Business context and reporting period
Rhythm Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company developing treatments for rare genetic disorders. This unaudited Form 10-Q reports the quarter and nine months ended September 30, 2018, with comparisons to the same 2017 periods. The company had no product revenue and reported one operating segment.
Its lead candidate, setmelanotide, is in Phase 3 development for POMC and LepR deficiency obesity and is being developed for other MC4 pathway disorders. RM-853, licensed from Takeda in March 2018 for Prader-Willi syndrome, remains in preclinical development.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data. Revenue was zero; accordingly, profit margins are not meaningful.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Research and development expense | 10.7 | 6.0 | 31.6 | 16.2 |
| Selling, general and administrative expense | 8.5 | 2.3 | 19.7 | 5.2 |
| Total operating expenses | 19.2 | 8.3 | 51.3 | 21.4 |
| Net loss | 17.7 | 10.0 | 48.6 | 23.2 |
| Net loss per share, basic and diluted | $0.52 | $1.78 | $1.63 | $3.02 |
At September 30, 2018, cash and cash equivalents were $58.2 million and short-term investments were $214.1 million, totaling $272.4 million. Total assets were $277.7 million, total liabilities $8.1 million, and accumulated deficit $159.1 million. The filing reports no borrowings or debt balance.
For the first nine months of 2018, operating cash used was $41.1 million, versus $21.6 million in 2017. Investing activities used $99.4 million, largely reflecting net purchases of short-term investments; financing activities provided $164.5 million, primarily from the June 2018 public offering. Cash, cash equivalents and restricted cash increased $24.0 million to $58.5 million at period-end. The company raised $163.0 million net from its June offering.
Material changes versus prior comparable periods
- Q3 operating expenses rose 132% and net loss increased 77% year over year. For the first nine months, operating expenses rose 139% and net loss increased 109%.
- Nine-month R&D expense increased 94%, including a $4.4 million noncash charge for the Takeda license, a $1.0 million Ipsen milestone, and higher clinical, personnel, genetic-sequencing and manufacturing-related costs.
- Nine-month SG&A expense increased 280%, reflecting expanded commercial preparation, personnel, marketing and public-company costs.
- Common shares outstanding increased to 34.4 million at September 30 from 27.3 million at December 31, 2017, including shares issued in the June offering and as Takeda license consideration.
Outlook, commentary and risks
- Management expected existing cash and investments to fund the operating plan into the second half of 2020. It anticipated continued losses and higher R&D and SG&A spending as trials advance and the company builds clinical, finance and commercial capabilities. Additional financing may be needed; availability and terms are uncertain and equity financing would dilute shareholders.
- The company had completed enrollment in the pivotal cohorts of the POMC and LepR Phase 3 trials and expected initial data in Q3 2019, with plans to seek approval for both indications concurrently. At filing, it planned to initiate a combined Phase 3 trial for Bardet-Biedl and Alström syndromes in 2018; further Phase 2 updates for POMC heterozygous and epigenetic disorders were planned for early 2019.
- Setmelanotide development and regulatory approval remain uncertain. Risks include Phase 3 results not confirming earlier findings, recruitment challenges in rare conditions, evolving FDA or EMA requirements, potential need for companion diagnostics, and manufacturing or trial delays.
- Safety and regulatory matters include possible MC4R-related effects and skin pigmentation or tanning associated with MC1 receptor activity. Regulators had not agreed with the company’s assessment of low-severity vacuolated cells observed in rat tissue in connection with the PEG vehicle; further studies, labeling implications or pediatric-development delays remained possible.
- Potential future payments under licenses include up to $40 million to Ipsen, $64.75 million to Camurus and $140 million to Takeda in development and commercial milestones, plus royalties, contingent on development, approval and sales. The amended Boston office lease has $5.1 million in disclosed future minimum payments.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls at September 30, 2018. Interest-rate sensitivity was described as not material for its short-term, low-risk investments.
Important facts for investors to verify
- Whether the POMC and LepR Phase 3 trials meet endpoints and whether data timing and concurrent filing plans remain achievable.
- Actual cash burn and the assumptions behind management’s runway estimate into the second half of 2020, given planned increases in clinical and commercialization spending.
- Regulatory feedback on the PEG-related tissue findings, pediatric development, clinical endpoints and possible companion-diagnostic requirements.
- Whether patient identification, enrollment and market-size estimates support development and commercialization plans across the rare indications.
- Potential dilution and financing needs, as well as contingent license milestones, royalties and lease obligations.