Inotek’s representatives and other parties.

Prior to July 2017, Inotek was a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of therapies for ocular diseases, including glaucoma. As discussed below, in July 2017, Inotek announced top-line results of its Phase 2 fixed-dose combination trial of trabodenoson and latanoprost for the treatment of glaucoma. The trial did not meet its primary efficacy endpoint and Inotek has since discontinued development of trabodenoson in order to focus on evaluating strategic alternatives.

From time to time, Inotek has considered various strategic business initiatives intended to strengthen its business and enhance stockholder value. These have included licensing or acquiring rights to product candidates, divesting certain product candidates or businesses, or acquisitions of or mergers with other companies with other products, product candidates or technologies. In this regard, Inotek engaged Perella Weinberg in September 2014 to assist Inotek in these activities. Inotek engaged Perella Weinberg, among other reasons, because Perella Weinberg is nationally recognized as having investment banking professionals with significant experience in investment banking and mergers and acquisitions transactions involving life sciences companies.

On January 3, 2017, Inotek publicly announced that MATrX-1, the first pivotal Phase 3 trial of its lead clinical candidate, trabodenoson, did not achieve its primary endpoint, and that once additional data was obtained Inotek would determine next steps in its trabodenoson monotherapy program.

In the late afternoon of January 6, 2017, the Inotek board of directors held a meeting. Members of Inotek management and representatives of Goodwin Procter LLP, which we refer to as Goodwin, Inotek’s legal counsel, were present. The Inotek board of directors discussed the risks, challenges, and strategic opportunities facing Inotek taking into consideration that the MATrX-1 trial did not achieve its primary endpoint and the near-term cash requirements. The Inotek board of directors and management discussed the advantages and disadvantages of various alternatives and the potential value to stockholders of liquidating Inotek. Following discussion, the Inotek board of directors instructed management to proceed with various strategic actions, including preserving cash available by discontinuing certain activities and terminating the employment of some individuals for cost reduction purposes, exploring the restructuring of Inotek’s convertible notes and continuing as an independent company while awaiting data expected mid-year from the Phase 2 fixed-dose combination trial of trabodenoson and latanoprost for the treatment of glaucoma. The Inotek board of directors also directed management to begin to explore strategic alternatives, including potential business combination transactions with the assistance of Perella Weinberg.

Before and after the January 6, 2017 meeting of the Inotek board of directors and throughout the strategic review process, members of Inotek management and its board of directors consulted with representatives from Goodwin to discuss certain legal aspects of the process and the board of directors’ fiduciary duties.

 

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During the remainder of January and February 2017, members of Inotek management met with representatives of Perella Weinberg to further discuss the process for contacting potential counterparties for a potential business combination transaction, and identified a list of approximately 600 companies and assets, based on criteria established by management after consultations with several members of the Inotek board of directors. These criteria focused on novel assets, interesting or clear biology, addressing high unmet medical needs, and potential for technology platform. While therapeutic area was a factor considered, the review was not limited to the areas of expertise possessed by members of Inotek’s management team (e.g. ophthalmology and immunology). Management control and the size of the counterparty were not factors in this review. With the assistance of representatives of Perella Weinberg, Inotek narrowed this list down to approximately 70 companies using this criteria.

In mid-January 2017, at the direction of the board of directors of Inotek, Perella Weinberg began to formally market to outside parties Inotek’s interest in exploring a possible business combination. In this process, members of Inotek management and representatives of Perella Weinberg contacted the potential target companies identified to gauge their preliminary interest in a potential strategic business combination with Inotek. Of the companies contacted, 23 companies expressed interest in exploring a potential business combination transaction with Inotek and entered into confidentiality agreements with Inotek to conduct further mutual diligence. Two of these confidentiality agreements contained standstill provisions. Under one such confidentiality agreement, the standstill obligations automatically terminated upon Inotek’s entry into a merger agreement and the other confidentiality agreement permitted confidential proposals to be made to Inotek at any time following Inotek’s entry into a merger agreement.

On February 2, 2017, the Inotek board of directors held a meeting. Members of management and representatives of Perella Weinberg and Goodwin were present. Mr. Southwell provided an update on management’s efforts to explore the strategic actions discussed at the previous board of directors meeting. Mr. Southwell and representatives of Perella Weinberg also provided an update on the recently initiated strategic process. At this meeting, the Inotek board of directors also established an advisory transaction committee, which we refer to as the Transaction Committee, for convenience in order to assist the board of directors in exploring a potential strategic transaction, including a possible business combination transaction. Timothy Barberich, Gary Phillips, MD, Carsten Boess and J. Martin Carroll, all of whom are nonexecutive, independent directors, and have significant experience with acquisition transactions were appointed to the transaction committee (Mr. Boess was subsequently appointed to the Transaction Committee on July 3, 2017). Subsequently, on July 3, 2017, Mr. Carroll was appointed chairman of the Transaction Committee. The board of directors authorized the Transaction Committee to oversee the strategic exploration process, and, in between meetings of the board of directors, to give direction to Inotek’s financial and legal advisors and to lead on behalf of Inotek (or to give guidance to Inotek’s representatives in connection with) any negotiations with potentially interested parties and periodically to brief the board of directors on the status of the strategic exploration process.

On March 21, 2017, the Inotek board of directors held a meeting. Members of management and representatives of Perella Weinberg and Goodwin were present. Management provided an update on the MATrX-1 trial findings and on the timing of the Phase 2 fixed-dose combination trial of trabodenoson. Management reported that a data readout was expected in July 2017, that the last subject had been screened, that the target was to randomize the last patient in April 2017, and that the total enrollment target was 200 patients. Management also provided an update on Inotek’s financial position and 2017 financial forecasts. Representatives of Perella Weinberg provided an update on the strategic process, including the parties contacted and discussion held to date. The Inotek board of directors discussed potential strategic alternatives for Inotek. The Inotek board of directors and management again discussed the advantages and disadvantages of various alternatives and the potential value to stockholders of liquidating Inotek. Following this discussion, the board of directors directed management and its advisors to continue the strategic process.

 

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During the period between January through May 2017, members of management and representatives of Perella Weinberg had preliminary discussions with several companies that executed confidentiality agreements with Inotek, but none of these discussions resulted in any specific proposals.

On May 12, 2017, as a result the strategic process outreach, Inotek and a privately held biopharmaceutical company, which we refer to as Company A, entered into a mutual confidentiality agreement, which did not contain a standstill provision. Subsequently, members of Inotek management and representatives of Perella Weinberg met or held conference calls with representatives of Company A in order to gain an understanding of Company A’s corporate structure and background, drug candidate pipelines, clinical and regulatory status, market opportunities and competitive landscape, strength of intellectual property portfolio, timelines, and capital requirements.

On June 20, 2017, the Inotek board of directors held a meeting. Members of management and representatives of Goodwin were present. Management provided a progress report on MATrX-1 and the timing of the Phase 2 fixed-dose combination trial of trabodenoson, including the anticipated timing for data availability in July 2017. The Inotek board of directors discussed various strategic alternatives depending on the data readout and taking into consideration the ongoing strategic process. Management also provided an update on Inotek’s financial position and 2017 financial forecasts.

On June 27, 2017, Mr. Southwell met with the chief executive officer of Company A to discuss their respective interest in a potential reverse merger transaction between Inotek and Company A.

On July 3, 2017, the Inotek board of directors held a meeting. Members of management and representatives of Perella Weinberg and Goodwin were present. Management provided a report on the preliminary, ongoing analysis of data for the Phase 2 fixed-dose combination trial of trabodenoson, including the failure of the trial to meet its primary efficacy endpoint. Mr. Southwell and representatives of Perella Weinberg provided an update on the strategic process and the discussions to date with interested parties and their perceived level of interest. The Inotek board of directors discussed the risks, challenges, and strategic opportunities facing Inotek taking into consideration the results of the trabodenoson fixed-dose combination trial and near-term cash requirements. The Inotek board of directors directed management to publicly announce that Inotek would be exploring strategic alternatives in conjunction with the public announcement of the trabodenoson fixed-dose combination trial results. Also at the meeting, Mr. Boess was appointed to the Transaction Committee and Mr. Carroll was appointed chairman of the Transaction Committee.

On July 7, 2017, Inotek publicly announced that its Phase 2 fixed dose combination trial with trabodenoson failed to meet its primary efficacy endpoint and that Inotek would explore strategic alternatives with the assistance of Perella Weinberg.

On July 10, 2017, the Transaction Committee held a meeting. Members of management and representatives of Perella Weinberg and Goodwin were present. Mr. Southwell and representatives of Perella Weinberg provided an update on the strategic process, including regarding unsolicited correspondences from potentially interested parties received in light of Inotek’s recent public announcement. Mr. Southwell and representatives of Perella Weinberg also provided an update regarding the recent discussion with Company A. The Inotek board of directors directed management and its advisors to continue discussions with Company A and to have discussions with any other potentially interested parties.

On July 12, 2017, the chief executive of Company A sent to Mr. Southwell a non-binding term sheet indicating that Company A would be interested in a reverse merger transaction with Inotek. The term sheet provided that following the merger, the stockholders of Inotek would hold approximately 49% of the combined company, on a fully diluted basis, and current Company A stockholders will own approximately 51% of the combined company, on a fully diluted basis, provided that if Inotek had less than $50 million of net cash at

 

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closing, the Inotek ownership percentage would be reduced by the amount which the Inotek net cash amount is less than $50 million. The proposal also included a condition to closing that Inotek’s net cash amount be at least $50 million. The proposal required that in connection with execution of a merger agreement, Inotek would provide a $5 million loan to Company A. The proposal also contemplated a termination fee of $5 million payable by Inotek for termination of the merger agreement under certain circumstances. The proposal also contemplated that the board of directors of the combined company would consist of nine individuals, with specific designees to be identified in the definitive merger agreement.

Following receipt of the proposed term sheet, representatives of Inotek engaged in discussions with representatives of Company A regarding the material terms of the proposal, and representatives of Inotek indicated that they expected that the minimum net cash closing condition and requirement for a $5 million loan would not be viewed favorably by the Inotek board of directors. During this time, Inotek and Company A, and their representatives, also engaged in further mutual due diligence.

On July 19, 2017, Inotek entered into a mutual confidentiality agreement that did not contain a standstill provision with a publicly listed U.K. biopharmaceutical company, which we refer to as Company B, that had contacted representatives of Perella Weinberg in light of Inotek’s July 7, 2017 public announcement. Subsequently, members of Inotek management and representatives of Perella Weinberg met or held conference calls with representatives of Company B in order to gain an understanding of Company B’s corporate structure and background, drug candidate pipelines, clinical and regulatory status, market opportunities and competitive landscape, strength of intellectual property portfolio, timelines, and capital requirements. In February 2017, as part of Inotek’s marketing efforts described above, Inotek had contact with Company B, but the parties did not enter into a confidentiality agreement or have any substantive discussions at that time.

On July 24, 2017, the vice president of business development of Inotek met with representatives of Rocket at an industry function in New York City, and arranged to meet again at Rocket’s offices later that week, and informed Mr. Southwell of the meeting. Later on July 24, 2017, the Transaction Committee held a meeting. Members of management and representatives of Perella Weinberg and Goodwin were present. Management and representatives of Perella Weinberg provided an update on the developments related to the strategic process since the previous Transaction Committee meeting, including that management, with the assistance of Perella Weinberg, had narrowed its evaluation efforts to scientific, clinical and business diligence efforts with respect to the three parties presenting a potentially realistic chance of producing the greatest value for Inotek stockholders. These parties were Company A, Company B and Rocket. The Inotek board of directors directed management and its advisors to continue further in-depth financial, business and scientific due diligence and evaluation of these three parties.

Following this meeting, members of Inotek management and representatives of Perella Weinberg participated in follow-up mutual diligence sessions with each of Company A, Company B and Rocket and their respective advisors.

On July 26, 2017, Inotek and Rocket entered into mutual confidentiality agreement, which did not contain a standstill provision.

Between July 26, 2017 and August 23, 2017, members of Inotek management and representatives of Perella Weinberg had discussions with Rocket and its representatives regarding proposed terms for a potential reverse merger transaction between Inotek and Rocket. During these discussions, representatives of Rocket indicated to representatives of Inotek that Rocket was interested in pursuing a reverse merger transaction with Inotek in which Inotek stockholders would receive a 17% ownership interest in the combined company, on a fully diluted basis, following the reverse merger.

During the week of July 31, 2017, Mr. Southwell had meetings with representatives of Company B in England and generally discussed the status of Inotek’s diligence review of Company B and the discussions

 

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between the parties and their respective representatives. During these discussions, representatives of Company B indicated to representatives of Inotek that Company B was interested in pursuing a business combination transaction with Inotek where the Inotek stockholders would receive a 40% ownership interest, on a fully diluted basis, in the combined company following the closing. The discussion did not otherwise result in any specific proposals.

On August 4, 2017, the Transaction Committee held a meeting. Members of management and representatives of Perella Weinberg and Goodwin were present. Mr. Southwell and representatives of Perella Weinberg provided an update on the discussions with Company A, Company B and Rocket and the diligence efforts of those companies and Inotek since the last Transaction Committee meeting and the perceived levels of interest of those companies. The Transaction Committee believed that while the level of ownership for Inotek stockholders being proposed by each of the three companies could be in a range that would provide substantial value to Inotek’s stockholders, the Transaction Committee discussed how best to further enhance stockholder value through the strategic process with Rocket, Company A and Company B and other potential strategic alternatives involving Inotek. Following these discussions, the Transaction Committee directed management and its advisors to continue discussions with each of the three companies and complete diligence and seek improved terms from each of the three companies. Specifically, the Transaction Committee was concerned with certain proposed transaction terms, transaction execution risk and due diligence matters associated with Company A, and due diligence matters associated with Company B’s studies which required further consultation with independent experts. Following the meeting, Inotek management and its advisors proceeded to address these and other issues.

On August 9, 2017, the Transaction Committee held a meeting. Members of management and representatives of Perella Weinberg and Goodwin were present. Mr. Southwell and representatives of Perella Weinberg provided an update on the discussions with Company A, Company B and Rocket and their perceived levels of interest in a transaction with Inotek. Management also discussed the results of their due diligence review of each of the three companies. The Inotek board of directors and management reviewed the possibility of a business combination with each of the companies, including strategic fit, long term growth platform, short and long term financial benefits, cultural fit and views of the strengths of the various companies, and other factors affecting whether to continue to include each company in the strategic process. Mr. Southwell reported that Company A had withdrawn its requirement for a $5 million loan in connection with its proposed reverse merger transaction. Following discussion, the Transaction Committee directed management and its advisors to propose terms for a reverse merger with Company A that included a 49% ownership interest, on a fully diluted basis, in the combined company for Inotek stockholders, a reciprocal $2.5 million termination fee and equal representation for Inotek and Company A on the board of directors of the combined company. Management also reported that its further diligence review of Company B resulted in certain heightened due diligence concerns, which impacted the expected valuation of Company B. Following discussion the Transaction Committee concluded that a transaction with Company B was not likely to be in the best interest of Inotek and its stockholders, and directed management to terminate discussions with Company B. Management also provided an update on discussions with Rocket and that Rocket was proposing a 17% fully diluted ownership interest for the Inotek stockholders in a combined company. The Transaction Committee directed management and its advisors to continue discussions with Rocket and seek improved proposed terms.

On August 13, 2017, Inotek provided a draft merger agreement to Company A. The draft merger agreement incorporated the terms discussed by the Inotek Transaction Committee at its August 9, 2017 meeting.

On August 15, 2017, as directed by the Transaction Committee, Inotek terminated strategic transaction discussions with Company B.

On August 17, 2017, representatives of Goodwin and representatives of Company A’s outside legal counsel discussed key points of the merger agreement. On August 20, 2017, Company A’s outside counsel provided a revised draft of the merger agreement which included a minimum net cash closing condition, among other revisions in favor of Company A.

 

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On August 18, 2017, Mr. Southwell and Gaurav Shah, MD, chief executive officer of Rocket, had an in-person meeting to discuss the respective interests of Inotek and Rocket in a potential reverse merger transaction. During the meeting, Dr. Shah indicated that in order for the parties to continue discussions, Inotek should present a term sheet for a reverse merger for Rocket’s consideration and that Rocket would require the execution of an exclusivity agreement. Dr. Shah and Mr. Southwell agreed in principle to a percentage ownership of Inotek that was based primarily on the net cash delivered by Inotek at closing. The parties also agreed that Inotek would send Rocket a proposed term sheet for Rocket’s consideration.

On August 21, 2017, the Inotek board of directors held a meeting. Members of management and representatives of Perella Weinberg and Goodwin were present. Mr. Southwell and representatives of Perella Weinberg provided an update on the discussions with each of Company A, Company B and Rocket since the last board of directors meeting. Mr. Southwell reported that there were concerns about Company A’s near term capital requirements and that Company A could have a clinical hold resulting in a seven to 12 month delay and that it was also believed that Company A was having concurrent discussions regarding a potential sale of Company A to a large publicly traded biopharmaceutical company and/or a capital financing transaction. Mr. Southwell and representatives of Perella Weinberg reported that Rocket had increased the proposed ownership percentage for Inotek stockholders, on a fully diluted basis, in the combined company from 17% to 19% based on Inotek’s expected cash at closing, and their view was that this was the maximum ownership level for Inotek stockholders that Rocket would be willing to agree to in the reverse merger.

After considering the information made available to them throughout the strategic process, the Inotek board of directors identified Rocket as the prospective strategic partner which represented the greatest potential value for Inotek and its stockholders, taking all of the previously identified criteria into account. The Inotek board of directors also discussed that it was only willing to agree to an exclusivity period with Rocket because the board of directors was reasonably satisfied with the results of the outreach to other potential strategic acquirers. Following discussion, the Inotek board of directors directed management and its advisors to continue discussions with Rocket and to expeditiously reach agreement on the terms of a proposed transaction with Rocket for the Board’s consideration, subject to the input provided at this meeting, and to enter into exclusivity with Rocket.

On August 21, 2017, as directed by the Inotek board of directors, Inotek management provided Rocket a proposed non-binding term sheet and from August 21, 2017 through August 23, 2017, Inotek and Rocket, together with their respective advisors, engaged in negotiations regarding the non-binding term sheet and continued their mutual due diligence.

On August 22, 2017, Mr. Southwell had a conversation with Roderick Wong, MD, the chairman of the Rocket board of directors, and generally discussed the status of discussions between the parties and their respective representatives. Mr. Southwell and Dr. Wong also discussed the the composition of the board of directors of the potential combined company, and agreed to consider including Mr. Southwell and Mr. Boess from Inotek’s board. Mr. Boess was proposed as the chair of the audit committee of the potential combined company. The conversation did not result in any additional proposals.

On August 23, 2017, Inotek and Rocket entered into a non-binding term sheet that contemplated, among other things, that following a transaction with Rocket the stockholders of Inotek would hold, on a fully diluted basis, approximately 19% of the combined company and current Rocket shareholders would hold, on a fully diluted basis, approximately 81% of the combined company if Inotek has a valuation of at least $47 million, which was based on a projected net cash balance (or cash and cash equivalents minus outstanding liabilities) at the closing of $42 million, plus an additional $5 million of enterprise value. Under the term sheet, Rocket had a stipulated valuation of $200 million which was not subject to any adjustments. The term sheet contemplated that ten days prior to the closing, Inotek’s estimated net cash at closing will be mutually agreed upon and the final exchange ratio will be calculated based on the relative values of the parties as described in the merger agreement. The term sheet also contemplated that if Inotek’s net cash at closing is within a range of $40.5 million to $43.5 million, no adjustment will be made to the foregoing split. The term sheet contemplated that the board of directors of the combined company would consist of five individuals, with one such member to be designated by

 

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Inotek and a reciprocal termination fee equal to $2 million. The term sheet also provided for a mutual exclusivity period for an initial 14 day period, which would renew for additional seven day periods as long as the parties continued to negotiate in good faith. Following execution of the term sheet, Inotek ceased discussions with all parties other than Rocket (including Company A).

On August 30, 2017, Goodwin provided a draft of the merger agreement to Rocket’s legal counsel, Gibson, Dunn & Crutcher LLP, which we refer to as Gibson. The draft merger agreement contemplated the terms agreed to in the August 23, 2017 term sheet between Inotek and Rocket.

On September 5, 2017, Gibson provided a revised draft of the merger agreement to Goodwin. From September 5, 2017 through the announcement of the execution of the merger agreement on September 12, 2017, representatives of Perella Weinberg and Goodwin, and Rocket and Gibson, had various telephonic discussions to finalize the merger agreement and related agreements.

On September 12, 2107, the Inotek board of directors held a meeting to discuss the terms of the proposed transaction with Rocket. Members of management and representatives of Perella Weinberg and Goodwin were present. Representatives of Goodwin reviewed the draft merger agreement and provided an update on the proposed terms and conditions. Representatives of Goodwin reviewed the fiduciary duties of the Inotek board of directors with respect to the proposed merger with Rocket. Representatives of Goodwin provided an overview of the negotiation process to date with Rocket’s representatives, as well as a presentation regarding the terms of the draft merger agreement, the draft voting agreement and draft lock-up agreement. The Inotek board of directors also discussed that to date, Rocket had not had, and had not requested to have, discussions with Inotek management or directors regarding their roles, compensation, retention or investment arrangements in connection with the proposed transaction, other than Mr. Southwell’s and Mr. Boess’ positions as directors of the combined company following the merger that is described in the section entitled “Interests of Inotek’s Directors and Executive Officers in the Merger” beginning on page 63 of this proxy statement. Representatives of Perella Weinberg reviewed certain financial matters concerning Rocket and the proposed merger. The representatives of Perella Weinberg then delivered to the Inotek board of directors an oral opinion, which was confirmed by the delivery of a written opinion dated September 12, 2017, that, as of that date, and based upon the assumptions made, procedures followed, matters considered, and qualifications and limitations set forth in its written opinion, the exchange ratio, as provided in the merger agreement, was fair, from a financial point of view, to Inotek. The Inotek board of directors also considered that representatives of Perella Weinberg informed the Inotek board of directors that Perella Weinberg had not provided any investment banking services to Rocket for which Perella Weinberg received compensation from Rocket in the last two years. In addition, during such two-year period, none of Perella Weinberg and its corporate advisory affiliates owned any equity or debt interests in Rocket. After further discussing the advantages and risks of the proposed transaction that are described in the section entitled “Inotek’s Reasons for the Merger; Recommendations of the Inotek Board of Directors,” and based on the discussions and deliberations at the Inotek board of directors meetings and after receiving Inotek’s management’s favorable recommendation of the merger, the Inotek board of directors unanimously determined that the merger agreement and the transactions contemplated by the merger agreement were fair to, and in the best interests of, Inotek and its stockholders, approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement, authorized management to execute the merger agreement on behalf of Inotek, resolved to recommend that Inotek stockholders vote to approve the issuance of the shares of Inotek common stock in connection with the merger.

Later on September 12, 2017, the parties finalized and executed the merger agreement, the voting agreements and the lock-up agreements, and issued a joint press release publicly announcing their entry into the merger agreement.

Inotek’s Reasons for the Merger; Recommendations of the Inotek Board of Directors

In the course of its evaluation of the merger and the merger agreement, the Inotek board of directors held numerous meetings, consulted with its management, legal counsel and its financial advisor and reviewed a

 

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significant amount of information and, in reaching its decision to approve the merger and the merger agreement, the Inotek board of directors considered a number of factors, including, among others, the following factors:

 

    information concerning Inotek’s business, financial performance (both past and prospective) and its financial condition, results of operation (both past and prospective), business and strategic objectives, as well as the risks of accomplishing those objectives;

 

    Inotek’s business and financial prospects if it were to remain an independent company and the Inotek board of directors’ determination that Inotek could not continue to operate as an independent company and needed to enter into an agreement with a strategic partner;

 

    the possible alternatives to the merger, the range of possible benefits and risks to the Inotek stockholders of those alternatives and the timing and the likelihood of accomplishing the goal of any of such alternatives and Inotek board of directors’ assessment that the merger presented a superior opportunity to such alternatives for Inotek stockholders;

 

    the Inotek board of directors’ view of the valuation of the potential merger candidates. In particular, taking into account the advice of Perella Weinberg, the board of directors’ view that Rocket was the most attractive candidate because of its clinical and preclinical gene therapy programs. After considering the financial advice it had received from Perella Weinberg, the Inotek board of directors believed that the merger would create a publicly traded gene therapy company that would create more value for Inotek’s stockholders than any of the other proposals that the Inotek board of directors had received;

 

    the ability of Inotek’s stockholders to participate in the future growth potential of the combined company following the merger;

 

    the results of discussions with third parties relating to a possible business combination or similar transaction with Inotek;

 

    the process undertaken by the Inotek board of directors in connection with pursuing a strategic transaction and the terms and conditions of the proposed merger, in each case in light of the current market dynamics;

 

    current financial market conditions and historical market prices, volatility and trading information with respect to Inotek’s common stock;

 

    the potential for obtaining a superior offer from an alternative purchaser in light of the other potential strategic buyers previously identified and contacted by or on behalf of Inotek and the risk of losing the proposed transaction with Rocket;

 

    the terms of the merger agreement, including the parties’ representations, warranties and covenants, the conditions to their respective obligations and the termination rights of the parties;

 

    The financial analysis presented by Perella Weinberg to the Inotek board of directors on September 12, 2017 and Perella Weinberg’s opinion, dated September 12, 2017, to the Inotek board of directors that, as of the date of the opinion and based upon its analysis and subject to the assumptions made, matters considered, qualifications and limitations set forth therein, the exchange ratio, as provided in the merger agreement, was fair to Inotek from a financial point of view (as more fully described in the section entitled “The Merger—Opinion of Inotek’s Financial Advisor” beginning on page 55);

 

    the likelihood that the merger would be consummated; and

 

    the merger agreement, subject to the limitations and requirements contained in the merger agreement, provides the Inotek board of directors with flexibility to furnish information to and conduct negotiations with third parties in certain circumstances and, upon payment to Rocket of a termination fee of $2 million (which the Inotek board of directors believes is reasonable under the circumstances) to terminate the merger agreement, to accept a superior proposal.

 

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In the course of its deliberations, the Inotek board of directors also considered, among other things, the following negative factors:

 

    the possibility that the merger will not be consummated and the potential negative effect of the public announcement of the merger on Inotek’s business and stock price;

 

    the challenges inherent in the combination of the two divergent businesses of the size and scope of Inotek and Rocket;

 

    certain provisions of the merger agreement that could have the effect of discouraging proposals for competing proposals involving Inotek, including the restrictions on Inotek’ ability to solicit proposals for competing transactions involving Inotek and that under certain circumstances Inotek may be required to pay to Rocket termination fee of $2 million;

 

    the substantial fees and expenses associated with completing the merger; and

 

    the risk that the merger may not be completed despite the parties’ efforts or that the closing may be unduly delayed and the effects on Inotek as a standalone company because of such failure or delay, and that a more limited range of alternative strategic transactions may be available to Inotek in such an event.

Although this discussion of the information and factors considered by the Inotek board of directors is believed to include the material factors considered by the Inotek board of directors, it is not intended to be exhaustive. In light of the variety of factors considered in connection with their evaluation of the merger and the complexity of these matters, the Inotek board of directors did not find it practicable to and did not quantify or attempt to assign any relative or specific weights to the various factors that it considered in reaching its determination that the merger and the merger agreement are advisable and in best interests of Inotek and its stockholders. In addition, the Inotek board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Inotek board of directors, but rather the Inotek board of directors conducted an overall analysis of the factors described above, including discussions with and questioning of Inotek management, Goodwin and Perella Weinberg.

Recommendation of the Inotek Board of Directors

After careful consideration, the Inotek board of directors approved the merger agreement and the merger and determined that the merger agreement and the merger are advisable, and in the best interests of, the stockholders of Inotek. Therefore, the Inotek board of directors recommends Inotek stockholders vote “FOR” the issuance of the shares of Inotek common stock in the merger and the other Inotek proposals set forth in this proxy statement.

In considering the recommendation of the Inotek board of directors with respect to the issuance of shares of Inotek common stock in the merger, you should be aware that the directors and executive officers of Inotek may have interests in the merger that are different from, or are in addition to, the interests of Inotek stockholders. Please see “The Merger—Interests of Inotek’s Executive Officers and Directors in the Merger.”

INOTEK’S BOARD OF DIRECTORS UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER ARE ADVISABLE, FAIR AND IN THE BEST INTERESTS OF INOTEK’S STOCKHOLDERS AND UNANIMOUSLY APPROVED THE MERGER AGREEMENT. INOTEK’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT INOTEK’S STOCKHOLDERS APPROVE THE ISSUANCE OF INOTEK’S COMMON STOCK PURSUANT TO THE MERGER AGREEMENT AND THE REVERSE STOCK SPLIT.

 

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Opinion of Inotek’s Financial Advisor

Inotek retained Perella Weinberg to act as its financial advisor in connection with the merger. Inotek selected Perella Weinberg based on Perella Weinberg’s qualifications, expertise and reputation and its knowledge of the business and affairs of Inotek and the industry in which Inotek conducts its businesses. Perella Weinberg, as part of its investment banking business, is continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, leveraged buyouts and other transactions as well as for corporate and other purposes.

On September 12, 2017, Perella Weinberg rendered its oral opinion, subsequently confirmed in writing, to the board of directors of Inotek that, as of such date and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the exchange ratio provided for in the merger agreement was fair, from a financial point of view, to Inotek. In providing its opinion, Perella Weinberg noted that the exchange ratio is intended to result in holders of Rocket ordinary shares and Inotek common stock immediately prior to the effective time of the merger holding, on a fully diluted basis, approximately 81% and 19% of the outstanding Inotek common stock, respectively, on a pro forma basis immediately following the effective time of the merger and that the exchange ratio and, accordingly, such percentages are subject to adjustment based upon Inotek’s net cash as of the closing of the merger.

The full text of Perella Weinberg’s written opinion, dated September 12, 2017, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Perella Weinberg in connection with such opinion, is attached hereto as Annex C and is incorporated by reference herein. Perella Weinberg’s opinion does not address Inotek’s underlying business decision to enter into the merger or the relative merits of the merger as compared with any other strategic alternative which may have been available to Inotek. Perella Weinberg’s opinion was not intended to be and does not constitute a recommendation to any holder of Inotek’s common stock as to how such holder should vote or otherwise act with respect to the merger or any other matter. Perella Weinberg’s opinion does not in any manner address the price at which Inotek’s common stock will trade at any time. In addition, Perella Weinberg expressed no opinion as to the fairness of the merger to the holders of any class of securities, creditors or other constituencies of Inotek. Perella Weinberg provided its opinion for the information and assistance of the board of directors of Inotek in connection with, and for the purposes of its evaluation of, the merger. This summary is qualified in its entirety by reference to the full text of the opinion.

In arriving at its opinion, Perella Weinberg, among other things:

 

    reviewed certain publicly available financial statements and other business and financial information with respect to Rocket and Inotek, including research analyst reports for Inotek;

 

    reviewed certain internal information, primarily related to expense forecasts, furnished to Perella Weinberg by the managements of Inotek and Rocket, respectively, and approved for Perella Weinberg’s use by Inotek. See the section entitled Certain Prospective Financial Information of Inotek beginning on page 62 of this proxy statement for a more complete description of Inotek’s net cash projections;

 

    discussed the past and current business, operations, financial condition and prospects of Inotek with senior executives of Inotek;

 

    discussed the past and current business, operations, financial condition and prospects of Rocket with senior executives of Inotek and Rocket;

 

    reviewed publicly available market capitalization data regarding companies in the biopharmaceutical industry that Perella Weinberg believed to be comparable in certain respects to Rocket;

 

    reviewed the publicly available financial terms of certain initial public offerings and business combination transactions involving companies in the biopharmaceutical industry that Perella Weinberg believed to be comparable in certain respects to Rocket;

 

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    reviewed the historical trading prices and trading activity for Inotek common stock;

 

    participated in discussions among representatives of Rocket and Inotek and their respective advisors;

 

    reviewed a draft, dated September 10, 2017, of the merger agreement (which we refer to as the Draft Agreement); and

 

    conducted such other financial studies, analyses and investigations, and considered such other factors, as Perella Weinberg deemed appropriate.

In arriving at its opinion, Perella Weinberg assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information supplied or otherwise made available to it (including information that is available from generally recognized public sources) for purposes of its opinion and further relied upon the assurances of the management of Inotek that such information did not contain any material omissions or misstatements of material fact. With respect to information provided to Perella Weinberg by Inotek and Rocket, Perella Weinberg was advised by the management of Inotek and Rocket, respectively, and assumed, with the consent of the board of directors of Inotek, that such information had been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of Inotek and Rocket, as applicable, and Perella Weinberg expressed no view as to the assumptions on which such information was based.

In arriving at its opinion, Perella Weinberg did not make any independent valuation or appraisal of the assets or liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of Inotek, Rocket or any of their respective subsidiaries, nor was it furnished with any such valuations or appraisals nor did it assume any obligation to conduct, nor did it conduct, any physical inspection of the properties or facilities of Inotek, Rocket or any of their respective subsidiaries. In addition, Perella Weinberg did not evaluate the solvency of any party to the merger agreement (or the impact of the merger thereon) under any applicable laws relating to bankruptcy, insolvency or similar matters. Perella Weinberg assumed that the final executed merger agreement would not differ from the Draft Agreement reviewed by it in any respect material to its analysis, and that the merger would be consummated on the terms set forth in the merger agreement, without any modification, waiver or delay that would be material to its analysis. In addition, Perella Weinberg assumed that in connection with the receipt of all the necessary approvals of the merger, no delays, limitations, conditions or restrictions would be imposed that could have an adverse effect on Rocket, Inotek or the contemplated benefits of the merger. Perella Weinberg also assumed that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. Perella Weinberg relied as to all legal matters relevant to rendering its opinion upon the advice of counsel.

Perella Weinberg’s opinion addressed only the fairness from a financial point of view, as of the date thereof, to Inotek of the exchange ratio provided for in the merger agreement. Perella Weinberg was not asked to, nor did it, offer any opinion as to any other term of the merger agreement or any other related document or the form or structure of the merger or the likely timeframe in which the merger will be consummated. Perella Weinberg expressed no view or opinion as to any such matters. In addition, Perella Weinberg expressed no opinion as to the fairness of the amount or nature of any compensation to be received by any officers, directors or employees of any parties to the merger, or any class of such persons, whether relative to the exchange ratio provided for in the merger agreement or otherwise. Perella Weinberg did not express any opinion as to any tax or other consequences that may result from the merger or any related document, nor did its opinion address any legal, tax, regulatory or accounting matters, as to which it understood Inotek to have received such advice as it deemed necessary from qualified professionals.

Perella Weinberg’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of, the date of its opinion. It should be understood that subsequent developments may affect Perella Weinberg’s opinion and the assumptions used in preparing it, and Perella Weinberg does not have any obligation to update, revise, or reaffirm its opinion. The issuance of Perella Weinberg’s opinion was approved by a fairness opinion committee of Perella Weinberg.

 

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Summary of Material Financial Analyses

The following is a summary of the material financial analyses performed by Perella Weinberg and reviewed with the board of directors of Inotek in connection with Perella Weinberg’s opinion and does not purport to be a complete description of the financial analyses performed by Perella Weinberg. The order of analyses described below does not represent the relative importance or weight given to those analyses by Perella Weinberg.

Some of the summaries of the financial analyses include information presented in tabular format. In order to fully understand Perella Weinberg’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Perella Weinberg’s financial analyses.

In preparing its analysis, Perella Weinberg took into account that the exchange ratio contained in the merger agreement is calculated by attributing values of $47,000,000 and $200,000,000 to Inotek and Rocket, respectively, subject to an adjustment based upon Inotek’s net cash as of the closing of the merger.

As the board of directors of Inotek was aware, Rocket’s management did not provide Perella Weinberg with, and Perella Weinberg did not otherwise have access to, financial forecasts regarding Rocket’s business, other than certain expense forecasts, and, accordingly, Perella Weinberg did not perform either a discounted cash flow analysis or any multiples-based analyses with respect to Rocket.

Market Valuation Analysis—Inotek

Perella Weinberg reviewed the historical trading price per share of Inotek common stock for the 180-days ended September 11, 2017, the last trading day prior to the day on which Inotek and Rocket publicly announced the merger.

Using publicly available information, Perella Weinberg reviewed the closing price per share of Inotek Common Stock on September 11, 2017 and the volume weighted average trading price (which we refer to as VWAP) for the Inotek common stock during each of the preceding 30-day, 60-day, 90-day and 180-day periods and calculated Inotek’s market capitalization relative to its net cash position, as of June 30, 2017, of approximately $57 million. The results of the analysis were as follows:

 

     Share
Price
     Premium
(Discount) to
Current
Share Price
as of
September 11,
2017
    Approximate
Market
Capitalization
Based on
Share Price

(in millions)
 

Closing Price on September 11, 2017

   $ 1.02        —       $ 29  

VWAP for 30-days ended September 11, 2017

   $ 0.99        (3.1 )%    $ 28  

VWAP for 60-days ended September 11, 2017

   $ 1.19        16.6   $ 34  

VWAP for 90-days ended September 11, 2017

   $ 1.31        28.2   $ 37  

VWAP for 180-days ended September 11, 2017

   $ 1.65        61.4   $ 47  

Perella Weinberg noted that Inotek had a net cash position of $57M as of June 30, 2017 and that Inotek anticipates delivering $42M of Inotek’s net cash at closing of the merger. Perella Weinberg noted that the stipulated valuation for Inotek in the merger provided for in the merger agreement was $47 million based on an estimated $42M of Inotek’s net cash to be delivered at the closing of the merger plus an agreed $5M of enterprise value, subject to adjustment for Inotek’s net cash at the closing of the merger. Perella Weinberg further noted that

 

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the $47 million value attributed to Inotek’s common stock pursuant to the exchange ratio formula in the merger agreement (assuming $42 million of Inotek’s net cash at the closing of the merger) was higher than Inotek’s market capitalization as of September 11, 2017.

Selected IPO Analysis—Rocket

Perella Weinberg reviewed publicly available information relating to the following initial public offerings for gene therapy companies in the biopharmaceutical industry which raised in excess of $50 million of gross proceeds since January 1, 2013, which we refer to as the Selected IPOs.

 

Pricing Date

  

Issuer

  

Indication

  

Development Stage

   Pre-money
Valuation
(in millions)
 

July 19, 2016

   Audentes Therapeutics, Inc.    Pompe disease    Pre-clinical(1)    $ 240  

February 10, 2016

   AveXis, Inc.    SMA Type 1    Phase I    $ 353  

November 10, 2015

   Voyager Therapeutics, Inc.    Advanced Parkinson’s Disease    Phase I    $ 294  

October 21, 2015

   Dimension Therapeutics, Inc.    Hemophilia B    Phase III    $ 252  

September 16, 2015

   REGENXBIO Inc.    Homozygous Familial Hypercholesterolemia    Phase I/II    $ 419  

January 29, 2015

   Spark Therapeutics, Inc.    Biallelic RPE65-mediated IRD    Phase III    $ 379  

July 30, 2014

   Avalanche Biotechnologies, Inc.    Wet AMD    Phase I/II    $ 261  

March 26, 2014

   Applied Genetic Technologies Corporation    X-linked Retinoschisis    Phase I/II    $ 111  

February 4, 2014

   uniQure N.V.    Lipoprotein lipase deficiency    Phase III(2)    $ 207  

January 29, 2014

   Celladon Corporation    Congestive heart failure    Phase II    $ 97  

June 18, 2013

   bluebird bio, Inc.   

Transfusion-Dependent

ß-thalassemia

   Phase II/III(3)    $ 287  

 

(1) Audentes disclosed that it intended to file IND in third quarter of 2016 per IPO prospectus.
(2) Glybera received EU approval in 2012. Phase III Development Stage refers to FDA status.
(3) Disclosed that it was entering Phase III in the second half of 2013.

Perella Weinberg noted that although such companies had certain financial and operating characteristics that could be considered similar to those of Rocket, none of the companies had the same management make-up, technology, size or mix of business as Rocket and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of Rocket. Perella Weinberg also noted that market conditions have varied over the precedent time periods.

Perella Weinberg calculated the pre-money valuation of each of the companies that participated in the Selected IPOs at the time of pricing of its initial public offering, and compared these pre-money valuations to the $200 million value attributed to the Rocket Shares pursuant to the exchange ratio formula in the merger agreement.

 

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The results of this analysis are summarized as follows:

 

     Pre-money
Valuation

(in millions)
 

Low

   $ 97  

Mean

   $ 264  

Median

   $ 261  

High

   $ 419  

Selected Public Company Market Valuation Analysis—Rocket

Perella Weinberg reviewed publicly available information relating to the market capitalization of the following publicly-traded early-stage gene therapy biopharmaceutical companies, which we refer to as the Selected Companies:

 

Issuer

   Lead Indication    Development Stage   Market
Capitalization

(in millions)
 

Abeona Therapeutics Inc.

   Sanfilippo Syndrome
Type A
   Phase I/II   $ 606  

Adverum Biotechnologies, Inc.

   Alpha-I Antitrysin
Deficiency
   Pre-clinical(1)   $ 190  

Applied Genetic Technologies Corporation

   X-Linked Retinoschisis    Phase I/II(2)   $ 85  

Audentes Therapeutics, Inc.

   X-Linked Myotublar
Myopathy
   Phase I/II   $ 731  

REGENXBIO Inc.

   Wet AMD    Phase I/II   $ 988  

Voyager Therapeutics, Inc.

   Advanced Parkinson’s
Disease
   Phase I   $ 424  

 

(1) Adverum has disclosed that it plans to initiate patient enrollment in a Phase I/II trial in Q4 2017.
(2) On June 8, 2017, AGTC announced topline safety data for X-Linked Retinoschisis Phase I/II Study; it disclosed that the product candidate was generally well tolerated and demonstrated good safety profile.

Perella Weinberg noted that although such companies had certain financial and operating characteristics that could be considered similar to those of Rocket, none of the companies had the same management, make-up, technology, size or mix of business as Rocket and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of Rocket.

Perella Weinberg calculated the aggregate market capitalization of each of the Selected Companies based upon the closing price of the common stock of each Selected Company on September 11, 2017 and the fully-diluted number of shares outstanding, using the treasury stock method, and compared these pre-money valuations to the $200 million value attributed to the Rocket Shares pursuant to the exchange ratio formula in the merger agreement.

The results of this analysis are summarized as follows:

 

     Market
Capitalization

(in millions)
 

Low

   $ 85  

Mean

   $ 504  

Median

   $ 515  

High

   $ 988  

 

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Selected Merger and Acquisition Transaction Analysis—Rocket

Using publicly available information, Perella Weinberg reviewed the terms of the following acquisitions since January 1, 2015 of early-stage companies in the biopharmaceutical industry with no product candidates beyond Phase 2 at the time of announcement of the transaction, which we refer to as the Selected Transactions:

 

Announcement Date

   Acquiror    Target    Total
Transaction
Value

(in millions)
     Upfront
Consideration
(in millions)
    Milestone/
CVR

(in millions)
 

May 23, 2017

   Bioverativ Inc.    True North
Therapeutics
   $ 825      $ 400     $ 425  

January 26, 2017

   Celgene Corporation    Delinia, Inc.    $ 775      $ 300     $ 475  

September 30, 2016

   Celgene Corporation    EngMab AG    $ 600      $ 600     $ 0  

August 1, 2016

   Pfizer Inc.    Bamboo
Therapeutics, Inc.
   $ 688      $ 193   $ 495  

February 1, 2016

   Avalanche
Biotechnologies, Inc.
   Annapurna
Therapeutics SAS
   $ 106      $ 106     $ 0  

November 9, 2015

   Astellas Pharma Inc.    Ocata Therapeutics,
Inc.
   $ 379      $ 379     $ 0  

October 9, 2015

   Roche Holding Ltd.    Adheron Therapeutics
Inc.
   $ 580      $ 105     $ 475  

July 28, 2015

   Merck & Co., Inc.    cCAM Biotherapeutics
Ltd.
   $ 605      $ 95     $ 510  

April 27, 2015

   Celgene Corporation    Quanticel
Pharmaceuticals, Inc.
   $ 485      $ 100     $ 385  

 

(1) Represents $43M upfront consideration paid for the 22% stake Pfizer acquired in Q1 2016 plus $150M upfront consideration for the remaining 78% equity acquired in Q3 2016.

Perella Weinberg noted that although the companies that were acquired in the Selected Transactions had certain financial and operating characteristics that could be considered similar to those of Rocket, none of the companies had the same management, make-up, technology, size or mix of business as Rocket and, accordingly, there were inherent limitations on the applicability of such companies to the valuation analysis of Rocket. Perella Weinberg also noted that market conditions have varied over the precedent time periods.

 

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Perella Weinberg calculated the aggregate value of each of the target companies in the Selected Transactions taking into account upfront transaction consideration and, if applicable, the maximum potential value of milestone payments or contingent value rights, and compared the upfront cash consideration paid in the Selected Transactions to the $200 million value attributed to the Rocket Shares pursuant to the exchange ratio formula in the merger agreement. For Selected Transactions which included non-cash consideration, Perella Weinberg based the value of such non-cash consideration on the implied value of the acquirer’s capital stock set forth in the transaction documents for such transactions. The results of this analysis are summarized as follows:

 

     Total
Transaction
Value

(in millions)
     Upfront
Consideration

(in millions)
     Milestone/
CVR

(in millions)
 

Low

   $ 106      $ 95      $ 385  

Mean

   $ 560      $ 253      $ 461  

Median

   $ 600      $ 193      $ 475  

High

   $ 825      $ 600      $ 510  

Miscellaneous

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth herein, without considering the analyses or the summary as a whole, could create an incomplete view of the processes underlying Perella Weinberg’s opinion. In arriving at its fairness determination, Perella Weinberg considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered. Rather, Perella Weinberg made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the analyses described herein as a comparison is directly comparable to Inotek, Rocket or the merger.

Perella Weinberg prepared the analyses described herein for purposes of providing its opinion to the board of directors of Inotek as to the fairness, from a financial point of view, as of the date of such opinion, of the exchange ratio provided for in the merger agreement to Inotek. These analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold.

As described above, the opinion of Perella Weinberg to the board of directors of Inotek was one of many factors taken into consideration by the board of directors of Inotek in making its determination to approve the merger. Perella Weinberg was not asked to, and did not, recommend the exchange ratio provided for in the merger agreement, which was determined through arms-length negotiations between Inotek and Rocket. Perella Weinberg did not recommend any specific amount for the exchange ratio or that any specific amount for the Exchange Ratio constituted the only appropriate exchange ratio for the merger.

Pursuant to the terms of the engagement letter between Perella Weinberg and Inotek, dated September 14, 2014, as amended by the letter agreement between Perella Weinberg and Inotek, dated September 11, 2017, Inotek agreed to pay Perella Weinberg a fee of $3 million, of which $1 million became payable upon the delivery of Perella Weinberg’s opinion (which amount would have become payable if Perella Weinberg had determined in good faith that it was not able to deliver its opinion), and the remainder of which will become payable upon the closing of the merger. In addition, Inotek agreed to reimburse Perella Weinberg for its reasonable out-of-pocket expenses, including attorneys’ fees and disbursements, and to indemnify Perella Weinberg and related persons for certain liabilities that may arise out of its engagement by Inotek and the rendering of its opinion.

In the ordinary course of its business activities, Perella Weinberg or its affiliates may at any time hold long or short positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers or clients, in debt or equity or other securities (or related derivative securities) or financial instruments (including bank loans or other obligations) of Inotek or any of its affiliates. During the two year period prior to

 

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the date of its opinion, Perella Weinberg and its affiliates provided services to and received compensation from Inotek in connection with Inotek’s convertible bond offering in August 2016. During the two-year period prior to the date of its opinion, Perella Weinberg and its affiliates had not provided any investment banking services to Rocket for which they had received compensation. In addition, during such two-year period, none of Perella Weinberg and its corporate advisory affiliates owned any equity or debt interests in Rocket. Perella Weinberg and its affiliates in the future may provide services to Inotek and Rocket and their respective affiliates and in the future may receive compensation for the rendering of such services.

Certain Prospective Financial Information of Inotek

Inotek does not, as a matter of course, publicly disclose long-term forecasts or internal projections as to future performance, earnings or other results due to, among other things, the inherent difficulty of predicting financial performance for future periods and the unpredictability of the underlying assumptions and estimates. In connection with its due diligence process and evaluation of the merger, Inotek’s management prepared certain prospective financial information relating to the estimated cash position for Inotek for the second half of fiscal year 2017, which we refer to as estimated net cash projections. The estimated net cash projections reflect Inotek’s cash balance for the stated time period less certain liabilities such as estimated transaction and severance costs. The estimated net cash projections were prepared for the purpose of determining the stipulated valuation of Inotek under the merger agreement and were provided to Perella Weinberg and Rocket for that purpose, on August 26, 2017 and August 29, 2017, respectively. The estimated net cash projections were not prepared with a view toward compliance with published guidelines of the SEC or the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information or GAAP. No non-GAAP to GAAP reconciliation of the estimated net cash projections was created or used during the transaction process. However, Inotek has included below a summary of the estimated net cash projections to provide its stockholders and investors access to certain non-public information that was furnished to third parties in connection with the merger.

Inotek’s estimated net cash projections took into account assumptions with respect to general business, economic, competitive, regulatory, market and financial conditions and other future events, as well as matters specific to Inotek’s business including the impact of clinical trial results on Inotek’s business. The inclusion of Inotek’s estimated net cash projections in this proxy statement should not be regarded as an indication that Inotek or Inotek’s board of directors considered, or now considers, these estimated net cash projections to be material to Inotek’s stockholders or necessarily indicative of actual future results. The estimated net cash projections did not give effect to any changes or expenses as a result of the merger or any other effects of the merger. Inotek does not consider the estimated net cash projections to be a reliable prediction of future results. You should not place undue reliance on the unaudited financial projections of Inotek contained in this proxy statement. Please read the information set forth below under the heading “Important Information about Inotek’s Estimated Net Cash Projections.”

 

Period

   Net Available Cash
(end of period)
(millions)
 

July 2017

   $ 45.7  

August 2017

   $ 44.8  

September 2017

   $ 43.8  

October 2017

   $ 43.2  

November 2017

   $ 42.6  

December 2017

   $ 42.1  

 

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Important Information about Inotek’s Estimated Net Cash Projections

While Inotek’s estimated net cash projections were prepared in good faith, no assurance can be made regarding future events. The estimates and assumptions underlying Inotek’s estimated net cash projections involve judgments with respect to, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions that may not be realized and that are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies, including, among others, the risks and uncertainties described under the sections entitled “Risk Factors” and “Cautionary Information Regarding Forward-Looking Statements” beginning on pages 14 and 44, respectively, all of which are difficult to predict and many of which are beyond the control of Inotek and/or Rocket and will be beyond the control of the combined company. There can be no assurance that the underlying assumptions will prove to be accurate or that the estimated net cash projections will be realized, and actual results likely will differ, and may differ materially, from those reflected in Inotek’s estimated net cash projections, whether or not the merger is completed.

Inotek’s management believes the estimated net cash projections were prepared in good faith and on a reasonable basis based on the best information available to Inotek’s management at the time of their preparation. Inotek’s estimated net cash projections, however, are not fact and should not be relied upon as being necessarily indicative of actual future results, and readers of this proxy statement are cautioned not to place undue reliance on this information.

The prospective financial information of Inotek included in this section has been prepared by, and is the responsibility of, Inotek’s management. Inotek’s independent registered public accounting firm has neither examined, compiled nor performed any procedures with respect to the accompanying Inotek prospective financial information and, accordingly, does not express an opinion or any other form of assurance with respect thereto. The report of Inotek’s independent registered public accounting firm included in this proxy statement relates to the historical financial information of Inotek. It does not extend to the prospective financial information of Inotek and should not be read to do so.

By including in this proxy statement a summary of Inotek’s estimated net cash projections, neither Inotek nor any of its representatives has made or makes any representation to any person regarding the ultimate performance of Inotek compared to the information contained in Inotek’s estimated net cash projections. Inotek has made no representation to Rocket, in the merger agreement or otherwise, concerning Inotek’s estimated net cash projections. Inotek’s estimated net cash projections summarized in this section were prepared for the periods described above and have not been updated to reflect any changes since the date of this proxy statement or any actual net cash position of Inotek. Neither Inotek, Rocket nor, after completion of the merger, the combined company undertakes any obligation, except as required by law, to update or otherwise revise Inotek’s estimated net cash projections to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error, or to reflect changes in general economic or industry conditions.

The foregoing summary of Inotek’s estimated net cash projections is not included in this proxy statement in order to induce any Inotek stockholder to vote in favor of any of the proposals described in this proxy statement.

Interests of Inotek’s Directors and Executive Officers in the Merger

In considering the recommendation of Inotek’s board of directors that you vote in favor of the merger proposals outlined herein, you should be aware that aside from their interests as Inotek stockholders, the directors and executive officers of Inotek have interests in the merger that are different from, or in addition to, those of other Inotek stockholders generally. Members of the Inotek board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to Inotek stockholders to vote in favor of the merger proposals outlined herein. See the section

 

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entitled “The Merger—Reasons for the Merger.” Inotek stockholders should take these interests into account in deciding whether to vote in favor of the merger proposals outlined herein. These interests are described in more detail below, and certain of them are quantified in the narrative and the tables below.

Pursuant to the merger agreement, it is expected that Inotek’s current directors Carsten Boess and David P. Southwell will continue to serve on the combined company’s board of directors following the merger. The merger agreement further provides that for a period of six years following the effective time of the merger:

 

    Inotek and Rocket will each, jointly and severally, indemnify and hold harmless all individuals who are present or former directors and officers or who become, prior to the effective date of the merger, directors or officers of Inotek or Rocket (including both Mr. Boess and Mr. Southwell) against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees incurred in connection with any claim, action, suit, proceeding or investigation arising out of or pertaining to the fact that such person is or was a director or officer of Inotek or Rocket, whether asserted or claimed prior to, at or after the effective time of the merger, relating to acts or omissions taken prior to the effective time to the fullest extent permitted under applicable law;

 

    the organizational documents of each of Inotek and Rocket, as the surviving corporation in the merger, will contain provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of present and former directors and officers of each of Inotek and Rocket than are presently set forth in the certificate of incorporation and bylaws (or equivalent organizational documents) of Inotek and Rocket, as applicable; and

 

    each of Inotek and Rocket, will maintain in effect directors’ and officers’ liability insurance policies, with coverage containing terms and conditions at least as favorable as the coverage under the presently existing policies maintained by Inotek and Rocket; provided, however, that in no event shall Inotek and Rocket be required to expend for such insurance coverage more than an amount equal to 200% of the current annual premiums paid by Inotek and Rocket, as applicable, for its existing policy.

Inotek’s executive officers are as follows:

 

Name

  

Position

David P. Southwell

   President, Chief Executive Officer and Director

Rudolf Baumgartner, M.D.

   Executive Vice President and Chief Medical Officer

Dale Ritter

   Vice President-Finance, Treasurer and Secretary

Severance and Change in Control Provisions of Employment Arrangements

Inotek previously entered into employment agreements or offer letters with each of David P. Southwell, effective as of August 11, 2014, as last amended September 1, 2017; Rudolf Baumgartner, M.D., dated May 2, 2007, as last amended September 12, 2017; and Dale Ritter, effective as of August 28, 2014, as last amended September 1, 2017, which we refer to as the Inotek Employment Agreements. The merger will constitute a change in control under each of the Inotek Employment Agreements, and we expect that each executive officer will be eligible to receive certain severance payments and other benefits in connection with a termination by Inotek without “cause” or the executive’s resignation for “good reason” (as such terms are defined in the respective Inotek Employment Agreement, and each such termination, a “qualifying termination”) following the merger.

Pursuant to the terms of Mr. Southwell’s employment agreement, if he experiences a qualifying termination of employment, then he will be entitled to receive (i) base salary and COBRA continuation (of the employer’s portion of the premium cost) for the 12-month period immediately following termination and (ii) 12 months’ accelerated vesting of his then-outstanding time-based equity awards. In lieu of these severance benefits, if Mr. Southwell experiences a qualifying termination following a “change in control” (as defined in

 

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Mr. Southwell’s employment agreement), he will instead be entitled to receive a lump sum severance payment equal to 18 months base salary and COBRA continuation (or the employer’s portion of the premium cost) for the 18-month period following termination. In either case, such severance payments and benefits are subject to Mr. Southwell’s execution and non-revocation of a separation agreement, including a general release of claims against Inotek. In addition, pursuant to the merger agreement, all of Mr. Southwell’s then-outstanding unvested equity awards will become fully vested and exercisable as of the effective time of the merger, regardless of whether he experiences a qualifying termination.

With respect to Dr. Baumgartner, under the terms of his offer letter, if he experiences a qualifying termination of employment at any time, then he will be entitled to receive (i) base salary for the 12-month period immediately following termination and (ii) COBRA continuation (of the employer’s portion of the premium cost) until the earlier of the end of the 12-month severance period or the end his eligibility under COBRA continuation coverage for any reason, subject to Dr. Baumgartner’s execution and non-revocation of a comprehensive release of claims against Inotek. In the event Dr. Baumgartner experiences a qualifying termination, all of his then-outstanding unvested equity awards will become fully exercisable or nonforfeitable as of such date. In addition, pursuant to the merger agreement, in the event of a “change in control” (as defined in Dr. Baumgartner’s offer letter), all of his then-outstanding unvested equity awards will become fully vested and exercisable regardless of whether he experiences a qualifying termination.

With respect to Mr. Ritter, his offer letter provides that, if he experiences a qualifying termination of employment at any time, then he will be entitled to receive (i) base salary for the six-month period immediately following termination and (ii) COBRA continuation (of the employer’s portion of the premium cost) until the earlier of the end of six-month severance period or the end of his eligibility under COBRA continuation coverage, subject to his execution and non-revocation of a comprehensive release of claims against Inotek. In the event Mr. Ritter experiences a qualifying termination, all of his then-outstanding stock options and other stock-based awards held at the time of termination will become fully exercisable or nonforfeitable as of such date. In addition, pursuant to the merger agreement, in the event of a “change in control” (as defined in Mr. Ritter’s offer letter) all of his then-outstanding stock options and other stock-based awards will become fully vested and exercisable.

In consideration of the payments and benefits to be received under each of the Inotek Employment Agreements, each executive officer is also a party to a restrictive covenants agreement with Inotek that contains customary restrictive covenants, including non-competition and non-solicitation provisions that apply during the term of the executive’s employment with Inotek and for 12 months thereafter. The receipt of the severance payments and benefits described above are conditioned on the executive officer not violating the terms of his respective restrictive covenants agreement with Inotek.

For an estimate of the value of the payments and benefits described above that would become payable under the Inotek Employment Agreements in the event of a qualifying termination of employment following the merger, see “—Golden Parachute Compensation” and the assumptions set forth under that subheading, below.

Retention Awards

Pursuant to letter agreements entered into September 12, 2017 with each executive officer, Inotek is awarding cash retention bonuses to such executives in exchange for his continued active employment in a full-time capacity through the effective time of the merger. The retention awards will become payable within five business days following the effective time of the merger. For the individual value of the retention awards granted to each executive officer, see “—Golden Parachute Compensation” and the assumptions set forth under that subheading, below.

Quantification of Equity Acceleration

Pursuant to the merger agreement and consistent with the terms of Inotek’s 2004 Stock Option and Incentive Plan and Inotek’s 2014 Stock Option and Incentive Plan, as amended, which we refer to collectively as the Inotek

 

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Stock Plans, all outstanding stock options under the Inotek Stock Plans will become fully vested and exercisable and restricted stock units or RSUs under the Inotek Stock Plans will become fully vested, in each case as of the effective time of the merger.

The following table identifies for each of Inotek’s executive officers the number of shares subject to his outstanding RSUs under the Inotek Stock Plans that would become fully vested in connection with the merger. The table assumes that the effective time of the merger is on January 30, 2018, that the estimated implied value per share of Inotek common stock is equal to the average closing price over the first five business days following September 12, 2017, or $1.29, and that no RSUs are settled and no dividends are paid with respect to Inotek common stock between the date of this proxy statement and the effective time of the merger.

In addition, while each of Inotek’s executive officers and non-employee directors holds outstanding stock options that will become fully vested and exercisable as of the effective time of the merger, the option exercise price per share exceeds the estimated implied value per share for each such stock option. Accordingly, such stock options have not been included in the table below.

 

Executive Officers    Shares
Underlying
Accelerating
Inotek
RSUs (#) (1)
     Total Equity
Award
Consideration

($) (2)
 

David P. Southwell

     525,000      $ 677,250  

Rudolf Baumgartner, M.D.

     221,250      $ 285,413  

Dale Ritter

     25,000      $ 32,250  

 

(1) Pursuant to the terms of the merger agreement and consistent with the terms of the Inotek Stock Plans, each outstanding stock option and RSU will accelerate in full as of the effective time of the merger; however, this table does not present information with respect to stock options held by Inotek’s executive officers or non-employee directors, as the exercise price of each such option exceeds the estimated implied value per share.
(2) The amounts included in this column are equal to (i) the aggregate number of shares of Inotek common stock subject to the RSUs, multiplied by (ii) an estimated implied value per share of $1.29.

In connection with the merger, Inotek’s board of directors has approved the extension of the exercise period for stock options held by Inotek employees and non-employee directors for a period of 12 months following such optionee’s termination of employment or cessation of service as a director, as applicable, following the merger.

Golden Parachute Compensation

This section sets forth the information required by Item 402(t) of Regulation S-K regarding the compensation that is based on or otherwise relates to the merger and that is payable or may become payable to Inotek’s named executive officers, who are Messrs. Southwell and Ritter and Dr. Baumgartner. This compensation is referred to as “golden parachute” compensation by the applicable SEC disclosure rules. The amounts set forth in the table are estimates based on multiple assumptions that may or may not actually occur, including assumptions described in this proxy statement and in the footnotes to the table. As a result, the actual amounts, if any, that a named executive officer will receive, may materially differ from the amounts set forth in the table.

The table below assumes that the effective time of the merger will occur on January 30, 2018, that the named executive officer experiences a qualifying termination of employment immediately following the effective time, that no amount of withholding taxes are applicable to any payments set forth in the table and that no payments are delayed for six months to the extent required under Section 409A of the Code. The amounts set forth in the table are estimates based on an implied value of $1.29 per share of Inotek common stock, which is equal to the average closing price per share of Inotek common stock over the first five business days following

 

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September 12, 2017. For a narrative description of the terms and conditions applicable to the payments quantified in the table below, see “—Severance and Change in Control Provisions of Employment Arrangements” above.

 

Name    Cash
($) (1)
     Equity
($) (2)
     Perquisites/
Benefits
($) (3)
     Other
($) (4)
     Total
($)
 

David P. Southwell

     719,585        677,250        47,909        239,862        1,684,606  

Rudolf Baumgartner, M.D.

     405,099        285,413        31,939        141,785        864,236  

Dale Ritter

     141,231        32,250        11,473        84,739        269,693  

 

(1) The cash amounts payable to each named executive officer consist of a severance payment equal to a specified number of months of base salary continuation, as follows: Mr. Southwell, 18 months base salary, payable in a lump sum; Dr. Baumgartner, 12 months, payable in equal monthly installments; and Mr. Ritter, six months, payable in equal monthly installments. All cash severance payments are “double trigger” and would be due upon a qualifying termination of employment following the merger. The cash severance payments are subject to the named executive officer’s execution and nonrevocation of a release of claims in favor of Inotek.
(2) The amounts listed in this column include the aggregate value of outstanding unvested RSUs granted under the Inotek Stock Plans that will accelerate as of the effective time of the merger, calculated based on the number of shares subject to the RSU multiplied by the implied per share value. In accordance with the applicable disclosure rules, outstanding stock options held by the named executive officers have been omitted from this calculation, as each such stock option has an option exercise price per share that exceeds the implied per share value.
(3) The amounts listed in this column represent the estimated value of payments for COBRA health continuation coverage for a specified number of months following termination, pursuant to the terms of the respective executive’s Inotek Employment Agreement, as follows: Mr. Southwell, 18 months; Dr. Baumgartner, 12 months; and Mr. Ritter, six months. Such amounts are based on the applicable named executive officer’s elected level of coverage for the plan year 2017 and the rate applicable to such coverage effective for calendar year 2017.
(4) Pursuant to letter agreements between Inotek and each named executive officer, each executive will be entitled to receive a cash retention award subject to his continued employment with Inotek in a full-time capacity through the effective time of the merger. Each retention award is “single trigger” and will be payable in a lump sum within five days following the effective time of the merger.

Federal Securities Law Consequences; Resale Restrictions

The issuance of Inotek’s common stock in the merger to Rocket shareholders will be effected by means of a private placement, which is exempt from registration under the Securities Act of 1933, as amended, which we refer to as the Securities Act, in reliance on Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D or Regulation S promulgated thereunder and such shares will be “restricted securities.” The shares issued in connection with the merger will not be registered under the Securities Act upon issuance and will not be freely transferable. Holders of such shares may not sell their respective shares unless the shares are registered under the Securities Act or an exemption is available under the Securities Act. The merger agreement provides that Rocket will use commercially reasonable efforts to take such actions and cause holders of Rocket’s share capital to provide all documentation, including investor questionnaire to allow Inotek to issue Inotek’s common stock to such holders in a manner that satisfies the requirements of Rule 506 of Regulation D under the Securities Act or Rule 902 of Regulation S.

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split and the Merger

The following discussion summarizes the material U.S. federal income tax consequences of the reverse stock split and the merger that are expected to apply to each Inotek stockholder. This summary is based upon current provisions of the Code, existing treasury regulations and current administrative rulings and court

 

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decisions, all in effect as of the date hereof and all of which are subject to change. Any change, which may be retroactive, could alter the tax consequences to Inotek stockholders as described in this summary. No attempt has been made to comment on all of the U.S. federal income tax consequences of the reverse stock split and the merger that may be relevant to particular holders, including holders who do not hold their shares as capital assets; holders subject to special treatment under the Code such as dealers in securities; banks; insurance companies; other financial institutions; mutual funds; real estate investment trusts; tax-exempt organizations; investors in pass-through entities; stockholders who are subject to the alternative minimum tax provisions of the Code; stockholders who hold their shares as part of a hedge, wash sale, synthetic security, conversion transaction, or other integrated transaction; U.S. holders, as defined below, that have a functional currency other than the U.S. dollar; traders in securities who elect to apply a mark-to-market method of accounting; stockholders who acquired their shares of stock pursuant to the exercise of options or otherwise as compensation or through a tax-qualified retirement plan or through the exercise of a warrant; and certain expatriates or former long-term residents of the United States. Stockholders described in this paragraph are urged to consult their own tax advisors regarding the consequences to them of the reverse stock split and the merger.

In the case of a stockholder that is a partnership, the U.S. federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships that are holders of Inotek capital stock and partners in such partnerships are urged to consult their own tax advisors regarding the consequences to them of the reverse stock split and the merger.

In addition, the following discussion does not address the tax consequences of the reverse stock split and the merger under state, local or non-U.S. tax laws or federal tax laws other than the income tax.

Inotek stockholders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the reverse stock split and the merger in light of their personal circumstances and the consequences under state, local and non-U.S. tax laws and other federal tax laws.

Reverse Stock Split

Inotek stockholders generally will not recognize gain or loss as a result of the reverse stock split. The aggregate adjusted tax basis in the shares of Inotek common stock received pursuant to the reverse stock split will equal the aggregate adjusted tax basis of the shares of Inotek common stock exchanged therefor. In general, each Inotek stockholder’s holding period for the shares of Inotek common stock received pursuant to the reverse stock split will include the holding period in the shares of Inotek common stock exchanged therefor. Inotek stockholders that acquired Inotek common stock on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.

Merger

Rocket and Inotek intend the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code. Each of Rocket and Inotek will use its commercially reasonable efforts to cause the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, and not to, and not to permit or cause any affiliate or any subsidiary of Rocket or Inotek to, take any action or cause any action to be taken which would reasonable be expected to cause the merger to fail to qualify as a reorganization under Section 368(a) of the Code. Rocket and Inotek will cooperate and use their commercially reasonable efforts in order for Rocket to obtain from Mayer Brown LLP, and Inotek to obtain from Goodwin Procter LLP, an opinion that the merger will constitute a reorganization within the meaning of Section 368(a) of the Code. Inotek stockholders will not sell, exchange or dispose of any shares of Inotek common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Inotek stockholders as a result of the merger.

 

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Anticipated Accounting Treatment

The merger will be treated by Inotek as a reverse merger under the purchase method of accounting in accordance with accounting principles GAAP. For accounting purposes, Rocket is considered to be acquiring Inotek in this transaction. Therefore, the aggregate consideration paid in connection with the merger will be allocated to Inotek’s tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of Inotek will be consolidated into the results of operations of Rocket as of the effective time of the merger. These allocations will be based upon a valuation that has not yet been finalized.

 

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THE SPECIAL MEETING

Date, Time and Place

A special meeting of Inotek’s stockholders will be held at [●] local time, on [●], 2017 at [●].

Purpose of the Special Meeting

The purpose of the special meeting is to consider and vote on the following proposals:

 

  1. To approve the issuance of Inotek’s common stock pursuant to the Agreement and Plan of Merger and Reorganization, dated as of September 12, 2017, by and among Inotek, the acquisition subsidiary, a wholly-owned subsidiary of Inotek, and Rocket, and the resulting “change of control” of Inotek under NASDAQ rules.

 

  2. To approve an amendment to Inotek’s seventh amended and restated certificate of incorporation to effect a reverse stock split of Inotek’s common stock.

 

  3. To consider and vote upon an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and 2.

If Inotek is to complete the merger with Rocket, stockholders must approve Proposal 1. The approval of Proposal 2 is not a condition to the completion of the merger with Rocket.

Stockholders also will consider and act on any other matters as may properly come before the special meeting or any adjournment or postponement thereof, including any procedural matters incident to the conduct of the special meeting.

Record Date; Shares Outstanding and Entitled to Vote

The board of directors has fixed [●], 2017 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of Inotek’s common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, Inotek had [●] shares of common stock outstanding and entitled to vote at the special meeting. Each holder of record of shares of common stock on the record date will be entitled to one vote for each share held on all matters to be voted upon at the special meeting.

How to Vote Your Shares

If you hold your shares in your own name, you may submit a proxy by telephone, via the internet or by mail or vote by attending the special meeting and voting in person.

 

    Submitting a Proxy by Telephone: You can submit a proxy for your shares by telephone until [●] Eastern Time on [●] by calling the toll-free telephone number on the enclosed proxy card.

 

    Submitting a Proxy via the internet: You can submit a proxy via the internet until [●] Eastern Time on [●] by accessing the web site listed on your proxy card and following the instructions you will find on the web site.

 

    Submitting a Proxy by Mail: If you choose to submit a proxy by mail, simply mark the enclosed proxy card, date and sign it, and return it in the postage paid envelope provided or return it to [●].

 

    By casting your vote in any of the three ways listed above, you are authorizing the individuals listed on the proxy to vote your shares in accordance with your instructions.

 

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If your shares are held in the name of a bank, broker or other nominee, you will receive instructions from the holder of record that you must follow for your shares to be voted. Please follow the instructions from the holder of record carefully. Also, please note that if the holder of record of your shares is a broker, bank or other nominee and you wish to vote in person at the special meeting, you must request a proxy from your bank, broker or other nominee that holds your shares and present that proxy and proof of identification at the special meeting.

How to Change Your Vote

Any Inotek stockholder of record voting by proxy, other than those Inotek stockholders who have executed a voting agreement and irrevocable proxy, has the right to revoke the proxy at any time before the polls close at the special meeting by:

 

    sending a written notice stating that he, she or it would like to revoke his, her or its proxy to the Corporate Secretary of Inotek;

 

    delivering a duly executed proxy card to the Corporate Secretary of Inotek bearing a later date than the proxy being revoked;

 

    Submitting a proxy on a later date by telephone or via the internet (only your last telephone or internet proxy will be counted), before [●] Eastern Time on [●]; or

 

    Attending the special meeting, withdrawing your proxy, and voting in person. Attendance alone at the special meeting will not revoke a proxy.

If a stockholder of Inotek has instructed a broker to vote its shares of Inotek’s common stock that are held in “street name,” the stockholder must follow directions received from its broker to change those instructions.

Proxies; Counting Your Vote

A majority of the shares entitled to vote, present in person or represented by proxy constitute a quorum at the special meeting. Stockholders shall have one vote for each share of stock entitled to vote owned by them as of the record date. Assuming the presence of a quorum at the meeting:

 

    To approve the issuance of Inotek’s common stock pursuant to the merger agreement and the resulting “change of control” of Inotek under NASDAQ rules, the affirmative vote of the holders of a majority of the shares of Inotek’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting is required. A failure to submit a proxy card or vote at the special meeting, or an abstention or “broker non-vote” will have no effect on the outcome of this proposal.

 

    To approve an amendment to Inotek’s seventh amended and restated certificate of incorporation to effect a reverse stock split of Inotek’s common stock, the affirmative vote of holders of a majority of the outstanding shares of Inotek’s common stock as of the record date for the special meeting is required. A failure to submit a proxy card or vote at the special meeting, or an abstention will have the same effect as a vote against the approval of this proposal.

 

    To consider and vote upon an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and 2; the affirmative vote of the holders of a majority of the Inotek’s common stock having voting power present in person or represented by proxy at the special meeting is required. A failure to submit a proxy card or vote at the special meeting, or an abstention will have the same effect as a vote against the approval of this proposal.

Appraisal Rights

Holders of Inotek common stock are not entitled to appraisal rights or dissenters’ rights in connection with the merger. If the merger is completed, Rocket’s stockholders are entitled to appraisal rights or dissenters’ rights under the Delaware General Corporation Law or the California Corporations Code, if and to the extent applicable.

 

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Voting by Inotek’s Directors, Executive Officers and Certain Stockholders

Certain Inotek stockholders, including certain directors and officers of Inotek, owned approximately 5% of Inotek’s fully-diluted common stock (including common stock which may be issued upon exercise of options and vesting of restricted stock units or settlement of vested restricted stock units) and are subject to voting agreements to which each such stockholder has granted a proxy to vote such stockholder’s shares of Inotek common stock in favor of the transactions contemplated by the merger agreement, as further described in the section entitled “Agreements Related To The Merger” beginning on page 87 of this proxy statement.

Solicitation of Proxies

Inotek will bear the cost of soliciting proxies, including the printing, mailing and filing of this proxy statement, the proxy card and any additional information furnished to Inotek’s stockholders. You will need to obtain your own internet access if you choose to access the proxy materials and/or vote over the internet. Inotek and Rocket may use the services of its directors, officers and other employees to solicit proxies from Inotek’s stockholders without additional compensation. In addition, Inotek has engaged The Proxy Advisory Group, LLC, a proxy solicitation firm, to solicit proxies from Inotek’s stockholders for a success-based fee of $20,000, which is deemed earned and payable upon successfully securing stockholder approval for all proposals referenced herein. Inotek will also reimburse The Proxy Advisory Group, LLC, for reasonable out-of-pocket expenses capped at $2,000. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of Inotek’s common stock for the forwarding of solicitation materials to the beneficial owners of Inotek’s common stock. Inotek will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

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THE MERGER AGREEMENT

The following is a summary of the material terms of the merger agreement. A copy of the merger agreement is attached as Annex A to this proxy statement and is incorporated by reference into this proxy statement. The merger agreement has been attached to this proxy statement to provide you with information regarding its terms. The summary of the material terms of the merger agreement below and elsewhere in this proxy statement is qualified in its entirety by reference to the merger agreement. This summary may not contain all of the information about the merger agreement that is important to you. Inotek urges you to read carefully the merger agreement in its entirety as it is the legal document governing the merger.

Form of the Merger

Upon the terms and subject to the conditions of the merger agreement, Rome Merger Sub, which we refer to as the acquisition subsidiary, a Delaware corporation and wholly-owned subsidiary of Inotek formed by Inotek in connection with the merger, will merge with and into Rocket. The merger agreement provides that upon the consummation of the merger the separate existence of acquisition subsidiary shall cease. Rocket will continue as the surviving corporation and will be a wholly-owned subsidiary of Inotek. Under the merger agreement, the parties agreed to reasonably cooperate in the consideration and implementation of alternative structures to effect the business combination contemplated by the merger agreement as long as any such alternative structure does not impose a material delay on, or condition to, the consummation of the merger, cause any condition to the consummation of the merger contained in the merger agreement to not be capable of being satisfied (unless waived) or adversely affect any of the parties thereto or either of the parties’ stockholders.

After completion of the merger, Inotek will be renamed “Rocket Pharmaceuticals, Inc.” and expects to trade on the NASDAQ Global Market under the symbol “RCKT”.

Effective Time of the Merger

The merger agreement requires the parties to promptly consummate the merger after all of the conditions to the consummation of the merger contained in the merger agreement are satisfied or waived, including the adoption of the merger agreement by the stockholders of Rocket and the approval by the Inotek stockholders of the issuance of Inotek common stock in the merger. The merger will become effective upon the registration of the plan of merger by the Cayman Registrar of Companies or at such later time as specified in such plan of merger and as mutually agreed between Inotek and Rocket. The time at which the merger becomes effective is referred to herein as the “effective time.” Neither Inotek nor Rocket can predict the exact timing of the consummation of the merger.

Merger Consideration

At the effective time of the merger and without any further action on the part of Inotek, acquisition subsidiary, Rocket or any shareholder of Rocket:

 

    any shares of Rocket ordinary shares or preferred shares held as treasury shares or held or owned by Rocket or, the acquisition subsidiary immediately prior to the effective time shall automatically be cancelled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor; and

 

    each share of Rocket preferred share outstanding shall be converted to Rocket ordinary shares, which shall have the right to receive a number of Inotek’s common stock equal to the “exchange ratio” (as defined in the merger agreement) and each share of Rocket ordinary shares outstanding immediately prior to the effective time (excluding shares to be cancelled as described above and shares which are held by Rocket shareholders who have exercised and perfected appraisal rights or dissenters’ rights for such shares in accordance with the Companies Law (as revised) of the Cayman Islands, which we refer to as Cayman Law, if and to the extent applicable) shall be converted solely into the right to receive a number of shares of Inotek common stock equal to such exchange ratio.

 

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The “exchange ratio” shall be equal to the quotient obtained by dividing (a) the product of (i) the Rocket Ownership Factor multiplied by (ii) the quotient of (x) the total number of outstanding shares of Inotek Common Stock on a fully-diluted basis divided by (y) the Inotek Ownership Factor; by (b) the total number of outstanding Rocket Ordinary Shares on a fully-diluted basis.

For purposes of calculating the exchange ratio:

 

    Rocket Ownership Factor shall mean a percentage equal to 100% minus the Inotek Ownership Factor;

 

    Inotek Ownership Factor shall mean nineteen percent (19%); provided however that if Inotek’s Net Cash as of the “determination date” (as defined in the merger agreement) is less than $40.5 million (Lower Target Net Cash) or greater than $43.5 million (Upper Target Net Cash); and

 

    Inotek Ownership Factor shall mean the percentage quotient obtained by dividing (a) the sum of (i) the $47 million, minus (ii) the difference between the Adjusted Lower Target Net Cash (i.e. any amount that is less than the Lower Target Net Cash) and the Lower Target Net Cash (if any) plus (iii) the difference between the Adjusted Upper Target Net Cash (i.e. the amount, if any, that net cash is greater than the Upper Target Net Cash) and the Upper Target Net Cash (if any); by (b) the sum of (i) $200 million, minus (ii) the difference between the Adjusted Lower Target Net Cash and Lower Target Net Cash (if any), plus (c) the difference between the Adjusted Upper Target Net Cash and the Upper Target Net Cash (if any) plus (iv) $47 million.

Not less than ten days prior to the closing of the merger, Inotek will deliver to Rocket a schedule setting forth its good faith estimated calculation of net cash as of the projected closing date of the merger. If Rocket objects to the net cash calculation, the parties shall attempt in good faith to resolve the disputed items and negotiate an agreed-upon determination of net cash. If the parties are unable to negotiate an agreed-upon determination of net cash or any component thereof, any remaining disagreements will be referred to an independent auditor jointly selected by Inotek and Rocket, or if the parties cannot agree on an independent auditor, either Inotek or Rocket may request that the Boston, Massachusetts Office of the American Arbitration Association select an independent auditor. The determination of the amount of net cash made by the accounting firm shall be final and binding on Inotek and Rocket.

For illustrative purposes only, assuming Inotek’s net cash was determined to be $42 million, the exchange ratio (without giving effect to the proposed reverse stock split of Inotek common stock described elsewhere in this proxy) for the Rocket share capital would be approximately 302 shares of Inotek common stock for each share of Rocket share capital as of September 19, 2017. Therefore, if the merger had been completed based on such calculation and a Rocket shareholder owned 1,000 shares of Rocket share capital as of the effective time, such Rocket shareholder would have had the right to receive approximately 302,000 shares of Inotek common stock in exchange for your shares of Rocket share capital.

The example above assumes the following:

 

    30,728,111 shares of Inotek common stock are outstanding on a fully-diluted basis;

 

    433,534 shares of Rocket ordinary shares are outstanding on a fully-diluted basis;

 

    Rocket Ownership Factor is 81%

 

    Inotek Ownership Factor is 19%

The exchange ratio will be determined, as discussed above and as described in the merger agreement, based upon the amount of “net cash” of Inotek, which, as defined in the merger agreement, generally consists of Inotek’s cash and cash equivalents less certain expenses and liabilities, as of a determination date prior to the closing date of the merger.

 

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The following table illustrates the percentage ownership of the combined company by Inotek’s and Rocket’s shareholders, on fully-diluted basis, assuming various amounts of net cash of Inotek as of the determination date.

 

Inotek’s Net Cash as of Determination Date Calculated Pursuant
to Merger Agreement

   Inotek Stockholder Ownership
of Combined Company
    Rocket Shareholder Ownership
of Combined Company
 

Equal to or greater than $40.5 million and lower than or equal to $43.5 million

     19.00     81.00

Equal to $65.0 million

     25.51     74.49

Equal to $50.0 million

     21.10     78.90

Equal to $37.5 million

     18.03     81.97

Equal to $20.0 million

     11.7     88.30

No fractional shares of Inotek common stock will be issuable to Rocket shareholders pursuant to the merger. Notwithstanding any other provision of the merger agreement, all fractional shares of Inotek common stock that a holder of Rocket ordinary shares converted pursuant to the merger would otherwise be entitled to receive will be aggregated and then, if a fractional share of Inotek common stock results from that aggregation, be rounded up to the nearest whole share of Inotek common stock.

Stock Options

At the effective time of the merger, each outstanding option, whether or not vested, to purchase ordinary shares issued by Rocket unexercised prior to the effective time of the merger shall be converted into and become an option to purchase Inotek common stock, and Inotek shall assume the Rocket Share Option Plans (as defined in the merger agreement) and each such Rocket option in accordance with its terms (as in effect as of September 12, 2017). All rights with respect to each Rocket option shall be assumed by Inotek in accordance with its terms. Accordingly, from and after the effective time of the merger each option or warrant assumed by Inotek may be exercised solely for shares of Inotek common stock.

The number of shares of Inotek common stock subject to each outstanding Rocket option assumed by Inotek shall be determined by multiplying (A) the number of shares of Rocket common stock that were subject to such option, as in effect immediately prior to the effective time by (B) the exchange ratio and rounding the resulting number down to the nearest whole number of shares of Inotek common stock.

The per share exercise price for the Inotek common stock issuable upon exercise of each Rocket option assumed by Inotek shall be determined by dividing (A) the per share exercise price of Rocket common stock subject to such option, as in effect immediately prior to the effective time, by (B) the exchange ratio and rounding the resulting exercise price up to the nearest whole cent.

Any restriction on the exercise of any Rocket option assumed by Inotek shall continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such Rocket option shall, subject to certain exceptions set forth in the merger agreement, otherwise remain unchanged.

Regulatory Approvals

Neither Inotek nor Rocket is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Inotek must comply with applicable federal and state securities laws and NASDAQ rules and regulations in connection with the issuance of shares of Inotek’s common stock in the merger, including the filing with the SEC of this proxy statement and the required shareholder approval for the resulting “change of control” of Inotek under NASDAQ rules. The merger agreement provides that Rocket and Inotek shall use reasonable best efforts to respond as promptly as is practicable in compliance with: (i) any inquiries or requests received from the Federal Trade Commission or the Department of Justice for information or documentation; and (ii) any inquiries or requests received from any other governmental body in connection with antitrust or competition matters.

 

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NASDAQ Listing

Inotek’s common stock is currently listed on the NASDAQ Global Market under the symbol “ITEK”. Pursuant to the merger agreement, Inotek has agreed to use its reasonable best efforts to maintain its existing listing on the NASDAQ Global Market (or, alternatively, the NASDAQ Capital Market) and to cause the shares of Inotek common stock being issued in the merger to be approved for listing on the NASDAQ Global Market (or, alternatively, the NASDAQ Capital Market) at or prior to the effective time of the merger.

Prior to consummation of the merger, Inotek will file an initial listing application with the NASDAQ Global Market pursuant to NASDAQ “reverse merger” rules. If such application is accepted, Inotek anticipates that its common stock will continue to be listed on the NASDAQ Global Market following the closing of the merger under the trading symbol “RCKT.”

Amendments to Inotek’s Certificate of Incorporation; Memorandum and Articles of Association of the Surviving Corporation

At the effective time, the certificate of incorporation of Inotek shall be the certificate of incorporation of Inotek immediately prior to the effective time of the merger, subject to any amendment thereto to effect the reverse stock split as described herein. In addition, at the effective time, the memorandum and articles of association of Rocket, as the surviving corporation in the merger, shall be amended and restated in its entirety to read identically to the memorandum and articles of association of the acquisition subsidiary immediately in effect prior to the effective time of the merger.

Conditions to the Completion of the Merger

Each party’s obligation to complete the merger or otherwise consummate the transactions to be consummated at closing is subject to the satisfaction or, to the extent permitted by applicable law, the written waiver by each of the parties, at or prior to the closing of the merger, of various conditions (subject to certain exceptions set forth in the merger agreement), which include the following:

 

    there must not have been any temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the merger issued by any court of competent jurisdiction or other governmental body, and no law, statute, rule, regulation, ruling or decree shall be in effect which has the effect of making the consummation of the merger illegal;

 

    shareholders of Rocket must have approved the merger and other transactions contemplated by the merger agreement, and stockholders of Inotek must have approved the issuance of Inotek common stock in the merger; and

 

    the NASDAQ Listing Application must have been approved.

In addition, each party’s obligation to complete the merger is further subject to the satisfaction or waiver by that party of the following additional conditions:

 

    all representations and warranties of the other party contained in the merger agreement must be true and correct on the date of the merger agreement and on the closing date of the merger with the same force and effect as if made on the date on which the merger is to be consummated, except in each case where the failure of to be true and correct has not had, and would not reasonably be expected to have, a material adverse effect on the party making the representations or for those representation and warranties which address matters only as of a particular date;

 

    the other party to the merger agreement must have performed or complied with in all material respects all covenants and obligations required to be performed or complied with by it on or before the closing of the merger;

 

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    the other party to the merger agreement party must have received all required governmental and other legally required consents, and such consents must be in full force and effect at the closing of the merger;

 

    the other party must not have experienced a continuing material adverse effect since the date of the merger agreement; and

 

    the other party must have delivered certain certificates and other documents required under the merger agreement for the closing of the merger, including, without limitation, a certificate executed by the chief executive officer of the other party confirming that certain of the conditions set forth above have been duly satisfied.

In addition, the obligation of Inotek and the acquisition subsidiary to complete the merger is further subject to the satisfaction or waiver of the following conditions:

 

    there shall have been no effect, states of fact, change, event, circumstance, or development that is or could reasonably be expected to be materially adverse to, or has or could reasonably be expected to have or result in a material adverse effect on (a) the business, financial condition, assets or operations of Inotek and its subsidiaries, taken as a whole, or (b) the ability of Rocket to consummate the merger or any of the other contemplated transactions or to perform any of its covenants or obligations under the merger agreement in all material respects, each referred to as a material adverse effect as it relates to Rocket. The merger agreement provides that certain events shall not, either alone or in combination, be considered a materially adverse effect as it relates to Rocket, including, without limitation:

 

    any adverse effect that results from (i) general economic, business, financial or market conditions; (ii) conditions in any of the industries or industry sectors in which Rocket or any of its subsidiaries operates; or (iii) any act of terrorism, war, national or international calamity or any other similar event (in each case, provided that such adverse effect does not affect Rocket and its subsidiaries, taken as a whole, in a disproportionate manner as compared to the Rocket’s industry peers);

 

    any adverse effect resulting from any change in any applicable law, statute, rule, regulation, ruling or decree of any governmental body after the date of the merger agreement (provided that such adverse effect does not affect Rocket in a disproportionate manner as compared to the Rocket’s industry peers or as compared to Inotek);

 

    any changes in GAAP after the date of the merger agreement;

 

    any adverse effect resulting from any action taken by Rocket or any of its subsidiaries with Inotek’s prior written consent or the taking of any action expressly required by the merger agreement;

 

    any decision or action, or inaction, by the FDA or other comparable foreign governmental body, with respect to any product candidate of Rocket;

 

    any effect resulting from the announcement or pendency of the merger (including any litigation or any loss of or adverse change in the relationship of Rocket and its subsidiaries with their respective employees, investors, contractors, lenders, customers, partners, suppliers, vendors or other third parties related thereto).

In addition, the obligation of Rocket to complete the merger is further subject to the satisfaction or waiver of the following conditions:

 

   

there shall have been no effect, states of fact, change, event, circumstance, or development that is or could reasonably be expected to be materially adverse to, or has or could reasonably be expected to have or result in a material adverse effect on (a) the business, financial condition, assets or operations of Inotek and its subsidiaries taken as a whole, or (b) the ability of Inotek to consummate the merger or

 

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any of the other contemplated transactions or to perform any of its covenants or obligations under the merger agreement in all material respects, each referred to as a material adverse effect as it relates to Inotek. The merger agreement provides that certain events shall not, either alone or in combination, be considered a materially adverse effect as it relates to Inotek, including, without limitation:

 

    any adverse effect that results from (i) general economic, business, financial or market conditions; (ii) conditions in any of the industries or industry sectors in which Inotek or any of its subsidiaries operates; or (iii) any act of terrorism, war, national or international calamity or any other similar event (in each case, provided that such adverse effect does not affect Inotek and its subsidiaries, taken as a whole, in a disproportionate manner as compared to the Inotek’s industry peers);

 

    any adverse effect resulting from any change in any applicable law, statute, rule, regulation, ruling or decree of any governmental body after the date of the merger agreement (provided that such adverse effect does not affect Inotek in a disproportionate manner as compared to the Inotek’s industry peers or as compared to Rocket);

 

    any changes in GAAP after the date of the merger agreement;

 

    any adverse effect resulting from any action taken by Inotek or any of its subsidiaries with Rocket’s prior written consent or the taking of any action expressly required by the merger agreement;

 

    any decision or action, or inaction, by the FDA or other comparable foreign governmental body, with respect to any product candidate of Inotek;

 

    any changes in the listing status of Inotek common stock on the NASDAQ Global Market or a determination by The NASDAQ Stock Market that such listing status of Inotek may change;

 

    any effect resulting from the announcement or pendency of the merger (including any litigation or any loss of or adverse change in the relationship of Inotek and its subsidiaries with their respective employees, investors, contractors, lenders, customers, partners, suppliers, vendors or other third parties related thereto); and

 

    a decline in Inotek’s stock price, in and of itself (it being understood that any cause of any such decline may be deemed to constitute, in and of itself, a material adverse effect and may be taken into consideration when determining whether a material adverse effect has occurred).

No Solicitation

Each of Rocket, any of its subsidiaries or any Representative (as defined in the merger agreement) of any of Rocket or its subsidiaries, without Inotek’s prior written consent, shall not directly or indirectly:

 

    initiate, solicit, seek or knowingly encourage or support any inquiries, proposals or offers that constitute or may reasonably be expected to lead to, a “company acquisition proposal” (as defined in the merger agreement);

 

    engage or participate in, or knowingly facilitate, any discussions or negotiations regarding, or furnish any nonpublic information to any Person in connection with, any inquiries, proposals or offers that constitute, or may reasonably be expected to lead to, a company acquisition proposal; or

 

    enter into any letter of intent, agreement in principle or other similar type of agreement relating to a “company acquisition proposal,” or enter into any agreement or agreement in principle requiring Rocket to abandon, terminate or fail to consummate the transactions contemplated hereby or resolve, propose or agree to do any of the foregoing.

 

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Each of Inotek, any of its subsidiaries or any Representative (as defined in the merger agreement) of any of Inotek or its subsidiaries, without Rocket’s prior written consent, shall not directly or indirectly:

 

    initiate, solicit, seek or knowingly encourage or support any inquiries, proposals or offers that constitute or may reasonably be expected to lead to, a “parent acquisition proposal” (as defined in the merger agreement);

 

    engage or participate in, or knowingly facilitate, any discussions or negotiations regarding, or furnish any nonpublic information to any Person in connection with, any inquiries, proposals or offers that constitute, or may reasonably be expected to lead to, a parent acquisition proposal; or

 

    enter into any letter of intent, agreement in principle or other similar type of agreement relating to a “parent acquisition proposal,” or enter into any agreement or agreement in principle requiring Inotek to abandon, terminate or fail to consummate the transactions contemplated hereby or resolve, propose or agree to do any of the foregoing.

However, before obtaining the applicable Inotek stockholder approvals required to consummate the merger and the proposed stock issuance Inotek may furnish nonpublic information regarding Inotek to, and may enter into discussions or negotiations with, any third party in response to a bona fide written “parent acquisition proposal” (as defined below), which Inotek’s board of directors determines in good faith, after consultation with its outside counsel and independent financial advisor, constitutes or is reasonably likely to result in a “superior offer” (as defined in the merger agreement) if:

 

    Inotek receives from the third party making the “parent acquisition proposal” an executed confidentiality agreement containing terms which are not less restrictive to such person than those contained in the confidentiality agreement between Inotek and Rocket, and containing additional provisions that expressly permit Inotek to comply with the provisions in the merger agreement related to non-solicitation;

 

    a copy of such confidentiality agreement is promptly, and in any event within twenty-four hours, provided to Rocket for informational purposes only;

 

    Inotek contemporaneously supplies to Rocket any such nonpublic information or access to any such nonpublic information to the extent it has not been previously provided or made available to Rocket;

 

    Neither Inotek nor any representative of Inotek has breached the non-solicitation provisions of the merger agreement described above; and

 

    Inotek’s board of directors determines in good faith, based on the advice of outside legal counsel, that taking such action would be required to comply with the fiduciary duties of such board of directors under applicable legal requirements.

The merger agreement defines “parent acquisition proposal” as any proposal, indication of interest or offer for:

 

    a merger (including a reverse merger), consolidation, recapitalization, reorganization, liquidation, dissolution, business combination, share exchange, arrangement or consolidation, or any similar transaction involving Inotek or any of its subsidiaries;

 

    a sale, lease, exchange, mortgage, pledge, transfer, or other acquisition of fifteen percent (15%) or more of the assets of Inotek and its subsidiaries, taken as a whole, in one or a series of related transactions;

 

   

a purchase, tender offer or other acquisition (including by way of merger, consolidation, share exchange, arrangement, consolidation or otherwise) of beneficial ownership (the term “beneficial ownership” having the meaning assigned thereto in Section 13(d) of the Exchange Act and the rules

 

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and regulations thereunder) of securities representing fifteen percent (15%) or more of the voting power of Inotek (including securities of Inotek currently beneficially owned by such Person;

 

    any liquidation or dissolution of a party.

The merger agreement provides that if any party or any representative of such party receives any inquiries, discussion, proposal or expression of interest, then such party shall promptly (and in no event later than twenty-four (24) hours after such party becomes aware of such acquisition proposal or inquiry) advise the other party, orally and in writing, and shall indicate in reasonable detail the terms and conditions of such proposal, inquiry or contact, including price, and the identity of the offeror of such acquisition proposal. Such party shall keep the other party informed, on a current basis, of the status and material developments (including any changes to the terms) of any such acquisition proposal.

Meeting of Inotek’s Stockholders and Rocket Shareholder Approval

Inotek is obligated under the merger agreement to call, give notice of and hold a meeting of its stockholders for the purposes of voting on the issuance of shares of Inotek common stock and the merger and the reverse stock split. The Inotek stockholders’ meeting shall be held as promptly as practicable after this proxy statement is filed with the SEC and either (i) the SEC has indicated either that it does not intend to review the proxy statement or that’s its review is completed or (ii) at least ten calendar days have passed since the proxy statement was filed with the SEC without receiving any correspondence from the SEC commenting upon or indicating that it intends to review the proxy statement. Inotek has agreed to use reasonable best efforts to ensure that all proxies solicited in connection with the stockholders’ meeting are solicited in compliance with all applicable laws. Inotek’s obligation to hold such meeting shall not be limited or otherwise affected by any withdrawal or modification of the recommendation of the Inotek board of directors with respect to the issuance of shares of Inotek common stock in the merger.

Rocket is obligated under the merger agreement to obtain written consents of its stockholders sufficient to adopt the merger agreement and approve the merger and related transactions. By September 19, 2017, Rocket had obtained the requisite vote necessary to approve the merger and related transactions at an extraordinary general meeting of shareholders of Rocket.

Directors and Officers Following the Merger

At and immediately after the effective time of the merger, the combined company will initially have a seven member board of directors. The initial directors to serve on the board of directors of the combined company shall be Roderick Wong, MD, Managing Partner of RTW Investments, and will include David Southwell, President and Chief Executive Officer of Inotek, Carsten Boess, current Inotek director, Gaurav Shah, MD, Chief Executive Officer of Rocket, as well as three additional members, until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal. At and immediately after the effective time of the merger, the officers of the company shall include Gaurav Shah, MD, who will serve as Chief Executive Officer of the combined company.

Indemnification of Officers and Directors

The merger agreement provides that, for a period of six years following the effective time of the merger, each of Inotek and Rocket, as the surviving corporation in the merger, will, to the fullest extent permitted under the DGCL or Cayman Law, jointly and severally, indemnify and hold harmless all individuals who are present or former directors and officers or who become, prior to the effective date of the merger, directors or officers of Inotek or Rocket, against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that such person is or was a director or officer of Inotek or Rocket, whether asserted or claimed prior to,

 

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at or after the effective time of the merger, relating to acts or omissions taken prior to the effective time to the fullest extent permitted under the DGCL or Cayman Law for directors or officers of Delaware corporations or Cayman Island companies, as applicable. Each such indemnified person will be entitled to advancement of expenses incurred in the defense of any such claim, action, suit, proceeding or investigation from each of Inotek or Rocket, as the surviving corporation in the merger, jointly and severally, upon receipt by Inotek or Rocket, from such person of a request for such advancement; provided that such person provides an undertaking, to the extent then required by the DGCL or Cayman Law, to repay such advances if it is ultimately determined that such person is not entitled to indemnification.

In addition, for a period of six years following the effective time of the merger, the certificate of incorporation and bylaws of Inotek and the memorandum and articles of association of Rocket, as the surviving corporation in the merger, will contain provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of present and former directors and officers of each of Inotek and Rocket than are presently set forth in the certificate of incorporation and bylaws (or equivalent organizational documents) of Inotek and Rocket, as applicable.

The merger agreement also provides that, for a period of six years commencing at the closing of the merger, each of Inotek and Rocket, will maintain in effect directors’ and officers’ liability insurance policies, with coverage containing terms and conditions at least as favorable as the coverage under the presently existing policies maintained by Inotek and Rocket; provided, however, that in no event shall Inotek and Rocket be required to expend for such insurance coverage more than an amount equal to 200% of the current annual premiums paid by Inotek and Rocket, as applicable, for its existing policy. In addition, the merger agreement provides that Inotek shall maintain directors’ and officers’ liability insurance policies commencing at the closing date of the merger, on commercially reasonable terms and conditions and with coverage limits customary for United States public companies similarly situated to Inotek.

Covenants; Conduct of Business Pending the Merger

During the period commencing on September 12, 2017 and ending at the earlier of the date of termination of the merger agreement and the effective time of the merger, Inotek has agreed that it will conduct its business in the ordinary course consistent with the operating plans and financial model delivered to Rocket in accordance with past practices and in compliance with all applicable laws, rules, regulations, and certain contracts, and to take other agreed-upon actions, including, without limitation, providing Rocket prompt notice upon the occurrence of certain events or discovery of certain conditions, facts or circumstances. During the same period, Rocket also agreed that it will conduct its business in the ordinary course of its normal operations and consistent with its past practices and in compliance with all applicable laws, rules, regulations and certain contracts, and to take other agreed-upon actions, including, without limitation, providing Inotek prompt notice upon the occurrence of certain events or discovery of certain conditions, facts or circumstances.

Inotek and Rocket also agreed that prior to the effective time of the merger, subject to certain limited exceptions set forth in the merger agreement, without the consent of the other party, each of Inotek and Rocket would not, and would not cause or permit any of their subsidiaries to:

 

    declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of capital stock; or repurchase, redeem or otherwise reacquire any shares of capital stock or other securities (except for shares of common stock from terminated employees, and provided that such repurchase is at the lower of the current fair value or the original cost basis for such shares);

 

    amend its certificate of incorporation, bylaws, memorandum and articles of association, or other charter or organizational documents, as applicable, or effect or become a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock or share split, reverse stock or share split or similar transaction, except as related to any of the transactions contemplated by the merger agreement;

 

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    form any subsidiary or acquire any equity interest or other interest in any other entity;

 

    lend money to any person; incur or guarantee any indebtedness for borrowed money; issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities; guarantee any debt securities of others; or make any capital expenditure or commitment in excess of $100,000 individually or $250,000 in the aggregate, other than in the ordinary course of business (as defined in the merger agreement); and in the case of Rocket excluding any such expenditures or commitments set forth in its operating budget;

 

    adopt, establish or enter into any employee plan; cause or permit any employee plan to be amended other than as required by law or to make amendments for the purposes of section 409A of the tax code (subject to review and approval by the other party, with such approval not to be unreasonably withheld); pay or establish any bonus any profit-sharing or similar payment to, or increase the amount of the wages, salary, commissions, benefits or other compensation or remuneration payable to, any of its directors, officers or employees; accelerate the vesting of any compensation or benefit; hire or promote any employee; or grant any severance, retention, termination or similar payments or benefits to any individual;

 

    enter into any material transaction outside the ordinary course of business;

 

    acquire any material asset, sell, lease or otherwise irrevocably dispose of any of its material assets or properties or grant any encumbrance with respect to such assets or properties, except in the ordinary course of business;

 

    make any changes in accounting methods, principles or practices, except insofar as may have been required by the SEC or a change in GAAP or, except as so required, change any assumption underlying, or method of calculating, any bad debt, contingency or other reserve;

 

    change any annual tax accounting period; enter into any tax allocation agreement, tax sharing agreement or tax indemnity agreement; enter into any closing agreement with respect to any tax (in the case of Inotek, other than pursuant to customary indemnifications for Taxes contained in credit or other commercial agreements no principal purpose of which relates to taxes or tax returns); settle or compromise any claim, audit or assessment in respect of material tax; apply for or enter into any ruling from any tax authority with respect to taxes; or consent to any extension or waiver of the statute of limitations period applicable to any material tax claim or assessment;

 

    enter into, amend or terminate any material contract;

 

    initiate, compromise or settle any legal proceeding; and

 

    fail to make any material payment with respect to any of its accounts payable or indebtedness in a timely manner in accordance with the terms thereof and consistent with past practice.

Convertible Notes

In August 2016, Inotek issued an aggregate $52,000,000 aggregate principal amount of 5.75% convertible senior notes due in 2021. Each outstanding convertible note of Inotek will remain outstanding after the merger unless converted by the holder thereof or repurchased by Inotek. Under the merger agreement, each of Inotek and Rocket has agreed to ensure that the merger does not constitute a “Fundamental Change” or “Make-Whole Fundamental Change,” each as defined in the indentures governing the convertible notes.

Other Agreements

Each of Inotek and Rocket has agreed to use its commercially reasonable efforts to:

 

    file or otherwise submit all applications, notices, reports and other documents reasonably required to be filed with a governmental entity with respect to the merger and any transaction contemplated by the merger agreement and to promptly submit any additional information required by any such governmental entity;

 

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and each of Inotek and Rocket shall use its reasonable best efforts to:

 

    coordinate with the other in preparing and exchanging information and promptly provide the other with copies of all filings or submissions made in connection with the merger;

 

    obtain all consents, approvals or waivers reasonably required in connection with the transactions contemplated by the merger agreement;

 

    lift any injunction prohibiting, or any other legal bar to, the merger or other transactions contemplated by the merger agreement; and

 

    take all actions and satisfy all conditions necessary to consummate the merger and any transaction contemplated by the merger agreement.

Inotek and Rocket have agreed that:

 

    Inotek and Rocket shall take all actions necessary to ensure that the merger shall not constitute a “Fundamental Change” or “Make-Whole Fundamental Change” (each as defined in the indenture governing the “Parent Convertible Notes” (as defined in the merger agreement));

 

    Inotek shall use its reasonable best efforts to maintain its existing listing on the NASDAQ Global Market (or, alternatively, the NASDAQ Capital Market) and to cause the shares of Inotek common stock being issued in the merger to be approved for listing (subject to notice of issuance) on the NASDAQ Global Market (or, alternatively, the NASDAQ Capital Market) at or prior to the effective time of the merger;

 

    Rocket shall take all action necessary in accordance with all applicable Legal Requirements and Rocket’s memorandum and articles of association, charter, bylaws and other organizational documents to call, give notice of, convene and hold a meeting of the Rocket shareholders to consider and vote on proposals to adopt and approve the merger agreement, the merger and the other contemplated transactions sufficient to obtain approval by 11:59 P.M. New York time on September 22, 2017 (as previously discussed, on September 19, 2017 by the requisite vote, the shareholders of Rocket adopted the merger agreement at an extraordinary general meeting of shareholders of Rocket);

 

    Rocket shall use its reasonable best efforts to obtain an investment representation letter from each holder of its capital stock and shall take all action required to effect the conversion of its issued and outstanding shares of preferred stock into shares of common stock in accordance with the merger agreement;

 

    as promptly as practicable following the date of the merger agreement, and in any event no later than ten days after Rocket shall have delivered the requisite financials, Inotek shall prepare and cause to be filed with the SEC this proxy statement and shall use its commercially reasonable efforts to (i) cause the proxy statement to comply with the rules and regulations promulgated by the SEC, (ii) respond promptly to any comments of the SEC or its staff and (iii) cause the proxy statement to be mailed to Inotek’s stockholders as promptly as practicable after it has been filed with the SEC and either (a) the SEC has indicated either that it does not want to review the proxy statement or its review is completed or (b) at least ten calendar days has passed since the proxy statement was filed with the SEC;

 

    for a period of six years after the closing of the merger, the combined company will indemnify each of the directors and officers of Inotek and Rocket to the fullest extent permitted under the DGCL and Cayman Law and will maintain directors’ and officers’ liability insurance for the directors and officers of Inotek and Rocket; and

 

    Inotek shall maintain directors’ and officers’ liability insurance policies commencing at the closing date of the merger, on commercially reasonable terms and conditions and with coverage limits customary for U.S. public companies similarly situated to Inotek.

 

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Termination

The merger agreement may be terminated at any time before the completion of the merger, whether before or after the required stockholder approvals of the merger and the issuance of Inotek common stock have been obtained, as set forth below:

 

    by mutual written consent duly authorized by the Boards of Directors of each of Inotek and Rocket;

 

    by either Inotek or Rocket if the merger has not been consummated by March 15, 2018; provided, that this right to terminate the merger agreement will not be available to any party whose action or failure to act has been a principal cause of the failure of the merger to be completed by such date and such action or failure to act constitutes a breach of the merger agreement;

 

    by either Inotek or Rocket if a court of competent jurisdiction or other governmental entity has issued a final and non-appealable order, decree or ruling or taken any other action that permanently restrains, enjoins or otherwise prohibits the merger;

 

    by Inotek if the Rocket shareholder approval has not been obtained by 11:59 P.M. New York time on September 22, 2017 (as previously discussed, on September 19, 2017 by the requisite vote, the shareholders of Rocket adopted the merger agreement at an extraordinary general meeting of shareholders of Rocket);

 

    by either Inotek or Rocket if the stockholders of Inotek have not given the requisite approval to consummate the merger or any of the transactions contemplated by the merger agreement, including the sale of shares of Inotek’s common stock to be issued to Rocket shareholders, and the reverse stock split; provided, that this right to terminate the merger agreement shall not be available to Inotek if failure to obtain the approval of the Inotek stockholders was caused by the action or failure to act of Inotek and such action or failure to act constitutes a material breach by Inotek of the merger agreement;

 

    by Rocket, at any time prior to the approval of the issuance of the shares of Inotek common stock pursuant to the merger, if (each such event, an “Inotek triggering event”):

 

    the Inotek board of directors fails to recommend that the stockholders of Inotek vote to approve the merger and the issuance of Inotek common stock in connection with the merger or withdraws or modifies its recommendation in a manner adverse to Rocket;

 

    Inotek fails to include in this proxy statement the recommendation of its board of directors;

 

    the Inotek board of directors approves, endorses or recommends any acquisition proposal; or

 

    Inotek enters into any letter of intent or similar document or any contract relating to any acquisition proposal, other than a confidentiality agreement permitted pursuant to the merger agreement;

 

    by Inotek, at any time prior to the adoption of the merger agreement by the stockholders of Rocket, if (each such event, a “Rocket triggering event”):

 

    the Rocket board of directors fails to recommend that the Rocket shareholders vote or act by written consent to approve the merger or withdraws or modifies its recommendation in a manner adverse to Inotek;

 

    the Rocket board of directors approves, endorses or recommends any acquisition proposal; or

 

    Rocket enters into any letter of intent or similar document or any contract relating to any acquisition proposal, other than a confidentiality agreement permitted pursuant to the merger agreement;

 

   

by Inotek or Rocket if the other party has breached any of its representations, warranties, covenants or agreements contained in the merger agreement or if any representation or warranty of the other party has become inaccurate, in either case such that the conditions to the closing of the merger would not be

 

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satisfied as of time of such breach or inaccuracy; provided, however, that if such breach or inaccuracy is curable, then the merger agreement will not terminate as a result of a particular breach or inaccuracy until the earlier of the expiration of a 30-day period after delivery of written notice of such breach or inaccuracy and the breaching party ceasing to exercise commercially reasonable efforts to cure such breach (it being understood that the merger agreement shall not terminate as a result of such particular breach or inaccuracy if such breach is cured prior to such termination becoming effective); and

 

    by Inotek, at any time prior to the receipt of the stockholder approval of the merger agreement and the transactions contemplated thereby, in connection with Inotek entering into a definitive agreement to effect a “Parent Superior Offer” (as defined in the merger agreement).

Termination Fee

Except as set forth below, all fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby shall be paid by the party incurring such expenses, whether or not the merger is consummated.

Fee Payable by Inotek

Inotek must pay Rocket, within ten business days after the termination of the merger agreement, a nonrefundable termination fee of $2,000,000 if, among other events specified in the merger agreement, the merger agreement is terminated by Inotek or Rocket because (i) the merger has not been consummated by March 15, 2018 (and, prior to termination of the merger agreement, a person publicly makes an acquisition proposal or amends an acquisition proposal made prior to the date of the merger agreement and, within 12 months after such termination, Inotek enters into a definitive agreement to consummate, or consummates, any such acquisition proposal),; (ii) the stockholders of Inotek do not approve the merger agreement, the merger, the issuance of Inotek common stock in connection with the merger and the other transactions contemplated by the merger agreement (and, prior to the Inotek stockholder meeting, a person publicly makes an acquisition proposal or amends an acquisition proposal made prior to the date of the merger agreement and, within 12 months after such termination, Inotek enters into a definitive agreement to consummate, or consummates, any such acquisition proposal); or (iii) an Inotek triggering event (as defined in the merger agreement ); or (iv) Inotek enters into a definitive agreement to effect a parent superior offer.

In addition, either party may terminate the merger agreement if the stockholders of Inotek do not approve the merger and related transactions. In the event the stockholders of Inotek fail to approve the merger and related transactions and Rocket terminates the merger agreement, Inotek shall pay Rocket the out-of-pocket fees and expenses, incurred by or on behalf of the person entitled to payment, in connection with the preparation, negotiation, execution and performance of merger agreement and the transactions contemplated thereby in an amount not to exceed $500,000 promptly, and in any event not more than two business days following such termination; provided that the payment by Inotek of the amount not to exceed $500,000 shall be credited against any termination fee payable pursuant to the foregoing paragraph.

Fee Payable by Rocket

Rocket must pay Inotek, within ten business days after the termination of the merger agreement, a nonrefundable termination fee of $2,000,000 if the merger agreement is terminated by Inotek because Rocket shareholder approval was not obtained by 11:59 P.M. New York time on September 22, 2017 (as previously discussed, on September 19, 2017 by the requisite vote, the shareholders of Rocket adopted the merger agreement at an extraordinary general meeting of shareholders of Rocket).

Representations and Warranties

The merger agreement contains customary representations and warranties of Inotek, Rocket and the acquisition subsidiary for a transaction of this type. Inotek’s representations and warranties are qualified by its

 

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disclosure schedules and, in some cases, by Inotek’s SEC reports. Rocket’s representations and warranties are qualified by its disclosure schedules. The representations and warranties in the merger agreement relate to, among other things:

 

    subsidiaries and due organization;

 

    governing documents, charters and codes of conduct;

 

    capital structure;

 

    financial statements and, with respect to Inotek, documents filed with the SEC and the accuracy of information contained in those documents;

 

    any material changes or events;

 

    title to assets;

 

    real property and leaseholds;

 

    intellectual property;

 

    material agreements, contracts and commitments;

 

    any undisclosed liabilities;

 

    compliance with legal and regulatory requirements;

 

    filing of tax returns and payment of taxes;

 

    employee and labor matters, benefit plans and related matters;

 

    environmental matters;

 

    insurance matters;

 

    legal proceedings, orders and other litigation matters;

 

    authority to enter into the merger agreement and the related agreements;

 

    votes required for completion of the merger and approval of the proposals that will come before each of the Inotek special meeting and the Rocket written stockholder consent;

 

    any conflicts or violations of each party’s agreements as a result of the merger or the merger agreement; and

 

    any brokerage or finder’s fee or other fee or commission in connection with the merger.

The representations and warranties are, in many respects, qualified by materiality and knowledge, and will not survive the merger, but their accuracy forms the basis of one of the conditions to the obligations of Rocket and Inotek to complete the merger.

Amendment

The merger agreement may be amended with the approval of the respective boards of directors of Inotek and Rocket at any time, except that after the merger agreement has been adopted by either the stockholders of Inotek or the shareholders of Rocket, no amendment which by law requires further approval of the stockholders or shareholders of either party, as the case may be, shall be made without such further stockholder or shareholder approval.

 

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AGREEMENTS RELATED TO THE MERGER

In connection with the execution of the merger agreement, certain Rocket shareholders and Inotek stockholders entered into voting agreements with Inotek and Rocket pursuant to which, among other things, each of these shareholders and stockholders agreed, solely in its capacity as a stockholder or shareholder, to vote (i) in favor of adoption and approval of (A) the issuance of the shares of Inotek’s common stock by virtue of the merger (B) the adoption of the merger agreement and approval of the merger, and (C) an amendment to the certificate of incorporation of Inotek to effect the reverse stock split; (ii) against any action or agreement that, to the knowledge of the stockholder, would reasonably be expected to result in a breach in any material respect of any covenant, representation or warranty or any other obligation or agreement of Inotek or any of its subsidiaries or affiliates under the merger agreement or that would reasonably be expect to result in any of the conditions to Inotek’s or any of its subsidiaries’ or affiliates’ obligations under the merger agreement not being fulfilled; and (iii) against any Inotek acquisition proposal, or any agreement, transaction, or other matter that is intended to, or would reasonably be expected to, impede, interfere with, delay, postpone, discourage or materially and adversely effect the consummation of the merger and all other transactions contemplated by the merger agreement. The voting agreements grant a proxy to vote such shares in favor of the transactions contemplated by the merger agreement. In addition, the voting agreements place restrictions on the transfer of the shares of Inotek and Rocket shares held by the respective signatory stockholders and shareholders.

As of September 12, 2017, the shareholders of Rocket that entered into voting agreements owned in the aggregate approximately 67.2% of the outstanding Rocket capital share on an as-converted to common stock basis. On September 19, 2017, Rocket’s shareholders adopted the merger agreement and approved the merger and related transactions at an extraordinary general meeting of shareholders of Rocket.

As of September 12, 2017, stockholders owning in the aggregate approximately 5% of Inotek’s fully-diluted common stock (including common stock which may be issued upon exercise of options and vesting of restricted stock units or settlement of vested restricted stock units) have entered into voting agreements. The Inotek stockholders that entered into the voting agreements are Timothy Barberich, Carsten Boess, J. Martin Carroll, Paul G. Howes, Patrick Machado, Gary Phillips, M.D., David P. Southwell, Richard N. Spivey, PharmD, PhD, Rudolf A. Baumgartner, M.D. and Dale Ritter.

In addition, pursuant to the conditions of the merger agreement, certain Rocket shareholders and Inotek stockholders identified above, entered into lock-up agreements with Inotek and Rocket pursuant to which, among other things, each of these shareholders and stockholders agreed, solely in its capacity as a shareholder or stockholder, not to, except in limited circumstances (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for Inotek’s common stock (including without limitation, Inotek’s common stock or such other securities which may be deemed to be beneficially owned by the stockholder in accordance with the rules and regulations of the SEC and securities of Inotek which may be issued upon exercise of a stock option or warrant or settlement of a restricted stock unit or publicly disclose the intention to make any such offer, sale, pledge, grant, transfer or disposition; (ii) enter into any swap, short sale, hedge or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the stockholder’s shares regardless of whether any such transaction described in the aforementioned clause (i) this clause (ii) is to be settled by delivery of Inotek’s common stock or such other securities, in cash or otherwise or (iii) make any demand for or exercise any right with respect to the registration of any shares of Inotek’s common stock or any security convertible into or exercisable or exchangeable for Inotek’s common stock; from the closing of the merger until 180 days from the closing date of the merger.

 

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MATTERS BEING SUBMITTED TO A VOTE OF INOTEK’S STOCKHOLDERS

Proposal 1: Approval of the Issuance of Common Stock in the Merger

General

At the special meeting, Inotek’s stockholders will be asked to approve the issuance of Inotek’s common stock pursuant to the merger agreement and the resulting “change of control” of Inotek under NASDAQ rules. Immediately following the effective time of the merger, Rocket’s shareholders will own approximately 81% of the combined company on a fully-diluted basis and Inotek’s stockholders will own approximately 19% of the combined company, on a fully-diluted basis, subject to various assumptions and conditions described in detail in this proxy statement. The terms of, reasons for and other aspects of the merger agreement and the issuance of Inotek’s common stock pursuant to the merger agreement are described in detail in the other sections of this proxy statement.

The full text of the merger agreement is attached to this proxy statement as Annex A.

Required Vote; Recommendation of Board of Directors

The affirmative vote of the holders of a majority of the shares of Inotek’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting. A failure to submit a proxy card or vote at the special meeting, or an abstention or “broker non-vote” will have no effect on the outcome of Proposal 1.

INOTEK’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT INOTEK’S STOCKHOLDERS VOTE “FOR” PROPOSAL 1 TO APPROVE THE ISSUANCE OF INOTEK’S COMMON STOCK PURSUANT TO THE MERGER AGREEMENT AND THE RESULTING “CHANGE OF CONTROL” OF INOTEK UNDER NASDAQ RULES.

Proposal 2: Approval of the Reverse Stock Split

General

At the special meeting, Inotek’s stockholders will be asked to approve an amendment to Inotek’s seventh amended and restated certificate of incorporation to effect a reverse stock split of the issued and outstanding shares of Inotek’s common stock. Upon the effectiveness of the amendment to Inotek’s seventh amended and restated certificate of incorporation effecting the reverse stock split, the outstanding shares of Inotek’s common stock will be combined into a lesser number of shares such that one share of Inotek’s common stock will be issued for a specified number of shares, which shall be greater than one and equal to or less than 10, of outstanding Inotek’s common stock, with the exact number within the range to be determined by Inotek’s board of directors prior to the effective time of such amendments and publicly announced by Inotek. The forms of the proposed amendments to the Inotek seventh amended and restated certificate of incorporation will, together, effect the reverse stock split, as more fully described below, but will not change the number of authorized shares, or the par value, of Inotek’s common stock.

If Proposal 2 is approved, the reverse stock split would become effective as soon as reasonably practicable, provided Inotek’s board of directors still believes that a reverse stock split is in the best interests of Inotek and its stockholders at such time. Inotek’s board of directors may effect only one reverse stock split in connection with this Proposal 2. Inotek’s board of directors’ decision will be based on a number of factors, including market conditions, existing and expected trading prices for Inotek’s common stock and the listing requirements of the NASDAQ Global Market. Even if the stockholders approve the reverse stock split, Inotek reserves the right not to effect the reverse stock split if Inotek’s board of directors does not deem the reverse stock split to be in the best interests of Inotek and its stockholders. Inotek’s board of directors may determine to effect the reverse stock

 

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split, if it is approved by the stockholders, even if the other proposals to be acted upon at the meeting are not approved, including the issuance of shares of Inotek’s common stock in the merger and the resulting “change of control” of Inotek under NASDAQ rules.

Purpose

The Inotek board of directors believes that a reverse stock split may be desirable for a number of reasons. Inotek common stock is currently, and will be following the completion of the merger, listed on The NASDAQ Global Market. According to applicable NASDAQ rules, in order for Inotek common stock to continue to be listed on The NASDAQ Global Market, Inotek must satisfy certain requirements established by The NASDAQ Global Market. The Inotek board of directors expects that a reverse stock split of Inotek common stock will increase the market price of Inotek common stock so that Inotek is able to maintain compliance with the relevant NASDAQ listing requirements for the foreseeable future.

The Inotek board of directors also believes that the increased market price of Inotek common stock expected as a result of implementing a reverse stock split will improve the marketability and liquidity of Inotek common stock and will encourage interest and trading in Inotek common stock. Because of the trading volatility often associated with low-priced stocks, many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. Some of those policies and practices may function to make the processing of trades in low-priced stocks economically unattractive to brokers. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, the current average price per share of Inotek common stock can result in individual stockholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were substantially higher. It should be noted that the liquidity of Inotek common stock may be harmed by the proposed reverse stock split given the reduced number of shares that would be outstanding after the reverse stock split. The Inotek board of directors is hopeful, however, that the anticipated higher market price will reduce, to some extent, the negative effects of the policies and practices of institutional investors and brokerage houses described above on the liquidity and marketability of the common stock.

Notwithstanding the foregoing, there can be no assurance that: (a) the market price per share following the reverse stock split would rise in proportion to the reduction in the number of pre-split shares of Inotek common stock outstanding before the reverse stock split; (b) the market price per share following the reverse stock split would remain in excess of the minimum price required for listing on The NASDAQ Global Market for a sustained period of time; (c) the Inotek common stock will not be delisted from NASDAQ due to a failure to meet other continued listing requirements even if the market price per post-reverse split share of Inotek common stock remains in excess of such required minimum price; and (d) the reverse stock split would result in a per share price that would attract brokers and investors who do not trade in lower-priced stock. The market price of Inotek common stock will also be based on Inotek’ performance and other factors, some of which are unrelated to the number of shares outstanding. If the reverse stock split is effected and the market price of Inotek common stock declines, the percentage decline as an absolute number and as a percentage of Inotek’s overall market capitalization may be greater than would occur in the absence of the proposed reverse stock split.

NASDAQ Requirements for Listing on the NASDAQ Global Market

Inotek’s common stock is currently listed on the NASDAQ Global Market under the symbol “ITEK.”

According to NASDAQ rules, an issuer must, in a case such as this, apply for initial inclusion following a transaction whereby the issuer combines with a non-NASDAQ entity, resulting in a change of control of the issuer and potentially allowing the non-NASDAQ entity to obtain a NASDAQ listing. These are referred to as NASDAQ’s “reverse merger” rules. Accordingly, the listing standards of the NASDAQ Global Market or NASDAQ Capital Market will require Inotek to have, among other things, a $4.00 per share (or, to the extent

 

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applicable, $3.00 per share) minimum bid price upon the effective time of the merger. Because the current price of Inotek common stock is less than the required minimum bid prices, the reverse stock split is necessary to obtain approval of the listing of the combined company and the shares of Inotek common stock being issued in the merger on either market.

Additionally, Inotek’s board of directors believes that maintaining its listing on the NASDAQ Global Market may provide a broader market for Inotek’s common stock and facilitate the use of Inotek’s common stock in financing and other transactions. Inotek’s board of directors unanimously approved the reverse stock split partly as a means of maintaining the share price of Inotek’s common stock following the merger above $4.00 per share or, to the extent applicable, $3.00 per share.

One of the effects of the reverse stock split will be to effectively increase the proportion of authorized shares which are unissued relative to those which are issued. This could result in the combined company being able to issue more shares without further stockholder approval. Inotek currently has no plans to issue shares, other than in connection with the merger, and to satisfy obligations under Inotek’s employee stock options and warrants from time to time as these options and warrants are exercised. The reverse stock split will not affect the number of authorized shares of Inotek’s common stock, which will continue to be 120,000,000.

Principal Effects of the Reverse Stock Split

If the stockholders approve the proposal to implement the reverse stock split and Inotek’s board of directors implements the reverse stock split, Inotek will amend Inotek’s seventh amended and restated certificate of incorporation to effect the reverse stock split. The text of the forms of the proposed amendment to Inotek’s certificate of incorporation is attached to this proxy statement as Annex E.

The reverse stock split will be effected simultaneously for all outstanding shares of Inotek’s common stock. The reverse stock split will affect all of Inotek’s stockholders uniformly and will not affect any stockholder’s percentage ownership interests in Inotek, except to the extent that the reverse stock split results in any of Inotek’s stockholders owning a fractional share. Common stock issued pursuant to the reverse stock split will remain fully paid and nonassessable. The reverse stock split will not affect Inotek’s continuing to be subject to the periodic reporting requirements of the Exchange Act.

As of the effective time of the reverse stock split, Inotek will adjust and proportionately decrease the number of shares of Inotek’s common stock reserved for issuance upon exercise of, and adjust and proportionately increase the exercise price of, all options and warrants and other rights to acquire Inotek’s common stock. In addition, as of the effective time of the reverse stock split, Inotek will adjust and proportionately decrease the total number of shares of Inotek’s common stock that may be the subject of the future grants under Inotek’s stock option plans.

Procedure for Effecting Reverse Stock Split and Exchange of Stock Certificates

If Inotek’s stockholders approve the proposal to effect the reverse stock split, and if Inotek’s board of directors still believes that a reverse stock split is in the best interests of Inotek and its stockholders, Inotek’s board of directors will determine the ratio of the reverse stock split to be implemented. Inotek will file the certificates of amendment with the Secretary of State of the State of Delaware immediately prior to the effective time of the merger. Inotek’s board of directors may delay effecting the reverse stock split without resoliciting stockholder approval. Beginning on the effective date of the reverse stock split, each certificate representing pre-split shares will be deemed for all corporate purposes to evidence ownership of post-split shares.

As soon as practicable after the effective date of the reverse stock split, stockholders will be notified that the reverse stock split has been effected. Inotek expects that Inotek’s transfer agent will act as exchange agent for purposes of implementing the exchange of stock certificates. Holders of pre-split shares will be asked to

 

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surrender to the exchange agent certificates representing pre-split shares in exchange for certificates representing post-split shares in accordance with the procedures to be set forth in a letter of transmittal to be sent by Inotek. No new certificates will be issued to a stockholder until such stockholder has surrendered such stockholder’s outstanding certificate(s) together with the properly completed and executed letter of transmittal to the exchange agent. Any pre-split shares submitted for transfer, whether pursuant to a sale or other disposition, or otherwise, will automatically be exchanged for post-split shares. STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNLESS AND UNTIL REQUESTED TO DO SO.

Fractional Shares

No certificates or scrip representing fractional shares of Inotek’s common stock will be issued in connection with the reverse stock split. Each holder of Inotek’s common stock who would otherwise have been entitled to receive a fraction of a share of Inotek’s common stock shall be entitled to receive, in lieu thereof, upon surrender of such holder’s certificate(s) representing such fractional shares of Inotek’s common stock, cash (without interest) in an amount equal to such fractional part of a share of Inotek’s common stock multiplied by the average last reported sales price of Inotek’s common stock at 4:00 p.m., Eastern time, end of regular trading hours on NASDAQ during the 10 consecutive trading days ending on the last trading day prior to the effective date of the merger.

By authorizing the reverse stock split, stockholders will be approving the combination of any whole number of shares of common stock between and including a number that is greater than one and less than or equal to 10 into one share. The certificate of amendment filed with the Secretary of State of the State of Delaware effecting the reverse stock split will include only that number determined by the board of directors to be in the best interests of Inotek and its stockholders. In accordance with these resolutions, the board of directors will not implement any amendment providing for a different split ratio.

Inotek’s stockholders should be aware that, under the escheat laws of the various jurisdictions where stockholders reside, where Inotek is domiciled, and where the funds will be deposited, sums due for fractional interests that are not timely claimed after the effective date of the split may be required to be paid to the designated agent for each such jurisdiction, unless correspondence has been received by Inotek or the exchange agent concerning ownership of such funds within the time permitted in such jurisdiction. Thereafter, stockholders otherwise entitled to receive such funds will have to seek to obtain them directly from the state to which they were paid.

Accounting Matters

The reverse stock split will not affect the common stock capital account on Inotek’s balance sheet. However, because the par value of Inotek’s common stock will remain unchanged on the effective date of the split, the components that make up the common stock capital account will change by offsetting amounts. Depending on the size of the reverse stock split the board of directors decides to implement, the stated capital component will be reduced and the additional paid-in capital component will be increased with the amount by which the stated capital is reduced. The per share net income or loss and net book value of Inotek will be increased because there will be fewer shares of Inotek’s common stock outstanding. Prior periods’ per share amounts will be restated to reflect the reverse stock split.

Potential Anti-Takeover Effect

Although the increased proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect, for example, by permitting issuances that would dilute the stock ownership of a person seeking to effect a change in the composition of Inotek’s board of directors or contemplating a tender offer or other transaction for the combination of Inotek with another company, the reverse

 

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stock split proposal is not being proposed in response to any effort of which Inotek is aware to accumulate shares of Inotek’s common stock or obtain control of Inotek, other than in connection with the merger with Rocket, nor is it part of a plan by management to recommend a series of similar amendments to Inotek’s board of directors and stockholders. Other than the proposals being submitted to Inotek’s stockholders for their consideration at the special meeting, Inotek’s board of directors does not currently contemplate recommending the adoption of any other actions that could be construed to affect the ability of third parties to take over or change control of Inotek.

No Appraisal Rights

Under DGCL, Inotek’s stockholders are not entitled to appraisal rights with respect to the reverse stock split, and Inotek will not independently provide stockholders with any such right.

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split

The following is a summary of certain material U.S. federal income tax consequences of the reverse stock split. It does not purport to be a complete discussion of all of the possible U.S. federal income tax consequences of the reverse stock split and is included for general information only. Further, it does not address any state, local or foreign income or other tax consequences. This discussion does not address the tax consequences to holders that are subject to special tax rules, such as banks, insurance companies, regulated investment companies, personal holding companies, foreign entities, nonresident alien individuals, broker-dealers and tax-exempt entities. The discussion is based on the provisions of the U.S. federal income tax law as of the date hereof, which are subject to change retroactively as well as prospectively. This summary also assumes that the shares of Inotek’s common stock held by stockholders before the reverse stock split were, and the shares of common stock held after the reverse stock split will be, held as “capital assets,” as defined in the Code. The tax treatment of a stockholder may vary depending upon the particular facts and circumstances of such stockholder. Each stockholder is urged to consult with such stockholder’s own tax advisor with respect to the tax consequences of the reverse stock split.

Inotek stockholders generally will not recognize gain or loss as a result of the reverse stock split. The aggregate adjusted tax basis in the shares of Inotek common stock received pursuant to the reverse stock split will equal the aggregate adjusted tax basis of the shares of Inotek common stock exchanged therefor. In general, each Inotek stockholder’s holding period for the shares of Inotek common stock received pursuant to the reverse stock split will include the holding period in the shares of Inotek common stock exchanged therefor. Inotek stockholders that acquired Inotek common stock on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.

This summary of certain material U.S. federal income tax consequence of the reverse stock split is not binding on the Internal Revenue Service or the courts. Accordingly, each stockholder should consult with his or her own tax advisor with respect to all of the potential tax consequences to him or her of the reverse stock split.

Vote Required; Recommendation of Board of Directors

The affirmative vote of holders of a majority of the outstanding shares of Inotek’s common stock as of the record date for the special meeting is required for approval of Proposal 2. A failure to submit a proxy card or vote at the special meeting, or an abstention or “broker non-vote” for Proposal 2 will have the same effect as a vote against the approval of Proposal 2.

INOTEK’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT INOTEK STOCKHOLDERS VOTE “FOR” PROPOSAL 2 TO AMEND INOTEK’S CERTIFICATE OF INCORPORATION TO EFFECT THE REVERSE STOCK SPLIT.

 

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Proposal 3: Approval of Possible Adjournment of the Special Meeting

General

If Inotek fails to receive a sufficient number of votes to approve Proposals 1 or 2, Inotek may propose to adjourn the special meeting. Inotek currently does not intend to propose adjournment at the special meeting if there are sufficient votes to approve Proposal Nos. 1 and 2.

Vote Required; Recommendation of Board of Directors

The affirmative vote of the holders of a majority of the Inotek’s common stock having voting power present in person or represented by proxy at the special meeting is required to approve the adjournment of the special meeting for the purpose of soliciting additional proxies to approve Proposals 1 or 24. A failure to submit a proxy card or vote at the special meeting, or an abstention or “broker non-vote” will have no effect on the outcome of Proposal 3.

INOTEK’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT INOTEK’S STOCKHOLDERS VOTE “FOR” PROPOSAL 3 TO ADJOURN THE SPECIAL MEETING, IF NECESSARY, IF A QUORUM IS PRESENT, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF PROPOSALS 1 or 2.

 

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INOTEK’S BUSINESS

For a description of Inotek’s business, please refer to the section entitled “Item 1. Business” set forth in Inotek’s Annual Report on Form 10-K for the year ended December 31, 2016, included as Annex B-1 to this proxy statement, which section is incorporated by reference herein. For a description of legal proceedings Inotek is party to, please refer to the section entitled “Item 3. Legal Proceedings” set forth in Inotek’s Annual Report on Form 10-K for the year ended December 31, 2016, included as Annex B-1 to this proxy statement, and the section entitled “Item 1. Legal Proceedings” set forth in Inotek’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017, included as Annex B-2 and Annex B-3 to this proxy statement, as filed with the SEC on May 10, 2017 and August 3, 2017, respectively, which sections are incorporated by reference herein.

 

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INOTEK’S PROPERTY

For a description of Inotek’s property, please refer to the section entitled “Item 2. Properties” set forth in Inotek’s Annual Report on Form 10-K for the year ended December 31, 2016, included as Annex B-1 to this proxy statement, which section is incorporated by reference herein.

 

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ROCKET’S BUSINESS

Overview

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 LVV programs currently undergoing clinical trials targeting 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 are expected to enter the clinic in 2018. In addition, Rocket has an AAV program for which it expects to file an IND application in 2018, which will permit the commencement of human clinical studies shortly 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 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, as viruses 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 to the targeted tissue or organ (such as the cells inside a patient’s bone marrow). Rocket has two viral vectors in 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) and with a favorable safety profile.

The gene therapies can be delivered either 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 in-vivo (inside the body), in which case the vector is injected directly into the patient 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

 

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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 of pediatric acute lymphoblastic leukemia, which we refer to as 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, which we refer to as LAD-I, Pyruvate Kinase Deficiency, which we refer to as PKD, and Infantile Malignant Osteopetrosis, which we refer to as 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, 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 years.

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, which we refer to as 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 Hutchinson. 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.

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.

Rocket currently has one LVV-based program targeting LAD-I, RP-L201. RP-L201 is a pre-clinical program that Rocket in-licensed from CIEMAT. This program is currently being developed through an ongoing collaboration with CIEMAT, with an IMPD expected to be filed by CIEMAT in the first half of 2018. Upon the filing and clearance of the IMPD, Rocket expects to commence enrolling patients at CIEMAT in a clinical trial in 2018.

 

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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 often results in removal of the spleen, jaundice and chronic iron overload.

Rocket currently has one LVV-based program targeting PKD, RP-L301. RP-L301 is a pre-clinical program that Rocket in-licensed from CIEMAT. This program is currently being developed through an ongoing collaboration with CIEMAT, with an IMPD expected to be filed by CIEMAT in late 2018. Upon the filing and clearance of the IMPD, Rocket expects to commence enrolling patients at CIEMAT in a clinical trial in 2018.

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 early in the first year of life and is associated with severe manifestations leading to death within the first decade of life without undergoing allogenic hematopoietic stem cell transplantation, which we refer to as HSCT (bone marrow transplant). For patients who do receive a bone marrow transplant, positive results have been limited, with frequent graft failure or rejection (graft-versus-host-disease, which we refer to as GVHD) and other severe complications. Untreated, IMO patients also 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.

Rocket currently has one LVV-based program targeting IMO, RP-L401. RP-L401 is a pre-clinical 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 by upon completion of IND/IMPD-enabling studies.

AAV 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 pre-clinical development, with IND-enabling studies ongoing. Rocket expects to file an IND for this program in 2018.

CRISPR/Cas9 based-program

In addition to its LVV and AAV programs, Rocket also has 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 sequence. “CRISPR/Cas9” stands for Clustered, Regularly Interspaced Short Palindromic Repeats

 

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(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 using 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 which Rocket’s programs and product candidates:

 

 

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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 target devastating diseases with substantial unmet need. In the medium- and long-term Rocket expects to develop proprietary in-house analytics and manufacturing capabilities and to expand its pipeline to target additional indications that Rocket believes to be potentially compatible with its gene therapy technologies. 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 Rocket 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 deoxyribonucleic acid, which we refer to as 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

 

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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, which we refer to as 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 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 FA 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

vg: viral genome

<< : substantially less than

 

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Rocket 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, which we refer to as 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 (failure) 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 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 safe and 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, 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 between 1972-2010 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, peliosis, 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

 

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several clinical studies. In addition to the monogenic nature of each patient’s disease, Rocket believes there are three critical factors that will lead Rocket’s gene therapy programs into the next generation of promising therapy:

 

  1. The ability of HSCT (stem cell transplant) to cure the hematologic component of FA is proof-of-principal that gene therapy will work in FA. If a sufficient number of hematopoietic stem cells with a correct (non-Fanconi) 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 (donor-mediated) transplant and with reduced long-term treatment cost burden.

 

  2. Evidence that HSCs with wild-type (non-mutated) FANC genes have a proliferative advantage over their counterparts bearing a FANC mutation. This selective advantage has been demonstrated in preclinical models, but more importantly has been proven in the clinical setting in FA patients with evidence of mosaicism, which is a situation where some cells contain two mutant alleles but other cells harbor one (or two) wild-type allele(s), resulting from a reversion in the FANC mutation in even a single cell and which occurs in as many as 10-15% of FA patients. Mosaicism has been associated with stable or increasing blood counts for years. In one series, this stability was evident in 8 of 8 mosaic patients over a median of 5 years with no evidence of leukemic transformation, with one patient followed for 27 years with ongoing hematologic stability. In contrast, aplasia developed in 31 of 45 non-mosaic patients. These sustained blood counts support the contention that even a modest number of wild-type stem cells may substantially repopulate a FA patient’s bone marrow, reducing rates of bone marrow aplasia and possibly leukemia.

Confirmation of this selective advantage in gene therapy has been demonstrated in a patient treated with gene therapy at CIEMAT.

 

  3. Improved vector design, stem cell selection methods, cell harvest and transduction procedures have 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. Additionally, improved transduction processes at both Hutch and CIEMAT combined with improved vector processing have now led to product VCNs at or above the target range of >1 in recently treated patients.

Clinical Development Programs RP-L101 and RP-L102

Efforts underway at Rocket partners Hutch (developing RP-L101) and CIEMAT (developing RP-L102) have incorporated 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 overcome FA-specific gene therapy challenges. Rocket partners have demonstrated the ability to successfully mobilize and harvest target numbers of stem cells (HSPCs) generally acknowledged to be required for successful therapy. This has been accomplished through the selection of younger patients, and mobilization (a method to increase the number of bone marrow-derived stem cells circulating in the blood) with both G-CSF and plerixafor. 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 September 1, 2017, three patients have received infusion of gene-corrected stem cells with RP-L101 (Hutch), and four 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 seven patients.

 

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All patients treated as of September 2017 on either protocol 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 the four patients treated at CIEMAT (RP-L102) have been evident in peripheral blood cells during the months subsequent to therapy, with progressive increases noted over time in each patient.

 

 

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FIGURE 1: Peripheral blood mononuclear cell in vivo VCN (gene markings) at 1.5-15 months in 4 FANCA patients receiving RP-L102 (Rio P et al. Proc. ESGCT 2017).

After the first patient was treated at Hutchinson, 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 1.87 (preliminary, on day of transduction) 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 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 a likely driver of leukemogenesis.

Low dose non-myeloablative cytotoxic and non-cytotoxic conditioning agents to facilitate engraftment of corrected stem cells will also be explored. In addition to transduction enhancers, these modifications will be further evaluated in the clinical programs starting in 2018.

Regulatory Status

In the United States, the FA program is in the clinical-stage with an IND in place with the FDA since 2011. Three patients have been treated to date, and enrollment continues. The FA program in the European Union is in the clinical-stage with an IMPD is in place with Spanish Health Authority. Four patients have been treated to date, and enrollment continues. Both the FDA and European Medicines Agency (EMA) have granted orphan drug designation for the “Lentiviral vector carrying the Fanconi anemia-A (FANCA) gene for the treatment of Fanconi anemia type A.”

 

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Leukocyte Adhesion Deficiency-1 (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 ITGB2 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 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 patients who do not receive an allogeneic HSCT. Mortality for severe LAD-I has been reported as 75% by age two.

Current 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 enable a potentially curative therapy utilizing patients’ own HSPCs, without the dependency on the rapid identification of an appropriate donor required in allogenic 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 treatment of LAD-1: (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 (2) consistent and robust improvements in transduction and cell processing. Of note, proprietary transduction protocols currently yield product VCNs ³ 1 and transduction efficiencies of >50%. In addition, with the addition of either of two 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.

 

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Pre-Clinical Proof of Concept

Pre-clinical results have indicated correction of LAD-I in mouse models, including restoration of neutrophils’ ability to adhere to endothelial surfaces and migrate 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 CD18 mutation results in impaired inflammatory responses, leukocytosis (high white blood cell count), and hepatosplenomegaly (swelling of liver and spleen).

 

 

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FIGURE 7: A) Lymphocyte CD18 expression of transplanted CD18HYP mice (primary and secondary transplants) following transduction with human CD18-containing vector evaluating 3 different promotors. The Chim.hCD18 vector has been chosen because it is predominantly expressed on mature myeloid lineages (not depicted here). B) CD11a expression is increased following transplant of transduced stem cells relative to control vector, indicating restoration of ß2-Integrin dimerization (Leon-Rico 2016).

The ability of gene correction to restore neutrophil migration towards inflammatory stimuli was also confirmed in an air-pouch inflammation model and a lung inflammation model. Finally, gene correction has also been shown to increase CD18 expression, CD18/CD11 dimerization, and neutrophil functionality in human cord-blood derived CD34+ cells that were modified to an LAD-I phenotype via transduction of short-hairpin RNA (shRNA) targeted to CD18 mRNA.

Regulatory Status

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

The program is in pre-clinical stage of development and expected to be in clinic in the first half of 2018.

Pyruvate Kinase Deficiency (PKD):

Overview of PKD

Red blood cell PKD is a rare autosomal recessive disorder resulting from mutations in the PKLR gene encoding for a component of the red blood cell glycolytic pathway. PKD is characterized by chronic non-spherocytic hemolytic anemia, 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 splenomegaly (surgical removal 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 from the large number of diverse mutations that may affect the PKLR gene. Estimates of disease incidence have 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 molecularly targeted therapies.

 

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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 and cardiomyopathy 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 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.

Rationale for Gene Therapy in PKD

Patients with heterozygous PKR 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, even 10% normal marrow was enough 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. A recent study showed a PKD affected dog treated with an ex vivo gene therapy was rendered transfusion independent with a normalization of LDH, despite only partial gene correction.

Of note, proprietary transduction protocols in PKD now yield product VCNs of 2, with VCNs increasing to ³4 with addition of transduction enhancers. Rocket expects that mobilization and harvesting procedures will be relatively straightforward for PKD patients (see Figure 3 below).

 

 

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FIGURE 3: Results from experiment testing the addition of a transduction enhancer to an early batch of non-optimized vector. From left to right product VCN with 3 increasing doses of transduction enhancer without vector (negative controls), then 2 dose levels of vector each combined with increasing doses of enhancer.

Pre-Clinical Proof-of-Concept

Rocket expects that mobilization and harvesting procedures will be relatively straightforward for PKD patients. Pre-clinical 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, correction of splenomegaly and reduction in hepatic erythroid clusters and iron deposits.

 

 

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FIGURE 4: Increases in RBC, Hb and reduction in reticulocytes 40-280 days following transplantation of gene corrected cells in PKD mice (primary transplants) (Garcia-Gomez 2016).

 

 

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FIGURE 5: Correction of splenomegaly at 140 days following transplantation of gene corrected cells in PKD mice (Garcia-Gomez 2016).

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 pre-clinical stage of development and Rocket expects the program to be in the clinic before the end of 2018.

 

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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 early 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 of 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.

Rocket believes that its IMO program has the potential to be a safer and more consistently curative therapy for this challenging pediatric disease.

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.

Pre-Clinical 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 pre-clinical models. Pre-clinical results demonstrate that gene correction of HSPCs from IMO patients is feasible, and that these HSPCs can engraft in immunocompromised mice. Osteoclasts from these mice demonstrate increased bone resorption in vitro, as measured by increased calcium and collagen fragment CTX-I.

Additional pre-clinical 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 pre-clinical stages of development. Additional preclinical studies are planned to enable clinical investigation of RP-L401 in 2019.

AAV-Targeted Program:

RP-A101 is in pre-clinical 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

 

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monogenic 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 curative organ transplant procedures.

Preliminary pre-clinical studies have indicated that clinically feasible AAV doses can restore functional levels of protein in knockout mouse models, and that gene/protein restoration are associated with marked histologic improvement in the organs in which the disorder causes extensive morbidity and mortality.

 

 

LOGO

 

FIGURE 6: 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; Right panels indicate RP-A101 mediated restoration of architecture and resolution of additional abnormalities.

 

 

LOGO

 

FIGURE 7: Western blot comparing missing protein expression levels in KO mouse model in target tissue (with the right three bars representing increasing doses).

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.

 

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Regulatory Status

RP-A101 is currently in pre-clinical development. A FDA pre-pre-IND meeting has been scheduled for early 2018, and Rocket anticipates filing an IND in second half of 2018.

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, and enabled assembly of Fanconi DNA repair cellular elements.

Regulatory Status

This program is currently in discovery stage of drug development.

Intellectual property

Rocket strives to protect and enhance the proprietary technology, inventions, and improvements that are commercially important to the development 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 Rocket in the future, 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 methods of manufacturing the same.

Rocket has in-licensed numerous patent applications and possesses substantial know-how and trade secrets relating to the 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 gene therapy. As of October 2017, Rocket’s patent portfolio includes four in-licensed patent families relating to its product candidates and related technologies, discussed more fully below. Specifically, Rocket have 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

 

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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, which we refer to as CIBER, Fundacion Instituto de investigacion Sanitaria Fundacion Jimenez Diaz, which we refer to as FIISFJD, and Fundacion Para la Investigacion Biomedica del Hospital Del Nino Jesus, which we refer to as 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)

 

(a) 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.

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 length of time 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,

 

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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 for 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

In November 2015, Rocket entered into an exclusive license agreement with Hutchinson granting Rocket worldwide, sublicenseable, 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 Hutchinson an up-front payment (in the form of Rocket equity), an 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. Hutchinson is responsible for prosecuting and maintaining the licensed patents (the cost of which is to be reimbursed by Rocket), but Hutchinson will follow any reasonable comments of Rocket with respect to such prosecution. Rocket has first right to enforce the licensed patents against infringement unless the parties agree otherwise.

In December 2015, Rocket entered into an exclusive license agreement with Hutchinson granting Rocket worldwide, sublicenseable, exclusive rights to certain patents covering Hutchinson’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 commercialize 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 Hutchinson an up-front payment (in the form of Rocket equity), developmental milestone payments, and sublicense revenue payments. Hutchinson is responsible for prosecuting and maintaining the licensed patents (the cost of which is to be reimbursed by Rocket), but Hutchinson will follow any reasonable comments of Rocket with respect to such prosecution. Rocket has first right to enforce the licensed patents against infringement unless the parties agree otherwise.

License Agreements with CIEMAT

In March 2016, Rocket entered into a license agreement with CIEMAT, CIBER, and FIISFJD (which we refer to collectively as CIEMAT (March 2016), 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 (March 2016) 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 (March 2016). Rocket also has the first responsibility to enforce and defend the licensed patents against infringement and/or challenge, in cooperation with CIEMAT (March 2016). For five years following the

 

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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 (March 2016) at market value. Rocket is obligated to license (without charge) to CIEMAT (March 2016) for non-commercial use any improvements to the licensed intellectual property that Rocket creates.

In July 2016, Rocket entered into a license agreement with CIEMAT, CIBER, and FIISFJD (which we refer to collectively as CIEMAT (July 2016)) 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 sublicenseable with the prior consent of CIEMAT (July 2016), 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 (July 2016) 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 (July 2016). Rocket also has the first responsibility to enforce and defend the licensed patents against infringement and/or challenge, in cooperation with CIEMAT (July 2016). 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 (July 2016) at market value. Rocket is obligated to license (without charge) to CIEMAT (July 2016) for non-commercial use any improvements to the licensed intellectual property that Rocket creates.

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, sublicenseable, worldwide license to certain intellectual property rights of Dr. Richter relating to lentiviral-mediated gene transfer to treat Osteopetrosis. 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 products covered by a valid claim within the licensed intellectual property) and sublicense revenue payments to Dr. Richter. Under the terms of the agreement, Lund University and Dr. Richter are obligated to perform contract research for Rocket regarding the use of lentiviral-mediated gene transfer to treat Osteopetrosis. Intellectual property resulting from the contract research created by Dr. Richter is included in the license 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.

 

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INOTEK’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For Inotek’s management’s discussion and analysis of financial condition and results of operations, please refer to the section entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in Inotek’s Annual Report on Form 10-K for the year ended December 31, 2016, included as Annex B-1 to this proxy statement, and the section entitled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in Inotek’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017, included as Annex B-2 and Annex B-3 to this proxy statement, as filed with the SEC on May 10, 2017 and August 3, 2017, respectively, which sections are incorporated by reference herein.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT

INOTEK’S MARKET RISK

For quantitative and qualitative disclosures about Inotek’s market risk, please refer to the section entitled “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” set forth in Inotek’s Annual Report on Form 10-K for the year ended December 31, 2016, included as Annex B-1 to this proxy statement, and the section entitled “Item 3. Quantitative and Qualitative Disclosures About Market Risk” set forth in Inotek’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017, included as Annex B-2 and Annex B-3 to this proxy statement, as filed with the SEC on May 10, 2017 and August 3, 2017, respectively, which sections are incorporated by reference herein.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT

ROCKET’S MARKET RISK

Rocket is exposed to market risks in the ordinary course of business. Market risk is the risk of change in fair value of a financial instrument due to changes in interest rates, equity prices, financing, exchange rates or other factors. These market risks are principally limited to foreign currency exchange risk.

Foreign Currency Exchange Risk

All of Rocket’s employees and the majority of Rocket’s operations are currently located in the United States. Rocket has engaged in contracts with contractors or other vendors in a currency other than the U.S. dollar. To date, Rocket has had minimal exposure to fluctuations in foreign currency exchange rates as the time period from the date that transactions are initiated and the date of payment or receipt of payment is generally of short duration. Accordingly, Rocket believes it does not have a material exposure to foreign currency risk.

 

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ROCKET’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read together with Rocket’s financial statements and accompanying notes appearing elsewhere in this proxy statement. This Management’s Discussion and Analysis contains forward-looking statements that involve risks and uncertainties. Please see “Cautionary Information Regarding Forward-Looking Statements” on page 44 for additional factors relating to such statements, and see “Risk Factors” relating to Rocket beginning on page 19 for a discussion of certain risk factors applicable to Rocket’s business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur in future periods.

Overview

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 LVV programs currently undergoing clinical trials targeting 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 are expected to enter the clinic in 2018. In addition, Rocket has an AAV program for which it expects to file an IND application in 2018, which will permit the commencement of human clinical studies shortly 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 for which Rocket currently has 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.

Since inception in 2015, Rocket has devoted substantially all of its resources to organizing and staffing the company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights, conducting discovery, research and development activities for the programs and planning for potential commercialization. Rocket does not have any products approved for sale and has not generated any revenue from product sales. From inception through June 30, 2017, Rocket raised net cash proceeds of approximately $41.9 million from private investors through both equity and convertible debt financing to fund operating activities.

Since inception, Rocket has incurred significant operating losses. Rocket’s ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of the current or future product candidates and programs. Rocket had a net loss of $7.6 million and $4.2 million for the year ended December 31, 2016 and the period from July 14, 2015 (inception) to December 31, 2015, respectively, and $6.2 million and $2.8 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, Rocket had an accumulated deficit of $18.0 million. Rocket expects to continue to incur significant expenses and higher operating losses for the foreseeable future as Rocket advances its current product candidates from discovery through preclinical development and clinical trials and seek regulatory approval of their product candidates. In addition, if Rocket obtains marketing approval for any of their product candidates, Rocket expects to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Furthermore, Rocket expects to incur additional costs as a public company in the event the merger occurs. Accordingly, Rocket will need additional financing to support continuing operations and potential acquisitions of licensing or other rights for product candidates.

Until such a time as Rocket can generate significant revenue from product sales, if ever, Rocket will seek to fund its operations through public or private equity or debt financings or other sources, which may include collaborations with third parties and government programs or grants. Adequate additional financing may not be

 

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available to Rocket on acceptable terms, or at all. Rocket can make no assurances that it will be able to raise the cash needed to fund its operations and if Rocket fails to raise capital when needed, Rocket may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates or delay pursuits of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, Rocket is unable to predict the timing or amount of increased expenses or when or if Rocket will be able to achieve or maintain profitability. Even if Rocket is able to generate product sales, Rocket may not become profitable. If Rocket fails to become profitable or is unable to sustain profitability on a continuing basis, then Rocket may be unable to continue its operations at planned levels and be forced to reduce or terminate its operations.

Recent Developments

On September 12, 2017, Rocket entered into a merger agreement with Inotek pursuant to which Inotek will acquire all of the outstanding equity of Rocket. Subject to the terms and conditions of the merger agreement, at the closing of the transaction, Inotek will be renamed Rocket Pharmaceuticals, Inc.

Inotek is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of therapies for ocular diseases, including glaucoma. Inotek’s lead product candidate has been trabodenoson, a first-in-class selective adenosine mimetic that they rationally designed to lower intraocular pressure, which we refer to as IOP, by restoring the eye’s natural pressure control mechanism. Inotek’s first pivotal Phase 3 clinical trial of trabodenosen did not meet its primary endpoint because it did not demonstrate a statistically significant difference in absolute IOP from placebo at every single one of the 12 time points comprising the primary endpoint. In July 2017, Inotek voluntarily discontinued development of its clinical programs and continued engaging Perella Weinberg Partners as a financial advisor to assist Inotek in pursuing strategic alternatives, which resulted in the proposed merger with Rocket. As of June 30, 2017, Inotek had $109 million of cash, cash equivalents and short term investments, $52 million of convertible debt, and $4 million in other liabilities.

Following the closing of the merger, the shareholders of Rocket are expected to own approximately 81% of the combined company (on a fully diluted basis) and the stockholders of Inotek are expected to own approximately 19% of the combined company (on a fully diluted basis). The transaction has been approved by the board of directors of both companies and by the shareholders of Rocket. The transaction is expected to close in the first quarter of 2018, subject to the approval of the stockholders of Inotek and other customary closing conditions, as detailed in this proxy statement.

In connection with the transaction, Rocket will be deemed to be the accounting acquirer and therefore the transaction will be treated as a reverse acquisition because (i) Rocket shareholders are expected to own approximately 81% of the voting interests of the combined company immediately following the closing of the transaction; (ii) directors appointed by Rocket will hold a majority of the board seats in the combined company; and (iii) Rocket management will hold all key positions in the management of the combined company. Rocket is expected to incur additional general and administrative expenses as it complies with the NASDAQ exchange listing and SEC requirements. In addition, Rocket will be treated as the predecessor company for financial reporting purposes going forward.

Financial Operations Overview

Revenue

To date, Rocket has not generated any revenue from any sources, including from product sales, and Rocket does not expect to generate any revenue from the sale of products in the near future. If Rocket’s development efforts for product candidates are successful and result in regulatory approval or license agreements with third parties, Rocket may generate revenue in the future from product sales.

 

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Operating Expenses

Research and Development Expenses

Rocket’s research and development program expenses consist primarily of external costs incurred for the development of its product candidates. These expenses include:

 

    expenses incurred under agreements with research institutions that conduct research and development activities including, process development, preclinical, and clinical activities on Rocket’s behalf;

 

    costs related to process development, production of preclinical and clinical materials, including fees paid to contract manufacturers and manufacturing input costs for use in internal manufacturing processes;

 

    consultants supporting process development and regulatory activities; and

 

    costs related to in-licensing of rights to develop and commercialize Rocket’s product candidate portfolio.

Rocket recognizes external development costs based on contractual payment schedules aligned with program activities, invoices for work incurred, and milestones which correspond with costs incurred by the third parties. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses.

Rocket’s direct research and development expenses are tracked on a program-by-program basis for product candidates and consist primarily of external costs, such as research collaborations and third party manufacturing agreements associated with Rocket’s preclinical research, process development, manufacturing, and clinical development activities. Rocket’s direct research and development expenses by program also include fees incurred under license agreements. Rocket’s personnel, non-program and unallocated program expenses include costs associated with activities performed by Rocket’s internal research and development organization and generally benefit multiple programs. These costs are not separately allocated by product candidate and consist primarily of:

 

    salaries and personnel-related costs, including benefits, travel and share-based compensation, for Rocket’s scientific personnel performing research and development activities;

 

    facilities and other expenses, which include expenses for rent and maintenance of facilities, and depreciation expense; and

 

    lab supplies and equipment used for internal research and development activities.

The table below summarizes Rocket’s research and development expenses incurred by program:

 

     Year Ended
December 31,
     Period from
July 14, 2015
(Inception)

to December 31,
     Six Months Ended
June 31,
 
     2016      2015      2017      2016  
     (in thousands)  

Fanconi Anemia

   $ 1,545      $ 762      $ 575      $ 445  

Pyruvate Kinase Deficiency

     936        —          587        624  

Leukocyte Adhesion Deficiency-1

     280        —          282        —    

Infantile Malignant Osteopetrosis

     140        —          103        —    

Undisclosed Indication

     —          —          586        —    

Unallocated research and development expenses

     3,093        2,474        2,971        1,225  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 5,994      $ 3,236      $ 5,104      $ 2,294  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Rocket’s research and development activities are central to its business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development. As a result, Rocket expects that research and development expenses will increase substantially over the next several years as it increases personnel costs, including share-based compensation, supports ongoing clinical studies, seeks to achieve proof-of-concept in one or more product candidates, advances preclinical programs to clinical programs, and prepares regulatory filings for product candidates.

Rocket cannot determine with certainty the duration and costs to complete current or future clinical studies of product candidates or if, when, or to what extent Rocket will generate revenues from the commercialization and sale of any of its product candidates that obtain regulatory approval. Rocket may never succeed in achieving regulatory approval for any of its product candidates. The duration, costs, and timing of clinical studies and development of product candidates will depend on a variety of factors, including:

 

    the scope, rate of progress, and expense of ongoing as well as any clinical studies and other research and development activities that Rocket undertakes;

 

    future clinical study results;

 

    uncertainties in clinical study enrollment rates;

 

    changing standards for regulatory approval; and

 

    the timing and receipt of any regulatory approvals.

Rocket expects research and development expenses to increase for the foreseeable future as it continues to invest in research and development activities related to developing product candidates, including investments in manufacturing, as its programs advance into later stages of development and as it conducts additional clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of product candidates is highly uncertain. As a result, Rocket is unable to determine the duration and completion costs of research and development projects or when and to what extent Rocket will generate revenue from the commercialization and sale of any of its product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation and travel expenses for Rocket’s employees in executive, operational, finance, legal, business development, and human resource functions. Other general and administrative expenses include facility-related costs, professional fees for accounting, tax and legal and consulting services.

Rocket expects general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to support the continued advancement of its product candidates. Rocket also anticipates that it will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with being a public company assuming the proposed merger with Inotek occurs.

Research and development incentives

New York City allows investors and owners of emerging technology companies focused on biotechnology to claim a tax credit against the General Corporation Tax and Unincorporated Business Tax for amounts paid or incurred for certain facilities, operations, and employee training in New York City. Payments received in connection with the NYC Biotech credit program are recognized in the period that the payment is received due to the uncertainty associated with the amount of credit that Rocket may receive.

Critical Accounting Policies and Significant Judgments and Estimates

Rocket’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of Rocket’s financial statements and related disclosures requires

 

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Rocket to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in Rocket’s financial statements. Rocket bases its estimates on historical experience, known trends and events and various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Rocket evaluates estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

While Rocket’s significant accounting policies are described in more detail in Note 3 to its financial statements appearing elsewhere in this proxy statement, Rocket believes that the following accounting policies are those most critical to the judgments and estimates used in the preparation of its consolidated financial statements.

Accrued Research and Development Expenses

Rocket estimates its accrued research and development expenses as of the date of each of its balance sheets. Rocket recognizes external development costs based on contractual payment schedules aligned with program activities, invoices for work performed, and milestones which correspond with costs incurred by the third parties. This process involves reviewing contracts and purchase orders with service providers, identifying services that have been performed on Rocket’s behalf, confirming the level of service performed are aligned with the contract, expected remaining period of performance and the associated cost incurred for the service when Rocket has not yet been invoiced or otherwise notified of actual cost. Expenses that are paid in advance of performance are deferred as a prepaid expense and expensed as the services are provided.

Examples of estimated accrued research and development expenses include fees paid to:

 

    collaborations with research organizations in connection with preclinical development, process development and clinical studies;

 

    contract manufacturing organizations and other vendors related to process development and manufacturing of materials for use in preclinical development and clinical studies; and

 

    service providers for professional service fees such as consulting and other research and development related services.

Rocket’s understanding of the status and timing of services performed relative to the actual status and timing may vary and may result in Rocket reporting changes in estimates in any particular period. To date, there have been no material differences from Rocket’s estimates to the amount actually incurred.

Share-based compensation

Rocket has issued options to purchase its ordinary shares. Rocket accounts for share based compensation in accordance with Accounting Standards Codification, which we refer to as ASC, Topic 718, Compensation—Stock Compensation. ASC Topic 718 establishes accounting for share-based awards exchanged for employee services. Under the fair value recognition provisions of ASC Topic 718, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or vesting period. Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the use of highly subjective assumptions, including the expected life of the share-based payment awards, the fair value of ordinary shares and share price volatility. Rocket accounts for share-based awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, which requires the fair value of the award to be re-measured at fair value as the award vests.

Rocket estimates the grant date fair value of share options and the related compensation expense, using the Black-Scholes option valuation model. This option valuation model requires the input of subjective assumptions

 

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including: (1) fair value of ordinary shares, (2) expected life (estimated period of time outstanding) of the options granted, (3) volatility, (4) risk-free rate and (5) dividends. In general, the assumptions used in calculating the fair value of share-based payment awards represent Rocket’s management best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and Rocket uses different assumptions, Rocket’s share-based compensation expense could be materially different in the future.

Significant Factors Used in Determining the Fair Value of Rocket’s Ordinary Shares

As there has been no public market for Rocket’s ordinary shares to date, the estimated fair value of Rocket’s ordinary shares has been determined by its board of directors as of the date of each option grant, with input from its management, considering Rocket’s most recently available third-party valuations of ordinary shares and Rocket’s board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Rocket was assisted in the process by third-party valuations prepared in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Rocket’s ordinary shares valuations were prepared using market approaches to estimate Rocket’s enterprise value and the option-pricing method, which we refer to as OPM, to allocate the enterprise value among the various classes of equity securities. The OPM treats preferred and ordinary shares, warrants, options and any other similar instruments as a series of different call options on the fair value of the equity of a business enterprise. The OPM considers the rights to distributions of different