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What changed 10-Q

Item 1. Financial Statements

2022-05-03 compared with 2021-11-02 · 163 added, 157 removed, 250 unchanged (56% of the section changed)

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(in thousands, except share and per share data)

September 30,

Current assets:

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Short-term investments

Accounts receivable, net

Prepaid expenses and other current assets

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Accrued expenses and other current liabilities

Contract liability

Lease liability

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Long-term liabilities:

Deferred tax liability

Lease liability

Total liabilities

Commitments and contingencies (Note 5)

Stockholders’ equity:

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10,000,000 shares authorized;

no shares issued and outstanding at September 30, 2021 and December 31, 2020

no shares issued and outstanding at March 31, 2022 and December 31, 2021

Common stock, $ 0.001 par value:

120,000,000 shares authorized;

50,268,312 and 44,235,903 shares issued and outstanding September 30, 2021 and December 31, 2020 , respectively

50,393,731 and 50,283,574 shares issued and outstanding at March 31, 2022 and December 31, 2021 , respectively

Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive loss

Accumulated deficit

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Rhythm Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(in thousands, except share and per share data)

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

Product revenue, net

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Total other income, net

Loss before taxes

Provision for (benefit from) income taxes

Net loss per share, basic and diluted

Weighted-average common shares outstanding, basic and diluted

Other comprehensive loss:

Unrealized (loss) gain on marketable securities

Comprehensive loss

(Loss) income before taxes

Provision for income taxes

Net (loss) income

Net (loss) income per share

Weighted-average common shares outstanding

Other comprehensive (loss) income:

Net (loss) income

Unrealized loss on marketable securities

Comprehensive (loss) income

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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Balance at December 31, 2021

Stock compensation expense

Stock-based compensation expense

Issuance of common stock in connection with ESPP

Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units

Issuance of common stock upon completion of public offering, net of offering costs

Unrealized loss on marketable securities

Balance at March 31, 2022

Stock compensation expense

Issuance of common stock in connection with exercise of stock options

Unrealized gain on marketable securities

Balance at June 30, 2021

Stock compensation expense

Issuance of common stock in connection with ESPP

Issuance of common stock in connection with exercise of stock options

Unrealized gain on marketable securities

Balance at September 30, 2021

Balance at December 31, 2020

Stock compensation expense

Issuance of common stock in connection with ESPP

Issuance of common stock in connection with exercise of stock options

Unrealized gain on marketable securities

Balance at March 31, 2020

Stock compensation expense

Issuance of common stock in connection with exercise of stock options

Unrealized gain on marketable securities

Balance at June 30, 2020

Stock compensation expense

Stock-based compensation expense

Issuance of common stock in connection with ESPP

Issuance of common stock in connection with exercise of stock options

Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units

Issuance of common stock upon completion of public offering, net of offering costs

Unrealized loss on marketable securities

Balance at September 30, 2020

Balance at March 31, 2021

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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(in thousands)

Nine months ended September 30,

Three months ended March 31,

Operating activities

Adjustments to reconcile net loss to cash used in operating activities:

Net (loss) income

Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation expense

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Proceeds from sale of priority review voucher

Milestone obligation under license agreement

Purchases of property and equipment

Net cash (used in) provided by investing activities

Net cash provided by (used in) investing activities

Financing activities

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Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

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Rhythm Pharmaceuticals, Inc.

(the “Company” or “we”) is 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.

(the “Company” or “we”) is a global, commercial-stage biopharmaceutical company committed to transforming the treatment paradigm for people living with rare genetic diseases of obesity, which are characterized by early-onset, severe obesity and an insatiable hunger or hyperphagia.

Rhythm’s precision medicine, IMCIVREE (setmelanotide), for which for which we have exclusive worldwide rights, has the potential to restore dysfunctional melanocortin 4 receptor (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.

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, or leptin receptor, or LEPR, deficiency confirmed by genetic testing.

IMCIVREE also has been approved by the European Commission 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.

IMCIVREE is now commercially available in the United States, and we are pursuing an international strategy to establish access and reimbursement for IMCIVREE in the European Union, or EU, and Great Britain.

We also have 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 marketing authorization application, or MAA, 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 Alström syndrome.

IMCIVREE was approved in November 2020 by the U.S.

Food and Drug Administration (FDA) for chronic weight management in adult and pediatric patients 6 years of age and older with obesity due to proopiomelanocrotin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency confirmed by genetic testing and in July and September 2021, respectively, by the European Commission (EC) and Great Britain’s Medicines & Healthcare Products Regulatory Agency (MHRA) 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.

IMCIVREE is the first-ever FDA-approved and EC- and MHRA-authorized therapy for patients with these rare genetic diseases of obesity.

The Company’s supplemental New Drug Application (sNDA) to the FDA is assigned a Prescription Drug User Fee Act (PDUFA) goal date of June 16, 2022, for the treatment of obesity and control of hunger in adult and pediatric patients six years of age and older with Bardet-Biedl Syndrome (BBS) or Alström syndrome.

A Type II variation application to the European Medicines Agency seeking regulatory approval and authorization for setmelanotide to treat obesity and control of hunger in adult and pediatric patients 6 years of age and older with BBS also is under review.

In addition, we are advancing a broad clinical development program for setmelanotide in patients with additional rare genetic diseases of obesity in an effort to expand the approved indications in the United States and Europe.

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

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

Bardet-Biedl and Alstrom syndromes;

obesity due to a genetic variant in one of the two alleles of the POMC, PCSK1 or LEPR gene, or heterozygous POMC, PCSK1 or LEPR obesity (collectively 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.

In addition, we have expanded our development program to explore setmelotide’s potential efficacy in patients with severe obesity which may be due to variants in an additional 31 genes that are related to the MC4R pathway.

There are additional diseases being studied as part of investigator-initiated protocols.

Currently, there are no effective or approved treatments for these MC4R pathway-related diseases.

The Company believes 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.

The Company has wholly owned subsidiaries in the US, Ireland, the United Kingdom, France, Italy, the Netherlands and Canada.

The Company is subject to risks and uncertainties common to commercial-stage companies in the biotechnology industry, including but not limited to, risks associated with the commercialization of approved products, completing preclinical studies and clinical trials, receiving regulatory approvals for product candidates, development by competitors of new biopharmaceutical products, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations.

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These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities.

There are many uncertainties regarding the COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how the pandemic will impact its patients, employees, suppliers, vendors, business partners and distribution channels.

While the pandemic did not materially affect the Company's financial results and business operations for the three months ended March 31, 2022, the Company is unable to predict the impact that COVID-19 will have on its financial position and operating results in future periods due to numerous uncertainties.

The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.

The Company has incurred operating losses and negative cash flows from operations since inception.

As of September 30, 2021, the Company had an accumulated deficit of $ 486,073 .

As of March 31, 2022, the Company had an accumulated deficit of $ 581,703 .

The Company has primarily funded these losses through the proceeds from the sales of common and preferred stock, asset sales as well as capital contributions received from the former parent company, Rhythm Holdings LLC.

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The future success of the Company is dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations.

In February 2021, the Company completed the sale of a Rare Pediatric Disease Priority Review Voucher, or PRV, that it received in connection with the approval of IMCIVREE for $ 100,000 .

As the PRV did not have a carrying value, the gain recognized within Other income (loss) was equal to the gross proceeds received, with costs related to the sale of the voucher recorded within selling, general and administrative expenses.

At September 30, 2021, the Company had $ 328,354 of cash and cash equivalents and short-term investments on hand.

At March 31, 2022, the Company had $ 240,964 of cash and cash equivalents and short-term investments on hand.

In the future, the Company will be dependent on obtaining funding from third parties, such as proceeds from the issuance of debt, sale of equity, product sales and funded research and development programs to maintain the Company's operations and meet the Company's obligations.

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If the Company fails to obtain additional funding when needed, the Company would be forced to scale back, terminate its operations or seek to merge with or be acquired by another company.

Management believes that the Company's existing cash resources will be sufficient to fund the Company's operations into at least the second half of 2023.

Management believes that the Company's existing cash resources will be sufficient to fund the Company's operations into at least the fourth quarter of 2023.

Summary of Significant Accounting Policies

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As permitted under these rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted.

The accompanying interim balance sheet as of September 30, 2021, the statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020, the statements of stockholders equity for the three and nine months ended September 30, 2021 and 2020 and the statements of cash flows for the nine months ended September 30, 2021 and 2020 and the related footnote disclosures are unaudited.

In management's opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements as of and for the year ended December 31, 2020 and include all adjustments, which are all normal recurring adjustments, necessary for the fair presentation of the interim financial statements.

The results for the nine months ended September 30, 2021 are not necessarily indicative of the results expected for the full fiscal year, any other interim periods, or any future year or period.

The accompanying condensed consolidated balance sheet as of March 31, 2022, the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021 and the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 and the related footnote disclosures are unaudited.

In management's opinion, the unadited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2021 and include all adjustments, which are all normal recurring adjustments, necessary for the fair presentation of the interim financial statements.

The results for the three months ended March 31, 2022 are not necessarily indicative of the results expected for the full fiscal year, any other interim periods, or any future year or period.

The accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the unaudited condensed consolidated financial statements.

As of September 30, 2021, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Certain amounts totaling $ 63 in the consolidated statement of stockholders’ equity for the three months ended March 31, 2020, related to unrealized gains on marketable securities, have been reclassified from additional paid-in capital to accumulated other comprehensive income to conform to the current period presentation.

This reclassification had no impact on the previously reported results of operations or cash flows for the three months ended March 31, 2020.

Risks and Uncertainties

There are many uncertainties regarding the COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how the pandemic will impact its patients, employees, suppliers, vendors, business partners and distribution channels.

While the pandemic did not materially affect the Company's financial results and business operations for the nine months ended September 30, 2021, the Company is unable to predict the impact that COVID-19 will have on its financial position and operating results in future periods due to numerous uncertainties.

The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.

As of March 31, 2022, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date

of the financial statements and the reported amounts of revenue and expenses during the reporting period.

The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances.

This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made.

Significant estimates relied upon in preparing these financial statements include accruals related to research and development expenses, assumptions used to record stock-based compensation expense and the valuation allowance on the Company's deferred tax assets.

Significant estimates relied upon in preparing these financial statements include accruals related to research and development expenses, assumptions used to record stock-based compensation expense, assumptions used to value the common stock received from RareStone Group Ltd., or RareStone, and the valuation allowance on the Company's deferred tax assets.

Estimates are periodically reviewed in light of changes in circumstances, facts and experience.

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The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.

The Company is exposed to risks associated with extending credit to customers related to the sale of products.

The Company does not require collateral to secure amounts due from its customers.

At March 31, 2022, substantially all of the Company’s revenue was generated from a single customer in the United States.

The Company relies on third-party manufacturers and suppliers for the manufacture and supply of its product.

The inability of the suppliers or manufacturers to fulfill supply requirements of the Company could materially impact future operating results.

A change in the relationship with the suppliers or manufacturer, or an adverse change in their business, could materially impact future operating results .

Segment Information

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Accordingly, the Company has one reportable segment.

Accounts Receivable, net

Accounts receivable consists of amounts due from customers, net of customer allowances for cash discounts and any estimated expected credit losses.

The Company's measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

To date, the Company has not experienced any credit losses.

The Company's contracts with its customers have standard payment terms that generally require payment within 45 days.

The Company analyzes amounts that are past due for collectability, and periodically evaluates the creditworthiness of its customers.

At March 31, 2022, the Company determined an allowance for doubtful account was not required based upon our review of contractual payments and our customers’ circumstances .

Revenue Recognition

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Product Revenue, net

Subsequent to its regulatory approval in the U.S.

on November 25, 2020, the Company began to sell IMCIVREE in the U.S.

in March, 2021.

Subsequent to its regulatory approval, the Company began to sell IMCIVREE in the U.S.

in March 2021 and in France in March 2022.

The product is distributed through an exclusive third-party logistics, or 3PL, distribution agent that does not take title to the product.

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There are no other performance obligations besides the sale of product.

We classify payments to our customer or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative expenses in our consolidated statements of operations.

We classify payments to our customer or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative expenses in our condensed consolidated statements of operations and comprehensive (loss) income.

Otherwise, payments to a customer or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below.

Taxes collected from the customer relating to product sales and remitted to governmental authorities are excluded from revenue.

Because our payment terms are generally forty-five days , we conclude there is not a significant financing component because the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less.

Because our payment terms are generally forty-five days , the Company concluded there is not a significant financing component because the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less.

The Company expenses incremental costs of obtaining a contract as and when incurred since the expected amortization period of the asset that we would have recognized is one year or less.

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price, or the transaction price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between us and our customer, health care providers and other indirect customers relating to the sale of IMCIVREE.

Revenues from product sales are recorded at the net sales price, or the transaction price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between us and our customers, health care providers and other indirect customers relating to the sale of IMCIVREE.

These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer).

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The following are the components of variable consideration related to product revenue:

The Company estimates obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers and patients at prices lower than the list prices charged to our customer.

The government and other entities charge us for the difference between what they pay for the product and the selling price to our customer.

The Company records reserves for these chargebacks related to product sold to our customer during the reporting period, as well as our estimate of product that remains in the distribution channel at the end of the reporting period that we expect will be sold to qualified healthcare providers and patients in future periods.

The Company estimates obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers and patients at prices lower than the list prices charged to our customers.

The government and other entities charge us for the difference between what they pay for the product and the selling price to our customers.

The Company records reserves for these chargebacks related to product sold to our

customers during the reporting period, as well as our estimate of product that remains in the distribution channel at the end of the reporting period that we expect will be sold to qualified healthcare providers and patients in future periods.

Government rebates:

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We estimate Medicaid, Medicare and Tricare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payer mix.

These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability that is included in accrued expenses on our consolidated balance sheet.

These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability that is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet.

For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program.

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Product returns:

Our customer has limited return rights related to the product’s damage or defect.

Our customers have limited return rights related to the product’s damage or defect.

The Company estimates the amount of product sales that may be returned and records the estimate as a reduction of revenue and a refund liability in the period the related product revenue is recognized.

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The estimate is recorded as a reduction of revenue in the same period the related revenue is recognized.

During the three and nine months ended September 30, 2021, we recorded product revenue, net, of $ 1,028 and $ 1,337 .

The table that summarizes balances and activity in each of the product revenue allowance and reserve categories has not been included for the three and nine months ended September 30, 2021 due to the immateriality of the revenue recognized during the periods.

During the three months ended March 31, 2022 and 2021, we recorded product revenue, net, of $ 1,498 and $ 35 , respectively.

The table that summarizes balances and activity in each of the product revenue allowance and reserve categories has not been included for the three months ended March 31, 2022 and 2021, due to the immateriality of the revenue recognized during the periods.

License Agreements

RareStone Group Ltd.

In December 2021, the Company entered into an Exclusive License Agreement with RareStone Group Ltd., or the RareStone License.

Pursuant to the RareStone License, we granted to RareStone an exclusive, sublicensable, royalty-bearing license under certain patent rights and know-how to develop, manufacture, commercialize and otherwise exploit any pharmaceutical product that contains setmelanotide in the diagnosis, treatment or prevention of conditions and diseases in humans in China, including mainland China, Hong Kong and Macao.

RareStone has a right of first negotiation in the event that the Company chooses to grant a license to develop or commercialize the licensed product in Taiwan.

The arrangement includes a license and an additional performance obligation to supply product upon the request of RareStone.

According to the terms of the RareStone License , RareStone has agreed to seek local approvals to commercialize IMCIVREE for the treatment of obesity and hyperphagia due to biallelic proopiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency, as well as Bardet-Biedl and Alström syndromes.

Additionally, RareStone has agreed to fund efforts to identify and enroll patients from China in the Company’s global EMANATE trial, a Phase 3, randomized, double-blind, placebo-controlled trial to evaluate setmelanotide in five independent sub-studies in patients with obesity due to a heterozygous variant of POMC/PCSK1 or LEPR;

certain variants of the SRC1 gene, certain variants of the SH2B1 gene, or PCSK1 N221D deletions within the MC4R pathway.

According to the terms of the RareStone License , RareStone made an upfront payment to Rhythm of $ 7,000 and issued 1,077,586

ordinary shares in the Company.

Rhythm will be eligible to receive development and commercialization milestones of up to $ 62,500 , as well as tiered royalty payments on annual net sales of IMCIVREE.

As of March 31, 2022, the Company received the upfront payment of $ 7,000 , however the Company has not fulfilled its obligations related to the transfer of know how related to the license, and as such, the upfront payment was recorded as a contract liability on the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

The RareStone equity was issued to Rhythm in February 2022, and recorded at its estimated fair value of $ 2,440 in other long-term assets and as a component of the contract liability on the condensed consolidated balance sheet at March 31, 2022.

The valuation of the RareStone equity is based upon a preliminary valuation and our estimates and assumptions related to this equity valuation are subject to change as we complete our procedures with respect to the valuation.

Cost of Product Sales

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Subsequent to receiving FDA approval in November 2020, the Company has capitalized a nominal amount of inventory related costs that were incurred subsequent to FDA approval.

At September 30, 2021, the Company had $ 95 of inventory recorded as a component of other current assets on the condensed consolidated balance sheet.

At March 31, 2022, the Company had $ 108 of inventory recorded as a component of prepaid and other current assets on the condensed consolidated balance sheet.

Cost of product sales will consist of manufacturing costs, transportation and freight, amortization of capitalized intangibles, royalty payments and indirect overhead costs associated with the manufacturing and distribution of IMCIVREE.

Cost of product sales may also include period costs related to certain manufacturing services and inventory adjustment charges.

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

Accounts Receivable, Net

In general, accounts receivable consists of amounts due from customers, net of customer allowances for cash discounts and chargebacks.

The Company's contracts with customers have standard payment terms that generally require payment within 45 days .

The Company analyzes accounts that are past due for collectability, and periodically evaluates the creditworthiness of its customers.

As of September 30, 2021, we determined an allowance for doubtful accounts was not required based upon our review of contractual payment terms and individual customer circumstances.

Cost of product sales may also include periodic costs related to certain manufacturing services and inventory adjustment charges.

Intangible Assets, Net

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If our estimate of the product’s useful life is shorter than the remaining patent life, then a shorter period is used.

Amortization expense is recorded as a component of cost of sales on the consolidated statements of operations and comprehensive income (loss).

Intangible assets are evaluated for impairment at least annually in the fourth quarter or more frequently if impairment indicators exist.

Events that could result in an impairment, or trigger an interim impairment assessment, include the decision to discontinue the development of a drug, the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug.

In connection with any impairment assessment, the fair value of the intangible assets as of the date of assessment is compared to the carrying value of the intangible asset.

Impairment losses are recognized if the carrying value of an intangible asset is both not recoverable and exceeds its fair value.

Amortization expense is recorded as a component of cost of sales on the consolidated statements of operations and comprehensive loss.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, which consist primarily of property and equipment and finite lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets.

The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset.

If such assets are considered to be impaired, the Company measures the impairment to be recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, less the cost to sell.

No events or changes in circumstances existed to require an impairment assessment during the three months ended March 31, 2022 and 2021, respectively.

Fair Value Measurements

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Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s cash equivalents and marketable securities at September 30, 2021 and December 31, 2020 were carried at fair value, determined according to the fair value hierarchy.

The Company’s cash equivalents and marketable securities at March 31, 2022 and December 31, 2021 were carried at fair value, determined according to the fair value hierarchy.

See Note 4 for further discussion.

The carrying amounts reflected in the consolidated balance sheets for accounts payable and accrued expenses approximate their fair values due to their short-term maturities at September 30, 2021 and December 31, 2020, respectively.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities.

Diluted net loss per common share is computed by adjusting the weighted average shares outstanding for the potential dilutive effects of common stock equivalents outstanding during the period calculated in accordance with the treasury stock method.

For purposes of the diluted net loss per share calculation, stock options and restricted stock units are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive

for all periods presented due to the net losses incurred.

Therefore, basic and diluted net loss per share were the same for all periods presented.

The following table includes the potential common shares, presented based on amounts outstanding at each period end, that were excluded from the computation of diluted net loss per share due to their anti-dilutive effect, for the periods indicated:

The carrying amounts reflected in the consolidated balance sheets for accounts payable and accrued expenses and other current liabilities approximate their fair values due to their short-term maturities at March 31, 2022 and December 31, 2021, respectively.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period, without consideration of potential dilutive securities.

Diluted net income (loss) per common share is computed by adjusting the weighted-average shares outstanding for the potential dilutive effects of common stock equivalents outstanding during the period calculated in accordance with the treasury stock method.

For purposes of the diluted net income (loss) per share calculation, 781,404 stock options and 82,591 restricted stock units were considered to be common stock equivalents for the three months ended March 31, 2021.

For the three months ended March 31, 2022, the common stock equivalents have been excluded from the calculation of diluted net income (loss) per share, as their effect would be anti-dilutive for the period presented due to the net loss incurred.

The following table includes the potential common shares that were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive for the periods indicated:

Three Months Ended

Nine Months Ended

September 30,

September 30,

Stock options

Restricted stock units

Performance stock units

Potential common shares

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Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments , which has been subsequently amended by ASU No.

2018-19, ASU No.

2019-04, ASU No.

2019-05, ASU No.

2019-10, ASU No.

2019-11 and ASU No.

2020-03, or ASU 2016-13.

The provisions of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology and require a consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

Since the Company ceased to be an emerging growth company as of December 31, 2020, the Company adopted the standard during the fourth quarter of 2020 and applied the modified retrospective method of adoption to the Company’s financial statements as of January 1, 2020.

Based on the composition of the investment portfolio as of the adoption date, the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows for the year ended December 31 2020 and no adjustment was required to be recorded to the opening retained earnings balance as of January 1, 2020.

In December 2019, the FASB issued ASU 2019-12, Income Taxes-Simplifying the Accounting for Income Taxes , or ASU 2019-12.

1 unchanged sentence

The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted.

standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted.

Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively.

We have adopted ASU 2019-12 as of January 1, 2021 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

Accrued Expenses

Accrued expenses consisted of the following:

September 30,

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

Research and development costs

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Payroll related

Accrued expenses

Accrued expenses and other current liabilities

Fair Value of Financial Assets

As of September 30, 2021 and December 31, 2020, the carrying amount of cash and cash equivalents and short-term investments was $ 328,354 and $ 172,792 , respectively, which approximates fair value.

As of March 31, 2022 and December 31, 2021, the carrying amount of cash and cash equivalents and short-term investments was $ 240,964 and $ 294,855 , respectively, which approximates fair value.

Cash and cash equivalents and short-term investments includes investments in U.S.

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Fair value Measurements as of

September 30, 2021 using:

March 31, 2022 using:

Cash Equivalents:

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Corporate Debt Securities and Commercial Paper

Other Long-term Assets:

RareStone Common Stock

Fair value Measurements as of

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Corporate Debt Securities and Commercial Paper

The estimated fair value of the shares of RareStone equity was determined using Level 3 inputs.

As of March 31, 2022, our RareStone equity represents our only Level 3 assets and liabilities carried at fair market value.

The fair value measurement of the RareStone equity is sensitive to changes in the unobservable inputs used to value the financial instrument.

Changes in the inputs could result in changes to the fair value of each financial instrument.

Our RareStone equity was valued at $ 2,440 at March 31, 2022.

The Company determined the estimated fair values using a discounted cash flow model under the income approach and an option pricing allocation model for the period end March 31, 2022.

Inherent in discounted cash flow and option pricing allocation models are assumptions related to the equity value of the entity, expected equity volatility, holding period, risk-free interest rate and discount for lack of marketability.

The Company estimated equity volatility based on historical volatility of guideline public companies.

The risk-free interest rate was based on the U.S.

Treasury rates for a maturity similar to the expected holding period.

Changes in our level 3 secruities for the three months ended March 31, 2022 and 2021 are as follows:

Three months ended

Beginning aggregate estimated fair value of Level 3 securities

Initial recording of RareStone equity

Ending aggregate estimated fair value of Level 3 securities

Marketable Securities

The following tables summarize the Company's marketable securities:

September 30, 2021

March 31, 2022

Corporate debt securities and commercial paper (due within 1 year)

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The Company estimated the incremental borrowing rate for the leased asset based on a range of comparable interest rates the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment.

As of September 30, 2021, the Company has not entered into any lease arrangements classified as a finance lease.

As of March 31, 2022, the Company has not entered into any lease arrangements classified as a finance lease.

The Company’s corporate headquarters is located in Boston, Massachusetts.

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The Company’s lease agreement commenced May 2019 and has a term of six years with a five-year renewal option to extend the lease.

The Company has not included the five-year renewal option to extend the lease in its measurement of the ROU asset or lease liability.

The following table presents the maturities of the Company’s operating lease liability related to office space as of September 30, 2021, all of which is under a non-cancellable operating lease:

The Company has not included the five-year renewal option to extend the lease in its measurement of the right-of-use asset or lease liability.

The following table presents the maturities of the Company’s operating lease liability related to office space as of March 31, 2022, all of which is under a non-cancellable operating lease:

Operating Lease

Remainder of 2021

Total operating lease payments

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Intangible Assets, Net

As of September 30, 2021, the Company’s finite-lived intangible assets, which totaled $ 4,772 , resulted from the capitalization of certain milestone payments made to Ipsen Pharma, S.A.S., or Ipsen, in accordance with the terms of the

Company’s license agreement with Ipsen, in connection with the Company’s first commercial sale of IMCIVREE in the U.S.

in March 2021.

As of March 31, 2022, the Company’s finite-lived intangible assets, which totaled $ 8,527 resulted from the capitalization of certain milestone payments made to Ipsen Pharma, S.A.S., or Ipsen, in accordance with the terms of the Company’s license agreement with Ipsen, in connection with the Company’s first commercial sale of IMCIVREE in the U.S.

in March 2021 and in France in March 2022.

As of March 31, 2022, amortization expense for the next five years and beyond is summarized as follows:

The Company began amortizing its finite-lived intangible assets in April 2021 over an 11 year period based on IMCIVREE’s expected patent exclusivity period.

Amortization expense totaled $ 114 and $ 228 for the three and nine months ended September 30, 2021.

Amortization expense will be included in cost of sales on the consolidated statements of operations and comprehensive loss.

The Company recorded a tax (benefit) of ($ 8,995 ) for the three month period ended September 30, 2021.

The Company recorded a tax provision of $ 7,989 for the nine months period ended September 30, 2021 primarily related to the sale of the PRV, offset by a tax benefit from ordinary losses generated by the Company over the remainder of current year.

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

Amortization expense totaled $ 130 for the three months ended March 31, 2022.

Amortization expense is included in cost of sales on the consolidated statements of operations and comprehensive loss.

The Company did not record a tax provision for the three month period ended March 31, 2022 as the Company generated sufficient tax losses during the period.

The Company recorded an income tax provision of $ 22,006 for the three month period ended March 31, 2021, primarily related to the sale of the PRV, offset by a tax benefit from ordinary losses generated by the Company during the period.

The Company expects to have sufficient tax losses in the current year to offset income and thus no current year liability is expected.

The Company expects to maintain a full valuation allowance against its net deferred tax assets for the year.

As of March 31, 2022, an aggregate of 13,361,315 shares of common stock were reserved for future issuance under the Company’s stock plans, including outstanding stock options, restricted stock units, and performance stock units

that have been issued totaling 8,968,037 and 1,404,259 shares are available for future grants under the Company’s 2017 Employee Stock Purchase Plan.

On February 9, 2022, the Company’s board of directors adopted the Rhythm Pharmaceuticals, Inc.

2022 Employment Inducement Plan (the “Inducement Plan”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Stock Market LLC listing rules (“Rule 5635(c)(4)”).

In accordance with Rule 5635(c)(4), awards under the Inducement Plan may only be made to a newly hired employee who has not previously been a member of the Company’s board of directors, or an employee who is being rehired following a bona fide period of non-employment by the Company or a subsidiary, as a material inducement to the employee’s entering into employment with the Company or its subsidiary.

An aggregate of 1,000,000 shares of the Company’s common stock have been reserved for issuance under the Inducement Plan.

The Company will continue to grant awards under the 2017 Plan pursuant to the terms thereof.

The exercise price of stock options granted under the Inducement Plan will not be less than the fair market value of a share of the Company’s common stock on the grant date.

Other terms of awards, including vesting requirements, are determined by the Company’s board of directors and are subject to the provisions of the Inducement Plan.

Stock options granted to employees generally vest over a four-year period but may be granted with different vesting terms.

Certain options may provide for accelerated vesting in the event of a change in control.

Stock options granted under the Inducement Plan expire no more than 10 years from the date of grant.

As of March 31, 2022, no stock option awards have been issued under the Inducement Plan.

As of March 31, 2022, no restricted stock unit awards have been granted under the Inducement Plan.

As of March 31, 2022, 1,000,000 shares of common stock are available for future grant under the Inducement Plan.

On November 2, 2021, we entered into a sales agreement, or the Sales Agreement, with Cowen and Company LLC, or Cowen, as sales agent, pursuant to which we may, from time to time, issue and sell common stock with an aggregate value of up to $ 100,000 in "at-the-market"

offerings, or the ATM.

Sales of common stock, if any, pursuant to the Sales Agreement, may be made in sales deemed to be an “at the market offering” as defined in Rule 415(a) of the Securities Act, including sales made directly through The Nasdaq Global Market or on any other existing trading market for our common stock.

As of March 31, 2022, there was $ 100,000 of common stock remaining available for sale under the ATM.

On February 9, 2021 the Company completed a public offering of 5,750,000 shares of common stock at an 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.

The Company received $ 161,731 in net proceeds after deducting underwriting discounts, commissions and offering expenses.

During the three months ended March 31, 2020, the Company entered into a separation agreement with its former Chief Executive Officer, Keith Gottesdiener, M.D.

The Company modified certain equity awards held by Dr.

Gottesdiener.

The modification included the continuation of vesting of stock options through the end of December 31, 2020 and an extension of the post-termination exercise period for vested options from 90 days to up to two years .

In connection with this modification, the Company recorded an incremental compensation charge of $ 2,811 during the nine months ended September 30, 2020.

As of September 30, 2021, an aggregate of 9,972,556 shares of common stock were reserved for future issuance under the Company’s stock plans, including outstanding stock options and restricted stock units that have been issued of 6,406,621 shares of common stock and 962,942 shares are available for future grants under the Company’s 2017 Employee Stock Purchase Plan.

Related-Party Transactions

Expenses paid directly to consultants and vendors considered to be related parties amounted to $ 450 , $ 808 , $ 1,547 , and $ 2,584 for the three and nine months ended September 30, 2021 and 2020, respectively.

Outstanding payments due to these related parties as of September 30, 2021 and December 31, 2020 were $ 0 and $ 187 , respectively, and were included within accounts payable on the balance sheet.

Expenses paid directly to consultants and vendors considered to be related parties amounted to $ 480 and $ 636 for the three months ended March 31, 2022 and 2021, respectively.

Outstanding payments due to these related parties as of March 31, 2022 and December 31, 2021 were $ 45 and $ 50 , respectively, and were included within accounts payable on the balance sheet.

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.