Rhythm Pharmaceuticals, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Rhythm is a commercial-stage biopharmaceutical company developing treatments for rare neuroendocrine diseases. Its marketed product is IMCIVREE (setmelanotide); its pipeline includes setmelanotide expansion programs, RM-718 and licensed candidate LB54640.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data.
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Product revenue | $26.0 | $11.5 |
| Cost of sales | $2.8 | $1.4 |
| Research and development | $128.7 | $37.9 |
| Selling, general and administrative | $34.4 | $24.6 |
| Operating loss | $(139.9) | $(52.5) |
| Net loss | $(141.4) | $(52.2) |
| Net loss per share, diluted | $(2.35) | $(0.92) |
| Cash used in operating activities | $(40.7) | $(36.4) |
Revenue increased 126% year over year, primarily reflecting higher IMCIVREE sales. Cost of sales was approximately 10.8% of product revenue, implying an approximate 89.2% product gross margin on that basis. Management expects cost of sales to remain approximately 10%–12% of product revenue in the foreseeable future.
The substantially larger loss mainly reflects a $92.4 million non-cash-and-cash consideration expense for the acquired LB54640 in-process research and development (IPR&D), which had no alternative future use and was expensed. R&D also rose with clinical activity and staffing; SG&A rose with commercial expansion, headcount and professional services. Total other expense was $1.2 million, including $4.8 million interest expense and $3.0 million interest income.
Liquidity, obligations and balance sheet
- At March 31, cash and cash equivalents were $53.4 million and short-term investments were $147.8 million, totaling $201.2 million. Total current assets were $235.8 million and current liabilities $54.2 million. The accumulated deficit was $1,036.1 million.
- Cash, cash equivalents and restricted cash declined $6.5 million during the quarter. Investing cash inflow of $30.1 million included $70.1 million of investment maturities, offset in part by the $40.0 million cash payment for LB54640. Financing provided $4.2 million, including equity-related proceeds, less $2.8 million of deferred-royalty repayments.
- The deferred royalty obligation was $107.4 million at quarter-end. Under the HealthCare Royalty financing, revenue-based payments are tiered, total payments are capped at 185%–250% of funded amounts, and minimum-payment provisions and change-of-control/default terms may accelerate or increase obligations.
- The LGC license consideration included $40.0 million paid at signing, common shares valued at $18.7 million, and a $40.0 million cash payment due 18 months after the agreement date, recorded at $33.7 million present value. LGC may also receive up to $205 million in milestone payments and royalties if applicable conditions are met.
- After quarter-end, the company closed a $150.0 million issuance of Series A Convertible Preferred Stock on April 15, 2024. Management expects quarter-end cash and investments plus these proceeds to fund operations into 2026. The preferred shares rank senior to common stock for dividends and liquidation, are convertible subject to terms, and carry a liquidation preference; see the filing for the amended terms.
Developments, outlook and risks
- Management expects continued operating losses and significant R&D and commercialization spending. It cautions that trial duration, costs and outcomes are uncertain; the quarter’s results are not necessarily indicative of future periods.
- Company-stated near-term milestones included submission of an FDA supplemental application for IMCIVREE in patients ages 2 to under 6 in Q2 2024; planned EMEA approval in Q4 2024; Japanese hypothalamic-obesity cohort dosing in Q2 2024; DAYBREAK stage 2 data and initial LB54640 Phase 2 SIGNAL dosing in Q3 2024; completion of the RM-718 Phase 1 trial and data in the first half of 2024; and top-line Phase 3 hypothalamic-obesity data in the first half of 2025. These are expectations, not guaranteed outcomes.
- Key risks include clinical and regulatory uncertainty, limited rare-disease patient populations and uncertain market access/reimbursement, dependence on third-party manufacturers and clinical vendors, and continued need for financing. A single U.S. customer generated 74% of Q1 revenue; that customer represented 72% of receivables at quarter-end.
- The company reports no pending or threatened litigation it believes would reasonably be expected to have a material adverse effect. Its termination of the RareStone China license for alleged breach remains disputed by RareStone.
- Disclosure controls and procedures were not effective at March 31, 2024 because of a material weakness in IT general controls over user access and program change management. Management reported no resulting material misstatement and is undertaking remediation; effectiveness is not established until controls operate and are tested.
Most important facts for investors to verify
- Whether IMCIVREE revenue growth, patient access and reimbursement progress continue, including the concentration in one U.S. customer.
- Whether the clinical and regulatory milestones occur on the stated timelines and produce results sufficient to support approvals.
- How the $150 million preferred financing’s conversion, dividend, voting and liquidation terms affect common-stock dilution and priority.
- Cash burn and funding runway against expanding development costs, the RIFA repayment terms and LGC’s deferred payment and contingent milestones.
- Progress in remediating the IT-control material weakness, and any developments in the disputed RareStone termination.