Business Overview and History:
Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) is a global, commercial-stage biopharmaceutical company dedicated to transforming the lives of patients living with rare neuroendocrine diseases. The company's focus on advancing its melanocortin-4 receptor (MC4R) agonists, including its lead asset IMCIVREE (setmelanotide), has positioned it as a leader in precision medicine for the treatment of rare genetic disorders affecting the MC4R pathway.
Rhythm Pharmaceuticals was incorporated in February 2013 under the name Rhythm Metabolic, Inc. and changed its name to Rhythm Pharmaceuticals, Inc. in October 2015. The company's focus has been on developing and commercializing setmelanotide, an MC4R agonist. In its early years, Rhythm faced challenges as a research and development-focused company, expensing all costs related to the manufacture of setmelanotide as research and development expenses due to the inherent risks and uncertainty around regulatory approval.
The company achieved a significant milestone in November 2020 with the FDA approval of IMCIVREE (setmelanotide) for chronic weight management in adult and pediatric patients 6 years of age and older with obesity due to pro-opiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1), or leptin receptor (LEPR) deficiency. This marked the first-ever FDA approval of a therapy for these rare genetic diseases of obesity.
Following the U.S. approval, Rhythm expanded globally, obtaining marketing authorizations for IMCIVREE in the European Union, Great Britain, and Canada. These approvals were for the treatment of obesity and control of hunger associated with genetically confirmed Bardet-Biedl syndrome (BBS) or genetically confirmed loss-of-function biallelic POMC, including PCSK1, deficiency or biallelic LEPR deficiency. The company has successfully achieved market access or named patient sales of IMCIVREE for BBS or POMC and LEPR deficiencies, or both, in more than 15 countries outside the United States.
Throughout its development journey, Rhythm has had to overcome obstacles in identifying and enrolling patients in its clinical trials for setmelanotide, given the rarity of the target indications. Despite these challenges, the company has persevered in its mission to address the unmet needs of patients with rare genetic disorders of obesity.
Financial Performance:
Rhythm's financial performance has shown strong momentum, with net revenue from global sales of IMCIVREE reaching $33.3 million in the third quarter of 2024, representing a 48% increase compared to the same period in the prior year. The company's US revenue accounted for 70% of product revenue during the quarter, growing 8% sequentially, while international revenue increased by 35% over the prior quarter, contributing 30% of total product revenue. International revenue primarily comes from Germany and France.
For the full fiscal year 2023, Rhythm reported revenue of $77.43 million, a net loss of $184.68 million, operating cash flow of -$136.16 million, and free cash flow of -$136.20 million. In comparison, for the third quarter of 2024, the company reported revenue of $33.25 million, a net loss of $43.64 million, operating cash flow of -$25.22 million, and free cash flow of $14.79 million, showing significant improvement in financial metrics.
The company's cost of sales stood at 11.5% of net product revenue in the third quarter of 2024, compared to 10.7% in the same period of 2023, reflecting higher labor and overhead costs. For the three months ended September 30, 2024, cost of sales was $3.83 million, while for the nine months ended September 30, 2024, it was $9.58 million.
Research and development expenses increased by 13% year-over-year to $37.9 million in the third quarter of 2024, driven by ongoing clinical trials and manufacturing development activities. For the nine months ended September 30, 2024, research and development expenses were $196.79 million, which included a $92.40 million acquisition of in-process research and development assets related to LGC's bivamelagon LB54640.
Selling, general, and administrative expenses rose by 16% to $35.4 million in the third quarter of 2024, primarily due to increased compensation and marketing costs. For the nine months ended September 30, 2024, selling, general and administrative expenses were $106.17 million.
Rhythm reported a net loss of $43.6 million, or $0.73 per share, in the third quarter of 2024, compared to a net loss of $44.2 million, or $0.76 per share, in the same period of the prior year. The company's cash and cash equivalents, along with short-term investments, amounted to $298.4 million as of September 30, 2024, which management expects to be sufficient to fund planned operations well into 2026.
For 2024, Rhythm has reduced its operating expense guidance to a range of $245 million to $255 million, down from the prior guidance range of $250 million to $270 million. This updated guidance is comprised of R&D non-GAAP operating expenses of approximately $137 million and SG&A non-GAAP operating expenses of approximately $113 million (both at the midpoint of the range).
Liquidity:
As of September 30, 2024, Rhythm Pharmaceuticals reported cash and cash equivalents, along with short-term investments, totaling $298.4 million. This strong liquidity position is expected to provide the company with sufficient funding to support its planned operations well into 2026, potentially beyond multiple value-creating milestones, including the topline data readout from the Phase III trial in hypothalamic obesity planned for the first half of 2025.
The company's ability to maintain a robust cash reserve while investing in research and development and commercial expansion demonstrates its prudent financial management and positions it well for future growth opportunities. Rhythm's current ratio stands at 3.49, and its quick ratio is 3.34, indicating a strong short-term liquidity position. The company has a debt-to-equity ratio of 0, reflecting a conservative capital structure.
In June 2022, Rhythm entered into a Revenue Interest Financing Agreement (RIFA) with HealthCare Royalty Partners for up to $100 million, of which the company has received $96.7 million to date, net of debt issuance costs. This additional funding further strengthens the company's financial position and provides flexibility for strategic investments.
Pipeline and Regulatory Updates:
In addition to the commercial success of IMCIVREE, Rhythm continues to advance its pipeline of MC4R agonists. The company is currently conducting a Phase 3 trial evaluating setmelanotide in acquired hypothalamic obesity, with a topline data readout expected in the first half of 2025. This follows positive results from a Phase 2 trial and the establishment of paid early-access programs in France and Italy, where adult patients with acquired hypothalamic obesity have shown meaningful weight loss on setmelanotide therapy.
Rhythm is also progressing its next-generation MC4R agonist candidates, including RM-718, a weekly formulation, and bivamelagon LB54640, an investigational oral small molecule MC4R agonist. The company expects to begin dosing patients with acquired hypothalamic obesity in Part C of the Phase 1 trial for RM-718 in the first quarter of 2025 and to complete enrollment in the Phase 2 trial for bivamelagon LB54640 in the same timeframe.
Furthermore, Rhythm recently announced the acceptance by the FDA of a supplemental New Drug Application (sNDA) for IMCIVREE to treat children as young as 2 years old in its approved indications. The FDA has granted priority review to this application, with a PDUFA goal date of December 26, 2024. This potential label expansion would reinforce IMCIVREE's position as a targeted therapy for rare MC4R pathway diseases and address the significant unmet need in early-onset obesity and hyperphagia.
Rhythm's commitment to advancing the understanding and care of rare MC4R pathway diseases is further demonstrated by its collaboration with Professor Philip Beales and Axovia Pharmaceuticals to better understand the global epidemiology of Barret-Biedl syndrome, as well as its continued support of patient registries and educational initiatives in various international markets.
Risks and Challenges:
While Rhythm has made significant strides in establishing IMCIVREE and advancing its pipeline, the company faces certain risks and challenges that investors should be aware of. The rarity of the target indications means that the company must continue to invest in patient identification and education efforts to ensure appropriate diagnosis and treatment. Additionally, the company's reliance on third-party manufacturers and suppliers for the production of IMCIVREE and its pipeline candidates introduces supply chain risks that must be carefully managed.
Furthermore, the company's ongoing clinical trials for setmelanotide and its other product candidates, such as RM-718 and bivamelagon LB54640, carry inherent risks related to patient enrollment, safety, and the potential for unfavorable results. Regulatory approval for additional indications and geographic expansions also remains a key milestone that the company must navigate.
Outlook and Conclusion:
Rhythm Pharmaceuticals has demonstrated its ability to execute on its commercial strategy, with steady growth in IMCIVREE revenues across both the US and international markets. The company's focus on rare MC4R pathway diseases, coupled with its pipeline of innovative product candidates, positions it well to continue transforming the lives of patients living with these rare conditions.
Looking ahead, Rhythm's anticipated topline data readout for the Phase 3 trial in acquired hypothalamic obesity, the potential label expansion for IMCIVREE to include younger pediatric patients, and the progress of its next-generation MC4R agonists suggest that the company is poised for further growth and value creation. As Rhythm navigates the challenges inherent to the rare disease space, its proven track record of execution and its commitment to addressing the unmet needs of patients with rare neuroendocrine diseases make it a compelling investment opportunity in the biopharmaceutical sector.
The company's updated operating expense guidance for 2024 and its strong cash position provide a solid foundation for executing its strategic plans. With a focused approach to expanding IMCIVREE's market presence and advancing its pipeline candidates, Rhythm Pharmaceuticals is well-positioned to capitalize on the growing market for targeted therapies in rare genetic disorders of obesity.