Rhythm Pharmaceuticals, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Financial amounts below are in U.S. dollars; unless otherwise stated, figures are in millions.
Business context
Rhythm is a late-stage biopharmaceutical company developing treatments for rare genetic disorders associated with severe obesity and hyperphagia. Its lead candidate, setmelanotide, is being developed for disorders involving the MC4R pathway. The company has no product revenue and depends on external financing to fund development. It also holds worldwide rights to RM-853, an oral candidate for Prader-Willi syndrome that remained in preclinical development.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 or prior balance-sheet date |
|---|---|---|
| Product revenue | None | None |
| Research and development expense | $22.5 | $22.8 |
| Selling, general and administrative expense | $12.8 | $7.8 |
| Total operating expenses | $35.3 | $30.5 |
| Net loss | $34.2 | $29.0 |
| Net loss per share, basic and diluted | $0.78 | $0.84 |
| Cash used in operating activities | $36.1 | $31.4 |
| Cash and cash equivalents | $55.8 | $62.3 at Dec. 31, 2019 |
| Short-term investments | $201.6 | $230.2 at Dec. 31, 2019 |
| Cash, cash equivalents and short-term investments | $257.4 | $292.5 at Dec. 31, 2019 |
| Total liabilities | $20.7 | $27.5 at Dec. 31, 2019 |
| Accumulated deficit | $359.5 | $325.3 at Dec. 31, 2019 |
There was no meaningful operating margin because the company had no revenue. The filing reports no borrowings or debt; liabilities were principally accounts payable, accruals and lease obligations. Current assets were $267.9 million and current liabilities were $17.7 million at March 31, 2020. Cash flow from investing activities was positive $28.9 million, primarily reflecting net maturities of short-term investments; financing activities provided $0.7 million.
Changes versus the prior comparable period
- Net loss widened by $5.2 million, or 18%, while operating expenses rose 16%.
- R&D expense declined slightly by $0.3 million: lower GO-ID genotyping study and sequencing costs were largely offset by higher NDA support, clinical trial, manufacturing and personnel costs.
- SG&A increased $5.0 million, or 65%, including costs related to the former CEO’s separation and increased patient-engagement and potential-commercialization activity.
- Operating cash use rose $4.7 million year over year. Cash, cash equivalents and short-term investments declined $35.0 million from year-end 2019.
- Basic and diluted loss per share improved to $0.78 from $0.84, in part alongside a larger weighted-average share count of 44.0 million versus 34.4 million.
Outlook, developments and risks
- Management said existing cash and short-term investments were expected to fund operations through at least the end of 2021. The company nevertheless expects continuing losses, rising expenses and a need for additional financing; future financing may dilute shareholders or be unavailable on acceptable terms.
- The company submitted an NDA to the FDA on March 27, 2020, for setmelanotide for POMC- and LEPR-deficiency obesity, following positive topline Phase 3 results. Submission does not assure acceptance, review or approval.
- The combined Phase 3 BBS and Alström syndrome trial completed enrollment in December 2019; topline results were expected by year-end 2020 or early Q1 2021. Additional Basket Study data were expected in 2020. An IND filing for RM-853 was expected in 2020.
- The CEO and President stepped down on March 27, 2020, after the NDA submission. The filing describes severance and equity-award modifications; the equity-award modification generated $2.811 million of incremental compensation expense, while MD&A attributes a $3.5 million SG&A charge to the separation agreement and option modification.
- Management reported office closures and remote work in response to COVID-19 and said it did not then expect a material business or financial impact or disruption to clinical supply. It cautioned that the pandemic could delay trials, enrollment, supply, regulatory activity or financing; the ultimate impact was uncertain.
- Key risks include regulatory disagreement with clinical data or endpoints, additional study requirements, adverse effects, difficulty identifying and enrolling rare-disease patients, reliance on contract manufacturers and research organizations, uncertain commercialization and reimbursement, and the need for further capital. The filing also discusses preclinical safety questions related to the PEG vehicle and the possibility of additional regulatory requirements.
Investor verification checklist
- Check subsequent FDA actions on the setmelanotide NDA, including acceptance, review timing, requested information and any approval conditions.
- Verify whether the BBS/Alström and Basket Study data were delivered on the stated timelines and how final results compare with topline or preliminary disclosures.
- Monitor quarterly operating cash use, investment balances, expense growth and whether management’s stated runway through at least the end of 2021 remains supportable.
- Review the full details and accounting treatment of the former CEO’s separation and equity modifications, including the difference between the $2.811 million incremental compensation charge and the $3.5 million SG&A charge described in MD&A.
- Track COVID-19 effects on trial conduct, clinical supply, regulatory timelines and access to capital, as well as any changes in financing needs.