Rhythm Pharmaceuticals, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2023. Rhythm is a commercial-stage biopharmaceutical company focused on IMCIVREE (setmelanotide), approved for certain rare obesity disorders, and its clinical pipeline. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Product revenue, net | $19.2m | $2.3m | $30.7m | $3.8m |
| License revenue | — | $6.8m | — | $6.8m |
| Total revenue | $19.2m | $9.1m | $30.7m | $10.6m |
| Cost of sales | $2.2m | $0.4m | $3.7m | $0.6m |
| Research and development | $33.5m | $31.5m | $71.5m | $64.0m |
| Selling, general and administrative | $30.0m | $22.3m | $54.7m | $43.8m |
| Operating loss | $(46.6)m | $(45.1)m | $(99.1)m | $(97.8)m |
| Net loss | $(46.7)m | $(45.0)m | $(98.9)m | $(97.8)m |
| Basic and diluted loss per share | $(0.82) | $(0.89) | $(1.74) | $(1.94) |
Revenue growth reflected increased IMCIVREE sales; the prior-year comparison also included $6.8m of one-time RareStone license revenue. Product revenue increased 731% in Q2 and 706% for the six-month period. Costs and expenses grew 22% in Q2 and 20% for six months. Approximate gross margin on total revenue less cost of sales was 88% in both 2023 periods; management expects cost of sales to be 11%–13% of net product revenue during 2023. Net losses were broadly similar year over year as increased sales were offset by higher operating expenses.
- Cash and liquidity: Cash, cash equivalents and short-term investments totaled $253.6m at June 30, 2023, down from $333.3m at December 31, 2022. Current assets were $283.9m and current liabilities $46.1m.
- Cash flow: Six-month operating cash use was $77.5m, compared with $92.4m in 2022. Investing activities provided $66.7m, primarily reflecting net maturities of short-term investments. Financing activities used $1.1m, including $2.7m of deferred royalty repayments.
- Debt-like obligation: The deferred royalty obligation under the HealthCare Royalty financing was $79.3m at June 30; its effective interest rate was 16.18%. The agreement provides for tiered royalties on revenue and includes minimum-payment, change-of-control and default provisions.
- Equity: Stockholders’ equity was $182.3m, down from $264.3m at year-end 2022. Accumulated deficit was $808.9m. Shares outstanding were 56.9m at June 30.
Material changes, outlook and risks
- Q2 R&D expense rose 7%; six-month R&D increased 12%, including $5.7m expensed for the Xinvento acquisition. Six-month SG&A rose 25%, reflecting hiring and expansion of U.S. and international commercial operations.
- Interest income increased, but the RIFA generated $6.4m of interest expense in the first half. The filing reports $6.7m of interest income for the six-month period.
- In February 2023, Rhythm acquired Xinvento for approximately $5.65m, accounted for as an asset acquisition and expensed as acquired IPR&D. The agreement includes up to $206m of contingent development, regulatory and commercial milestones; no contingent liability was recorded at acquisition.
- Management expects existing cash and investments, together with an anticipated $24.4m net RIFA tranche, to fund operations into 2025. On July 28, 2023, after quarter-end, the company notified the financing investors that the sales milestone had been achieved and expected the tranche in Q3. Management expects continued operating losses and rising R&D and commercialization spending; no specific revenue or profitability guidance is provided.
- Clinical outlook includes anticipated completion of enrollment in the pivotal hypothalamic-obesity Phase 3 trial in Q4 2023; data from several setmelanotide studies in the second half of 2023; an IND for weekly candidate RM-718 by year-end 2023; and an anticipated congenital hyperinsulinism IND in 2024. These are forward-looking expectations, not guarantees.
- RareStone disputes Rhythm’s termination of its China license for alleged material breaches; the parties reaffirmed their opposing positions in 2023. The dispute may affect development and commercialization plans in the covered markets.
- Revenue and receivables are concentrated: one U.S. customer accounted for approximately 84% of Q2 revenue and 80% of accounts receivable at June 30. Rhythm also relies on third-party manufacturers and genetic-testing providers.
- Key risks include clinical-trial enrollment, efficacy and safety uncertainty; commercialization, reimbursement and market-acceptance challenges; manufacturing and supply dependence; the cost and terms of future financing; and the RIFA’s royalty, minimum-payment and default obligations. Management said existing liquidity was sufficient for at least twelve months from filing; its longer stated runway depends partly on the anticipated RIFA proceeds.
- The company reported no material legal proceedings, no material changes to market-risk disclosures, and effective disclosure controls as of June 30. COVID-19 did not materially affect the reported period, but future effects remain uncertain.
Important facts for investors to verify
- Subsequent receipt and net amount of the expected $24.4m RIFA tranche, and the resulting cash runway.
- IMCIVREE sales growth, customer concentration, reimbursement approvals and the progression of international market access.
- Enrollment, timing and final results of the hypothalamic-obesity, EMANATE, DAYBREAK, pediatric and weekly-formulation trials.
- Any resolution or escalation of the RareStone dispute and its effect on China-related rights and development.
- Actual development spending, Xinvento milestone exposure, and future cash needs relative to management’s stated runway into 2025.