Rhythm(RYTM) - 2023 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents Rhythm Pharmaceuticals' unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and explanatory notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $64,593 | $127,677 | | Short-term investments | $234,667 | $205,611 | | Total current assets | $329,201 | $354,236 | | Total assets | $354,199 | $382,481 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $50,144 | $39,809 | | Deferred royalty obligation | $104,699 | $75,810 | | Total liabilities | $156,725 | $118,219 | | Total stockholders' equity | $197,474 | $264,262 | | Total liabilities and stockholders' equity | $354,199 | $382,481 | Condensed Consolidated Statements of Operations and Comprehensive Loss Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Product revenue, net | $22,504 | $4,284 | $53,194 | $8,094 | | Total revenues | $22,504 | $4,284 | $53,194 | $14,848 | | R&D Expenses | $33,570 | $21,116 | $105,059 | $85,082 | | SG&A Expenses | $30,475 | $21,938 | $85,158 | $65,715 | | Loss from operations | $(43,953) | $(39,267) | $(143,092) | $(137,054) | | Net loss | $(44,163) | $(40,861) | $(143,045) | $(138,626) | | Net loss per share | $(0.76) | $(0.79) | $(2.50) | $(2.73) | Condensed Consolidated Statements of Cash Flows Cash Flow Summary for the Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(106,774) | $(139,428) | | Net cash (used in) provided by investing activities | $(28,305) | $68,804 | | Net cash provided by financing activities | $71,945 | $196,463 | | Net (decrease) increase in cash | $(63,084) | $125,839 | | Cash, cash equivalents and restricted cash at end of period | $64,921 | $185,415 | Notes to Unaudited Condensed Consolidated Financial Statements - The company is a commercial-stage biopharmaceutical firm focused on its lead asset, IMCIVREE® (setmelanotide), a precision medicine for rare MC4R pathway diseases causing hyperphagia and severe obesity[19] - As of September 30, 2023, the company had an accumulated deficit of $853.1 million and expects operating losses to continue. Management believes existing cash, cash equivalents, and short-term investments of $299.3 million are sufficient to fund operations for at least the next twelve months[22][23][25] - On February 27, 2023, the company acquired Xinvento B.V. for approximately $5.7 million. The acquired In-Process Research and Development (IPR&D) assets were expensed as research and development[87][90] - The company has a Revenue Interest Financing Agreement (RIFA) with HealthCare Royalty Management, LLC, accounted for as a deferred royalty obligation. As of September 30, 2023, the carrying value was $104.7 million with an effective interest rate of 15.43%[115][120] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial performance, highlighting IMCIVREE revenue growth, increased operating expenses, and a strong liquidity position expected to fund operations into 2026 Overview and Recent Developments - The company focuses on advancing IMCIVREE® (setmelanotide) for rare MC4R pathway diseases, approved in the U.S., EU, and Great Britain for specific obesity indications[124] - Key clinical programs include a pivotal Phase 3 trial for hypothalamic obesity, with enrollment expected to complete in Q4 2023, and ongoing Phase 3 EMANATE and Phase 2 DAYBREAK trials[126][129][133] - Near-term milestones for Q4 2023 include completing enrollment in the hypothalamic obesity trial, submitting an IND for RM-718, and announcing data from several ongoing trials[143] - As of September 30, 2023, the company held approximately $299.3 million in cash, cash equivalents, and short-term investments, projected to fund operations into 2026[146] Results of Operations Comparison of Three Months Ended September 30, 2023 and 2022 (in thousands) | Metric | Q3 2023 | Q3 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product revenue, net | $22,504 | $4,284 | $18,220 | 425% | | Cost of sales | $2,412 | $497 | $1,915 | 385% | | Research and development | $33,570 | $21,116 | $12,454 | 59% | | Selling, general, and administrative | $30,475 | $21,938 | $8,537 | 39% | | Net loss | $(44,164) | $(40,861) | $(3,303) | 8% | - The 425% increase in Q3 2023 product revenue was driven by continued sales growth of IMCIVREE, particularly following the FDA approval for BBS in June 2022[167] - Q3 2023 R&D expenses increased by 59% YoY, primarily due to a $5.3 million increase in clinical trial costs for Phase 2 DAYBREAK, Phase 3 EMANATE, and the hypothalamic obesity trial, alongside higher personnel and preclinical research costs[169][171] Comparison of Nine Months Ended September 30, 2023 and 2022 (in thousands) | Metric | 9M 2023 | 9M 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product revenue, net | $53,194 | $8,094 | $45,100 | 557% | | License revenue | $0 | $6,754 | $(6,754) | -100% | | Research and development | $105,059 | $85,082 | $19,977 | 23% | | Selling, general, and administrative | $85,158 | $65,715 | $19,443 | 30% | | Net loss | $(143,046) | $(138,626) | $(4,420) | 3% | - For the nine months ended Sep 30, 2023, R&D expenses increased by 23% YoY, driven by a $5.7 million charge for IPR&D assets from the Xinvento acquisition, a $6.6 million increase in personnel costs, and a $4.9 million rise in clinical trial activity[179][181] Liquidity and Capital Resources - As of September 30, 2023, the company held cash, cash equivalents, and short-term investments totaling approximately $299.3 million[185] - Net cash used in operating activities for the first nine months of 2023 was $106.8 million, a decrease from $139.4 million in the same period of 2022, primarily due to higher revenues offsetting increased operating expenses[186][188][189] - Net cash provided by financing activities was $71.9 million for the first nine months of 2023, including $48.9 million from the ATM program, $24.4 million from the deferred royalty obligation, and $3.5 million from stock option exercises, offset by $4.8 million in royalty obligation repayments[193] - The company anticipates its existing cash and investments will be sufficient to fund operations into 2026[196] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reported no material changes to its market risk disclosures compared to the prior fiscal year-end - There were no material changes to the company's market risk disclosures as of September 30, 2023, compared to the end of 2022[210] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of September 30, 2023, the company's disclosure controls and procedures were effective[212] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[213] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - As of the filing date, the company is not involved in any material legal proceedings[215] Item 1A. Risk Factors This section details significant risks, including financial position, development and commercialization of setmelanotide, regulatory compliance, and operational challenges Risks Related to Financial Position and Need for Capital - The company has a limited operating history, incurred significant operating losses since inception (accumulated deficit of $853.1 million as of Sep 30, 2023), and anticipates continued losses[217][222] - Additional funding will be required for clinical trials and commercialization, which may not be available on acceptable terms, potentially delaying or terminating development efforts[224][231] - The Revenue Interest Financing Agreement (RIFA) could restrict IMCIVREE commercialization, limit cash flow, and dedicate a portion of cash flow to service the obligation[233][236] Risks Related to the Development of Setmelanotide - Positive results from earlier clinical trials may not predict later trial outcomes, and success in one indication does not guarantee success in others[239][241] - Target patient populations for MC4R pathway variants are small and not precisely established; smaller actual patient numbers could adversely affect revenue[251] - Setmelanotide may cause undesirable side effects (e.g., cardiovascular effects, skin darkening) that could delay or prevent regulatory approvals or limit its commercial profile[280][284] - Reliance on third-party CROs for clinical trials means their failure to perform successfully could delay or harm regulatory approvals and commercialization[316] Risks Related to the Commercialization of IMCIVREE (setmelanotide) - Commercial success depends on obtaining and maintaining adequate coverage and reimbursement from government and private payors, a time-consuming and uncertain process[321][322][324] - Market acceptance of IMCIVREE is not guaranteed, depending on factors like physician and patient acceptance, administration convenience (SC injection), and competition from other obesity therapies[334][335] - Complete reliance on third-party CMOs for setmelanotide manufacture means any non-compliance with GMP or failed regulatory inspections could delay or halt production and supply[346][348] - The company's termination of its license agreement with RareStone Group for cause could delay or terminate development and commercialization in China, Hong Kong, and Macao[353][355] Risks Related to Regulatory Approval and Marketing of Setmelanotide and Other Legal Compliance Matters - The regulatory approval process for additional indications is expensive, time-consuming, and uncertain, with failure materially impairing revenue generation[395] - FDA and other agencies actively enforce laws prohibiting off-label promotion; non-compliance could result in significant penalties and harm the business[445][447] - The company is subject to numerous federal, state, and foreign healthcare laws (e.g., Anti-Kickback Statute, False Claims Act); non-compliance could lead to criminal sanctions, civil penalties, and exclusion from government programs[451] - The evolving global data protection landscape (e.g., GDPR, CCPA/CPRA) means failure to comply with privacy and security laws could result in government enforcement, significant penalties, and reputational damage[458][461][463] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company reported no unregistered sales of equity securities, use of proceeds, or issuer purchases during the period - The company reports no unregistered sales of equity securities or issuer purchases of its equity securities during the period[534][536] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including amended executive offer letters and Sarbanes-Oxley Act certifications - Exhibits filed include amended and restated offer letters for executives David P. Meeker, Joseph Shulman, Jennifer Chien, and Hunter Smith, as well as CEO and CFO certifications[540]