Business context and reporting period
Rhythm Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company developing treatments for rare genetic metabolic disorders. This unaudited Form 10-Q covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. The company has no product revenue. Its lead candidate, setmelanotide, is in Phase 3 development for POMC and LEPR deficiency obesity and a combined Bardet-Biedl syndrome (BBS) and Alström syndrome trial. RM-853, licensed from Takeda for Prader-Willi syndrome, remains preclinical.
Financial highlights
Amounts below are in millions of dollars, except per-share data. The company reports no revenue, so sales margins are not meaningful.
| Metric | Q1 2019 / March 31, 2019 | Comparable period / December 31, 2018 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $22.8 | $12.3 in Q1 2018 |
| Selling, general and administrative expense | $7.8 | $4.7 in Q1 2018 |
| Total operating expenses | $30.5 | $17.0 in Q1 2018 |
| Net loss | $29.0 | $16.5 in Q1 2018 |
| Net loss per share, basic and diluted | $0.84 | $0.60 in Q1 2018 |
| Cash and cash equivalents plus short-term investments | $221.5 | $252.1 at December 31, 2018 |
| Current assets / current liabilities | $230.2 / $12.6 | $258.7 / $13.6 at December 31, 2018 |
| Total assets / total liabilities | $236.5 / $16.0 | $260.2 / $14.0 at December 31, 2018 |
Operating cash use was $31.4 million, versus $11.7 million in Q1 2018. Investing activities provided $23.5 million, primarily reflecting investment maturities net of purchases; financing activities provided $0.3 million. Cash, cash equivalents and restricted cash ended the quarter at $42.4 million. No debt is reported in the provided filing text. The company had an accumulated deficit of $213.6 million.
Material changes versus Q1 2018
- R&D expense rose 85% to $22.8 million, chiefly from expanded setmelanotide trials, clinical-trial staffing, genetic sequencing, and manufacturing activity. The increase was partly offset by the absence of the $4.4 million noncash Takeda license expense recorded in Q1 2018.
- SG&A expense increased 65% to $7.8 million, primarily due to hiring and pre-commercialization activity. Total operating expenses rose 80%, and net loss increased 76%.
- Operating cash use increased substantially, reflecting higher spending and working-capital movements, including increased prepaid CRO expenses.
- Cash and short-term investments declined by $30.5 million from year-end 2018. Stockholders’ equity fell to $220.5 million from $246.3 million.
Outlook, management commentary and risks
- Management expects existing cash and short-term investments to fund operations into the second half of 2020. The company expects losses and expenses to increase as trials advance, manufacturing continues, and clinical, finance and commercial operations expand. Additional funding may be required; availability and terms are uncertain.
- The company completed enrollment in the pivotal POMC and LEPR Phase 3 cohorts and expected initial data in Q3 2019, with plans to pursue concurrent regulatory filings for those indications. The combined Phase 3 BBS/Alström trial began enrolling in December 2018; Phase 2 studies continue for POMC heterozygous and epigenetic disorders.
- Setmelanotide had received FDA Breakthrough Therapy designation for four indications and EMA PRIME designation. These designations do not assure approval or a faster review. Trial outcomes, regulator expectations, patient recruitment and the definition of eligible genetic populations remain uncertain.
- Disclosed risks include the possibility that Phase 3 results may not confirm earlier findings; safety, endpoint validation and pediatric-use uncertainties; potential preclinical questions involving the PEG vehicle; dependence on CROs and contract manufacturers; and the possibility that the rare-disease patient populations are smaller than estimated.
- License agreements could require substantial contingent payments and royalties if products succeed: up to $40.0 million to Ipsen, $64.75 million to Camurus and $140.0 million to Takeda in milestone payments, plus royalties as applicable. These contingent amounts are not included as current contractual obligations because timing or achievement cannot be reasonably estimated.
- The company adopted lease accounting in January 2019 and recognized a right-of-use asset and lease liability; the March 31 lease liability was approximately $3.6 million. It reported no material legal proceedings and no off-balance-sheet arrangements. Disclosure controls were assessed as effective at a reasonable assurance level.
Most important facts for investors to verify
- Whether reported POMC and LEPR Phase 3 results, regulatory submissions and review timelines matched management’s expectations.
- Cash consumption, updated runway estimates and the timing and terms of any additional financing.
- Enrollment, safety and efficacy developments in the BBS/Alström and other setmelanotide trials, including regulatory feedback on endpoints and pediatric populations.
- Whether genetic testing and real-world diagnosis support the company’s estimated eligible patient populations.
- Progress and funding requirements for RM-853, and any material milestone, royalty or manufacturing obligations under the company’s licenses.