Rhythm Pharmaceuticals, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company completed its IPO in October 2017; its common stock began trading on Nasdaq on October 5, 2017. Unless indicated otherwise, financial amounts below are in U.S. dollars and millions.
Business context
Rhythm is a clinical-stage biopharmaceutical company developing setmelanotide, a peptide MC4R agonist, for rare genetic obesity disorders. It had no approved products and generated no product revenue. Setmelanotide was in Phase 3 trials for POMC deficiency obesity and leptin receptor (LepR) deficiency obesity, and Phase 2 programs for Bardet-Biedl syndrome, Alström syndrome, POMC heterozygous deficiency obesity, and POMC epigenetic disorders.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No product sales |
| Research and development expense | $22.894 | $19.594 | +17% |
| Selling, general and administrative expense | $9.518 | $6.311 | +51% |
| Total operating expenses | $32.412 | $25.905 | +25% |
| Net loss | $33.709 | $25.872 | Loss increased 30% |
| Net loss attributable to common stockholders | $37.582 | $29.074 | Includes preferred dividends |
| Basic and diluted loss per common share | $2.83 | $2.85 | |
| Net cash used in operating activities | $29.460 | $23.219 | Cash use increased |
Quarterly results also reflected rising costs: fourth-quarter 2017 operating expenses were $10.983 million and net loss was $10.531 million, compared with $8.375 million and $8.366 million, respectively, in fourth-quarter 2016. There are no meaningful revenue or profit margins to report because the company had no revenue.
At year-end, cash and cash equivalents were $34.236 million and short-term investments were $113.846 million, totaling $148.082 million. Working capital was $143.951 million; total assets were $151.736 million and total liabilities were $6.948 million. The balance sheet reported no debt. Management expected available cash and investments to fund operating expenses into the second half of 2019, but anticipated needing further financing thereafter or sooner if plans changed.
FY 2017 investing cash outflow was $110.044 million, primarily from purchases of short-term investments. Financing provided $167.200 million, including $125.658 million of net IPO proceeds and $40.842 million of net proceeds from preferred stock issuance. The IPO raised approximately $137.8 million gross.
Material changes and unusual items
- Operating expenses and cash used in operations rose as the company expanded clinical development, advanced Phase 3 studies, initiated additional trials, and increased staffing and public-company costs.
- Other expense was $1.297 million in 2017, including a $1.863 million revaluation loss on a Series A investor instrument, partly offset by $0.566 million of net interest income.
- The IPO converted preferred shares into common shares; year-end common shares outstanding were 27.284 million. The filing also reports a 1-for-9.17 reverse stock split, reflected retrospectively in share and per-share data.
- Historical 2016 and 2015 financial statements include allocated costs from an affiliated predecessor business; management cautions these may not reflect the costs of operating independently.
Outlook, commentary and risks
- Management expected to complete enrollment in the 10-patient 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 Phase 3 trial was planned to begin in 2018. Preliminary Phase 2 results for additional indications were anticipated in the first half of 2018. These are forward-looking expectations, not guaranteed outcomes.
- Phase 2 evidence included substantial weight and hunger reductions in very small POMC and LepR patient groups, and preliminary Bardet-Biedl results in five patients. The filing emphasizes that open-label, small-sample findings may not predict pivotal-trial outcomes.
- A four-week Phase 2 trial in 40 patients with Prader-Willi syndrome showed modest, statistically non-significant hyperphagia effects and no weight effect. Rhythm did not plan to proceed directly to Phase 3 and said it would reassess future studies.
- Safety observations included skin and mole darkening, injection-site reactions, occasional nausea or vomiting, and possible sexual effects. The company reported little evidence of blood-pressure or heart-rate changes to date, but noted that longer and larger trials are needed. Regulators had not agreed with the company’s assessment of minor PEG-vehicle-related toxicology findings in animal studies.
- Key business risks include clinical or regulatory failure or delay, small and uncertain target populations and enrollment challenges, dependence on one product candidate, future financing needs and dilution, reliance on contract manufacturers and CROs, intellectual-property and licensing risks, and uncertain pricing, reimbursement and commercial uptake. There was no material litigation reported.
Most important facts for investors to verify
- Whether pivotal POMC and LepR trials meet endpoints, support regulatory filings, and enroll on the stated timelines.
- Whether preliminary results in Bardet-Biedl and other indications are reproducible in larger, controlled studies, and whether the PWS program will resume.
- Actual cash burn, investment balances and financing requirements relative to management’s second-half-2019 runway estimate.
- Regulatory views on clinical endpoints, pediatric use, safety findings, and the need for further studies or a companion diagnostic.
- Patient-population estimates, manufacturing scale-up readiness, and the potential effect of license milestones and royalties on future economics.