Rhythm Pharmaceuticals, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited; amounts below are in U.S. dollars. Rhythm is a commercial-stage biopharmaceutical company developing and commercializing treatments for rare genetic obesity conditions. IMCIVREE (setmelanotide) began U.S. sales in March 2021.
Key financial metrics
| Metric | Q2 2021 | Six months 2021 | Comparable 2020 |
|---|---|---|---|
| Net product revenue | $0.274 million | $0.309 million | None |
| Research and development expense | $25.104 million | $45.015 million | Q2 $22.997 million; six months $45.501 million |
| Selling, general and administrative expense | $15.465 million | $29.983 million | Q2 $8.921 million; six months $21.717 million |
| Operating loss | $40.432 million | $74.830 million | Q2 $31.918 million; six months $67.218 million |
| Net income (loss) | $(35.389) million | $8.361 million | Q2 $(31.117) million; six months $(65.281) million |
| Cash used in operating activities | Not separately reported | $65.371 million | $65.827 million used |
Product sales less cost of sales ($0.137 million in Q2; $0.141 million for six months) produced a small positive gross contribution, but sales were immaterial relative to operating expenses; overall operating margins remained deeply negative.
- Liquidity: Cash and cash equivalents plus short-term investments totaled $368.154 million at June 30, 2021, versus $172.792 million at December 31, 2020. Management expected these resources to fund operations into at least the second half of 2023.
- Cash flows and financing: Six-month investing cash use was $132.187 million, including net purchases of short-term investments and a $5.0 million license-related intangible asset payment, partly offset by $100.0 million from the priority review voucher sale. Financing provided $165.968 million, primarily net proceeds from a February public offering.
- Debt and obligations: The filing reports no debt balance. Lease liabilities totaled $2.828 million; no material change to principal contractual obligations was reported.
- Balance sheet: Total assets were $388.390 million, total liabilities $36.701 million, stockholders’ equity $351.689 million, and accumulated deficit $450.966 million at June 30, 2021.
Changes versus prior period and unusual items
- Q2 revenue began following the U.S. product launch; initial sales were expected to be limited by the ultra-rare indications and small diagnosed patient population.
- Q2 net loss widened by $4.272 million year over year, chiefly because operating expenses rose 28%, including a 73% increase in SG&A associated with building U.S. and international commercial operations.
- Six-month 2021 net income primarily reflects the $100.0 million gain on sale of a Rare Pediatric Disease Priority Review Voucher, not recurring product profitability. The sale also resulted in a $16.984 million six-month tax provision; the company expected current-year tax losses to offset the voucher income and maintained a full valuation allowance against deferred tax assets.
- In February 2021, the company raised $161.731 million net through an offering of 5.75 million shares at $30 per share. Shares outstanding increased to 50.227 million at June 30 from 44.236 million at year-end 2020.
Outlook, commentary and risks
- Management expected operating losses and expenses to increase as clinical programs advance and the company expands commercialization, manufacturing, and global operations. It did not provide revenue or earnings guidance.
- As reported in the filing, the European Commission granted IMCIVREE marketing authorization in July 2021 for specified POMC/PCSK1 and LEPR deficiency conditions. The company was pursuing country-by-country access and reimbursement.
- After quarter-end, Rhythm reported positive topline Phase 3 results in Bardet-Biedl syndrome (BBS) and Alström syndrome: the trial met its primary and key secondary endpoints, but all primary-endpoint responders had BBS; none of three evaluable Alström patients met the primary endpoint. Full analysis and planned regulatory submissions were discussed for the second half of 2021. These were post-period developments, not Q2 financial results.
- Other development plans included Phase 3 EMANATE sub-studies, a Phase 2 DAYBREAK study, a trial in patients ages two to six, and trials of a weekly formulation. Timing and success depend on clinical outcomes, regulatory review, enrollment, and manufacturing.
- Principal risks include limited commercial experience and minimal product revenue, uncertain payer coverage and reimbursement, small and uncertain patient populations, clinical-trial and regulatory risk, reliance on third-party manufacturers, potential product side effects, intellectual-property and licensing risks, and continued need for capital. COVID-19 had not materially affected first-half financial results, but had interrupted some BBS/Alström trial activities and could cause further delays or supply disruption.
- No material legal proceedings were reported. Management concluded disclosure controls were effective as of June 30, 2021; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether IMCIVREE sales, access, reimbursement, and patient identification improve from the very low launch-period base.
- Final BBS and Alström trial data and the regulatory path, particularly given the reported lack of primary-endpoint responders among evaluable Alström patients.
- Actual operating cash burn and whether the stated runway through at least the second half of 2023 remains achievable as trial and commercialization spending rises.
- The recurring economics of product sales, including future manufacturing costs, royalties, and amortization; early-period cost of sales was unusually low because much pre-approval inventory cost had already been expensed as R&D.
- The treatment of the voucher-related tax provision and the company’s ability to use tax losses, alongside dilution from equity financing and outstanding equity awards.