Rhythm Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unless stated otherwise, dollar amounts below are in millions. Rhythm is a clinical-stage biopharmaceutical company developing treatments for rare genetic metabolic disorders. It had no product revenue.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Research and development expense | $35.3 | $8.6 | $58.1 | $20.9 |
| Selling, general and administrative expense | $8.8 | $6.4 | $16.6 | $11.2 |
| Total operating expenses | $44.1 | $15.0 | $74.7 | $32.0 |
| Operating loss | $(44.1) | $(15.0) | $(74.7) | $(32.0) |
| Net loss | $(42.8) | $(14.4) | $(71.8) | $(30.9) |
| Net loss per share, diluted | $(1.24) | $(0.52) | $(2.08) | $(1.12) |
Margins are not meaningful because the company had no revenue. Net interest income was $1.4 million in Q2 and $2.9 million for the six-month period.
At June 30, 2019, cash and cash equivalents were $63.1 million and short-term investments were $132.0 million, totaling $195.2 million, down from $252.1 million at December 31, 2018. Current assets were $203.5 million and current liabilities were $26.1 million. Total liabilities were $29.4 million, including $3.7 million of lease liabilities. The filing reports no interest-bearing debt.
For the six months, operating cash use was $56.9 million, investing cash provided was $69.7 million (principally net maturities of short-term investments), and financing cash provided was $0.8 million. Cash, cash equivalents and restricted cash increased by $13.6 million to $63.5 million. Accumulated deficit was $256.4 million.
Material changes versus prior comparable periods
- Q2 R&D expense rose 311% year over year; six-month R&D expense rose 178%. Management attributed the increases mainly to setmelanotide clinical trials, genetic sequencing and translational research, drug supply and manufacturing work, and added personnel.
- Q2 SG&A increased 37%; six-month SG&A increased 49%, primarily from hiring and commercial-readiness, disease-awareness and professional-service costs.
- Net loss widened to $42.8 million for Q2 and $71.8 million for the first half, versus $14.4 million and $30.9 million, respectively, in 2018. First-half 2018 included a $4.4 million non-cash expense for the Takeda license; the 2019 period had higher ongoing development spending.
- Operating cash use increased to $56.9 million from $24.1 million in the first half of 2018. The 2018 period included $163.0 million of net public-offering proceeds; no comparable offering proceeds were received in the first half of 2019.
Outlook, developments and risks
- Management expected available cash, cash equivalents and short-term investments to fund the operating plan into the fourth quarter of 2020. Rhythm expects continued operating losses and rising development and commercialization-preparation costs; additional financing may be required, and its availability and terms are uncertain.
- Setmelanotide was in Phase 3 development for POMC deficiency obesity, LEPR deficiency obesity, Bardet-Biedl syndrome and Alström syndrome. Enrollment in the pivotal POMC and LEPR cohorts was complete. Management expected initial data from those trials in Q3 2019 and planned to file for approval for those indications at the end of 2019 or early 2020. The combined pivotal Bardet-Biedl/Alström trial was enrolling.
- Setmelanotide had FDA Breakthrough Therapy designation for the four listed indications and EMA PRIME designation. These designations do not assure approval or a faster review.
- RM-853, a GOAT inhibitor licensed from Takeda for Prader-Willi syndrome, remained preclinical. The company expected to submit an IND in 2020. The Takeda agreement includes potential development and sales milestones totaling up to $140 million, plus royalties; payments depend on future achievements and commercialization.
- Key risks include uncertain Phase 3 efficacy and safety, rare-disease enrollment and patient-population estimates, regulatory and diagnostic requirements, manufacturing reliance on third parties, commercialization and reimbursement uncertainty, and the need for future financing. The filing discusses potential safety and regulatory questions involving the PEG vehicle and preclinical findings; regulators had not indicated whether they agreed with the company’s assessment.
- Potential milestone obligations under the Ipsen and Camurus licenses are up to $40.0 million and $64.75 million, respectively, plus royalties; these are contingent on development, approval, commercialization or other specified events. The filing states no material legal proceedings. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the anticipated Q3 2019 Phase 3 data and planned regulatory submissions occurred on schedule, and the complete efficacy and safety results.
- Whether the stated cash runway remains valid as clinical-trial, manufacturing, hiring and commercialization-preparation expenses evolve.
- Future financing needs, potential dilution or debt restrictions, and any effect on the development plan.
- Regulatory requirements and timing, including for carcinogenicity studies, pediatric use, genetic testing or companion diagnostics, and the PEG-related preclinical findings.
- Actual addressable patient populations, trial enrollment, manufacturing capacity and the terms and timing of contingent license milestones and royalties.