RHYTHM PHARMACEUTICALS, INC. 10-Q

Item 1. Financial Statements Rhythm Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets (in thousands, except share and per share data) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ 2022 2021 ​ ​ ​ ​ ​ ​ ​ Assets ​ ​ ​ ​ ​ ​ Current assets: ​ ​ Cash and cash equivalents ​ $ 78,537 ​ $ 59,248 Short-term investments ​ 162,427 ​ 235,607 Accounts receivable, net ​ ​ 862 ​ ​ 1,025 Prepaid expenses and other current assets ​ 11,623 ​ 12,507 Total current assets ​ 253,449 ​ 308,387 Property and equipment, net ​ 2,722 ​ 2,813 Right-of-use asset ​ ​ 1,442 ​ ​ 1,522 Intangible assets, net ​ ​ 8,527 ​ ​ 4,658 Restricted cash ​ 328 ​ 328 Other long-term assets ​ ​ 18,356 ​ ​ 11,815 Total assets ​ $ 284,824 ​ $ 329,523 Liabilities and stockholders’ equity ​ ​ Current liabilities: ​ ​ Accounts payable ​ $ 12,010 ​ $ 5,737 Accrued expenses and other current liabilities ​ 25,199 ​ 30,084 Contract liability ​ ​ 9,440 ​ ​ 7,000 Lease liability ​ 625 ​ 606 Total current liabilities ​ 47,274 ​ 43,427 Long-term liabilities: ​ ​ Lease liability ​ 1,781 ​ 1,945 Total liabilities ​ 49,055 ​ 45,372 Stockholders’ equity: ​ ​ Preferred Stock, $ 0.001 par value: 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2022 and December 31, 2021 ​ — ​ — Common stock, $ 0.001 par value: 120,000,000 shares authorized; 50,393,731 and 50,283,574 shares issued and outstanding at March 31, 2022 and December 31, 2021 , respectively ​ 50 ​ 50 Additional paid-in capital ​ ​ 818,051 ​ ​ 813,041 Accumulated other comprehensive loss ​ ​ ( 629 ) ​ ​ ( 1 ) Accumulated deficit ​ ( 581,703 ) ​ ( 528,939 ) Total stockholders’ equity ​ 235,769 ​ 284,151 Total liabilities and stockholders’ equity ​ $ 284,824 ​ $ 329,523 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements ​ 3 Table of Contents Rhythm Pharmaceuticals, Inc. Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (in thousands, except share and per share data) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2022 2021 Product revenue, net ​ ​ $ 1,498 ​ $ 35 Costs and expenses: ​ ​ ​ ​ ​ ​ ​ Cost of sales ​ ​ ​ 230 ​ ​ 4 Research and development ​ ​ ​ 32,510 ​ ​ 19,911 Selling, general, and administrative ​ ​ 21,449 ​ 14,518 Total costs and expenses ​ ​ 54,189 ​ 34,433 Loss from operations ​ ​ ( 52,691 ) ​ ( 34,398 ) Other income: ​ ​ ​ Other income ​ ​ — ​ 100,000 Interest income, net ​ ​ ( 73 ) ​ 154 Total other income, net ​ ​ ( 73 ) ​ 100,154 (Loss) income before taxes ​ ​ ​ ( 52,764 ) ​ ​ 65,756 Provision for income taxes ​ ​ ​ — ​ ​ 22,006 Net (loss) income ​ ​ $ ( 52,764 ) ​ $ 43,750 Net (loss) income per share ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ $ ( 1.05 ) ​ $ 0.92 Diluted ​ ​ $ ( 1.05 ) ​ $ 0.90 Weighted-average common shares outstanding ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ ​ 50,326,627 ​ ​ 47,638,565 Diluted ​ ​ 50,326,627 ​ 48,501,697 ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive (loss) income: ​ ​ ​ ​ ​ ​ ​ Net (loss) income ​ ​ $ ( 52,764 ) ​ $ 43,750 Unrealized loss on marketable securities ​ ​ ( 628 ) ​ ( 107 ) Comprehensive (loss) income ​ ​ $ ( 53,392 ) ​ $ 43,643 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements ​ ​ ​ ​ 4 Table of Contents Rhythm Pharmaceuticals, Inc. Condensed Consolidated Statements of Stockholders’ Equity (in thousands, except share data) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Other ​ ​ ​ Total ​ ​ Common Stock ​ Paid-In ​ Comprehensive Accumulated ​ Stockholders’ ​ Shares Amount Capital Income (Loss) Deficit Equity Balance at December 31, 2021 50,283,574 ​ $ 50 $ 813,041 $ ( 1 ) $ ( 528,939 ) $ 284,151 Stock-based compensation expense ​ — ​ — ​ 4,611 ​ — ​ — ​ 4,611 Issuance of common stock in connection with ESPP ​ 61,518 ​ ​ — ​ ​ 399 ​ ​ — ​ — ​ ​ 399 Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units ​ 48,639 ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — Unrealized loss on marketable securities — ​ — ​ — ​ ( 628 ) ​ — ​ ( 628 ) Net loss — ​ — ​ — ​ — ​ ( 52,764 ) ​ ( 52,764 ) Balance at March 31, 2022 ​ 50,393,731 ​ ​ 50 ​ ​ 818,051 ​ ​ ( 629 ) ​ ( 581,703 ) ​ ​ 235,769 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at December 31, 2020 44,235,903 ​ $ 44 $ 625,762 $ 49 $ ( 459,327 ) $ 166,528 Stock-based compensation expense ​ — ​ — ​ 5,191 ​ — ​ — ​ 5,191 Issuance of common stock in connection with ESPP ​ 17,000 ​ ​ — ​ ​ 388 ​ ​ — ​ — ​ ​ 388 Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units ​ 198,855 ​ ​ — ​ ​ 3,466 ​ ​ — ​ — ​ ​ 3,466 Issuance of common stock upon completion of public offering, net of offering costs ​ 5,750,000 ​ ​ 6 ​ ​ 161,725 ​ ​ — ​ — ​ ​ 161,731 Unrealized loss on marketable securities — ​ — ​ — ​ ( 107 ) ​ — ​ ( 107 ) Net income — ​ — ​ — ​ — ​ 43,750 ​ 43,750 Balance at March 31, 2021 ​ 50,201,758 ​ ​ 50 ​ ​ 796,532 ​ ​ ( 58 ) ​ ( 415,577 ) ​ ​ 380,947 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 5 Table of Contents Rhythm Pharmaceuticals, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2022 2021 ​ ​ ​ ​ ​ ​ ​ Operating activities ​ ​ ​ ​ ​ ​ Net (loss) income ​ $ ( 52,764 ) ​ $ 43,750 Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ Stock-based compensation expense ​ 4,611 ​ 5,191 Gain on sale of priority review voucher ​ ​ — ​ ​ ( 100,000 ) Deferred tax provision ​ ​ — ​ ​ 22,006 Depreciation and amortization ​ 350 ​ 201 Non-cash rent expense ​ ( 65 ) ​ ( 61 ) Changes in operating assets and liabilities: ​ ​ Prepaid expenses and other current assets ​ 950 ​ 1,651 Other long-term assets ​ ( 6,661 ) ​ — Accounts payable, accrued expenses and other current liabilities ​ ( 53 ) ​ ( 6,269 ) Net cash used in operating activities ​ ( 53,632 ) ​ ( 33,531 ) Investing activities ​ ​ Purchases of short-term investments ​ ( 39,479 ) ​ ( 297,542 ) Maturities of short-term investments ​ 112,128 ​ 51,842 Proceeds from sale of priority review voucher ​ ​ — ​ ​ 100,000 Purchases of property and equipment ​ ( 127 ) ​ ( 12 ) Net cash provided by (used in) investing activities ​ 72,522 ​ ( 145,712 ) Financing activities ​ ​ Net proceeds from issuance of common stock ​ ​ — ​ ​ 161,731 Proceeds from the exercise of stock options ​ — ​ 3,466 Proceeds from issuance of common stock from ESPP ​ 399 ​ 388 Net cash provided by financing activities ​ 399 ​ 165,585 Net increase (decrease) in cash, cash equivalents and restricted cash ​ 19,289 ​ ( 13,658 ) Cash, cash equivalents and restricted cash at beginning of period ​ 59,576 ​ 101,257 Cash, cash equivalents and restricted cash at end of period ​ $ 78,865 ​ $ 87,599 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements ​ 6 Table of Contents Rhythm Pharmaceuticals, Inc. Notes to Unaudited Condensed Consolidated Financial Statements (In thousands, except share and per share information) 1. Nature of Business Rhythm Pharmaceuticals, Inc. (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 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 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. Commercialization of approved products will require significant resources and in order to market IMCIVREE, the Company must continue to build its sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. 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. ​ 7 Table of Contents Liquidity The Company has incurred operating losses and negative cash flows from operations since inception. 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. To date, the Company has minimal product revenue and management expects operating losses to continue for the foreseeable future. The Company has devoted substantially all of its resources to its drug development efforts, comprising of research and development, manufacturing, conducting clinical trials for its product candidates, protecting its intellectual property, pre-commercialization activities and general and administrative functions relating to these operations. 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. 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. There is no guarantee that additional equity or other financings will be available to the Company on acceptable terms, or at all. 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 fourth quarter of 2023. ​ 2. Summary of Significant Accounting Policies Basis of Presentation The Company's unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or GAAP, and the applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification, or ASC, and Accounting Standards Updates, or ASU, of the Financial Accounting Standards Board, or FASB. As permitted under these rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted. 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 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 8 Table of Contents 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, 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. Changes in estimates are recorded in the period in which they become known. Actual results could differ materially from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of Rhythm Pharmaceuticals, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Off-Balance Sheet Risk and Concentrations of Credit Risk Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash and cash equivalents and short-term investments, which are maintained at two federally insured financial institutions. The deposits held at these two institutions are in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. 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 Operating segments are defined as components of an entity about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company currently operates in one business segment, which is the development and commercialization of therapies for patients with rare diseases. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. The Company does not operate separate lines of business with respect to its product or product candidates. 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 . 9 Table of Contents Revenue Recognition The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers , or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Product Revenue, net 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. Once the product is delivered to the Company’s exclusive specialty pharmacy provider, our sole customer in the U.S., the customer, or wholesaler takes title to the product. The wholesaler then distributes the product to health care providers and patients. In our exclusive distribution agreement with the 3PL company, the Company acts as principal because we retain control of the product. The Company generally does not offer returns of product sold to the customer. Revenue from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, upon transfer of title to the customer because at that point in time we have no ongoing obligations to the customer. 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 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 , 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 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). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. The following are the components of variable consideration related to product revenue: Chargebacks: 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 10 Table of Contents 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: The Company is subject to discount obligations under government programs, including Medicaid programs, Medicare and Tricare in the United States. 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 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. On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments. Trade discounts and allowances: The Company provides customary invoice discounts on IMCIVREE sales to our U.S. customer for prompt payment that are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive and pay for various distribution services from our customer in the distribution channel. For services that are either not distinct from the sale of our product or for which we cannot reasonably estimate the fair value, such fees are classified as a reduction of product revenue. Product returns: 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. Based on the distribution model for IMCIVREE and the price of IMCIVREE, the Company believes there will be minimal returns. Other incentives: Other incentives include co-payment assistance the Company provides to patients with commercial insurance that have coverage and reside in states that allow co-payment assistance. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue. The estimate is recorded as a reduction of revenue in the same period the related revenue is recognized. 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 11 Table of Contents 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 Prior to receiving approval from the FDA in November 2020 to sell IMCIVREE in the United States, the Company expensed all costs incurred related to the manufacture of IMCIVREE as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory approval of drug candidates. 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 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 periodic costs related to certain manufacturing services and inventory adjustment charges. Intangible Assets, Net Definite-lived intangible assets related to capitalized milestones under license agreements are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life. 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 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 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories: Level 1 — Quoted market prices in active markets for identical assets or liabilities. ​ 12 Table of Contents Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. ​ 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 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 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 ​ ​ ​ March 31, ​ 2022 2021 Stock options ​ ​ ​ 7,248,111 ​ ​ 3,641,903 Restricted stock units ​ ​ 784,041 ​ 97,631 Performance stock units ​ ​ ​ 935,885 ​ ​ — Potential common shares ​ ​ ​ 8,968,037 ​ ​ 3,739,534 ​ Subsequent Events The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. Application of New or Revised Accounting Standards From time to time, new accounting pronouncements are issued by the FASB and adopted by the Company as of the specified effective date. 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 December 2019, the FASB issued ASU 2019-12, Income Taxes-Simplifying the Accounting for Income Taxes , or ASU 2019-12. ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. 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 13 Table of Contents 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. 3. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ 2022 2021 Research and development costs ​ $ 12,164 ​ $ 17,480 Professional fees ​ 3,494 ​ 2,163 Payroll related ​ 3,131 ​ 8,371 Royalties ​ ​ 4,866 ​ ​ 791 Other ​ 1,544 ​ 1,279 Accrued expenses and other current liabilities ​ $ 25,199 ​ $ 30,084 ​ ​ 4. Fair Value of Financial Assets 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. treasury securities and money market funds that invest in U.S. government securities that are valued using quoted market prices. Accordingly, money market funds and government funds are categorized as Level 1. The financial assets valued based on Level 2 inputs consist of corporate debt securities and commercial paper, which consist of investments in highly-rated investment-grade corporations. The following tables present information about the Company's financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value Measurements as of ​ ​ March 31, 2022 using: ​ Level 1 Level 2 Level 3 Total Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash Equivalents: ​ ​ ​ ​ Commercial Paper ​ $ — ​ $ 49,477 ​ $ — ​ $ 49,477 Money Market Funds ​ ​ 17,505 ​ ​ — ​ ​ — ​ ​ 17,505 Marketable Securities: ​ ​ ​ ​ Corporate Debt Securities and Commercial Paper ​ ​ — ​ ​ 162,427 ​ ​ — ​ ​ 162,427 Other Long-term Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ RareStone Common Stock ​ ​ — ​ ​ — ​ ​ 2,440 ​ ​ 2,440 Total ​ $ 17,505 ​ $ 211,904 ​ $ 2,440 ​ $ 231,849 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value Measurements as of ​ ​ December 31, 2021 using: ​ Level 1 Level 2 Level 3 Total Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash Equivalents: ​ ​ ​ ​ Corporate Debt Securities and Commercial Paper ​ $ — ​ $ — ​ $ — ​ $ — Money Market Funds ​ 48,297 ​ — ​ — ​ 48,297 Marketable Securities: ​ ​ ​ ​ Corporate Debt Securities and Commercial Paper ​ ​ — ​ ​ 235,607 ​ ​ — ​ ​ 235,607 Total ​ $ 48,297 ​ $ 235,607 ​ $ — ​ $ 283,904 ​ 14 Table of Contents 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 ​ ​ March 31, ​ 2022 2021 Beginning aggregate estimated fair value of Level 3 securities ​ $ — ​ $ — Initial recording of RareStone equity ​ ​ 2,440 ​ ​ — Ending aggregate estimated fair value of Level 3 securities ​ $ 2,440 ​ $ — ​ Marketable Securities The following tables summarize the Company's marketable securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2022 ​ ​ ​ ​ ​ Gross ​ Gross ​ ​ ​ ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair ​ Cost Gains Losses Value Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate debt securities and commercial paper (due within 1 year) ​ $ 163,056 ​ $ — ​ $ ( 629 ) ​ $ 162,427 ​ ​ $ 163,056 ​ $ — ​ $ ( 629 ) ​ $ 162,427 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ ​ ​ ​ Gross ​ Gross ​ ​ ​ ​ ​ Amortized ​ Unrealized ​ Unrealized ​ Fair ​ Cost Gains Losses Value Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate debt securities and commercial paper (due within 1 year) ​ $ 235,608 ​ $ 50 ​ $ ( 51 ) ​ $ 235,607 ​ ​ $ 235,608 ​ $ 50 ​ $ ( 51 ) ​ $ 235,607 ​ ​ ​ ​ 5. Right Of Use Asset and Lease Liability The Company has a material operating lease for its head office facility and other immaterial operating leases for certain equipment. The Company’s office lease has a remaining lease term of 3.3 years. The Company measured the lease liability associated with the office lease using a discount rate of 10 % at inception. 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 March 31, 2022, the Company has not entered into any lease arrangements classified as a finance lease. 15 Table of Contents The Company’s corporate headquarters is located in Boston, Massachusetts. This facility houses the Company’s research, clinical, regulatory, commercial and administrative personnel. 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 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 2022 ​ $ 615 2023 ​ 834 2024 ​ 851 2025 ​ ​ 502 Thereafter ​ — Total operating lease payments ​ ​ 2,802 Less: imputed interest ​ ​ 396 Total operating lease liability ​ $ 2,406 ​ ​ ​ 6. Intangible Assets, Net 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: ​ ​ ​ ​ ​ 2022 ​ $ 641 2023 ​ 855 2024 ​ ​ 855 2025 ​ ​ 855 2026 ​ ​ 855 Thereafter ​ 4,466 Total ​ $ 8,527 ​ 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 $ 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. 7. Income Taxes 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. 8. Common Stock 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 16 Table of Contents 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. ​ 9. Related-Party Transactions 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. 17 Table of Contents