Rhythm Pharmaceuticals, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Amounts below are in U.S. dollars unless otherwise stated.
Business context
Rhythm is a clinical-stage biopharmaceutical company developing treatments for rare genetic metabolic disorders. Its lead candidate, setmelanotide, is in Phase 3 trials for POMC deficiency obesity and leptin receptor (LepR) deficiency obesity, with additional indications in earlier-stage trials. In March 2018, the company licensed worldwide rights to RM-853, a preclinical candidate for Prader-Willi syndrome (PWS). Rhythm had no product revenue.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $12.286 million | $4.873 million; up 152% |
| Selling, general and administrative expense | $4.715 million | $1.516 million; up 211% |
| Total operating expenses | $17.001 million | $6.389 million; up 166% |
| Operating loss | $17.001 million | $6.389 million |
| Interest income, net | $0.542 million | $0.029 million |
| Net loss | $16.459 million | $6.360 million; loss attributable to common stockholders was $7.526 million |
| Loss per common share, basic and diluted | $0.60 | $0.74 |
| Operating cash used | $11.651 million | $7.016 million |
At March 31, 2018, cash and cash equivalents were $43.167 million and short-term investments were $93.286 million, totaling $136.453 million, compared with $148.082 million at December 31, 2017. The company reported $139.443 million in total assets, $5.785 million in total liabilities, no debt disclosed, and an accumulated deficit of $126.711 million. Current assets were $138.414 million against current liabilities of $5.579 million. No meaningful operating margin was reported because the company had no revenue.
Investing activities provided $20.607 million, primarily from net maturities of short-term investments; financing activities provided no cash in Q1 2018. The increase in cash and restricted cash therefore does not represent cash generated by operations.
Changes versus the prior comparable period
Net loss increased by $10.099 million year over year. R&D expense rose mainly because of the RM-853 license charge, a $1.0 million Ipsen milestone expense, and additional clinical and development personnel. SG&A growth reflected increased headcount, commercial organization preparation, and public-company professional costs. Operating cash use increased by $4.635 million.
Q1 2018 R&D included a $4.448 million non-cash expense for the RM-853 license, settled by issuing 223,544 common shares on April 3, 2018. The company also recorded a $1.0 million Ipsen milestone when its criteria were met.
Outlook, commentary and risks
- Management expected existing cash and short-term investments to fund the operating plan into the second half of 2019, while anticipating significant expense increases and continued operating losses. Additional financing may be required; availability and terms are uncertain.
- Management expected to complete enrollment of ten patients in the POMC Phase 3 trial in the first half of 2018 and report data in the first half of 2019. LepR Phase 3 enrollment was expected to finish in 2018. A Bardet-Biedl syndrome Phase 3 trial was anticipated to start in 2018; preliminary results from other Phase 2 indications were expected in the first half of 2018. These are forward-looking expectations, not reported outcomes.
- Setmelanotide had FDA Breakthrough Therapy designation for POMC and LepR deficiency obesity. The filing notes that, in May 2018, FDA agreed to include Bardet-Biedl and Alström syndromes under the existing designation.
- RM-853 remains preclinical. Takeda may receive up to $70 million in development milestones and $70 million in sales milestones, plus royalties; these amounts depend on future development and commercial achievements. Ipsen and Camurus agreements also include contingent milestones and royalties.
- Principal risks include clinical-trial failure or delay, uncertain patient identification and enrollment, potential adverse effects and regulatory requirements, reliance on contract manufacturers and research organizations, uncertain reimbursement and commercialization, intellectual-property challenges, and the need for additional capital.
Important facts for investors to verify
- Confirm subsequent POMC and LepR enrollment, trial data timing, and progress on the planned Bardet-Biedl Phase 3 program.
- Track cash burn and financing needs against management’s stated runway into the second half of 2019.
- Assess the RM-853 development plan and the potential cost and dilution implications of milestone obligations and equity-settled license payments.
- Reconcile the MD&A cash-flow narrative, which refers to a net loss of approximately $11.0 million for Q1 2018, with the financial statements’ reported net loss of $16.459 million.
- Evaluate whether the company’s clinical, regulatory, manufacturing and patient-population assumptions remain supportable as programs advance.