Business context and reporting period
Rhythm Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company developing treatments for rare genetic disorders, principally setmelanotide for obesity caused by MC4 pathway deficiencies. This Form 10-K covers the fiscal year ended December 31, 2018; quarterly figures below are unaudited. The company had no product revenue.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $50.3 million | $22.9 million |
| Selling, general and administrative expense | $28.1 million | $9.5 million |
| Total operating expenses | $78.4 million | $32.4 million |
| Net loss | $74.1 million | $33.7 million |
| Net loss per share, basic and diluted | $2.39 | $2.83 |
| Net cash used in operating activities | $62.1 million | $29.5 million |
| Cash, cash equivalents and short-term investments at year-end | $252.1 million | $148.1 million |
| Working capital at year-end | $245.1 million | $144.0 million |
| Total liabilities at year-end | $14.0 million | $6.9 million |
There are no product sales or meaningful product margins to report. The balance sheet reports no borrowings; most liabilities were accounts payable, accrued expenses and deferred rent.
For Q4 2018, operating expenses were $27.2 million and net loss was $25.5 million, versus $11.0 million and $10.5 million, respectively, in Q4 2017. Q4 2018 revenue was zero.
Material changes versus prior periods
- FY 2018 operating expenses increased 142% year over year; R&D rose 120% and SG&A rose 195%, reflecting expanded clinical programs, staffing, genetic testing and pre-commercial activity.
- Net loss more than doubled to $74.1 million. Net loss per share improved to $2.39 from $2.83, in part reflecting a larger weighted-average share count after equity financings.
- Operating cash use increased to $62.1 million. Cash and investments rose largely due to the June 2018 public offering, which generated $162.9 million in net proceeds; financing cash flow was $164.7 million.
- A $4.4 million Takeda license fee for RM-853 was settled with shares and recorded as non-cash R&D expense. Interest income increased to $4.4 million from $0.6 million, partly offsetting the operating loss.
Outlook, risks and notable items
- Management expected available cash and investments to fund operations into the second half of 2020; it also cautioned that plans could change and additional capital may be needed.
- Setmelanotide Phase 3 pivotal cohorts for POMC and LEPR deficiency obesity were enrolled. Initial data were expected in Q3 2019, with concurrent NDA submissions planned thereafter. A combined Phase 3 trial for Bardet-Biedl and Alström syndromes began enrolling in December 2018.
- RM-853, acquired from Takeda for development in Prader-Willi syndrome, remained preclinical; Rhythm anticipated filing an IND in 2020. The completed Phase 2 setmelanotide study in Prader-Willi syndrome showed modest, statistically nonsignificant effects on hyperphagia and no effect on weight; further evaluation was uncertain.
- Management cited substantial development and regulatory uncertainty, including whether Phase 3 results will confirm early findings, limited patient numbers and diagnostic challenges, potential safety issues, manufacturing dependence, reimbursement and commercialization risks, and the possibility of future financing and dilution. Skin pigmentation and changes to moles, injection-site reactions, nausea and vomiting were among reported tolerability issues; the filing describes limited long-term safety experience.
- The filing reports no material legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2018; the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether setmelanotide’s pivotal trial results support the planned applications and regulatory timelines.
- Actual cash burn, liquidity runway and financing needs as clinical and pre-commercial costs rise.
- Patient population estimates, genetic testing and diagnostic requirements for each target indication.
- Longer-term safety, dosing adherence, manufacturing capacity and any companion-diagnostic requirements.
- Potential dilution and milestone or royalty obligations under the Ipsen, Camurus and Takeda agreements.