Rhythm Pharmaceuticals, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results; financial statement amounts below are in millions of dollars unless noted. Rhythm is a commercial-stage biopharmaceutical company focused on IMCIVREE (setmelanotide) for rare diseases involving the MC4R pathway.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net product revenue | $11.5 | $1.5 | +$10.0; +666% |
| Cost of sales | $1.4 | $0.2 | +$1.2 |
| Research and development | $37.9 | $32.5 | +$5.4; +17% |
| Selling, general and administrative | $24.6 | $21.4 | +$3.2; +15% |
| Loss from operations | $(52.5) | $(52.7) | $0.2 narrower |
| Net loss | $(52.2) | $(52.8) | $0.6 narrower |
| Net loss per share, basic and diluted | $(0.92) | $(1.05) | Improved |
| Net cash used in operating activities | $(36.4) | $(53.6) | $17.2 less cash used |
Revenue growth reflected increased IMCIVREE sales, with 83% of Q1 2023 revenue generated in the U.S. (versus 98% in Q1 2022). The filing attributes higher R&D costs mainly to the $5.4 million Xinvento acquired in-process R&D charge, additional personnel and gene-sequencing costs. SG&A rose with staffing, professional services and expanding commercial operations. Cost of sales remained low in part because much of the product manufacturing cost had been expensed as R&D in prior periods; it also includes Ipsen royalties and intangible amortization. The filing does not provide a standalone gross-margin figure.
Interest income of $3.4 million largely offset $3.1 million of RIFA interest expense and other items, resulting in $0.4 million of total other income, net. Cash, cash equivalents and short-term investments totaled $294.6 million at March 31, 2023, down from $333.3 million at December 31, 2022. Current assets were $317.8 million and current liabilities $46.0 million. Accumulated deficit was $762.2 million. The company reported a $77.5 million deferred royalty obligation and no conventional bank debt was identified in the presented balance sheet.
Cash used in operating activities was $36.4 million. Investing activities provided $18.5 million, mainly from net maturities of short-term investments, while financing activities used $0.1 million, including a $1.4 million RIFA payment. Management’s MD&A says existing cash and investments are expected to fund operations into 2025; the liquidity note separately states they are sufficient for at least the next twelve months from filing. The company expects continuing operating losses and may need additional financing.
Material changes and business developments
- Net product revenue increased substantially year over year as IMCIVREE commercialization expanded. Rhythm reported more than 300 new U.S. BBS prescriptions from FDA approval through March 31, 2023, with more than 100 written in Q1; these figures were announced after quarter-end.
- On February 27, 2023, Rhythm acquired Xinvento B.V., whose pipeline focuses on congenital hyperinsulinism (CHI). The $5.4 million purchase consideration was expensed as acquired IPR&D; additional consideration of up to $206 million is contingent on development, regulatory and commercial milestones.
- Revenue-interest financing proceeds received under the RIFA totaled $75 million gross in 2022. A further $25 million may become available after a specified cumulative-sales threshold is met within the agreement’s stated period.
- Shares outstanding were 56.9 million at March 31, 2023; weighted-average shares for Q1 were 56.7 million, compared with 50.3 million in Q1 2022.
Outlook, risks and unusual items
- Management expects R&D and SG&A expenses to increase as clinical programs progress and the company expands commercialization. It gave no revenue or earnings guidance.
- Near-term stated milestones included hypothalamic-obesity trial data, Canadian regulatory review and potential launch, additional DAYBREAK and pediatric trial updates, and further evaluation of a weekly setmelanotide formulation. The company anticipated completing enrollment in its pivotal hypothalamic-obesity Phase 3 trial in Q1 2024. On May 2, 2023, after quarter-end, it announced that the first patients had been dosed in that trial.
- The RIFA requires tiered revenue-based payments, has minimum-payment provisions and caps total payments at 185%–250% of funded amounts, depending on terms. Change of control or default may accelerate obligations; IMCIVREE-related assets secure the financing.
- Rhythm maintains that it terminated the RareStone China license for cause because of alleged material breaches. RareStone disputes the claims. The dispute could affect development and commercialization in the licensed territories; no material legal proceedings were reported as pending.
- Revenue concentration and execution risks are notable: one U.S. customer generated approximately 83% of Q1 2023 revenue. The company depends on third-party manufacturers and genetic-testing providers, and cash deposits at financial institutions exceed insured limits.
- Clinical, regulatory, reimbursement, manufacturing, patient-enrollment and financing outcomes remain uncertain. Rhythm cautioned that trial results and commercialization may not meet expectations, and that existing products may not achieve commercial success. COVID-19 did not materially affect Q1 2023 results, but future effects were uncertain.
Most important facts for investors to verify
- Whether IMCIVREE prescription growth, reimbursement and international market access translate into sustained revenue growth.
- The company’s cash runway assumptions, quarterly cash burn and conditions for receiving the remaining $25 million under the RIFA.
- The full economic burden and potential acceleration of RIFA payments, including royalty tiers, minimum payments and collateral provisions.
- Progress and outcomes for the pivotal clinical programs, including enrollment timing and the weekly formulation; verify that announced preliminary results are confirmed in final data.
- Resolution and financial or operational consequences of the RareStone dispute, and whether Xinvento milestones lead to substantial contingent payments.