Rhythm Pharmaceuticals, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The unaudited statements are presented in U.S. dollars; financial amounts below are in millions unless otherwise indicated.
Business context
Rhythm is a clinical-stage biopharmaceutical company developing treatments for rare genetic disorders associated with severe obesity and hyperphagia. Its lead candidate, setmelanotide, was in Phase 3 development for POMC deficiency obesity, LEPR deficiency obesity, Bardet-Biedl syndrome (BBS) and Alström syndrome. The company had no product revenue. RM-853, licensed from Takeda, remained in preclinical development.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $23.0 | $26.6 | $68.5 | $84.6 |
| Selling, general and administrative expense | $11.3 | $10.5 | $33.0 | $27.1 |
| Total operating expenses | $34.3 | $37.1 | $101.5 | $111.8 |
| Net loss | $33.8 | $36.0 | $99.1 | $107.8 |
| Net loss per share, basic and diluted | $0.77 | $1.04 | $2.25 | $3.13 |
| Cash used in operating activities | Not provided quarterly | $92.9 | $90.5 |
With no revenue, a revenue-based operating margin is not meaningful. At September 30, 2020, cash and cash equivalents were $67.7 million, short-term investments were $134.1 million, and combined cash and investments were $201.8 million, versus $292.5 million at December 31, 2019. Current assets were $209.9 million and current liabilities $15.8 million. Total liabilities were $18.5 million, including $3.2 million of lease liabilities; the filing reports no material financial debt. Stockholders’ equity was $196.9 million. Cash, cash equivalents and restricted cash increased $5.4 million over the first nine months, reflecting $96.6 million of net investing cash inflow—primarily investment maturities—and $92.9 million of operating cash use.
Changes versus comparable periods
- Q3 operating expenses fell 8% and net loss narrowed 6% year over year. R&D expense declined 13%, principally as certain studies neared completion and sequencing activity decreased; higher setmelanotide API purchases and an Ipsen milestone partly offset the decline.
- For the first nine months, operating expenses fell 9% and net loss narrowed 8%. Lower R&D spending on completed or nearing-completion studies was partly offset by higher Basket Study, regulatory milestone and API costs. SG&A rose 22%, including separation and equity-award modification costs related to former executives.
- Operating cash use increased to $92.9 million from $90.5 million for the nine-month period. Short-term investments declined from $230.2 million at year-end 2019 to $134.1 million at September 2020.
Outlook, commentary and risks
- Management expected existing cash and short-term investments to fund operations through at least the end of 2021, while anticipating continued losses and increased expenses for clinical development, manufacturing, regulatory work and potential commercialization. Additional funding may be required; availability and terms are uncertain.
- The FDA accepted the setmelanotide NDA for POMC and LEPR deficiency obesities and granted Priority Review, with a PDUFA goal date of November 27, 2020. The EMA MAA was submitted in June 2020 and validated in July.
- The company completed enrollment in the pivotal BBS/Alström Phase 3 trial and expected topline data by year-end 2020 or early Q1 2021. Additional Basket Study data were expected in early 2021.
- COVID-19 had not, at filing, materially changed the company’s expected regulatory timelines or clinical supply plans, but management cautioned that the pandemic could disrupt trials, enrollment, suppliers, financing and future commercialization.
- Key risks include regulatory review and possible additional study or companion-diagnostic requirements; clinical safety, efficacy and patient-enrollment uncertainty; manufacturing dependence on third parties; the small and uncertain addressable populations; future financing needs and potential dilution; and uncertain reimbursement and commercial adoption.
- CEO Keith Gottesdiener stepped down after the NDA submission; David Meeker was appointed CEO in July. Separation and equity-award modifications for former executives contributed to approximately $4.0 million of nine-month SG&A charges. Management reported effective disclosure controls as of September 30, 2020 and no material legal proceedings.
Important facts for investors to verify
- FDA action on the NDA by the November 27, 2020 goal date, and any label, diagnostic or post-approval requirements.
- Timing and results of the BBS/Alström Phase 3 trial and the planned Basket Study updates.
- Cash burn, investment balances and whether management’s runway estimate through year-end 2021 remains achievable.
- Whether COVID-19, manufacturing capacity or clinical-trial execution changes timelines or costs.
- Potential dilution or other financing terms if additional capital is needed; the filing states the company expected to cease emerging-growth-company status on December 31, 2020.