Business context and reporting period
Rhythm Pharmaceuticals, Inc. is a commercial-stage biopharmaceutical company focused on IMCIVREE (setmelanotide) for rare MC4R-pathway diseases. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023. IMCIVREE was approved or authorized in the U.S., EU and Great Britain for specified indications; additional indications remain in development.
Financial performance and position
Third quarter: Product revenue was $22.5 million, versus $4.3 million in Q3 2022, a 425% increase. Total revenue was also $22.5 million; no license revenue was recorded. Net loss was $44.2 million, compared with $40.9 million. Operating expenses were $66.5 million, including $33.6 million of R&D and $30.5 million of selling, general and administrative expense. Cost of sales was $2.4 million.
Nine months: Product revenue was $53.2 million, versus $8.1 million in 2022. Total revenue was $53.2 million, compared with $14.8 million, which included $6.8 million of RareStone license revenue. Net loss was $143.0 million, versus $138.6 million; operating loss was $143.1 million, versus $137.1 million. R&D expense was $105.1 million and SG&A expense was $85.2 million.
Cash flow and liquidity: Operating cash use was $106.8 million for the first nine months, compared with $139.4 million in 2022. Investing activities used $28.3 million and financing activities provided $71.9 million. Cash, cash equivalents and restricted cash fell $63.1 million to $64.9 million; cash and cash equivalents plus short-term investments totaled $299.3 million at quarter-end. Current assets were $329.2 million and current liabilities $50.1 million. Management expects available cash and short-term investments to fund operations into 2026.
Obligations and equity: The balance sheet recorded a $104.7 million deferred royalty obligation, with a 15.43% effective interest rate, and a $1.2 million related embedded derivative liability. The RIFA provides investors tiered royalties on revenue, with total payments capped at 185%–250% of funded amounts and possible minimum-payment obligations. The company raised $48.9 million net through its ATM equity program in Q3, issuing approximately 2.0 million shares. Shares outstanding at September 30 were 59.1 million.
Material changes versus the prior comparable period
- Q3 product revenue rose sharply with continued IMCIVREE commercialization; 80% of Q3 revenue came from one U.S. customer. For the first nine months, 84% came from that customer.
- Q3 R&D rose 59% and SG&A rose 39%, reflecting expanded trials, sequencing, staffing, professional services and commercialization activity. Nine-month R&D rose 23% and SG&A rose 30%.
- Cost of sales increased as sales volumes grew and included royalties, product costs and patient-assistance costs. Management expects cost of sales at 10%–12% of net product revenue during 2023 and the foreseeable future.
- Interest income increased, partly offsetting higher RIFA interest expense. Nine-month net loss increased by $4.4 million despite revenue growth.
- The company acquired Xinvento for approximately $5.7 million, expensed as R&D because the acquired in-process research and development had no alternative future use. Additional contingent consideration may total up to $206 million if specified milestones are achieved.
Outlook, commentary and risks
Management expects operating losses and expenses to continue, with R&D and commercialization spending expected to increase. Near-term milestones stated in the filing included completing enrollment in the pivotal hypothalamic-obesity Phase 3 trial in Q4 2023, filing an IND for RM-718 by year-end 2023, and reporting specified DAYBREAK, pediatric and weekly-formulation updates in Q4 2023. These are forward-looking expectations, not guaranteed outcomes.
- Clinical, regulatory and commercial execution remain uncertain; trial enrollment, results, approvals and reimbursement may be delayed or unsuccessful.
- IMCIVREE revenue is concentrated in one U.S. customer, and the company relies on third parties for manufacturing and genetic testing.
- The company has operating losses and an accumulated deficit of $853.1 million. Further funding may be needed; equity financing could dilute shareholders, while RIFA payments reduce future cash available for operations.
- Rhythm disputes RareStone’s objections to its termination of the China license for cause; the filing describes no additional correspondence through September 30, 2023.
- Other disclosed risks include product tolerability and safety, market access and pricing, supply continuity, intellectual property, data security and economic conditions. The company reported no material legal proceedings and stated disclosure controls were effective at the reasonable-assurance level.
Key facts investors should verify
- Whether product-revenue growth and customer concentration persist, and how access and reimbursement develop across markets.
- Actual cash burn, cash and investment balances, and whether management’s expected runway into 2026 remains supportable.
- RIFA royalty payments, minimum-payment and change-of-control provisions, and the impact of the 15.43% effective interest rate.
- Progress and results for the hypothalamic-obesity, EMANATE, DAYBREAK, pediatric and weekly-formulation programs, including timing versus stated milestones.
- Resolution and commercial implications of the RareStone dispute, and whether Xinvento milestones result in additional payments.