RHYTHM PHARMACEUTICALS, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the “safe harbor” created by those sections. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding: our financial performance, including our expectations regarding our existing cash, operating losses, expenses and sources of future financing; our ability to hire and retain necessary personnel; patient enrollments and the timing thereof; the timing of announcements regarding results of clinical trials; our ability to protect our intellectual property; ongoing activities under and our ability to negotiate our collaboration and license agreements, if needed; our marketing, commercial sales, and revenue generation; expectations surrounding our manufacturing arrangements; the impact of the novel coronavirus, or COVID-19, pandemic on our business and operations and our future financial results; 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. These forward-looking statements are neither promises nor guarantees of future performance, and are subject to a variety of known and unknown risks and uncertainties, many of which are beyond our control, and other important factors which could cause actual results to differ materially from those contemplated in such forward-looking statements. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including but not limited to those set forth in Part II, Item 1A under the heading “Risk Factors” of this Quarterly Report on Form 10-Q. Except as may be required by law, we have no plans to update our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q . We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made . Overview 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. 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. ​ 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. The European Commission and Great Britain’s Medicines & Healthcare Products Regulatory Agency, or MHRA, in July and September 2021, respectively, granted marketing authorization to IMCIVREE for the treatment of obesity and the control of hunger associated with genetically confirmed loss-of-function biallelic POMC, including PCSK1, deficiency or biallelic LEPR deficiency in adults and children 6 years of age and above. We are making steady progress towards achieving market access in Germany, Great Britain, France, Italy and Spain. Reimbursement dossiers have been submitted in The Netherlands and Israel, and we have recently initiated dossier development in Sweden. We recently completed and submitted a supplemental New Drug Application, or sNDA, to the U.S. Food and Drug Administration, or FDA, and a Type II variation application to the EMA for IMCIVREE for the treatment of obesity and control of hunger in adult and pediatric patients 6 years of age and older with Bardet-Biedl syndrome, or BBS, or 17 Table of Contents Alström syndrome. These regulatory submissions were based on data 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 patients who met the primary endpoint defined as more than 10 percent weight loss had BBS and none had Alström syndrome. However, data from this trial, supported by results from the Phase 2 trial, suggest that treatment with setmelanotide may result in decreased weight and hunger in people living with Alström syndrome. Based on FDA timelines, we will know in November 2021 if our sNDA has been accepted with Priority Review, as we have requested. If granted, the FDA typically has a review period of six-months from the date of acceptance. We currently anticipate a commercial launch in the United States in mid-2022. The review timeline in Europe is calendar-based, and we would expect a decision from the European Commission in the second half of 2022. Our continued development efforts are focused on obesity related to several single gene-related, or monogenic, MC4R pathway deficiencies: obesity due to a heterozygous 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; obesity due to SH2B adapter protein 1, or SH2B1, deficiency; hypothalamic obesity; and MC4R deficiency obesity. On January 26, 2021, we announced new interim data from our ongoing Phase 2 Basket Study across individuals with HET obesity and SRC1 and SH2B1 deficiency obesities that we believe demonstrate proof of concept in these diseases. The primary endpoint of the study was 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. In August 2021, we announced agreement with the FDA and EMA on the clinical design and primary endpoint of our pivotal Phase 3 EMANATE trial of setmelanotide. The trial will be a randomized, double-blind, placebo-controlled study with five independent sub-studies evaluating setmelanotide in patients with: heterozygous POMC/PCSK1 obesity; heterozygous LEPR obesity; certain variants of the SRC1; certain variants of SH2B1 genes; or PCSK1 N221D deletions within the MC4R pathway. Each sub-study will be independent of the others and, if successful, is designed to allow us to submit separate regulatory submissions to the FDA and EMA. We plan to initiate the EMANATE trial in the fourth quarter of 2021 or the first quarter of 2022. We also recently announced plans to initiate the Phase 2 DAYBREAK trial of setmelanotide in the fourth quarter of 2021. This trial will be a two-stage, double-blind, placebo-controlled study in patients with specific variants within one of 31 genes within the MC4R pathway. We leveraged 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, to identify an additional 31 MC4R pathway genes with strong or very strong pathway relevance. We also plan to initiate in the fourth quarter of 2021, a Phase 3 randomized, double-blind trial in patients currently on daily setmelanotide therapy (“ switch study ”) to evaluate the efficacy of daily and weekly formulations of setmelanotide in patients with obesity due to BBS. In the first half of 2022, we also plan to initate a Phase 3, randomized, double-blind trial in patients naïve to setmelanotide therapy (“ de novo study ”) to evaluate the weekly formulation of setmelanotide in patients with BBS. In the first half of 2022, we plan to announce new top-line data from the ongoing exploratory Phase 2 Basket Study evaluating setmelanotide in patients with obesity due to a variant in the MC4 receptor. Additionally, as an FDA post-marketing requirement, we are currently evaluating the effects of setmelanotide on the QT corrected for heart rate, or QTc interval, in healthy volunteers. We are studying additional diseases as part of investigator-initiated protocols. There are currently no effective or approved treatments for these MC4R pathway-related diseases. 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. Additional recent clinical, regulatory and corporate updates include: ​ ● In November 2021, at The Obesity Society’s ObesityWeek ® , a virtual conference, we delivered multiple data presentations including: the first-ever health-related quality of life (HRQOL) data from patients with BBS 18 Table of Contents treated with setmelanotide; efficacy and safety data from our Phase 3 trial of setmelanotide in BBS and Alström syndrome; new hunger reduction data from the SRC1 and SH2B1 deficiency cohorts in the exploratory Phase 2 Basket Trial; new data on utilization of URO; an analysis of the frequency of melanocortin-4 receptor (MC4R) pathway variants in U.S. patients with severe obesity; and a review of single minded-1 (SIM1) missense variants associated with severe obesity. ● In October, at the Obesity Medicine Association’s Overcoming Obesity 2021 Conference (OMA), we presented new HRQOL data from the Phase 3 trials evaluating setmelanotide in POMC or LEPR deficiency obesities that confirmed setmelanotide treatment led to sustained, clinically meaningful HRQOL improvements in a majority of patients; results from in-depth patient interviews conducted in POMC and LEPR patients enrolled in Rhythm’s pivotal Phase 3 trials, which highlighted that reduced hunger and improved satiety resulting from setmelanotide treatment substantially and meaningfully changed patients’ lives; and two presentations detailing updated results from our URO genetic testing of approximately 8,500 people in the United States with early-onset, severe obesity. ​ ● In September 2021, at the 59th Annual European Society for Paediatric Endocrinology meeting we delivered three oral and four poster presentations, including a new subgroup analysis of data from its Phase 3 clinical trial in BBS, which showed that patients treated with setmelanotide achieved statistically significant weight loss and hunger reduction compared to patients treated with placebo during a 14-week, double-blind treatment period; an interim analyses from our exploratory Phase 2 Basket Trial, which showed that setmelanotide achieved clinically meaningful weight loss or BMI-Z reduction in 30% (9 of 30) of study participants with obesity due to variants of the SRC1 gene; and 43% (15 of 35) of study participants with obesity due to variants of the SH21B gene, including 16p11.2 chromosomal deletions. ​ ● In September 2021, we announced the promotion of Linda Shapiro Manning, M.D., Ph.D., to Chief Medical Officer. She succeeded Murray Stewart, M.D., who transitioned to the role of Senior Medical Advisor. ​ 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, or 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 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 and following marketing authorizations in the European Union and Great Britain, we are pursuing a country-by-country strategy to establish market access and reimbursement for IMCIVREE in several countries. We expect to continue to fund our operations through the sale of equity, debt financings or other sources. We 19 Table of Contents intend to build our own marketing and commercial sales infrastructure and we may enter into collaborations with other parties for certain markets outside the United States. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, or at all. 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, 2021 we had an accumulated deficit of $486.1 million. Our net losses were $35.1 million, $33.8 million, $26.7 million and $99.1 million for the three and nine months ended September 30, 2021 and 2020, respectively. We expect to continue to incur significant expenses and increasing operating losses over the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we: ● continue to conduct clinical trials for setmelanotide; ● 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; ● take into account the levels, timing and collection of revenue earned from sales of IMCIVREE and other products approved in the future, if any; and ● continue to operate as a public company. As of September 30, 2021, our existing cash and cash equivalents and short-term investments were approximately $328.4 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. 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. 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 20 Table of Contents future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, the impact of variants, 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 Revenue To date, we have not generated significant revenue from product sales. Our lead product candidate, IMCIVREE, was approved by the FDA in November 2020 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 September 30, 2021 were insignificant. We expect cost of sales to increase in 2022 as we continue to sell inventory that is produced after we began 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, 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; ● employee-related expenses including salaries, benefits and stock-based compensation expense; ● the cost of lab supplies and acquiring, developing and manufacturing preclinical and clinical study materials; ● the cost of genetic sequencing of potential patients in clinical studies; and ● facilities, depreciation, and other expenses, which include rent and maintenance of facilities, insurance and other operating costs. We expense research and development costs to operations as incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The capitalized amounts are expensed as the related goods are delivered or the services are performed. 21 Table of Contents The following table summarizes our current research and development expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, Research and development summary 2021 2020 2021 2020 Research and development expense ​ $ 27,539 ​ $ 22,995 ​ $ 72,554 ​ $ 68,496 ​ We are unable to predict the duration and costs of the current or future clinical trials of our product candidates. The duration, costs, and timing of clinical trials and development of setmelanotide will depend on a variety of factors, including: ● the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and development activities; ● the rate of enrollment in clinical trials; ● the safety and efficacy demonstrated by setmelanotide in future clinical trials; ● changes in regulatory requirements; ● changes in clinical trial design; and ● the timing and receipt of any regulatory approvals. A change in the outcome of any of these variables with respect to the development of our product candidates would significantly change the costs and timing associated with its development and potential commercialization. Research and development activities are central to our business model. 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 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 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. Other significant costs include rent, legal fees relating to patent and corporate matters and fees for accounting and consulting services. The following table summarizes our current selling, general and administrative expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, Selling, general and administrative summary 2021 2020 2021 2020 Selling, general and administrative expense ​ $ 17,507 ​ $ 11,289 ​ $ 47,490 ​ $ 33,006 ​ 22 Table of Contents 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. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances on an ongoing basis, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Except for the application of ASC Topic 606, Revenue from Contracts with Customers, that was adopted during the year-ended December 31, 2018 but was not applicable until our first commercial sale, during the nine months ended September 30, 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, 2021 and 2020 The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020, together with the changes in those items in dollars and as a percentage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ Change ​ 2021 2020 $ % ​ ​ (in thousands) Statement of Operations Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Product revenue, net $ 1,028 $ — ​ $ 1,028 ​ NM ​ Costs and expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of sales ​ ​ 222 ​ ​ — ​ ​ 222 ​ NM ​ Research and development ​ ​ 27,539 ​ ​ 22,995 ​ ​ 4,544 ​ 20 % Selling, general, and administrative ​ 17,507 ​ 11,289 ​ 6,218 ​ 55 % Total costs and expenses ​ 45,268 ​ 34,284 ​ 10,984 ​ 32 % Loss from operations ​ (44,240) ​ (34,284) ​ (9,956) ​ 29 % Other income, net ​ 138 ​ 466 ​ (328) ​ (70) % Loss before taxes ​ ​ (44,102) ​ ​ (33,818) ​ ​ (10,284) ​ 30 % Benefit from income taxes ​ ​ (8,995) ​ ​ — ​ ​ (8,995) ​ NM ​ Net loss ​ $ (35,107) ​ $ (33,818) ​ $ (1,289) ​ 4 % ​ NM=Not meaningful ​ Product revenue, net increased to $1.0 million in 2021. There were no product revenues in the comparative prior period. The increase is due to FDA approval of our lead product candidate, IMCIVREE in November 2020. We recorded our first sales of IMCIVREE in March 2021 and the three months ended September 30, 2021 represent our second full quarter of sales subsequent to the launch of IMCIVREE. We expect our initial sales of IMCIVREE will be limited by the 23 Table of Contents ultra-rare nature of the disease and limited number of diagnosed patients in the United States. To date, all of our product revenue has been generated in the United States. Cost of sales increased to $0.2 million in 2021. There were no cost of sales in the comparative prior period. 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 September 30, 2021 were insignificant and primarily reflect the amortization of our capitalized sales based milestone payment made to Ipsen upon our first commercial sale as well as a royalty due to Ipsen on our net product sales. We expect cost of sales to increase as we continue to sell inventory that is produced after we began capitalizing IMCIVREE commercial inventory. Research and development expense. Research and development expense increased by $4.5 million to $27.5 million in 2021 from $23.0 million in 2020, an increase of 20%. The increase was primarily due to the following: ● an increase of $4.4 million in our clinical trial costs associated with new and planned clinical trials, including our Phase 2 DAYBREAK and Phase 3 EMANATE trials, Phase 3 pediatrics trial, QTc study, Phase 2 hypothalamic obesity study, and increased enrollment in our long-term extension study; these increases were partially offset by the conclusion of prior studies, including pivtal Phase 3 studies for POMC and LEPR, as well as GO-ID; and ● an increase of $2.7 million in salaries, benefits and stock-based compensation related to the hiring of additional full-time employees in order to support the growth of our research and development programs; The above increases were partially offset by: ● a decrease of $1.4 million due to reduced purchases of clinical supply material; and ● a decrease of $0.7 million in costs associated with accessing sequencing data from third-party biobanks to further our genetic research efforts. Selling, general and administrative expense. Selling, general and administrative expense increased by $6.2 million to $17.5 million in 2021 from $11.3 million in 2020, an increase of 55%. The increase was primarily due to the following: ● an increase of $3.0 million due to increased compensation and benefits related costs associated with additions to our exeutive leadership team, increased headcount to support our expanding business operations as well as to establish commercial operations in the United States and internationally ; ● an increase of $1.9 million due to increased professional fees and consulting services to support the build out of our commercial operations in the United States and internationally as well as corporate legal and consulting support for our international expansion ; and ● an increase of $0.9 million related to marketing activities for IMCIVREE. Other income, net. Other income decreased by $0.3 million due to lower interest rates. Provision for income taxes. We recorded a tax benefit of $9.0 million as a result of our operating expenses incurred during the three months ended September 30, 2021, which offset a portion of the tax provision we recorded as a result of the sale of our PRV. We expect to incurr sufficient operating expenses during the remainder of the current year to offset the income from the sale of our priority review voucher resulting in no current year tax liability. Net loss . Net loss increased by $1.3 million to $35.1 million in 2021, from $33.8 million in 2020. The increase in net loss was driven by higher operating expenses incurred during the period. 24 Table of Contents Comparison of the nine months ended September 30, 2021 and 2020 The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020, together with the changes in those items in dollars and as a percentage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ Change ​ 2021 2020 $ ​ % ​ ​ (in thousands) Statement of Operations Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Product Revenue, net ​ ​ 1,337 ​ ​ — ​ ​ 1,337 ​ NM ​ Operating Expenses: ​ ​ ​ ​ ​ Cost of Sales ​ ​ 363 ​ ​ — ​ ​ 363 ​ NM ​ Research and development ​ $ 72,554 ​ $ 68,496 ​ $ 4,058 ​ 6 % Selling, general, and administrative ​ 47,490 ​ 33,006 ​ 14,484 ​ 44 % Total operating expenses ​ 120,407 ​ 101,502 ​ 18,905 ​ 19 % Loss from operations ​ (119,070) ​ (101,502) ​ (17,568) ​ 17 % Other income, net ​ 100,313 ​ 2,403 ​ 97,910 ​ 4,074 % Loss before taxes ​ ​ (18,757) ​ ​ (99,099) ​ ​ 80,342 ​ (81) % Provision for income taxes ​ ​ 7,989 ​ ​ — ​ ​ 7,989 ​ NM ​ Net loss ​ $ (26,746) ​ $ (99,099) ​ $ 72,353 ​ (73) % NM=Not meaningful ​ Product revenue, net increased to $1.3 million in 2021. There were no product revenues in the comparative prior period. The increase is due to FDA approval of our lead product candidate, IMCIVREE in November 2020. We recorded our first sales of IMCIVREE in March 2021 and the three months ended September 30, 2021 represent our second full quarter of sales subsequent to the launch of IMCIVREE. 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. To date, all of our product revenue has been generated in the United States. Cost of sales increased to $0.4 million in 2021. There were no cost of sales in the comparative prior period. 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 September 30, 2021 were insignificant and cost of sales are primarily comprised of amortization of our capitalized sales based milestone payment due to Ipsen upon our first commercial sale as well as a royalty due to Ipsen on our net product sales. We expect cost of sales to increase as we continue to sell inventory that is produced after we began capitalizing IMCIVREE commercial inventory. Research and development expense. Research and development expense increased by $4.1 million to $72.6 million in 2021 from $68.5 million in 2020, an increase of 6%. The increase was primarily due to the following: ● an increase of $5.9 million in compensation and benefits due to the hiring of additional full-time employees in order to support the growth of our research and development programs and expansion of regulatory affairs operations; and ● an increase of $2.4 million related to costs associated with new and planned clinical trials, including Phase 2 DAYBREAK and Phase 3 EMANATE trials, Phase 3 pediatrics trial, QTc study, Phase 2 hypothalamic obesity study, and increased enrollment in our long-term extension study. These increases were mostly offset by decreases in our GO-ID study which has been completed; ● an increase of $1.1 million related to costs associated with pursuing the use of setmelanotide in additional indications; The above increases were partially offset by: 25 Table of Contents ● a decrease 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 ; ● a decrease of $1.1 million related to lower professional services fees related to regulatory filings; ● a decrease of $0.8 million related to reduced purchases of clinical supply material; and ● a decrease of $0.7 million of costs associated with accessing sequencing data from third-party biobanks to further our genetic research. ​ Selling, general and administrative expense. Selling, general and administrative expense increased by $14.5 million to $47.5 million in 2021 from $33.0 million in 2020, an increase of 44%. The increase was primarily due to the following: ● an increase of $7.1 million due to increased compensation and benefits related costs associated with additions to our executive leadership team, increased headcount to support our expanding business operations as well as to establish our commercial operations in the United States and internationally ; ● an increase of $4.0 million due to increased professional fees and consulting services to support the build out of our commercial operations in the United States and internationally as well as corporate legal and consulting support for our international expansion ; ● an increase of $1.6 million associated with the expenses incurred on the sale of our PRV to Alexion; ● an increase of $1.1 million due to increased costs associated with office support and insurance costs for our expanding workforce; and ● an increase of $0.7 million associated with the expenses incurred related to marketing activities for IMCIVREE. Other income, net. Other income increased by $97.9 million due primarily to the sale of our PRV in February 2021. Provision for income taxes. We recorded a tax provision of $8.0 million for the period ended September 30, 2021, primarily related to the sale of our PRV , offset by a tax benefit from our ordinary losses. We expect to incurr sufficient operating expenses during the remainder of the current year to offset the income from the sale of our priority review voucher resulting in no current year tax liability. Net Loss. Net loss decreased by $72.4 million to $26.7 million in 2021, from a loss of $99.1 million in 2020. The decrease in net loss was primarily due to impact of the $100.0 million gain on the sale of our PRV, offset by higher operating expenses and the provision of income taxes recorded recorded as a result sale of the PRV. ​ Liquidity and Capital Resources As of September 30, 2021, our cash and cash equivalents and short-term investments were approximately $328.4 million. 26 Table of Contents Cash flows The following table provides information regarding our cash flows for the nine months ended September 30, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2021 2020 ​ ​ (in thousands) Net cash provided by (used in): ​ ​ ​ ​ ​ ​ Operating activities ​ $ (105,531) ​ $ (92,858) Investing activities ​ (69,407) ​ 96,644 Financing activities ​ 166,381 ​ 1,589 Net (decrease) increase in cash, cash equivalents and restricted cash ​ $ (8,557) ​ 5,375 ​ Net cash used in operating activities 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 $105.5 million for the nine months ended September 30, 2021 and consisted primarily of a net loss of $102.0 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 $5.4 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 an increase of $8.9 million in prepaid expenses. 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 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 nine months ended September 30, 2021 relates to the $164.0 million of net purchases of short-term investments, $0.4 million related to the purchase of property plant and equipment and $5.0 million for the acquisition of an intangible asset, offset by the $100.0 million in proceeds from the sale of the PRV. 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 financing activities Net cash provided by financing activities was $166.4 million for the nine months ended September 30, 2021, which represents the net proceeds of $161.7 million from our common stock offering in February 2021 and $4.7 million of cash proceeds from the exercise of stock options and the issuance of common stock from our 2017 Employee Stock Purchase Plan, or the ESPP. 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 the ESPP and proceeds from the exercise of stock options. 27 Table of Contents 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 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 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. If we are unable to raise capital when needed or on favorable terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts. 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 obligations owed to Ipsen Pharma S.A.S., or Ipsen, Camurus AB, or Camurus, and Takeda pursuant to our license agreements; ● the extent to which we acquire or in-license other product candidates and technologies; ● the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; ● our ability to establish and maintain additional collaborations on favorable terms, if at all; and ● 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 and authorized by the EC and Great Britain 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 as this continues to evolve globally. 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. 28 Table of Contents 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. Debt financing, if available, involves agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties or other means, we may have to relinquish valuable rights to our setmelanotide program on terms that may not be favorable to us. If we are unable to raise additional funds through equity, debt financings or other means, when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our setmelanotide program that we would otherwise prefer to develop and market ourselves. Contractual obligations As of September 30, 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 We did not have during the period presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules. Item 3. Quantitative and Qualitative Disclosures About Market Risk As of September 30, 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.