Rhythm Pharmaceuticals, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are USD millions, except per-share data. The company is a commercial-stage biopharmaceutical business focused on IMCIVREE (setmelanotide) for rare MC4R-pathway obesity disorders, alongside clinical development for additional indications.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Product revenue, net | $4.284 | $1.028 | $8.094 | $1.337 |
| License revenue | — | — | $6.754 | — |
| Research and development | $21.116 | $27.539 | $85.082 | $72.554 |
| Selling, general and administrative | $21.938 | $17.507 | $65.715 | $47.490 |
| Operating loss | $(39.267) | $(44.240) | $(137.054) | $(119.070) |
| Net loss | $(40.861) | $(35.107) | $(138.626) | $(26.746) |
| Basic and diluted loss per share | $(0.79) | $(0.70) | $(2.73) | $(0.54) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(139.428) | $(105.531) |
- Product revenue grew 317% year over year in Q3 and 505% for the nine-month period, from a low base. Q3 product gross margin is approximately 88% using reported product revenue less cost of sales; the filing does not present a gross-margin measure, and cost of sales includes royalties and intangible amortization.
- Nine-month total revenue was $14.848 million, including $6.754 million of RareStone license revenue recognized in Q2 after transfer of the license. The company said it did not expect further RareStone license revenue in 2022.
- At September 30, cash and cash equivalents were $185.087 million and short-term investments were $162.708 million, totaling $347.795 million. Management said these resources were expected to fund operations into 2025. Cash, cash equivalents and restricted cash totaled $185.415 million at period end.
- Current liabilities were $33.098 million. Long-term liabilities included a $72.961 million deferred royalty obligation and a $0.920 million embedded derivative; the filing reports no conventional borrowing balance separately. The royalty financing carries a stated effective interest rate of 17.28% at September 30.
Material changes and notable items
- Q3 operating loss narrowed by $4.973 million year over year as R&D costs fell, partly offset by higher SG&A and sales-related costs. Q3 net loss nevertheless increased, as Q3 2021 included an $8.995 million tax benefit related to the prior-year priority review voucher sale.
- For the first nine months, net loss rose substantially versus 2021, when the company recorded $100 million of income from selling a priority review voucher. Current-period operating expenses increased 26%, with R&D up 17% and SG&A up 38%, reflecting clinical program activity, staffing, and commercialization buildout.
- Operating cash use increased to $139.428 million from $105.531 million. Financing provided $196.463 million, including approximately $117.0 million net proceeds from a September stock offering and $75.0 million from the royalty financing. The offering increased shares outstanding; a further 580,000 shares generated approximately $14.175 million net proceeds in October.
- Revenue-interest financing provides up to $100 million in exchange for tiered royalties on annual net revenues (initially 11.5% up to $125 million, then lower rates at higher revenue levels), subject to payment floors and an aggregate cap of 185%–250% of funded amounts. The remaining $25 million was contingent on a specified sales threshold.
Outlook, risks and contingencies
IMCIVREE was approved in the U.S. for BBS in June 2022 and authorized by the European Commission for BBS in September 2022. The company reported market access in France, Germany and Great Britain, and expected launches in Italy and the Netherlands in Q4 2022. It planned a Phase 3 hypothalamic-obesity trial for early 2023, a weekly-formulation BBS trial in the first half of 2023, and pediatric trial topline results in the second half of 2023. These are forward-looking plans, not assurances of results.
- Management expects continued operating losses and increased R&D and commercialization spending. Funding beyond the stated runway may be needed; additional financing may be unavailable or dilutive.
- Clinical and commercial outcomes depend on trial results, regulatory decisions, patient identification and enrollment, reimbursement and market adoption. The company relies on third-party manufacturers and suppliers and notes potential supply-chain and COVID-19 disruptions.
- Revenue concentration is significant: approximately 86% of nine-month revenue came from one U.S. customer. The filing also identifies payor access, competition, small target populations, safety, and manufacturing as material business risks.
- On October 28, 2022, the company notified RareStone that it terminated the China license for cause, alleging material breaches related to clinical studies and other obligations. RareStone disputed the claims and termination; the matter remained unresolved in the filing.
- The RareStone equity received as part of the license consideration was written down to a de minimis value, with a $1.040 million impairment recorded. The company reported no material legal proceedings and stated its disclosure controls were effective.
Important facts for investors to verify
- Whether product revenue, prescriptions, reimbursement approvals and international market access continue to expand beyond the concentrated U.S. customer base.
- Actual cash burn and the assumptions supporting management’s expectation that resources will fund operations into 2025.
- Progress and results of EMANATE, DAYBREAK, hypothalamic-obesity and pediatric trials, plus timing of stated regulatory and commercial milestones.
- Final status and financial or development consequences of the disputed RareStone termination.
- Future royalty-financing payments, the contingent $25 million funding tranche, and potential payment-floor or change-of-control obligations.