Rhythm Pharmaceuticals, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; financial statements are unaudited. Amounts below are in millions of dollars unless noted.
Business context
Rhythm is a commercial-stage biopharmaceutical company developing and commercializing IMCIVREE (setmelanotide) for rare obesity disorders involving the MC4R pathway. IMCIVREE was approved in the U.S. for Bardet-Biedl syndrome (BBS) in June 2022, expanding its existing U.S. indications. The company continues to invest in clinical development and is building commercial operations internationally.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Product revenue, net | $2.3 | $0.3 | $3.8 | $0.3 |
| License revenue | $6.8 | — | $6.8 | — |
| Research and development | $31.5 | $25.1 | $64.0 | $45.0 |
| Selling, general and administrative | $22.3 | $15.5 | $43.8 | $30.0 |
| Operating loss | $(45.1) | $(40.4) | $(97.8) | $(74.8) |
| Net income (loss) | $(45.0) | $(35.4) | $(97.8) | $8.4 |
| Operating cash flow | Not presented by quarter | $(92.4) | $(65.4) |
Q2 revenue included $6.8 million recognized upon transfer of the China-region license to RareStone; Rhythm said it did not expect further RareStone license revenue in 2022. Product sales remained early-stage and concentrated substantially in one U.S. customer. No meaningful product margin trend is established by the filing: cost of sales was $0.4 million for Q2, and included royalty and intangible amortization costs.
At June 30, cash and cash equivalents were $113.2 million and short-term investments were $122.4 million, totaling $235.6 million. Current assets were $249.3 million and current liabilities $44.6 million; working capital was approximately $204.8 million. Cash, cash equivalents and restricted cash increased $54.0 million during the first half. Investing cash flow was $108.5 million, largely reflecting net maturities of short-term investments; financing cash flow was $37.9 million, principally the initial RIFA proceeds. Accumulated deficit was $626.7 million.
The company reported a $34.3 million deferred royalty obligation and a $1.6 million embedded derivative liability associated with its royalty financing agreement. The filing describes this as debt-like financing, not conventional bank debt. Total liabilities were $82.0 million.
Changes versus the prior comparable periods
- Q2 product revenue rose to $2.3 million from $0.3 million; first-half product revenue was $3.8 million versus $0.3 million.
- Q2 operating expenses increased 33% to $54.2 million, reflecting higher clinical-development and commercial build-out costs. First-half R&D rose 42% and SG&A rose 46% year over year.
- First-half net loss was $97.8 million versus net income of $8.4 million in 2021. The prior-year period included $100.0 million from a one-time priority review voucher sale; the 2022 period did not.
- Cash and short-term investments fell from $294.9 million at December 31, 2021 to $235.6 million at June 30, 2022, despite the RIFA proceeds; operating cash use and investment activity affected the balance.
Outlook, developments and risks
- Management expected existing cash and short-term investments to fund operations into 2024. With a potential second RIFA tranche expected in the second half of 2022, management expected funding into at least the second half of 2024. These estimates depend on operating plans and conditional financing proceeds.
- The RIFA provides up to $100 million in total: $37.5 million was funded after U.S. BBS approval; up to a further $37.5 million is contingent on EMA approval for BBS; and $25 million is contingent on reaching a specified cumulative sales threshold. In exchange, Rhythm owes tiered royalties on defined revenues, with total payments capped at 185%–250% of funded amounts. Change-of-control and default provisions may accelerate obligations; IMCIVREE-related assets secure the financing.
- After quarter-end, EMA’s CHMP issued a positive opinion recommending the BBS indication expansion; the European Commission’s decision was anticipated in Q4 2022. The filing also reported positive interim Phase 2 hypothalamic-obesity results, but these were preliminary and based on a small evaluable group. Management planned further clinical development subject to regulatory consultation.
- Management expected continued operating losses and substantial R&D and commercialization spending. It cited potential cost savings from changes to EMANATE and DAYBREAK trials and streamlining trial sites, but provided no quantified savings guidance.
- Key risks include uncertain clinical outcomes and trial enrollment, limited diagnosed patient populations, market access and reimbursement, reliance on third-party manufacturers, and the need for future financing. COVID-19 had not materially affected results in the reported periods, but the company noted possible future trial, supply-chain and operational disruption.
- The company reported no material legal proceedings, no material changes in market-risk disclosures, effective disclosure controls as of June 30, and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and timing of the European Commission’s BBS decision and whether it triggers the conditional RIFA tranche.
- Actual IMCIVREE sales growth, payer coverage, patient identification, and the concentration of revenue in a single U.S. customer.
- Cash burn relative to the stated runway, the sales condition for the final RIFA tranche, and the financing’s royalty, minimum-payment, cap, collateral and acceleration terms.
- Full and final clinical data underlying the hypothalamic-obesity interim findings, and progress and enrollment in EMANATE, DAYBREAK and other trials.
- Whether commercial expansion and clinical development costs rise as expected, and whether management’s anticipated trial-cost savings are realized.