Rhythm Pharmaceuticals, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
Rhythm is a clinical-stage biopharmaceutical company developing treatments for rare genetic metabolic disorders. Its lead candidate, setmelanotide, is in Phase 3 development for POMC- and leptin receptor (LepR)-deficiency obesity, with development also targeting Bardet-Biedl syndrome (BBS), Alström syndrome and other MC4 pathway disorders. In March 2018, the company licensed RM-853, an oral GOAT inhibitor for Prader-Willi syndrome (PWS), which remains in preclinical development. Rhythm had no product revenue.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $8.584 | $5.397 | $20.870 | $10.270 |
| Selling, general and administrative expense | $6.437 | $1.357 | $11.152 | $2.873 |
| Total operating expenses / operating loss | $15.021 | $6.754 | $32.022 | $13.143 |
| Net loss | $14.412 | $6.802 | $30.871 | $13.162 |
| Net loss per common share, basic and diluted | $0.52 | $0.79 | $1.12 | $1.52 |
| Operating cash used | Not separately provided for Q2 | $24.131 | $13.158 |
As a development-stage company without product sales, gross margin and operating margin are not meaningful. Net interest income was $0.609 million for Q2 and $1.151 million for the first half of 2018, compared with net expense of $0.048 million and $0.019 million, respectively, in 2017.
At June 30, 2018, cash and cash equivalents were $210.484 million and short-term investments were $77.070 million, totaling $287.554 million. Total assets were $291.749 million, total liabilities $7.432 million, and stockholders’ equity $284.317 million. No borrowings or debt are reported in the balance sheet. The six-month cash-flow statement reported $37.044 million provided by investing activities, primarily net maturities of short-term investments, and $163.360 million provided by financing activities. Cash, cash equivalents and restricted cash ended the period at $210.734 million.
Material changes versus the prior comparable period
- Q2 operating expenses increased 122% year over year; first-half expenses increased 144%. R&D rose 59% in Q2 and 103% for the first half, while SG&A rose 374% and 288%, respectively.
- Management attributed higher R&D to increased staffing, clinical and development activity, and a $1.0 million Ipsen milestone expense. First-half R&D also included a $4.448 million noncash charge for the RM-853 license, settled with shares.
- Higher SG&A reflected hiring, building the commercial organization and patient-identification efforts, and increased professional and public-company costs.
- First-half net loss increased to $30.871 million from $13.162 million. Per-share loss was lower than the prior year in both periods, alongside substantially higher weighted-average shares following the IPO and preferred-stock conversion.
- The June 2018 common-stock offering raised $163.034 million net: 6,591,800 shares were sold at $26.42 per share. This was the principal driver of increased cash and financing cash flow.
Outlook, management commentary and risks
- Management expected existing cash and short-term investments to fund the operating plan into the second half of 2020, while anticipating continued and increasing losses and expenses. Additional financing may be required; availability and terms are uncertain.
- The company completed enrollment in pivotal cohorts of its POMC- and LepR-deficiency Phase 3 trials, expected initial data in Q3 2019, and planned to pursue concurrent regulatory filings thereafter. It planned to initiate a combined BBS/Alström Phase 3 trial in 2018 and provide a further update on POMC heterozygous and epigenetic Phase 2 work early in 2019.
- Management reported Phase 2 proof-of-concept results in several indications and FDA Breakthrough Therapy designation covering POMC deficiency, LepR deficiency, BBS and Alström syndrome. These are development updates, not assurances of trial success or approval.
- Key uncertainties include Phase 3 efficacy and safety, trial enrollment and timing, regulatory requirements and interpretation of endpoints, the size of rare-disease patient populations, manufacturing and third-party reliance, and the ability to raise future capital. The filing also discusses potential toxicology questions relating to the polyethylene glycol vehicle; regulators had not confirmed the company’s view that the findings were not a material safety concern.
- Potential, contingent license obligations include development and commercial milestones of up to $40 million to Ipsen, $64.75 million to Camurus and $140 million to Takeda, plus royalties as applicable. The filing states that timing and achievement of these milestone payments cannot reasonably be estimated.
- Subsequent to quarter-end, Rhythm amended its Boston headquarters lease; the new six-year term begins August 2019, with a five-year renewal option and disclosed future minimum lease payments of $5.244 million. The company reported no material legal proceedings and no material change in internal control over financial reporting; disclosure controls were judged effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the expected Q3 2019 Phase 3 data and planned regulatory submissions remained on schedule, and how trial outcomes affect the development plan.
- Cash burn, investment balances and spending relative to the stated funding runway into the second half of 2020.
- Trial enrollment, safety findings and regulatory feedback, including the toxicology and pediatric-development questions identified in the filing.
- Progress and future funding needs for RM-853, and the potential impact of contingent milestone and royalty commitments.
- Share dilution and potential share sales: the filing disclosed lock-up restrictions and registration rights affecting existing holders after the June offering.