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Rocket Pharmaceuticals (RCKT) is a best in class gene therapy company with five shots on goal and strong data to support its current valuation. The two largest assets, RP-L102, a lentiviral gene therapy for Fanconi Anemia and RP-A501, an AAV gene therapy for Danon Disease are each worth multiples of the current share price, if successfully commercialized. The management team is highly experienced and have successfully commercialized many products at predecessor companies. The board of directors are both experienced and proven money makers on wall street in the world of biotech. The shareholder base is strong with top quality investors and the company has sufficient cash on the balance sheet for at least two years, during which multiple value drivers will report out. Commercialization of the most advanced products could occur in the 2021 timeframe. While never an investment attribute alone, I would note that there have been multiple acquisitions in gene therapy during the last 18 months (AVXS, ONCE) at eye-watering valuations and large cap pharma is struggling to find pipeline assets and return on productivity for internal pipeline assets remains at a multi decade low.

This report provides an overview of the company and details of the most advanced product in development, RP-L102 for Fanconi Anemia, as this is the primary focus for investors currently. The company's largest pipeline asset, RP-A501 for Danon Disease will become a focus for investors during 2020.

RCKT has Five Programs. Four will be in the Clinic in 2019

Source: Company data

Pipeline has > $1bn in Revenue Potential

Source: Company data, my estimates

Plenty of Catalysts Anticipated During Next 12 months

With five assets either in, or almost in the clinic, there are multiple catalysts expected during the next twelve months.

Source: Company data, my estimates

The company finished 2Q 2019 with $257 million of cash on its balance sheet and during the last 12 months the company burnt $66.5 million of cash. This is expected to increase during 2020 and 2021 as multiple pivotal trials start and consensus forecasts suggest that the company will spend $99 million in 2020 and $98.5 million in 2021. Therefore the company has sufficient cash on its balance sheet for approximately 2.5 years during which time, there will be multiple clinical catalysts that will hopefully drive the share price higher, allowing the company to raise additional equity in late 2020 to fund the company to break even in the 2023 timeframe. In the current environment, investors need to avoid any company that requires substantial financing.

Rocket Pharmaceuticals trades with a market capitalization of just $546 million. As of June 30, 2019, the company had cash of $ 258 million and debt of $ 46 million. Compared to other companies in the gene therapy space, RCKT trades at a significant discount. The company is well capitalized with approximately two years of cash on the balance sheet and there are a number of value creating catalysts during the next 12 months. Additionally, whilst never a reason to solely own a biotech company, I would note that there have been a number of acquisitions in the gene therapy space during the past few years. Large-cap pharma and biotech is short on products and long on cash and they need to make acquisitions.

Selected M&A in the Gene Therapy Sector: 2016-2019

Source: Bloomberg, Company data

RCKT is currently covered by 8 Wall Street Sell Side analysts, as shown below. Notably, Large banks including Goldman Sachs, Jefferies, JP Morgan, Morgan Stanley, Citi and Barclays Capital are all missing. As the company evolves into a commercial company during the next several years, it is likely that some of these brokers will initiate coverage of the stock, thereby improving liquidity.

Source: Bloomberg

As with all biotechnology stocks, there are significant risks associated with this investment and under a worst case outcome, there is 100% downside. The most obvious risk is that the pipeline products fail in clinical development. While Rocket has five assets in its pipeline, and success in any one of these is likely enough to justify the current valuation, negative clinical trial data would clearly have a negative impact on the company's share price. Under the outcome that all five pipeline assets fail in development, the stock is likely worth zero.

We are also in an uncertain political environment with an election looming in 2020. It is unlikely that either party will be arguing for higher drug prices and biotech stocks often underperform during these periods. Investors can mitigate this risk by being short a number of lower quality biotech companies and long a number of higher quality biotech companies. In my opinion, investors need to be long biotech stocks that are financed through 2021 and have multiple catalysts during the next 12 months. Being short companies in the opposite camp likely generates a good return as well.

Currently this company is not really exposed to foreign exchange rate or interest rate risks but these factors may become relevant in years to come.

This report will start with a primer on exactly what gene therapy is and then a detailed analysis of Rocket's lead asset where clinical data has been evolving during the last 24 months.

Gene therapy refers to technologies that can insert genes into cells, thereby expressing the proteins encoded by the genes. Gene therapies consist of two key elements - the gene of interest, and a vector that carries the gene into the host's target cells. Over the years a number of vectors have been used, although most efforts now employ viruses to carry the target genes. In creating a gene therapy, most of the viral genome is replaced by the therapeutic gene of interest. This eliminates the ability of the virus to replicate and cause disease, and permits relatively large target genes to be carried. The manipulated genome is inserted into a viral vector and when the virus is given to a patient, it is taken up by the patient's cells where it delivers its DNA to the nucleus. The cell then makes the target protein using the new gene as if it were encoded by the cell's own genetic material. Importantly, this process of gene transfer can be conducted ex vivo or in vivo depending upon the application.

Although gene therapy has the potential to treat a wide range of conditions, orphan monogenic diseases are particularly well suited for this approach. There are a number of scientific, economic, and logistical attributes of severe, monogenic orphan diseases that make them ideal candidates for the development of gene therapies by small biotechnology companies. First, by their nature as monogenic diseases, their causes are defects in a single gene. The pathogenesis of the disease is often well understood, and its treatment can be straightforward: by placing a functional copy of the gene in affected tissues, the disease process can be functionally cured/halted. Second, as orphan disorders affect a relatively small number of patients, on the order of several thousand individuals, the clinical trial programs can be conducted in tens of patients, rather than thousands. Such trials are less expensive to run and the logistics are within the capabilities of even small biotech companies. Third, most monogenic orphan diseases have no currently available disease altering therapies. Therefore the unmet need is high and any safe and effective therapy will likely be embraced. Fourth, the FDA has been flexible in its requirements for licensure in severe orphan diseases, routinely granting accelerated approvals based on surrogate markers that are reasonably likely to predict clinical benefit. Finally, innovative, and effective orphan therapies still have pricing flexibility in most worldwide markets such that companies can achieve attractive risk-adjusted returns on their research and development investment. Therefore, the orphan business model is well established and has repeatedly generated high returns for small cap biotechnology companies.

Rocket is building a comprehensive gene therapy technology platform to address serious, rare diseases. Rocket is developing both ex vivo lentiviral-based gene therapy technologies as well as adeno-associated virus (AAV) technologies to be used in vivo. Rocket also has early preclinical efforts in gene editing such as CRISPR/Cas9 (Clustered Regularly Interspaced Short palindromic Repeat/CRISPR-associated protein-9 nuclease) in its pipeline.

RCKT is Focusing on both In Vivo and Ex Vivo Gene Therapies

Source: Company data

What is a Lentiviral Vector?

Lentiviruses are a genus of retroviruses that includes the human pathogen human immunodeficiency virus (HIV). Like all retroviruses, lentiviruses are RNA viruses that encode reverse transcriptase (RT). Once a virion infects a cell, RT converts the virus' RNA genome into a DNA copy. This DNA copy is then integrated into the host genome using the virally encoded integrase. Once integrated into the host genome, the virally encoded genes are expressed and copied alongside host genes using the normal host gene expression and replication machinery. Lentivirus-based gene therapy approaches seek to co-opt the viral integration process to stably introduce genes of therapeutic interest into the human genome. Unfortunately, every insertion event is associated with a theoretical risk of causing disease (insertional mutagenesis) due to disruption of the host genome at the site of integration. As a result, lentiviral gene therapy programs take several steps to limit the ability of the virus to generate unnecessary insertion events.

Lentiviral (and retroviral more generally) gene therapy is most often deployed in an ex vivo process whereby cells are removed from the body, transfected with a lentivirus encoding the gene of interest, and then reintroduced into the patient. In Rocket's programs, it is transducing hematopoietic stem cells (HSCs) isolated from patients with defined monogenic diseases in order to insert a normal copy of the gene that is defective in these patients. The transduced HSCs are then infused back into the patient so that they will engraft. Although historically the patient's native hematopoietic system is ablated to improve engraftment, Rocket and its academic collaborators have pioneered a lentiviral approach that requires no or minimal chemotherapy.

HSCs are a self-renewing cell type that reconstitutes the patient's hematopoietic system, thus providing permanent, life-long expression of the normal gene from this one-time treatment. Because HSCs differentiate to form a variety of terminal cell types, this general approach is potentially applicable to a variety of genetic diseases in a modular, repeatable fashion. The ex vivo use of HSCs rather than in vivo treatment of all cells dramatically reduces the number of insertion events required to generate a therapeutic effect thereby reducing the risk of insertional mutagenesis. In addition, Rocket's use of the patient's own cells (an autologous transplant) is an important attribute of lentiviral gene therapy, as this should avoid some of the serious immune complications associated with allogeneic transplants such as graft-versus host disease (GVHD), which require management with harsh immunosuppressive therapies and can be fatal.

The lentiviral vector Rocket uses is based on the HIV virus. The vector takes advantage of the virus' natural ability to integrate into the host genome in both dividing and nondividing cells in order to efficiently deliver the chosen genetic payload. However the vector has been modified in a number of ways to render it nonpathogenic. Virtually all the viral genes have been removed to make room for the transgene and eliminate the virus' ability to replicate. The infectious viral particles are generated by co-transfecting producer cells with separate plasmids containing the "gutted" viral backbone and transgene, the viral capsid proteins and viral polymerase to make viral RNA from the DNA plasmid, reverse transcriptase to make DNA from the virus' RNA, and VSV - a pantropic envelope protein that allows infection of a variety of human cell types (not just CD4+ T cells). This results in the production of infectious viral particles carrying the viral RNA, reverse transcriptase protein, and viral integrase protein. When the virus infects target cells, it is thus able to undergo the process of reverse transcription and integration into the genome, but because the natural viral genes are not present, it can only undergo this single cycle of transduction and cannot replicate or infect other cells. To make doubly sure of this, the terminal ends of the viral genome are also modified to be "self-inactivating," so that they would no longer be recognized for excision even if the necessary viral proteins were to become present in the cell. Thus, the transgene is stably inserted into the host genome. For those readers who would like additional information on lentival gene therapy I recommend you reed this report available on PubMed. Kenneth Lundstrom does a great job discussing the pros and cons of each approach.

AAV is a naturally occurring non-pathogenic virus that is not known to cause any disease in humans. AAV has a number of advantages as a delivery vehicle for in vivo applications of gene therapy. AAV vectors do not replicate inside the host cell, preventing their spread to unintended tissues, and they typically integrate at a very low level into the host cell's genome, reducing the risk of insertional mutagenesis. Moreover, cellular tropism can be effectively modulated by using the natural tropism of different AAV serotypes, synthetically engineering the AAV capsid, and/or altering the transgene's promoter sequence. AAV vectors are also able to transduce non-dividing cells (such as RPE cells in the retina), and once incorporated into a host cell, they can drive the expression of a therapeutic protein for years. Last, AAV vectors can carry a good amount of genetic material, up to 4.5kb permitting them to target a range of indications. Since AAVs are non-replicating and generally non-integrating, the viral genome is typically not copied when an infected cell divides. Therefore, there is a theoretical risk that the efficacy of AAV based therapy in dividing cells could wane as an increasing number of divisions occurs.

A large number of clinical trials of AAV gene therapy are either under way, or have been completed. Applications have been diverse, ranging from hemophilia to REP65-mediated blindness and Parkinson's disease. AAV is versatile, and can be delivered through a number of routes of administration including intravenous, intramuscular, intrapleural, intravitreal, subretinal, and intracranial. For example, in lysosmal storage disorder (LSD) and hemophilia, AAV gene therapies are delivered systemically via intravenous (i.v.) route of administration and liver cells are transduced. In more localized diseases such as retinal dystrophy, choroideremia, X-linked retinoschisis (XLRS), the gene therapies are directly injected into the eye. In advanced Parkinson's disease, the gene therapy candidate is injected intracranially.

Fanconi Anemia - A rare disease with limited treatment options and a median survival of 29 years

Fanconi Anemia (FA) is a rare autosomal recessive DNA repair-deficiency syndrome characterized by aplastic anemia and progressive bone marrow failure. Though FA is a blood disorder, broad complications across a number of organ systems are associated with the syndrome such as defects of the eyes, ears, bones, kidneys and the heart. Perhaps most important, up to 30% of patients with FA develop leukemia, myelodysplastic syndrome (MDS), and or solid tumors at ages between 5 and 15. The median life span for FA patients is approximately 29 years.

Disease Progression: Unmet need for a treatment for FA

Source: Kutler et al, Blood 101:1249, 2003

FA is a complex disease with abnormalities in at least 18 genes associated with the disorder. These genes typically belong in the FANC gene family (FANC A-G, FANC CJ, FANC CL, and FANC M). The FANC gene family is associated with the DNA repair pathway. A mutation in any of these genes renders cells unable to properly repair damaged DNA. FANC A, B, C, E, F, G, L and M) form a nuclear complex termed the FA core complex. The FA core complex is required for monoubiquitination of the FANCD2 protein. Monoubiquintination of the FANCD2 protein allows for FANCD2 to translocate to sites of DNA damage to facilitate BRCA2/FAN CD1 and FANC E function in homologous recombination for DNA repair. Due to mutations in this DNA repair machinery, FA patients are simply unable to repair DNA damage that occurs naturally as cells divide, are exposed to mutagens, etc. Depending upon the exact DNA insult that occurs, unrepaired DNA can lead to abnormal cell death (most commonly) or uncontrolled cell growth. The abnormal cell death in turn creates FA's characteristic anemia and other organ defects. In other cases unrepaired DNA damage leads to uncontrolled cell growth and the development of a leukemia, tumor, or MDS. While it is extremely uncommon for any one DNA insult to generate cancer rather than cell death, DNA damage is occurring constantly within millions of cells in any human. Therefore, with millions of potentially oncogenic unrepaired mutations occurring it is unsurprising that FA patients have a significantly increased risk of developing cancer.

Approximately 60% of FA cases are due to mutations in the FANC A gene (the specific genetic abnormality that Rocket's lead program addresses). Approximately half of FA patients are diagnosed prior to age 10 while about 10% are diagnosed during adulthood. The remaining ~40% of FA patients are diagnosed during their teenage years. Birth defects such as undeveloped skull, eyes, or abnormalities in radial bones, kidney, skeleton, or skin pigmentation often facilitate early diagnosis. The definitive test for FA is a chromosome breakage test using crosslinking agents (dieposxybutane or mitomycin C) in isolated patient blood cells. While blood cells from healthy volunteers are able to correct most of the crosslinking agent induced DNA damage, FA patients' cells are incapable of correcting the damage from DEB or MMC treatment. Other methods of diagnosis include the use of molecular genetic testing on the 18 genes associated with FA such as sequencing analysis. The only curative therapy for FA is hematopoietic stem cell transplantation (HSCT) (there is good information on this here).

However, HSCT has a number of notable difficulties and complications. For one, it can be difficult to find a matched donor so that the transplant can be performed with a reasonable likelihood of success. Even when a suitable match is found, HSCT confers a high degree of morbidity and mortality, particularly in FA patients. Recent advances in conditioning regimens and supportive care have reduced treatment-related mortality from 38% or higher to 5-10% at most centers; nonetheless, such rates of death due to the procedure are notable. Moreover, HSCT can have major short and long-term complications including veno-occlusive disease, infections, infertility, secondary malignancies and graft-versus-host disease. GvHD can be particularly problematic and can evolve into a life-long condition causing serious damage to the lung, skin and mucosa. In severe cases GvHD can also be deadly. Conditioning chemotherapy is also inherently mutagenic and is therefore associated with additional risk of tumors developing post-transplant (secondary malignancy). FA patients are unable to repair these mutations that occur throughout the body during conditioning. Therefore HSCT confers a particularly high risk of secondary malignancy to FA patients. For example, the chance of an FA patient developing a new malignancy such as squamous cell carcinoma is estimated to be ~4x higher post HSCT. Thus, while HSCT is curative of FA's characteristic hematological manifestations, "cured" patients remain at an elevated risk of experiencing morbidity/mortality.

There can be spontaneous improvement in a small fraction of FA patients due to somatic mosaicism. Somatic mosaicism results from the spontaneous, random mutations that occur during normal cell division and proliferation. The cells clonally derived from the initial mutant cell have a different genotype than their neighbors. Somatic mosaicism has been reported in patients with FA. In cells of FA patients, the reversion of a pathogenic FA allele to a functional wild type allele confers a survival advantage on the cell vs. its non-reverted sibling cells. The cell(s) with the wild type reversion exploit this survival advantage to gradually populate the bone marrow. Up to 10-15% of FA patients develop somatic mosaicism resulting in disease stabilization or even improvement in bone marrow function for a prolonged period of time. This observation supports the theory that a very small percentage of corrected cells is sufficient to change the clinical course of FA. Somatic mosaicism therefore provides a rational as to why gene therapy may be successful in the treatment of FA patients and RCKT refer to somatic mosaicism as natural gene therapy.

Somatic mosaicism in FA leads to stabilization/correction of blood counts, in some cases for decades. This uncommon variant results from a reverse mutation and demonstrates that a modest number of gene-corrected hematopoietic stem cells can repopulate a patient's blood and bone marrow with corrected (non-FA) cells.

Source: Soulier, J., et al. (2005) Detection of somatic mosaicism and classification of Fanconi anemia patients by analysis of the FA/BRCA pathway. Blood 105: 1329-1336

Commercial launch likely in 2021/22 with >$1bn potential.

RP-L102 is a lentiviral vector that employs the phosphoglycerate kinase (PGK) promoter to express the FANCA gene. Expression is further facilitated by inclusion of the Woodchuck Hepatitis virus posttranscriptional regulatory element (WPRE). RP-L102 was licensed from the Centro de Investigaciones Energeticas, Medioambientales Y Technologicas (CIEMAT) in Madrid, Spain. CIEMAT is the Investigational Medicinal Product Dossier (IMPD) sponsor of the ongoing Phase I/II FANCOLEN-1 study of RP-L102 in patients with FA. Rocket is entitled to the data and commercial rights to the drug product generated under the CIEMAT sponsored IMPD.

RP-L102 gene therapy could have significant advantages over HSCT for FA patients. Perhaps the most notable advantage is that RP-L102 is being developed by Rocket and its academic collaborators without the use of bone marrow conditioning with chemotherapy agents. In contrast, all HSCT protocols require chemotherapy conditioning. The lack of conditioning confers a number of advantages. For example, without the use of chemotherapy agents, patients do not need to be hospitalized, and treatment can occur outside of a transplant-unit. Most important, FA patients have a diminished ability to correct damage to genetic material like that typically caused by chemotherapeutic agents. Therefore, by avoiding chemotherapy conditioning, the FA patients should not have an increased risk of head and neck cancer or leukemia. Moreover, because of their toxicities in FA bone marrow transplants are indicated specifically for patients with signs of bone marrow failure. RPL102 should enable treatment earlier in the disease course, well before bone marrow failure. This will allow patients to avoid the risks associated with the low blood counts of bone marrow failure, including anemia, infections and hemorrhages.

Gene Therapy Value Proposition: Early, Low-toxicity Intervention to Prevent Hematologic Failure

Source: Company data

RCKT recently presented data at the American Society of Hematology of the first four patients treated with RCKT's lentivial gene therapy for FA.

Bone Marrow Engraftment: Increasing Levels Provide Evidence of Potential Survival Advantage of Gene-Corrected FA Cells

Source: Company data

Increases of Corrected Leukocytes Support Restoration of Normal Bone Marrow Function Consistent with Mosaic Phenotype

Source: ASH 2018

Functional Correction of Bone Marrow

Source: ASGCT 2018

RCKT is a best in class gene therapy company with multiple shots on goal. During the next 12 months, data will likely emerge on many of these assets and if successful, should lead to considerable upside. This report focuses on the company's lead asset and data that has been presented to date is extremely supportive of a likely successful outcome, which would lead to considerable upside. As with all biotech investments, there are obviously significant downside risks and the worst case outcome for this stock is that it ends up at zero. However, with 5 pipeline assets in development, this risk is lower than biotech companies that are reliant upon a single driver of value.

Disclosure: I am/we are long RCKT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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