What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-03 compared with 2020-11-02 · 142 added, 144 removed, 121 unchanged (70% of the section changed)

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our ability to protect our intellectual property;

our ability to negotiate our collaboration agreements, if needed;

ongoing activities under and our ability to negotiate our collaboration and license agreements, if needed;

our marketing, commercial sales, and revenue generation;

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the impact of the novel coronavirus, or COVID-19, pandemic on our business and operations and our future financial results;

ceasing to qualify as an emerging growth company or a smaller reporting company as of December 31, 2020;

and other statements identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “likely,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms are forward-looking statements.

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We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made .

We are a late-stage biopharmaceutical company focused on the development and commercialization of therapeutics for the treatment of rare genetic disorders which are characterized by early-onset, severe obesity and an insatiable hunger or hyperphagia.

Our lead product candidate is setmelanotide, a potent melanocortin-4 receptor, or MC4R, agonist for the treatment of rare genetic disorders of obesity.

We believe setmelanotide, for which we have exclusive worldwide rights, has the potential to restore dysfunctional MC4R signaling due to impaired MC4R pathway function.

We are a commercial-stage biopharmaceutical company focused on changing the paradigm for the treatment of rare genetic diseases of obesity, which are characterized by early-onset, severe obesity and an insatiable hunger or hyperphagia.

Our lead product candidate is IMCIVREE (setmelanotide), a potent melanocortin-4 receptor, or MC4R, agonist for the treatment of rare genetic diseases of obesity.

We believe IMCIVREE, for which we have exclusive worldwide rights, has the potential to restore dysfunctional MC4R signaling due to impaired MC4R pathway function.

MC4R pathway deficiencies result in the disruption of satiety signals and energy homeostasis in the body, which, in turn, leads to intense feelings of hunger and to obesity.

Our development efforts are initially focused on obesity related to several single gene-related, or monogenic, MC4R pathway deficiencies:

pro-opiomelanocortin, or POMC, deficiency obesity;

leptin receptor, or LEPR, deficiency obesity;

IMCIVREE has been approved by the U.S.

Food and Drug Administration, or FDA, for chronic weight management in adult and pediatric patients six years of age and older with obesity due to proopiomelanocortin, or POMC, proprotein convertase subtilisin/kexin type 1, or PCSK1, leptin receptor, or LEPR, deficiency confirmed by genetic testing.

IMCIVREE became commercially available in the U.S.

in the first quarter 2021.

Our continued development efforts are focused on obesity related to several single gene-related, or monogenic, MC4R pathway deficiencies:

Bardet-Biedl syndrome, or BBS;

Alström syndrome;

POMC or LEPR heterozygous deficiency obesity;

steroid receptor coactivator 1, or SRC1, deficiency obesity;

SH2B adapter protein 1, or SH2B1, deficiency obesity;

MC4R deficiency obesity and Smith-Magenis syndrome, as well as additional disorders as part of investigator-initiated protocols.

There are currently no effective or approved treatments for these MC4R pathway-related disorders.

We believe that the MC4R pathway is a compelling target for treating these genetic disorders because of its critical role in regulating appetite and weight by promoting satiety and weight control, and that peptide therapeutics are uniquely suited for activating this target.

We have previously reported positive topline Phase 3 data in POMC deficiency obesity and LEPR deficiency obesity, and have demonstrated proof of concept in Phase 2 clinical trials in BBS and Alström syndrome.

In these four genetic disorders of extreme and unrelenting appetite and obesity, setmelanotide has dramatically reduced both weight and hunger.

HET obesity due to a genetic variant in one of the two alleles of the POMC, PCSK1 or LEPR gene, or HETs;

obesity due to steroid receptor coactivator 1, or SRC1, deficiency;

and obesity due to SH2B adapter protein 1, or SH2B1, deficiency;

MC4R deficiency obesity and Smith-Magenis syndrome, as well as additional diseases as part of investigator-initiated protocols.

There are currently no effective or approved treatments for these MC4R pathway-related diseases.

We believe that the MC4R pathway is a compelling target for treating these genetic diseases because of its critical role in regulating appetite and weight by promoting satiety and weight control, and that peptide therapeutics are uniquely suited for activating this target.

We recently announced positive topline results from a pivotal Phase 3 clinical trial evaluating setmelanotide for the treatment of insatiable hunger and severe obesity in individuals with BBS or Alström syndrome.

The trial met its primary and all key secondary endpoints, showing statistically significant and clinically meaningful reductions in weight and hunger scores.

All primary endpoint responders were patients with BBS.

There were three evaluable patients with

Alström syndrome and none of them met the primary endpoint.

We are continuing to analyze the full data from patients with BBS or Alström syndrome, which we plan to present at a medical meeting in the second half of 2021.

We plan to complete regulatory submissions to both the FDA and the EMA for BBS in the second half of 2021, and we expect to determine next steps for Alström syndrome upon completing a full analysis of the final data from the Phase 3 trial.

Food and Drug Administration, or the FDA, has acknowledged the importance of these results by giving setmelanotide Breakthrough Therapy designation for the treatment of obesity associated with genetic defects upstream of the MC4R in the leptin melanocortin pathways.

The Breakthrough Therapy designation currently covers indications for POMC deficiency obesity, LEPR deficiency obesity, BBS and Alström syndrome.

The European Medicines Agency, or

EMA, has also granted PRIority MEdicine, or PRIME, designation for setmelanotide for the treatment of obesity and the control of hunger associated with deficiency disorders of the MC4R pathway.

Both the FDA and EMA have granted orphan drug status to setmelanotide for POMC and LEPR deficiency obesities.

The FDA has granted rare pediatric disease designations for setmelanotide in POMC and LEPR deficiency obesities.

Subject to FDA approval of setmelanotide for the treatment of POMC and LEPR deficiency obesities before September 30, 2022, we would be eligible to receive one priority review voucher, which could then be redeemed to receive priority review for any subsequent marketing application, or sold or transferred to other companies for their programs.

The FDA has accepted our NDA for setmelanotide for the treatment of POMC and LEPR deficiency obesities for filing, granted Priority Review of the NDA and assigned a Prescription Drug User Fee Act, or PDUFA, goal date of November 27, 2020.

We submitted a marketing authorization application, or MAA, for setmelanotide to treat individuals living with POMC deficiency obesity or LEPR deficiency obesity to the EMA in June 2020, which was validated in July 2020.

We demonstrated proof of concept in our Phase 2 clinical trial in BBS and Alström syndrome, and met with the FDA in May 2018 to discuss a combined pivotal Phase 3 clinical trial in these indications.

Based on these discussions with the FDA, we initiated this Phase 3 trial in December 2018 and we completed enrollment in December 2019 and expect to report topline data at the end of 2020 or early in the first quarter of 2021.

We have ongoing Phase 2 clinical trials, referred to as our Basket Study, in MC4R pathway heterozygous deficiency obesity and POMC epigenetic disorders, which we expanded in the second half of 2019 to include the following additional indications:

We have ongoing Phase 2 clinical trials, referred to as our Basket Study, in MC4R pathway heterozygous deficiency obesity, which we expanded in the second half of 2019 to include the following additional indications:

SRC1 deficiency obesity, SH2B1 deficiency obesity, MC4R deficiency obesity and Smith-Magenis syndrome.

We reported preliminary results in MC4R pathway heterozygous deficiency obesity in March 2019 and expect to report additional data in this indication in early 2021.

We also plan to report additional data from one or more of the other Basket Study indications in early 2021.

As of September 30, 2020, an aggregate of approximately 465 obese subjects and patients have been treated with setmelanotide in previous and ongoing clinical trials in which setmelanotide demonstrated statistically significant weight loss with good tolerability.

We have acquired exclusive, worldwide rights from Takeda Pharmaceutical Company Limited, or Takeda, to develop and commercialize T-3525770, now RM-853.

RM-853 is a potent, orally available ghrelin o-acyltransferase inhibitor currently in preclinical development.

Through our preclinical development pipeline, we continue to assess the therapeutic potential of RM-853 as well as opportunities to identify populations that may benefit from a mechanistically rationalized therapeutic approach.

We have assumed sole responsibility for the global product development and commercialization of RM-853.

Takeda received an upfront fee of $4.4 million in shares of our common stock, and will receive back-end development milestones, and single-digit royalties on future RM-853 sales.

We are currently evaluating next steps for pre-clinical development of RM-853.

We reported preliminary results in MC4R pathway heterozygous deficiency obesity in March 2019.

On January 26, 2021, we announced new proof-of-concept interim data from our ongoing Phase 2 Basket Study across individuals with one of three distinct rare genetic diseases of obesity:

HET obesity due to a genetic variant in one of the two alleles of the POMC, PCSK1 or LEPR gene, or HETs;

obesity due to SRC1 deficiency;

and obesity due to SH2B1 deficiency.

The primary endpoint of the study is the percent of patients in each subgroup showing at least a 5 percent loss of body weight over three months.

Consistent with prior clinical experience, setmelanotide was generally well tolerated in each of these rare genetic diseases of obesity.

We are in discussions with the FDA to define a potential path for setmelanotide towards registration for these indications.

Pending the outcome of these discussions, we plan to initiate a pivotal Phase 3 trial evaluating setmelanotide in patients with HET obesity and SRC1 and SH2B1 deficiency obesities in the second half of 2021.

We recently presented new data generated from our proprietary gene curation and selection strategy, which is designed to evaluate a gene’s relevance to the MC4R pathway with the goal of identifying genetic patient populations with the potential to benefit from setmelanotide therapy.

Using this proprietary approach, we identified an additional 31 MC4R pathway genes with strong or very strong pathway relevance.

Pending discussions with the FDA, we plan to initiate a new exploratory MC4R pathway basket trial in patients with these 31 new genes in the second half of 2021.

In the first half of 2021, we plan to initiate a Phase 2 clinical trial in hypothalamic obesity.

We also plan to initiate in the second half of 2021, a Phase 2 clinical trial in pediatric patients aged two to six years old and a Phase 3 potentially registration-enabling trial for the weekly formulation of setmelanotide.

In the second half of 2021, we plan to announce new top-line data from the ongoing exploratory Phase 2 Basket Study evaluating setmelanotide in MC4R-rescuable patients.

Also in the second half of 2021, we expect to obtain regulatory approval from the European Commission and make IMCIVREE commercially available in Europe in obesities due to POMC, PCSK1 and LEPR deficiencies.

On January 5, 2021, we entered into an asset purchase agreement with Alexion Pharmaceuticals, Inc., or Alexion, pursuant to which we agreed to sell our Rare Pediatric Disease Priority Review Voucher, PRV, to Alexion, or the PRV Transfer.

We were awarded the voucher under a FDA program intended to encourage the development of certain rare pediatric disease product applications.

We received the PRV when IMCIVREE was approved by the FDA.

Pursuant to the transfer agreement, Alexion agreed to pay us $100.0 million in cash upon the closing of the sale.

The PRV Transfer closed on February 17, 2021.

On February 9, 2021, we completed an underwritten public offering in which we sold 5,750,000 shares of our common stock at a public offering price of $30.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 750,000 additional shares of common stock.

We received aggregate net proceeds from the offering of $161.7 million after deducting underwriting discounts and commissions and offering expenses payable by us.

Our operations to date have been limited primarily to conducting research and development activities for setmelanotide.

To date, we have not generated any product revenue and have financed our operations primarily through the proceeds received from the sales of common and preferred stock as well as capital contributions from the former parent company, Rhythm Holdings LLC, or the LLC entity.

Since our initial public offering, or IPO, on October 10, 2017 through our October 18, 2019 public offering, we have raised aggregate gross proceeds of our common stock of approximately $484.5 million before deducting underwriting discounts, commissions and offering related transaction costs.

We will not generate revenue from product sales until we successfully complete development and obtain regulatory approval for setmelanotide, which we expect will take a number of years and is subject to significant uncertainty.

To date, we have not generated any significant product revenue and have financed our operations primarily through the proceeds received from the sales of common and preferred stock, asset sales, as well as capital contributions from the former parent company, Rhythm Holdings LLC.

From August 2015 through August 2017, we raised aggregate net proceeds of $80.8 million through our issuance of series A preferred stock.

Since our initial public offering, or IPO, on October 10, 2017 and our underwritten follow-on offerings through February 2021, we have raised aggregate net

proceeds of approximately $611.4 million through the issuance of our common stock after deducting underwriting discounts, commissions and offering related transaction costs.

As noted above, we also received $100.0 million from an asset sale, specifically in connection with the PRV Transfer.

We will not generate significant revenue from product sales until we are able to successfully establish a marketing and commercialization infrastructure for IMCIVREE.

IMCIVREE became commercially available to patients 6 years of age and older with obesity due to POMC, PCSK1 or LEPR deficiency in the U.S.

in the first quarter of 2021.

We expect to continue to fund our operations through the sale of equity, debt financings or other sources.

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If we fail to raise capital or enter into such other arrangements as, and when, needed, we may have to significantly delay, scale back or discontinue the development or commercialization of setmelanotide.

As of September 30, 2020 we had an accumulated deficit of $424.4 million.

Our net losses were $33.8 million, $36.0 million, $99.1 million and $107.8 million for the three and nine months ended September 30, 2020 and 2019, respectively.

As of March 31, 2021 we had an accumulated deficit of $415.6 million.

Our net income (losses) were $43.8 million and ($34.2) million for the three months ended March 31, 2021 and 2020, respectively.

We expect to continue to incur significant expenses and increasing operating losses over the foreseeable future.

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● continue to conduct clinical trials for setmelanotide;

● engage contract manufacturing organizations, or CMOs, for the manufacture of clinical and commercial-grade setmelanotide and the manufacture of RM-853 for preclinical development;

● seek regulatory approval for setmelanotide;

● expand our clinical and financial operations and build a marketing and commercialization infrastructure;

● engage contract manufacturing organizations, or CMOs, for the manufacture of clinical and commercial-grade setmelanotide;

● seek regulatory approval for setmelanotide for additional indications;

● expand our clinical, regulatory, commercial and corporate infrastructure and expand operations globally;

● engage in the sales and marketing efforts necessary to support the continued commercial efforts of IMCIVREE globally;

● the levels, timing and collection of revenue earned from sales of IMCIVREE and other products approved in the future, if any;

● continue to operate as a public company.

As of September 30, 2020, our existing cash and cash equivalents and short-term investments were approximately $201.8 million.

We expect that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses through at least the end of 2021.

As of March 31, 2021, our existing cash and cash equivalents and short-term investments were approximately $404.8 million.

We expect that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses into at least the second half of 2023.

Corporate Background

We are a Delaware corporation organized in February 2013 under the name Rhythm Metabolic, Inc., and as of October 2015, under the name Rhythm Pharmaceuticals, Inc.

Prior to our organization and a corporate reorganization, we were part of Rhythm Pharmaceuticals, Inc., a Delaware corporation which was organized in November 2008 and which commenced active operations in 2010.

We refer to this corporation as the Predecessor Company.

Impact of Novel Coronavirus

Impact of COVID-19

We are closely monitoring how the spread of COVID-19 is affecting our employees, business, preclinical studies and clinical trials.

In response to the COVID-19 pandemic, we have limited access to our executive offices with most employees continuing their work outside of our offices and travel has been restricted.

We currently continue to expect to meet disclosed timelines for reporting data from our pivotal Phase 3 trial in BBS and Alström syndrome.

We have recently updated our timelines on the Basket Study but the changes were unreleated to COVID-19.

We are continuing our regular interactions with the FDA and EMA and based on current information, we do not anticipate COVID-19 to materially affect our regulatory timelines for POMC deficiency obesity or LEPR deficiency obesity.

We do not currently anticipate any disruption in the clinical supply of setmelanotide and our CMOs have indicated that they have appropriate plans and procedures in place to ensure uninterrupted future supply of clinical and commercial-grade setmelanotide, subject to potential limitations on their operations due to COVID-19.

As a result, we do not currently expect that the COVID-19 pandemic will have a material impact on our business, results of operations and financial condition.

At this time, however, there is significant uncertainty relating to the trajectory of the pandemic and the impact of related responses, and disruptions caused by the COVID-19 pandemic may result in difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials and the incurrence of unforeseen costs as a result of disruptions in clinical supply or preclinical study or clinical trial delays.

The impact of COVID-19 on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, the ultimate impact on financial markets and the global economy, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

See “Risk Factors—The outbreak of the novel coronavirus disease, COVID-19, could adversely impact our business, including our preclinical studies, clinical trials and our commercialization prospects.” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

We have recently updated our timelines on the Basket Study but the changes were unrelated to COVID-19.

We are continuing our regular interactions with the FDA and EMA, and based on current information we do not currently anticipate any disruption in the clinical supply of setmelanotide.

Our CMOs have indicated that they have appropriate plans and procedures in place to ensure uninterrupted future supply of clinical and commercial-grade setmelanotide, subject to potential limitations on their operations due to COVID-19.

As a result, we do not currently expect that the COVID-19 pandemic will have a material

impact on our business, results of operations and financial condition.

At this time, however, there is still uncertainty relating to the trajectory of the pandemic and the impact of related responses, and disruptions caused by the COVID-19 pandemic have resulted and may in the future result in difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials and the incurrence of unforeseen costs as a result of disruptions in clinical supply or preclinical study or clinical trial delays.

For example, we experienced interruption of key clinical trial activities, such as patient attendance and clinical trial site monitoring, in our Phase 3 clinical trial evaluating setmelanotide for the treatment of insatiable hunger and severe obesity in individuals with BBS or Alström syndrome.

The impact of COVID-19 on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, the ultimate impact on financial markets and the global economy, the effectiveness of vaccines and vaccine distribution efforts and the effectiveness of other actions taken in the United States and other countries to contain and treat the disease.

See “Risk Factors—The COVID-19 pandemic has and may continue to adversely impact our business, including our preclinical studies, clinical trials and our commercialization prospects.” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Financial Operations Overview

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of setmelanotide unless and until we receive regulatory approval of setmelanotide.

We cannot predict if, when, or to what extent we will generate revenues from the commercialization and sale of setmelanotide.

Setmelanotide is currently our most advanced product candidate in clinical development, and we may never succeed in achieving regulatory approval for setmelanotide or any other product candidate that we decide to pursue in the future.

To date, we have not generated significant revenue from product sales.

Our lead product candidate, IMCIVREE, was recently approved by the FDA for chronic weight management in adult and pediatric patients six years of age and older with obesity due to POMC, PCSK1 or LEPR deficiency confirmed by genetic testing.

IMCIVREE became commercially available in the U.S.

in the first quarter of 2021.

We recorded our first sales of IMCIVREE in March 2021.

We expect our initial sales of IMCIVREE will be limited by the ultra-rare nature of the disease and limited number of diagnosed patients in the United States.

Cost of sales

All of our inventory of IMCIVREE produced prior to FDA approval is available for commercial or clinical use.

Most of the manufacturing costs have been recorded as research and development expenses in prior periods.

Accordingly, the costs for IMCIVREE included in our cost of sales for the three months ended March 31, 2021 were insignificant.

We expect cost of sales to increase as we begin to sell inventory that is produced after we begin capitalizing IMCIVREE commercial inventory.

The Company is currently evaluating the impact of this previously expensed inventory on the future cost of product sales.

Research and development expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery and genetic sequencing efforts, and the clinical development of setmelanotide and RM-853, which include:

● expenses incurred under agreements with third parties, including CROs that conduct research and development and preclinical activities on our behalf, and the cost of consultants and CMOs that manufacture drug products for use in our preclinical studies and clinical trials;

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Three Months Ended

Nine Months Ended

September 30,

Research and development summary

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Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

We expect research and development costs to

increase significantly for the foreseeable future as our setmelanotide and RM-853 development programs progress.

We expect research and development costs to increase significantly for the foreseeable future as our setmelanotide and other development programs progress.

However, we do not believe that it is possible at this time to accurately project total program-specific expenses to commercialization and there can be no guarantee that we can meet the funding needs associated with these expenses.

Selling, general and administrative expenses

Selling expenses consist of professional fees related to preparation for the eventual commercialization of setmelanotide, if approved, as well as salaries and related benefits for commercial employees, including stock-based compensation.

As we accelerate our preparation for commercialization and, if it is approved, start to market setmelanotide and as we explore new collaborations to develop and commercialize setmelanotide, we anticipate that these expenses will materially increase.

Selling expenses consist of professional fees related to preparation for the eventual commercialization of setmelanotide, as well as salaries and related benefits for commercial employees, including stock-based compensation.

As we accelerate our preparation for commercialization and start to market setmelanotide and as we explore new collaborations to develop and commercialize setmelanotide, we anticipate that these expenses will materially increase.

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, relating to our full-time employees not involved in R&D or commercial activities.

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Three Months Ended

Nine Months Ended

September 30,

Selling, general and administrative summary

Selling, general and administrative expense

We anticipate that our selling, general and administrative expenses will increase in the future to support continued and expanding development efforts, potential commercialization of setmelanotide and increased costs of operating as a public company.

We anticipate that our selling, general and administrative expenses will increase in the future to support continued and expanding development efforts, commercialization of IMCIVREE in the United States and the European Union as well as increased costs of operating as a global commercial stage biopharmaceutical public company.

These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, compliance with exchange listing and SEC expenses, insurance and investor relations costs, among other expenses.

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Actual results may differ from these estimates under different assumptions or conditions.

During the three months ended September 30, 2020, there were no significant changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Other than adopting ASC Topic 606, Revenue from Contracts with Customers, as of January 1, 2021, during the three months ended March 31, 2021, there were no other significant changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Results of Operations

Comparison of the three months ended September 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019, together with the changes in those items in dollars and as a percentage:

Comparison of the three months ended March 31, 2021 and 2020

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020, together with the changes in those items in dollars and as a percentage:

Three Months Ended

September 30,

(in thousands)

Statement of Operations Data:

Operating Expenses:

Product revenue, net

Costs and expenses:

Cost of sales

Research and development

Selling, general, and administrative

Total operating expenses

Total costs and expenses

Loss from operations

Other income, net

Income (loss) before taxes

Provision for income taxes

Net income (loss)

NM=Not meaningful

Research and development expense.

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The decrease was primarily due to the following:

● a decrease of $5.2 million related to our clinical trials associated with the GO-ID genotyping study and the once-weekly formulation study.

These studies were nearing or at completion during the period and we had begun to gather and analyze the results from the studies;

● a decrease of $3.2 million related to translational research and genetic sequencing efforts, as the near-completion of the GO-ID study resulted in lower sequencing volume.

● a decrease of $1.6 million related to our clinical trials associated with setmelanotide.

We completed the GO-ID genotyping study, the POMC and LEPR Phase 3 studies and the once weekly formulation Phase 2 study in early to mid-2020.

These decreases were slightly offset by increases related to the expansion of the Phase 2 basket study and the start of a new renal insufficiency PK study in late 2020;

● a decrease of $1.7 million primarily related to purchases of setmelanotide API and drug product in first quarter of 2020 for clinical trials and preparation for potential commercialization.

The above decreases were partially offset by:

● an increase of $3.6 million related to purchases of setmelanotide API for clinical trials and commercial scale up;

● an increase of $1.0 million related to a milestone expense associated with the license agreement with Ipsen on filing the MMA for setmelanotide for the treatment of POMC and LEPR deficiency obesities with the EMA.

● an increase of $0.7 million due to the hiring of additional full-time employees in order to support the growth of our research and development programs.

Selling, general and administrative expense.

Selling, general and administrative expense increased by $1.7 million to $14.5 million in 2021 from $12.8 million in 2020, an increase of 13%.

The increase was primarily due to the following:

● an increase of $1.3 million related to stock compensation expense associated with a grant to our new Chief Executive Officer and other new hire grants during the period, and the modification of certain awards in connection our Chief Commercial Officer’s separation agreement.

The above increase was partially offset by:

● a decrease of $0.8 million related to consulting services associated with patient engagement, disease awareness and unbranded education about rare genetic causes of obesity.

Net loss decreased by $2.2 million to $33.8 million in 2020, from $36.0 million in 2019.

The decrease in net loss was primarily due to the decrease in research and development expense discussed above.

Comparison of the nine months ended September 30, 2020 and 2019

The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019, together with the changes in those items in dollars and as a percentage:

Nine Months Ended

September 30,

(in thousands)

Statement of Operations Data:

Operating Expenses:

Research and development

Selling, general, and administrative

Total operating expenses

Loss from operations

The increase was primarily due:

● an increase of $1.6 million associated with the expenses incurred on the sale of our PRV to Alexion.

Other income, net.

Research and development expense.

Research and development expense decreased by $16.1 million to $68.5 million in 2020 from $84.6 million in 2019, a decrease of 19%.

The decrease was primarily due to the following:

● a decrease of $16.0 million related to our clinical trial associated with the GO-ID genotyping study, the POMC and LEPR clinical studies and the once-weekly formulation study.

These studies were nearing their completion during the period and we had begun to gather and analyze the results from the studies;

● a decrease of $7.5 million related to translational research, pathway validation and genetic sequencing efforts, as the near-completion of the GO-ID study resulted in lower sequencing volume.

The above decreases were partially offset by:

● an increase of $3.0 million related to a milestone expense associated with the license agreement with Ipsen on filing the NDA with the FDA and filing the MAA with the EMA;

● an increase of $2.5 million related to our Phase 2 Basket Study clinical trial, as we continue to expand patients and trial sites into this study;

● an increase of $1.2 million related to purchases of setmelanotide API for clinical trials and commercial scale up.

Selling, general and administrative expense.

Selling, general and administrative expense increased by $5.9 million to $33.0 million in 2020 from $27.1 million in 2019, an increase of 22%.

The increase was primarily due to the following:

● a charge of $4.0 million related to the separation agreements and modification of stock options for our former Chief Executive Officer and Chief Commercial Officer upon their departures;

● an increase of $1.0 million in various consulting and professional services related to legal and IT support costs for continued support of the growth in personnel and systems.

Net loss decreased by $8.7 million to $99.1 million in 2020, from $107.8 million in 2019.

The decrease in net loss was primarily due to the decrease in research and development expense discussed above, partially offset by the increase in selling, general and administrative expense discussed above.

Other income increased by $99.0 million due primarily to the sale of our PRV in February 2021.

Provision for income taxes.

We recorded a tax provision of $22.0 million for the period ended March 31, 2021, primarily related to the sale of our PRV , offset by a tax benefit from our ordinary losses.

We expect to have sufficient tax losses in the current year to offset the income from the sale and thus no current year liability is expected.

Net income (loss).

Net income (loss) increased by $77.9 million to $43.8 million in 2021, from a loss of $34.2 million in 2020.

The increase in net income was primarily due to the increase in other income discussed above.

Liquidity and Capital Resources

As of September 30, 2020, our cash and cash equivalents and short-term investments were approximately $201.8 million.

The following table provides information regarding our cash flows for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30,

As of March 31, 2021, our cash and cash equivalents and short-term investments were approximately $404.8 million.

The following table provides information regarding our cash flows for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

(in thousands)

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Financing activities

Net increase in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

Net cash used in operating activities

The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

Net cash used in operating activities was $92.9 million for the nine months ended September 30, 2020 and consisted primarily of a net loss of $85.6 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, depreciation and amortization and rent expense.

The change in operating assets and liabilities reflected a total use of cash of approximately $7.3 million from a decrease in prepaid expenses and accounts payables and accrued expenses associated with our CROs, CMOs and consultants due to the timing of payments.

Net cash used in operating activities was $90.5 million for the nine months ended September 30, 2019 and consisted primarily of a net loss of $97.9 million adjusted for non-cash items, which consisted of the non-cash stock-based compensation, depreciation and amortization and rent expense.

The change in operating assets and liabilities reflected a total use of cash of approximately $4.6 million for an increase in prepaid expenses associated with our CROs and CMOs due to the timing of payments offset by an increase of $11.0 million in accounts payables and accrued expenses.

We also received proceeds of $0.9 million from tenant improvement allowances related to our new office space.

Net cash provided by investing activities

Net cash provided by investing activities for the nine months ended September 30, 2020 relates to the net maturities of short-term investments.

Net cash provided by investing activities for the nine months ended September 30, 2019 relates to the net maturities of short-term investments of $114.5 million, partially offset by $3.4 million of cash used for tenant improvements and new furniture and fixtures related to our new office space.

The use of cash in all periods resulted primarily from our net income (loss) adjusted for non-cash charges and changes in components of working capital.

Net cash used in operating activities was $33.5 million for the three months ended March 31, 2021 and consisted primarily of a net loss of $28.9 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, the gain on the sale of the PRV, a deferred provision for income taxes, depreciation and amortization and rent expense.

The change in operating assets and liabilities reflected a total use of cash of approximately $6.3 million from an increase in accounts payables and accrued expenses associated with our CROs, CMOs and consultants due to the timing of payments, offset by a decrease of $1.7 million in prepaid expenses.

Net cash used in operating activities was $36.1 million for the three months ended March 31, 2020 and consisted primarily of a net loss of $28.6 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, depreciation and amortization and rent expense.

The change in operating assets and liabilities reflected a total use of cash of approximately $7.5 million from an increase in prepaid expenses and decreases in accounts payables and accrued expenses associated with our CROs, CMOs and consultants due to the timing of payments.

Net cash (used in) provided by investing activities

Net cash used in investing activities for the three months ended March 31, 2021 relates to the $245.7 million of net purchases of short-term investments, offset by the $100.0 million in proceeds from the sale of the PRV.

Net cash provided by investing activities for the three months ended March 31, 2020 relates to the net maturities of short-term investments.

Net cash provided by financing activities

Net cash provided by financing activities was $1.6 million for the nine months ended September 30, 2020, which represents net proceeds from purchases made under our 2017 Employee Stock Purchase Plan and proceeds from the exercise of stock options.

Net cash provided by financing activities was $1.5 million for the nine months ended September 30, 2019, which represents net proceeds from purchases made under our 2017 Employee Stock Purchase Plan and proceeds from the exercise of stock options.

Net cash provided by financing activities was $165.6 million for the three months ended March 31, 2021, which represents the net proceeds of $161.7 million from our common stock offering in February 2021 and $3.9 million of cash proceeds from the exercise of stock options and the issuance of common stock from the ESPP.

Net cash provided by financing activities was $0.7 million for the three months ended March 31, 2020, which represents net proceeds from purchases made under our 2017 Employee Stock Purchase Plan and proceeds from the exercise of stock options.

Funding requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the clinical development of and seek marketing approval for setmelanotide.

In addition, if we obtain marketing approval for setmelanotide, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators.

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the clinical development of and seek marketing approval for setmelanotide for future indications, and build out our global organization.

In addition, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators.

We also expect to incur additional costs associated with operating as a public company.

We expect that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses through at least the end of 2021.

We expect that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses into at least the second half of 2023.

We may need to obtain substantial additional funding in connection with our research and development activities and any continuing operations thereafter.

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Our future capital requirements will depend on many factors, including:

● the cost to commercialize setmelanotide, by building an internal sales force or entering into collaborations with third parties and providing support services for patients;

● the scope, progress, results and costs of clinical trials for our setmelanotide program;

● the costs, timing and outcome of regulatory review of our setmelanotide program;

● the costs to commercialize setmelanotide, if approved, by building an internal sales force or entering into collaborations with third parties and providing support services for patients;

● the obligations owed to Ipsen Pharma S.A.S., or Ipsen, Camurus AB, or Camurus, and Takeda pursuant to our license agreements;

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● our ability to establish and maintain additional collaborations on favorable terms, if at all;

Developing our setmelanotide program is a time-consuming, expensive and uncertain process that may take years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales.

In addition, setmelanotide, if approved, may not achieve commercial success.

Our commercial revenues, if any, will be derived from sales of setmelanotide following regulatory approval, if at all.

● the costs of operating as a public company, including those resulting from losing our emerging growth company status.

Although IMCIVREE has been approved by the FDA in certain indications, IMCIVREE may not achieve commercial success.

In addition, developing our setmelanotide program is a time-consuming, expensive and uncertain process that may take years to complete, and we may never generate the necessary data or results required to obtain future marketing approvals and achieve product sales.

Accordingly, we will need to continue to rely on additional financing to achieve our business objectives.

Adequate additional financing may not be available to us on acceptable terms, or at all.

In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Quarterly Report on Form 10-Q as this continues to evolve globally.

See “Impact of Novel Coronavirus” above and “Risk Factors— The outbreak of the novel coronavirus disease, COVID-19, could adversely impact our business, including our preclinical studies, clinical trials and our commercialization prospects.” in Part II, Item 1A of this Quarterly Report on Form 10-Q for a further discussion of the possible impact of the COVID-19 pandemic on our business.

See “Impact of COVID-19” above and “Risk Factors— The COVID-19 pandemic has and may continue to adversely impact our business, including our preclinical studies, clinical trials and our commercialization prospects.” in Part II, Item 1A of this Quarterly Report for a further discussion of the possible impact of the COVID-19 pandemic on our business.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements.

From August 2015 through August 2017, we raised aggregate gross proceeds of $81.0 million through our issuance of series A preferred stock.

Since our IPO, in October 2017, through our October 2019 public offering, we have raised aggregate net proceeds of approximately $450.0 million through the issuance of our common stock after deducting underwriting discounts, commissions and offering related transaction costs.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.

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Contractual obligations

As of September 30, 2020, there were no material changes to our principal contractual obligations and commitments as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

As of March 31, 2021, there were no material changes to our principal contractual obligations and commitments as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Recent Accounting Pronouncements

For a discussion of pending and recently adopted accounting pronouncements, see Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

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Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2020, there were no material changes to our quantitative and qualitative disclosures about market risks as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

As of March 31, 2021, there were no material changes to our quantitative and qualitative disclosures about market risks as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis