Rhythm Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017. Financial statements are unaudited. Rhythm is a clinical-stage biopharmaceutical company with no product revenue; its lead candidate, setmelanotide, is being developed for rare genetic obesity disorders involving the MC4 pathway.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development | $6.0m | $5.4m | $16.2m | $14.0m |
| General and administrative | $2.3m | $1.0m | $5.2m | $3.6m |
| Total operating expenses | $8.3m | $6.4m | $21.4m | $17.5m |
| Net loss | $10.0m | $6.4m | $23.2m | $17.5m |
| Net loss per common share | $1.78 | $0.71 | $3.02 | $1.95 |
| Operating cash used | Not stated by quarter | Not stated by quarter | $21.6m | $17.0m |
At September 30, 2017, cash and cash equivalents were $27.9m, short-term investments were $2.5m, and total current assets were $32.0m. Total liabilities were $5.7m, with no debt reported. Stockholders’ deficit was $51.9m; accumulated deficit was $99.7m. Cash and short-term investments totaled $30.4m. No meaningful operating margin is reported because the company had no revenue.
For the nine months, financing provided $41.5m, principally from preferred-stock issuance; investing activities provided $1.4m, primarily from net maturities of short-term investments. Cash increased by $21.4m to $27.9m.
Material changes and financing
- Year-over-year nine-month operating expenses rose 22%; R&D increased 16% as clinical trials and development activities expanded, while G&A increased 45% due to stock compensation, legal costs related to the shareholder distribution, and higher headcount and office costs.
- Nine-month net loss increased 32%. Q3 net loss increased 57%, including a $1.8m noncash revaluation expense on a Series A investor instrument.
- In October 2017, after quarter-end, the company completed its IPO, selling 8,107,500 shares at $17 per share. Net proceeds were approximately $125.8m; preferred shares converted into 17,406,338 common shares. The reported September-quarter balances do not include the IPO. The company reported approximately $156.2m in cash and short-term investments after giving effect to IPO proceeds.
- Management expected existing resources, including the IPO proceeds, to fund the operating plan into the first half of 2019. The company expects continued significant losses and increased expenses as it advances trials and builds clinical, finance, and commercial capabilities.
Outlook, risks, and notable items
- Management expected to complete enrollment in the POMC-deficiency Phase 3 trial by year-end 2017 and report data in the first half of 2019. It expected to start the LepR-deficiency Phase 3 trial in Q4 2017 and complete enrollment in 2018; a Bardet-Biedl syndrome Phase 3 trial was planned for 2018.
- Preliminary Phase 2 results for Bardet-Biedl syndrome were expected in Q4 2017; preliminary results for Alström syndrome, POMC heterozygous deficiency, and POMC epigenetic-disorder studies were expected in the first half of 2018.
- These timelines and outcomes are uncertain. Key risks include clinical-trial enrollment and results, regulatory requirements and approval, drug safety, manufacturing and third-party dependence, uncertain target-population estimates, future financing needs, and the possibility of dilution or unfavorable financing terms.
- Potential future license obligations include up to $40m in development and commercial milestones to Ipsen, plus royalties; Camurus may receive up to $64.75m in milestones plus royalties. These contingent payments are not included as fixed contractual obligations. A $1m prepayment toward an Ipsen milestone was made in July 2017.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls at September 30, 2017. The filing notes that historical financial information may not represent standalone costs because some prior-period expenses were allocated from an affiliated company.
Important facts for investors to verify
- Progress against the stated enrollment, trial-start, and data-reporting timelines, and whether regulators require additional studies or change trial designs.
- Cash burn and actual runway after the IPO, including the pace of hiring and clinical-development spending.
- Clinical efficacy and safety evidence across each indication; early results do not assure later-stage success.
- Whether manufacturing supply, patient identification and enrollment, and licensing obligations affect development timing or costs.
- The extent of dilution from outstanding equity awards, potential future financings, and the conversion of preferred stock in the IPO.