Rhythm Pharmaceuticals, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; standalone fourth-quarter results are not provided in the supplied filing text.
Business context
Rhythm is a commercial-stage biopharmaceutical company focused on rare genetic obesity. Its sole marketed product, IMCIVREE (setmelanotide), was approved in the U.S. in November 2020 for certain POMC, PCSK1, and LEPR deficiencies and became commercially available in early 2021. The European Commission and Great Britain authorized it for these deficiencies in 2021. The company is also developing setmelanotide for additional indications and a once-weekly formulation.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net product revenue | $3.2 million | $0 |
| Cost of sales | $0.6 million | $0 |
| Research and development expense | $104.1 million | $90.5 million |
| Selling, general and administrative expense | $68.5 million | $46.1 million |
| Loss from operations | $170.1 million | $136.6 million |
| Other income, net | $100.4 million | $2.6 million |
| Net loss | $69.6 million | $134.0 million |
| Net loss per share, basic and diluted | $1.40 | $3.04 |
- The $100 million sale of a Rare Pediatric Disease Priority Review Voucher drove most of FY2021 other income and reduced the reported net loss; it did not reflect operating profitability.
- Revenue was generated in the U.S. and came from a single customer. The company says initial sales are constrained by the very small diagnosed patient population. FY2021 cost of sales was unusually low because most pre-approval manufacturing costs had already been expensed as R&D.
- Cash and cash equivalents were $59.2 million and short-term investments were $235.6 million at year-end, totaling $294.9 million. Total current assets were $308.4 million and current liabilities $43.4 million. No borrowings or debt balance are reported in the supplied financial statements.
- Net cash used in operating activities was $146.0 million, versus $122.0 million in 2020. Investing activities used $62.2 million; financing activities provided $166.5 million, principally from a February 2021 stock offering.
- Management estimated year-end cash and investments would fund operating expenses into the second half of 2023. The filing also states management expects existing resources to cover at least 12 months from the March 1, 2022 filing date. Continued losses and potential need for additional capital remain material considerations.
Material changes and developments
- First recorded IMCIVREE sales occurred in March 2021; full-year net product revenue was $3.2 million.
- R&D expense rose 15% year over year, primarily from clinical-trial activity, staffing and preclinical work. SG&A rose 48%, reflecting commercial build-out, increased headcount, professional services and disease-awareness efforts.
- Net loss narrowed from $134.0 million to $69.6 million, mainly because of the one-time $100 million voucher-sale gain, even as operating loss widened.
- In February 2021, Rhythm raised approximately $161.6 million net from an equity offering. It also established a $100 million at-the-market equity program in November 2021 and had made no sales under it by year-end.
- A December 2021 China license with RareStone provided $7 million cash upfront and potential equity, milestones and royalties. The $7 million was recorded as a contract liability because specified know-how transfer obligations remained unfulfilled at year-end.
Outlook, risks and contingencies
- The FDA accepted the BBS/Alström supplemental application for priority review and set a June 16, 2022 PDUFA date. Rhythm subsequently decided to withdraw the Alström indication from the pending EMA application following agency feedback. These were future regulatory decisions, not approvals as of the filing date.
- Management planned to initiate the Phase 3 EMANATE trial in the first half of 2022 and continue development across additional genetic obesity indications, pediatric patients and a weekly formulation. Trial outcomes and timelines are uncertain.
- Key risks include limited commercial experience and a small, uncertain patient pool; payer coverage, reimbursement and market acceptance; dependence on setmelanotide; clinical and regulatory uncertainty; potential adverse effects; reliance on contract manufacturers and CROs; and intellectual-property protection.
- COVID-19 had interrupted some clinical-trial activities. Management did not then expect a material effect on business or supply, but acknowledged uncertainty and potential future trial, supply-chain and commercialization disruption.
- Potential license milestones, royalties and other obligations are contingent on future events. The company estimated approximately $5 million in potential development and commercial milestone payments over the 12 months following filing; these contingencies were not recorded as liabilities when milestones had not been achieved.
- The company reported no material legal proceedings. Management and the independent auditor concluded internal control over financial reporting was effective at December 31, 2021; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification points
- Track IMCIVREE prescriptions, net sales, customer concentration, gross economics as post-approval inventory is sold, and reimbursement progress in the U.S. and Europe.
- Verify subsequent FDA and EMA decisions, including the BBS application, the withdrawn Alström request, and progress and results for EMANATE and other trials.
- Assess cash burn against the stated runway, planned R&D and commercial spending, and any use of the $100 million ATM facility or other financing.
- Review the RareStone license’s fulfillment of transfer obligations and subsequent recognition of upfront consideration, equity and potential milestone or royalty income.
- Reconcile the MD&A cash-flow discussion, which describes a net loss of $147.9 million for 2021, with the audited statements reporting a net loss of $69.6 million; the audited cash-flow statement separately adjusts for the $100 million voucher-sale gain.