RHYTHM PHARMACEUTICALS, INC.
You should read the following discussion and analysis of our financial condition
and results of operations together with our unaudited condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q. In addition to historical information, some of the
information contained in this discussion and analysis or set forth elsewhere in
this Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject
to the "safe harbor" created by those sections. All statements other than
statements of historical facts contained in this Quarterly Report on Form 10-Q,
including without limitation statements regarding: our financial performance,
including our expectations regarding our existing cash, operating losses,
expenses and sources of future financing; our ability to hire and retain
necessary personnel; patient enrollments and the timing thereof; the timing of
announcements regarding results of clinical trials; our ability to protect our
intellectual property; ongoing activities under and our ability to negotiate our
collaboration and license agreements, if needed, and the impact of termination;
our marketing, commercial sales, and revenue generation; expectations
surrounding our manufacturing arrangements; the impact of the novel coronavirus,
or COVID-19, pandemic on our business and operations and our future financial
results; and other statements identified by words such as "anticipates,"
"believes," "could," "estimates," "expects," "intends," "may," "might,"
"likely," "plans," "potential," "predicts," "projects," "seeks," "should,"
"target," "will," "would," or similar expressions and the negatives of those
terms are forward-looking statements. These forward-looking statements are
neither promises nor guarantees of future performance, and are subject to a
variety of known and unknown risks and uncertainties, many of which are beyond
our control, and other important factors which could cause actual results to
differ materially from those contemplated in such forward-looking statements. We
discuss factors that we believe could cause or contribute to these differences
below and elsewhere in this report, including but not limited to those set forth
in Part II, Item 1A under the heading "Risk Factors" of this Quarterly Report on
Form 10-Q. Except as may be required by law, we have no plans to update our
forward-looking statements to reflect events or circumstances after the date of
this Quarterly Report on Form 10-Q. We caution readers not to place undue
reliance upon any such forward-looking statements, which speak only as of the
date made.
21
Table of Contents
Overview
We are a global, a commercial-stage biopharmaceutical company committed to transforming the lives of patients and their families living with hyperphagia and severe obesity caused by rare melanocortin 4 receptor (MC4R) pathway diseases. Rhythm's precision medicine, IMCIVREE® (or setmelanotide), for which we have exclusive worldwide rights, has the potential to restore dysfunctional MC4R pathway signaling and MC4R pathway function. MC4R pathway deficiencies result in the disruption of satiety signals and energy homeostasis in the body, which, in turn, leads to intense feelings of hunger and to obesity. IMCIVREE is the first-ever therapy developed for patients with hyperphagia and severe obesity caused by certain rare MC4R pathway diseases that is approved or authorized inthe United States ,European Union (EU) orGreat Britain . Inthe United States , IMCIVREE is approved for chronic weight management in adult and pediatric patients 6 years of age and older with monogenic or syndromic obesity due to pro-opiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency as determined by aU.S. Food and Drug Administration (FDA)-approved test demonstrating variants in POMC, PCSK1 or LEPR genes that are interpreted as pathogenic, likely pathogenic, or of uncertain significance, or Bardet-Biedl syndrome (BBS). TheEuropean Commission (EC) has authorized setmelanotide for the treatment of obesity and the control of hunger associated with genetically confirmed BBS or genetically confirmed loss-of-function biallelic POMC, including PCSK1, deficiency or biallelic LEPR deficiency in adults and children 6 years of age and above. TheUK's Medicines & Healthcare Products Regulatory Agency (MHRA) authorized setmelanotide for the treatment of obesity and the control of hunger associated with genetically confirmed loss-of-function biallelic POMC, including PCSK1, deficiency or biallelic LEPR deficiency in adults and children 6 years of age and above. We have achieved market access for IMCIVREE inFrance ,Germany andGreat Britain , and we expect to secure market access inItaly andthe Netherlands in the fourth quarter of 2022. In addition toUnited States , EU andUK , we and our partners are seeking approval and market access for IMCIVREE to treat patients with these MC4R pathway-related obesities inArgentina andIsrael . We also are advancing a broad clinical development program evaluating setmelanotide in several ongoing clinical trials, and we are leveraging what we believe is the largest known DNA database focused on obesity - with approximately 45,000 sequencing samples as ofDecember 31, 2021 - to improve the understanding, diagnosis and care of people living with severe obesity due to certain variants in genes associated with the MC4R pathway. InApril 2022 , we enrolled the first patient in the pivotal Phase 3 EMANATE clinical trial, a randomized, double-blind, placebo-controlled trial to evaluate setmelanotide in four independent sub-studies in patients with obesity due to a heterozygous variant of the POMC/PCSK1 genes or LEPR gene or certain rare variants of the SRC1 gene or the SH2B1 gene. We also have initiated the Phase 2 DAYBREAK clinical trial designed to evaluate setmelanotide in patients who carry a confirmed variant in one or more of 10 additional genes with strong or very strong relevance to the MC4R pathway. InNovember 2022 , we announced plans to initiate a pivotal, Phase 3 trial to evaluate setmelanotide in patients with hypothalamic obesity in early 2023. In addition, our broad clinical programs evaluating setmelanotide in rare MC4R pathway diseases include the ongoing Phase 3 study in pediatric patients with MC4R pathway deficiencies between the ages of 2 and 6 years old, and a potential registration-enabling study with our once-weekly formulation of setmelanotide. Additionally, as an FDA post-marketing requirement, we are currently evaluating the effects of setmelanotide on the QT interval corrected for heart rate, or QTc interval, in healthy volunteers. There are currently no effective or approved treatments for these MC4R pathway related diseases. The FDA has acknowledged the importance of these results by giving setmelanotide Breakthrough Therapy designation for the treatment of obesity associated with genetic defects upstream of the MC4R in the leptin melanocortin pathways. The Breakthrough Therapy designation currently covers indications for POMC deficiency obesity, LEPR deficiency obesity, BBS and, as ofNovember 2022 , hypothalamic obesity.
Additional recent clinical, regulatory and commercial updates include:
OnNovember 8, 2022 , we announced that, as ofSeptember 30, 2022 , more than 80 physicians have written more than 120 prescriptions for IMCIVREE for patients with BBS since IMCIVREE was approved by the FDA. We have secured approval for reimbursement for more than 40 of those prescriptions. OnNovember 2, 2022 , we also announced the design of our Phase 3 clinical trial in acquired hypothalamic obesity following recent discussions with the FDA. The trial, which is anticipated to initiate in early 2023, is expected to enroll 22 Table of Contents 120 patients randomized 2:1 to setmelanotide therapy or placebo for 60 weeks, including up to 8 weeks for dose titration. The primary endpoint will be the percent change in body mass index (BMI) versus placebo. Key secondary endpoints will include the proportion of patients who achieve ?5% reduction in BMI from baseline in adults (?18) or BMI Z-score reduction of ?0.2 from baseline in pediatrics at Week 60 compared with placebo; and mean change in the weekly average of the daily most hunger score in patients ?12 years from baseline to Week 60 compared with placebo.
At
Positive full dataset from our Phase 2 trial evaluating setmelanotide for the
treatment of hypothalamic obesity demonstrating that 89% percent (16 of 18)
? patients had a 5% or greater reduction in BMI at 16 weeks; 14.5 mean percent
reduction in BMI and 12.6 mean percent reduction body weight (N=18) at Week 16
from baseline; Additionally, we reported that 14 patients continued on therapy in our
long-term extension trial. As of a cut-off date of
? these patients who reached a total of 29 weeks on setmelanotide therapy
achieved a mean BMI reduction of 21.1% (SD, 11.2%); and five (5) of these
patients who reached a total of 41 weeks on setmelanotide therapy achieved a
mean BMI reduction of 26.7% (SD, 12.4%). Results from the Clinical Registry Investigating Bardet-Biedl Syndrome
(CRIBBS): We also presented results from CRIBBS, the international registry of
patients with BBS that launched in 2014. We collaborated with the Marshfield
? results demonstrated that children with BBS experience high disease burden due
to hyperphagia and that hyperphagia was positively correlated with higher BMI
weight categories. Obesity was found to be highly prevalent in a large sample
of children with BBS, and most children who had obesity continued to have it or
experienced worsening weight gain over time.
OnNovember 1, 2022 , we also announced that the FDA has granted Breakthrough Therapy designation to setmelanotide for the treatment of hypothalamic obesity. TheFDA's Breakthrough Therapy designation is designed to expedite development and review of medicines that aim to address a serious condition with preliminary clinical evidence indicating that the drug may demonstrate substantial improvement over existing treatments on one or more clinically significant endpoints. OnOctober 12, 2022 , we announced our sponsorship of the inaugural International Meeting on Pathway-Related Obesity: Vision of Excellence (IMPROVE) 2022 inBerlin, Germany , bringing together approximately 100 specialists to share the latest scientific developments and patient care practices related to rare MC4R pathway-related obesities. Also onOctober 12, 2022 at IMPROVE, we announced data from our exploratory Phase 2 Basket Study evaluating setmelanotide in patients stratified into two cohorts, one with predicted setmelanotide rescuable MC4R pathway deficiency and one with predicted nonrescuable MC4R deficiency.
On
On
OnSeptember 19, 2022 , we completed a public offering of 4,800,000 shares of common stock at a price to the public of$26.00 per share for aggregate net proceeds to us of$117.0 million , after deducting underwriting discounts and commissions and offering expenses payable by us. OnOctober 18, 2022 , we completed the sale of an additional 580,000 shares of common stock at a price to the public of$26.00 per share pursuant to the partial exercise of the underwriters' 23 Table of Contents
option to purchase additional shares, for aggregate net proceeds to us of
approximately
OnSeptember 19, 2022 , we announced presentations during the 60th Annual Meeting of theEuropean Society for Paediatric Endocrinology (ESPE 2022) held inRome, Italy that detailed new findings on the burden of hyperphagia and obesity on patients with BBS and their caregivers and data from new analyses that showed setmelanotide achieved substantial weight loss benefit in adolescent and pediatric patients with rare MC4R pathway diseases across three separate pivotal trials. OnSeptember 6, 2022 , we announced that the EC has expanded the marketing authorization for IMCIVREE to include the treatment of obesity and control of hunger associated with genetically confirmed BBS in adult and pediatric patients 6 years of age and older. Also onSeptember 6, 2022 , we announced thatHealth Canada granted Priority Review for our New Drug Submission (NDS) for setmelanotide, indicated in adult and pediatric patients 6 years of age and older with impairments in the MC4R pathway due to genetic diseases, for the treatment of obesity and control of hunger in BBS or biallelic POMC, PCSK1, LEPR deficiency. Priority Review shortensHealth Canada's submission review performance target to 180 days, in comparison to 300 days for non-Priority Review.
In addition, we reported that we expect to achieve the following near-term milestones:
? Launch IMCIVREE in
LEPR deficiencies in the fourth quarter of 2022;
? Initiate pivotal Phase 3 trial to evaluate setmelanotide in hypothalamic
obesity in early 2023;
Initiate a Phase 3, randomized, double-blind trial in patients naïve to
? setmelanotide therapy ("de novo study") to evaluate the weekly formulation of
setmelanotide in patients with BBS in the first half of 2023;
Complete regulatory review by
? IMCIVREE commercially available in
control of hunger in adults and pediatric patients 6 years and older with BBS,
or with POMC, PCSK1 or LEPR deficiencies in 2023; and
Announce topline data from our Phase 3, open-label trial evaluating one year of
? setmelanotide therapy in pediatric patients with MC4R pathway deficiencies
between the ages of 2 and 6 years old in the second half of 2023.
Our operations to date have been limited primarily to conducting research and development activities for setmelanotide. To date, we have generated less than$15.0 million of revenue from product sales and we have financed our operations primarily through the proceeds received from the sales of common and preferred stock, asset sales, as well as capital contributions from the former parent company,Rhythm Holdings LLC . FromAugust 2015 throughAugust 2017 , we raised aggregate net proceeds of$80.8 million through our issuance of series A preferred stock. Since our initial public offering, or IPO, onOctober 10, 2017 and our underwritten follow-on offerings throughOctober 2022 , we have raised aggregate net proceeds of approximately$742.6 million through the issuance of our common stock after deducting underwriting discounts, commissions and offering related transaction costs. We also received$100.0 million from an asset sale, specifically in connection with the sale of our PRV. InDecember 2021 , we entered into an Exclusive License Agreement withRareStone Group Ltd. , and received$7.0 million in connection with the execution of that agreement. InJune 2022 , we entered into the RIFA (as defined below) with entities managed by HealthCare Royalty and received cumulative proceeds of$74.8 million , net of certain transaction costs at closing.
We will not generate significant revenue from product sales until we are able to successfully establish a marketing and commercialization infrastructure for IMCIVREE. IMCIVREE became commercially available to patients 6 years of
24
Table of Contents
age and older with obesity due to POMC, PCSK1 or LEPR deficiency in theU.S. in the first quarter of 2021 and patients 6 years of age and older with obesity due to BBS duringJune 2022 . Following marketing authorizations in the EU andGreat Britain , we are pursuing a country-by-country strategy to establish market access and reimbursement for IMCIVREE in several countries. DuringMarch 2022 , we treated the first patients with IMCIVREE inFrance under the paid early access program and we treated the first patients with IMCIVREE inGermany duringJune 2022 . We expect to continue to fund our operations through the sale of equity, debt financings or other sources. We intend to build our own marketing and commercial sales infrastructure and we may enter into collaborations with other parties for certain markets outsidethe United States . However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such other arrangements as, and when, needed, we may have to significantly delay, scale back or discontinue the development or commercialization of setmelanotide. As ofSeptember 30, 2022 , we had an accumulated deficit of$667.6 million . Our net losses were$40.9 million ,$35.1 million ,$138.6 million , and$26.7 million for the three and nine months endedSeptember 30, 2022 and 2021, respectively. We expect to continue to incur significant expenses and increasing operating losses over the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
? continue to conduct clinical trials for setmelanotide;
? engage contract manufacturing organizations, or CMOs, for the manufacture of
clinical and commercial-grade setmelanotide;
? seek regulatory approval for setmelanotide for additional indications;
? expand our clinical, regulatory, commercial and corporate infrastructure and
expand operations globally;
? engage in the sales and marketing efforts necessary to support the continued
commercial efforts of IMCIVREE globally;
? take into account the levels, timing and collection of revenue earned from
sales of IMCIVREE and other products approved in the future, if any; and
? continue to operate as a public company.
As ofSeptember 30, 2022 , our existing cash and cash equivalents and short-term investments were approximately$347.8 million . We expect that our previously announced changes to the EMANATE and DAYBREAK trials, coupled with a streamlining of our planned global network of clinical trial sites, will result in meaningful cost savings. We expect that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations into 2025. Corporate Background
We are a
Impact of COVID-19
We are closely monitoring how the continued spread of COVID-19 is affecting our
employees, business, preclinical studies and clinical trials. In response to the
COVID-19 pandemic, we have limited access to our executive offices with most
employees continuing their work outside of our offices and travel has been
restricted. Based on current information we do not currently anticipate any
disruption in the clinical supply of setmelanotide. Our CMOs have indicated that
they have appropriate plans and procedures in place to ensure uninterrupted
future supply of clinical and commercial-grade setmelanotide, subject to
potential limitations on their operations due to COVID-19. As a result, we do
not currently expect that the COVID-19 pandemic will have a material impact on
our business, results of operations and financial condition. At this time,
however, there is still uncertainty relating to the trajectory of the pandemic
and the impact of
25
Table of Contents
related responses, and disruptions caused by the COVID-19 pandemic have resulted
and may in the future result in difficulties or delays in initiating, enrolling,
conducting or completing our planned and ongoing clinical trials and the
incurrence of unforeseen costs as a result of disruptions in clinical supply or
preclinical study or clinical trial delays. For example, in 2020, we experienced
interruption of key clinical trial activities, such as patient attendance and
clinical trial site monitoring, in our Phase 3 clinical trial evaluating
setmelanotide for the treatment of insatiable hunger and severe obesity in
individuals with BBS or Alström syndrome. The impact of COVID-19 on our future
results will largely depend on future developments, which are highly uncertain
and cannot be predicted with confidence, such as the duration of the pandemic,
the impact of variants, evolving travel restrictions and social distancing in
the United States and other countries, business closures or business
disruptions, the ultimate impact on financial markets and the global economy,
the effectiveness of vaccines and vaccine distribution efforts and the
effectiveness of other actions taken in the United States and other countries to
contain and treat the disease. See "Risk Factors-The COVID-19 pandemic has and
may continue to adversely impact our business, including our preclinical
studies, clinical trials and our commercialization prospects." in Part II, Item
1A of this Quarterly Report on Form 10-Q.
Financial Operations Overview
Revenue
To date, we have generated less than$15.0 million of revenue from product sales. Our lead product candidate, IMCIVREE, was approved by the FDA inNovember 2020 for chronic weight management in adult and pediatric patients six years of age and older with obesity due to POMC, PCSK1 or LEPR deficiency confirmed by genetic testing. IMCIVREE became commercially available inthe United States in the first quarter of 2021. We recorded our first sales of IMCIVREE inthe United States inMarch 2021 and we made our first sales inFrance duringMarch 2022 under the paid early access program. IMCIVREE was approval by the FDA and the EC in adult and pediatric patients six years of age and older with obesity due to BBS in June and September of 2022, respectively.
Following these approvals for BBS, we expect our sales of IMCIVREE will continue to grow as we identify and treat more patients with this disease and obtain reimbursement throughout the international markets in which we operate.
Cost of sales
All of our inventory of IMCIVREE produced prior to FDA approval is available for commercial or clinical use. Most of the manufacturing costs have been recorded as research and development expenses in prior periods. Accordingly, the costs for IMCIVREE included in our cost of sales for the three and nine months endedSeptember 30, 2022 were insignificant. We expect cost of sales to increase in 2022 as we continue to sell inventory that is produced after we began capitalizing IMCIVREE commercial inventory. We continue to evaluate the impact of this previously expensed inventory on the future cost of product sales, however we do not expect there to be a significant impact based on the cost structure of the product.
Research and development expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery and genetic sequencing efforts, and the clinical development of setmelanotide, which include:
expenses incurred under agreements with third parties, including CROs that
? conduct research and development and preclinical activities on our behalf, and
the cost of consultants and CMOs that manufacture drug products for use in our
preclinical studies and clinical trials;
? employee-related expenses including salaries, benefits and stock-based
compensation expense;
? the cost of lab supplies and acquiring, developing and manufacturing
preclinical and clinical study materials;
? the cost of genetic sequencing of potential patients in clinical studies; and
26
Table of Contents
? facilities, depreciation, and other expenses, which include rent and
maintenance of facilities, insurance and other operating costs.
We expense research and development costs to operations as incurred. 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. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
The following table summarizes our current research and development expenses:
Three Months Ended Nine Months Ended
September 30 , September 30 ,Research and development summary 2022 2021 2022
2021
Research and development expense
We are unable to predict the duration and costs of the current or future clinical trials of our product candidates. The duration, costs, and timing of clinical trials and development of setmelanotide will depend on a variety of factors, including:
? the scope, rate of progress, and expense of our ongoing, as well as any
additional, clinical trials and other research and development activities;
? the rate of enrollment in clinical trials;
? the safety and efficacy demonstrated by setmelanotide in future clinical
trials;
? changes in regulatory requirements;
? changes in clinical trial design; and
? the timing and receipt of any regulatory approvals.
A change in the outcome of any of these variables with respect to the development of our product candidates would significantly change the costs and timing associated with its development and potential commercialization.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our setmelanotide and other development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses to commercialization and there can be no guarantee that we can meet the funding needs associated with these expenses.
Selling, general and administrative expenses
Selling expenses consist of professional fees related to preparation for the
commercialization of setmelanotide, as well as salaries and related benefits for
commercial employees, including stock-based compensation. As we implement and
execute our commercialization plans and start to market setmelanotide and as we
explore new collaborations to develop and commercialize setmelanotide, we
anticipate that these expenses will materially increase.
General and administrative expenses consist primarily of salaries and other
related costs, including stock-based compensation, relating to our full-time
employees not involved in R&D or commercial activities. Other significant costs
include rent, legal fees relating to patent and corporate matters and fees for
accounting, tax and consulting services.
27
Table of Contents
The following table summarizes our current selling, general and administrative
expenses:
Three Months Ended Nine Months Ended
September 30 , September 30 ,Selling, general and administrative summary 2022 2021 2022 2021 Selling, general and administrative expense$ 21,938 $ 17,507
We anticipate that our selling, general and administrative expenses will increase in the future to support continued and expanding development efforts, commercialization of IMCIVREE inthe United States and theEuropean Union as well as increased costs of operating as a global commercial stage biopharmaceutical public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, compliance with local rules and regulations inthe United States and foreign jurisdictions, exchange listing andSecurities and Exchange Commission (SEC) expenses, insurance and investor relations costs, among other expenses.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted inthe United States , or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances on an ongoing basis, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There were no significant changes to our critical accounting policies as
reported in our Annual Report on Form 10-K for the fiscal year ended
Results of Operations
Comparison of the three months ended
The following table summarizes our results of operations for the three months endedSeptember 30, 2022 and 2021, together with the changes in those items
in
dollars and as a percentage:
Three Months Ended
September 30, Change
2022 2021 $ %
(in thousands)
Statement of Operations Data:
Product revenue, net $ 4,284 $ 1,028 $ 3,256 317 %
Costs and expenses:
Cost of sales 497 222 275 124 %
Research and development 21,116 27,539 (6,423) (23) %
Selling, general, and administrative 21,938 17,507 4,431 25 %
Total costs and expenses 43,551 45,268 (1,717) (4) %
Loss from operations (39,267) (44,240) 4,973 (11) %
Other (expense) income, net (1,594) 138 (1,732) (1,255) %
Loss before taxes (40,861) (44,102) 3,241 (7) %
Benefit from income taxes - (8,995) 8,995 (100) %
Net loss $ (40,861) $ (35,107) $ (5,754) 16 %
28
Table of Contents
NM=Not meaningful
Product revenue, net. Product revenue, net increased by $3.3 million to
$4.3 million for the three months ended September 30, 2022 from $1.0 million for
the three months ended September 30, 2021 , an increase of 317%. The FDA
approved our lead product candidate, IMCIVREE in November 2020 and we recorded
our first sales of IMCIVREE in March 2021 . We expect our sales of IMCIVREE to
continue to increase following the FDA approval for the treatment of patients
with BBS in the United States during June 2022 and by the EC in September 2022 .
Through September 30, 2022 , a substantial amount of our product revenue, or
81%, has been generated in the United States . During March 2022 , we completed
our first sales of IMCIVREE in France through an early access program. During
June 2022 , we completed our first sales of IMCIVREE in Germany .
Cost of sales. Cost of sales increased by $0.3 million to $0.5 million for the
three months ended September 30, 2022 from $0.2 million for the three month
period ended September 30, 2021 . All of our inventory of IMCIVREE produced
prior to FDA approval is available for commercial or clinical use. Most of the
manufacturing costs have been recorded as research and development expenses in
prior periods. Accordingly, the costs for IMCIVREE included in our cost of
sales for the three months ended September 30, 2022 and 2021 were insignificant
and primarily reflect the amortization of our capitalized sales based milestone
payment made to Ipsen Pharma S.A.S., or Ipsen, upon our first commercial sale in
the United States and European Union , as well as a royalty due to Ipsen on our
net product sales. We expect cost of sales to increase over time as we sell
inventory that is produced after we began capitalizing IMCIVREE commercial
inventory.
Research and development expense. Research and development expense decreased by
$6.4 million to $21.1 million in 2022 from $27.5 million in 2021, a decrease of
23%. The decrease was primarily due to the following:
a decrease of
impact of study design amendments to our Phase 2 DAYBREAK study, as well as,
? reduced activity due to the winding down of our BBS, QT, Phase 2 Basket and
renal studies; these decreases were partially offset by increased costs
associated with our Phase 3 EMANATE trials, and increased enrollment in our
long-term extension study;
? a decrease of
clinical material;
? a decrease of
development activities;
? a decrease of
? a decrease of
The above decreases were partially offset by:
? an increase of
our expanded clinical programs.
Selling, general and administrative expense. Selling, general and administrative expense increased by$4.4 million to$21.9 million in 2022 from$17.5 million in 2021, an increase of 25%. The increase was primarily due to the following:
an increase of
? costs associated with additional headcount to support our expanding business
operations as well as to build out our commercial operations in the United
States and internationally;
an increase of
? premiums, office support, travel and entertainment related costs for our
expanding workforce and increased commercial operations; and
29
Table of Contents
an increase of
? and marketing activities for IMCIVREE in connection with preparing for the EC
approval for BBS obtained in
market access.
The above increases were partially offset by:
? a decrease of
Other (expense) income, net. Other (expense) income, net decreased by$1.7 million to($1.6) million for the three months endedSeptember 30, 2022 . Other (expense) income, net consists of($2.1) million of interest expense related to our RIFA withHealthCare Royalty Partners, LLC and a($1.0) million write off expense related to our RareStone equity partially offset by$1.0 million of interest income primarily due to improving interest rates during the period and$0.7 million fair market value adjustment related to our RIFA embedded derivative. (Benefit from) provision for income taxes. There is no provision for income taxes for the three months endedSeptember 30, 2022 , as we project to generate operating losses during the year. We recorded an income tax benefit of$9.0 million as a result of the reversal of a tax provision recorded upon the sale of our PRV during the three months endedSeptember 30, 2021 . Net loss. Net loss increased by$5.8 million to$40.9 million for the three months endedSeptember 30, 2022 , from net loss of$35.1 million for the three months endedSeptember 30, 2021 . The increase in net loss was a result of higher costs as noted above, offset by current period revenues, and the non-recurring nature of the impact of a tax benefit related to the sale of our PRV in the prior year period.
Comparison of the nine months ended
The following table summarizes our results of operations for the nine months endedSeptember 30, 2022 and 2021, together with the changes in those items
in
dollars and as a percentage:
Nine Months Ended
September 30, Change
2022 2021 $ %
(in thousands)
Statement of Operations Data:
Product Revenue, net $ 8,094 $ 1,337 $ 6,757 505 %
License revenue 6,754 - 6,754 NM
Costs and expenses:
Cost of sales 1,105 363 742 204 %
Research and development 85,082 72,554 12,528 17 %Selling, general, and administrative 65,715 47,490
18,225 38 % Total costs and expenses 151,902 120,407 31,495 26 % Loss from operations (137,054) (119,070) (17,984) 15 % Other (expense) income, net (1,572) 100,313 (101,885) (102) % Loss before taxes (138,626) (18,757) (119,869) 639 % Provision for income taxes - 7,989 (7,989) (100) % Net loss$ (138,626) $ (26,746) $ (111,880) 418 % NM=Not meaningful Product revenue, net. Product revenue, net increased by$6.8 million to$8.1 million for the nine months endedSeptember 30, 2022 from$1.3 million for the nine months endedSeptember 30, 2021 , an increase of 505%. The FDA approved our lead product candidate, IMCIVREE inNovember 2020 and we recorded our first sales of IMCIVREE inMarch 2021 . We expect our sales of IMCIVREE to continue to increase following the FDA approval for the treatment of 30
Table of Contents
patients with BBS inthe United States duringJune 2022 and by the EC duringSeptember 2022 . ThroughSeptember 30, 2022 , substantially all of our product revenue, or 86%, has been generated inthe United States . DuringMarch 2022 , we completed our first sales of IMCIVREE inFrance through an early access program. DuringJune 2022 , we completed our first sales of IMCIVREE inGermany . License revenue. License revenue was$6.8 million for the nine months endedSeptember 30, 2022 and was entirely related to the RareStone license. We entered into a license agreement with the RareStone inDecember 2021 and completed our activities required to transfer the license to RareStone during the second quarter of 2022, which resulted in the recognition of the license revenue. We do not expect to recognize additional license revenue related to the RareStone arrangement during 2022. Cost of sales. Cost of sales increased by$0.7 million to$1.1 million for the nine months endedSeptember 30, 2022 from$0.4 million in the nine months endedSeptember 30, 2021 , an increase of 204%. Most of the IMCIVREE manufacturing costs have been recorded as research and development expenses in prior periods. Accordingly, the product cost component related for IMCIVREE included in our cost of sales for the nine months endedSeptember 30, 2022 were insignificant and cost of sales primarily reflect the amortization of our capitalized sales based milestone payment made to Ipsen Pharma S.A.S., or Ipsen, upon our first commercial sale in theUnited States andEuropean Union , as well as a royalty due to Ipsen on our net product sales. The$0.7 million increase in cost of sales was due to an increase of$0.3 million of additional amortization,$0.3 million of additional royalties due to our growth in sales and$0.1 attributed to product cost primarily associated with higher sales volume. We expect cost of sales to increase overtime as we sell inventory that is produced after we began capitalizing IMCIVREE commercial inventory. Research and development expense. Research and development expense increased by$12.5 million to$85.1 million in the nine months endedSeptember 30, 2022 from$72.6 million in the nine months endedSeptember 30, 2021 , an increase of 17%. The increase was primarily due to the following:
an increase of
planned clinical trials, including our Phase 2 DAYBREAK and Phase 3 EMANATE
? trials, Phase 3 pediatrics trial, QTc study, Phase 2 hypothalamic obesity
study, and increased enrollment in our long-term extension study. These
increases were partially offset by reduced activity due to the completion and
winding down of our POMC LEPR, BBS, Phase 2 Basket, renal and GO-ID studies;
? an increase of
material;
? an increase of
with our expanded clinical programs;
an increase of
? additional full-time employees in order to support the growth of our research
and development programs and expansion of regulatory affairs operations;
an increase of
? Camurus, related to development milestone achieved related to our weekly
formulation; and
? an increase of
The above increases were partially offset by:
? a decrease of
? a decrease of
and development activities.
31
Table of Contents
Selling, general and administrative expense. Selling, general and administrative
expense increased by $18.2 million to $65.7 million in the nine months ended
September 30, 2022 from $47.5 million in the nine months ended September 30,
2021 , an increase of 38%. The increase was primarily due to the following:
an increase of
? commercial operations, sales and marketing activities for IMCIVREE in
connection with preparing for the
and EC approval in
an increase of
? costs associated with additional headcount to support our expanding business
operations as well as to build out our commercial operations in the United
States and internationally; and
an increase of
? technology, international office space, sponsorships and general corporate
travel related expenses for our expanding workforce.
Other (expense) income, net. Other (expense) income, net decreased by$101.9 million to($1.6) million in the nine months endedSeptember 30, 2022 . The decrease was primarily due to the sale of our PRV inFebruary 2021 . The sale of our PRV in the prior year was a non-recurring transaction. Other (expense) income, net consists of$2.2 million of interest expense related to our RIFA and a$1.0 million write-off expense related to our RareStone equity for the nine months endedSeptember 30, 2022 , partially offset by$1.4 million of interest income and$0.7 million of other income resulting from the remeasurement of our embedded derivative related to our RIFA. Provision for income taxes. There is no provision for income taxes for the nine months endedSeptember 30, 2022 , as we project to generate operating losses during the year. We recorded a provision for income taxes of$8.0 million as a result of the sale of our PRV during the nine months endedSeptember 30, 2021 . Net loss. Net loss increased by$111.9 million to$138.6 million for the nine months endedSeptember 30, 2022 , from net loss of$26.7 million for the nine months endedSeptember 30, 2021 . The increase in net loss was primarily a result of the non-recurring nature of our PRV sale in 2021, which resulted in$100.0 million of other income during the prior year period, as well as higher costs partially offset by product and license revenue in the current year as noted above.
Liquidity and Capital Resources
As of
Cash flows
The following table provides information regarding our cash flows for the nine
months ended
Nine Months Ended September 30,
2022 2021
(in thousands)
Net cash provided by (used in):
Operating activities $ (139,428) $ (105,531)
Investing activities 68,804 (69,407)
Financing activities 196,463 166,381
Net increase (decrease) in cash, cash equivalents and restricted cash
$ 125,839 (8,557)
Net cash used in operating activities
The use of cash in all periods resulted primarily from our net loss adjusted for non-cash charges and changes in components of working capital.
32
Table of Contents
Net cash used in operating activities was$139.4 million for the nine months endedSeptember 30, 2022 and consisted primarily of a net loss of$120.9 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, depreciation and amortization and rent expense. The change in operating assets and liabilities reflected a total use of cash of approximately$4.9 million from a decrease in other long-term assets, prepaid expenses and other current assets coupled with a$13.7 million decrease in accounts payable, deferred revenue and accrued expenses and other current liabilities. Net cash used in operating activities was$105.5 million for the nine months endedSeptember 30, 2021 and consisted primarily of a net loss of$102.0 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, the gain on the sale of the PRV, a deferred provision for income taxes, depreciation and amortization and rent expense. The change in operating assets and liabilities reflected a total use of cash of approximately$5.4 million from an increase in accounts payables and accrued expenses associated with our CROs, CMOs, and consultants due to the timing of payments, offset by an increase of$8.9 million in prepaid expenses.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was$68.8 million for the nine months endedSeptember 30, 2022 and relates to$224.6 million of maturities of short-term investments, partially offset by$151.5 million of purchases of short-term investments, a$4.0 million milestone obligation payment under our license agreement with Ipsen and$0.3 million related to the purchase of property plant and equipment. Net cash used in investing activities was$69.4 for the nine months endedSeptember 30, 2021 and relates to$164.0 million of net purchases of short-term investments,$0.4 million related to the purchase of property plant and equipment and$5.0 million for the acquisition of an intangible asset, partially offset by the$100.0 million in proceeds from the sale of the PRV.
Net cash provided by financing activities
Net cash provided by financing activities was$196.5 million for the nine months endedSeptember 30, 2022 , which represents the net proceeds of$117.0 million from our common stock offering inSeptember 2022 , net proceeds from of$75.0 million from the RIFA, and$4.5 million of cash proceeds from the exercise of stock options and the issuance of common stock from our 2017 Employee Stock Purchase Plan, or the ESPP. Net cash provided by financing activities was$166.4 million for the nine months endedSeptember 30, 2021 , which represents the net proceeds of$161.7 million from our common stock offering inFebruary 2021 and$4.7 million of cash proceeds from the exercise of stock options and the issuance of common stock from the ESPP.
Revenue Interest Financing Agreement
OnJune 16, 2022 , we announced a non-dilutive revenue interest financing agreement, or RIFA, withHealthCare Royalty Partners, LLC , or HealthCare Royalty, for a total investment amount of up to$100 million . In exchange for the total investment amount to be received by Rhythm, HealthCare Royalty will receive a tiered royalty based on global net product sales generated by IMCIVREE. For additional information, see Note 10, "Long-term Obligations" to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Funding requirements
We expect our expenses to increase in connection with our ongoing activities,
particularly as we continue the clinical development of and seek marketing
approval for setmelanotide for future indications, and build out our global
organization. In addition, we expect to incur significant commercialization
expenses related to product sales, marketing, manufacturing and distribution to
the extent that such sales, marketing and distribution are not the
responsibility of potential collaborators. We also expect to incur additional
costs associated with operating as a public company.
33
Table of Contents
We expect that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations into 2025. We may need to obtain substantial additional funding in connection with our research and development activities and any continuing operations thereafter. If we are unable to raise capital when needed or on favorable terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
Our future capital requirements will depend on many factors, including:
the cost to commercialize setmelanotide, by building an internal sales force or
? entering into collaborations with third parties and providing support services
for patients;
? the scope, progress, results and costs of clinical trials for our setmelanotide
program;
? the costs, timing and outcome of regulatory review of our setmelanotide
program;
? the obligations owed to Ipsen, Camurus and Takeda pursuant to our license
agreements;
? the extent to which we acquire or in-license other product candidates and
technologies;
the costs of preparing, filing and prosecuting patent applications, maintaining
? and enforcing our intellectual property rights and defending intellectual
property-related claims;
? our ability to establish and maintain additional collaborations on favorable
terms, if at all; and
? the costs of operating as a public company, including those resulting from
losing our emerging growth company status.
Although IMCIVREE has been approved by the FDA and authorized by the EC andGreat Britain in certain indications, IMCIVREE may not achieve commercial success. In addition, developing our setmelanotide program is a time-consuming, expensive and uncertain process that may take years to complete, and we may never generate the necessary data or results required to obtain future marketing approvals and achieve product sales. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Quarterly Report as this continues to evolve globally. See "Impact of COVID-19" above and "Risk Factors- The COVID-19 pandemic has and may continue to adversely impact our business, including our preclinical studies, clinical trials and our commercialization prospects." in Part II, Item 1A of this Quarterly Report for a further discussion of the possible impact of the COVID-19 pandemic on our business. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, involves agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties or other means, we may have to relinquish valuable rights to our setmelanotide program on terms that may not be favorable to us. If we are unable to raise additional funds through equity, debt financings or other means, when needed, we may be 34
Table of Contents
required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our setmelanotide program that we would otherwise prefer to develop and market ourselves.
Contractual obligations
As ofSeptember 30, 2022 , apart from additional contractual obligations under our RIFA as disclosed in Note 10, "Long-Term Obligations", to the unaudited condensed consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q, there were no other material changes to our principal contractual obligations and commitments as reported in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Recent Accounting Pronouncements
For a discussion of pending and recently adopted accounting pronouncements, see Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
© Edgar Online, source
