What changed in this filing

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Item 1. Financial Statements

2022-08-03 compared with 2022-05-03 · 192 added, 86 removed, 327 unchanged (46% of the section changed)

18 unchanged sentences

Accrued expenses and other current liabilities

Contract liability

Deferred revenue

Lease liability

1 unchanged sentence

Long-term liabilities:

Deferred royalty obligation

Lease liability

Derivative liability

Total liabilities

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10,000,000 shares authorized;

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

no shares issued and outstanding at June 30, 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

50,454,170 and 50,283,574 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

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(in thousands, except share and per share data)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

Product revenue, net

License revenue

Costs and expenses:

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(Loss) income before taxes

Provision for income taxes

(Benefit from) provision for income taxes

Net (loss) income

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Net (loss) income

Unrealized loss on marketable securities

Unrealized (loss) income on marketable securities and other long-term assets

Comprehensive (loss) income

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Balance at March 31, 2022

Stock-based compensation expense

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

Unrealized gain on marketable securities

Unrealized loss on Rarestone equity

Balance at June 30, 2022

Balance at December 31, 2020

5 unchanged sentences

Balance at March 31, 2021

Stock compensation expense

Issuance of common stock in connection with exercise of stock options

Unrealized gain on marketable securities

Balance at June 30, 2021

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

2 unchanged sentences

(in thousands)

Three months ended March 31,

Six months ended June 30,

Operating activities

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Depreciation and amortization

Amortization of debt issuance costs

Non-cash rent expense

1 unchanged sentence

Prepaid expenses and other current assets

Deferred revenue

Other long-term assets

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Proceeds from sale of priority review voucher

Milestone obligation under license agreement

Purchases of property and equipment

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Proceeds from issuance of common stock from ESPP

Proceeds from royalty financing agreement

Net cash provided by financing activities

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Cash, cash equivalents and restricted cash at end of period

Supplemental disclosures:

Deferred financing costs in accrued expenses

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

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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.

(the “Company” or “we”) is a global, commercial-stage biopharmaceutical company committed to transforming the lives of patients and their families living with hyperphagia and severe obesity caused by rare melanocortin-4 receptor (MC4R) pathway diseases.

Rhythm’s precision medicine, IMCIVREE ® (setmelanotide), for which we have exclusive worldwide rights, has the potential to restore dysfunctional MC4R signaling due to impaired MC4R pathway function.

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

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.

In the United States, IMCIVREE is approved for chronic weight management in adult and pediatric patients 6 years of age and older with monogenic or syndromic obesity due to pro-opiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency as determined by U.S.

Food and Drug Administration (FDA) approved test demonstrating variants in POMC , PCSK1 or LEPR genes that are interpreted as pathogenic, likely pathogenic, or of uncertain significance (VUS), or Bardet-Biedl syndrome (BBS).

In the European Union and Great Britain, IMCIVREE is indicated 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.

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.

In July 2022, the European Medicines Agency’s Committee for Medicinal Products for Human Use (CHMP) adopted a positive opinion, recommending to expand the current indication for IMCIVREE to include the treatment of obesity and control of hunger in adult and pediatric patients 6 years of age and older with BBS.

The European Commission, which has the authority to grant and expand marketing authorizations for medicinal products in the EU, is anticipated to make a final decision on the application to expand the indication for IMCIVREE in the second half of 2022.

In addition, we are advancing a broad clinical development program for setmelanotide in patients with hyperphagia and severe obesity caused by additional rare MC4R pathway diseases to expand the approved indications in the United States and Europe.

In addition to the United States, European Union and United Kingdom, we and our partners are seeking approval for IMCIVREE to treat patients with these MC4R pathway-related obesities in Israel, China, Hong Kong and Macau.

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 has wholly owned subsidiaries in the United States, Ireland, the United Kingdom, France, Italy, the Netherlands, Germany, Spain 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.

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 may continue to 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 and six months ended June 30, 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 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.

As of June 30, 2022, the Company had an accumulated deficit of $ 626,704 .

The Company has primarily funded these losses through the proceeds from the sales of common and preferred stock, asset sales, royalty financing, out-license arrangements, 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.

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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.

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

At June 30, 2022, the Company had $ 235,596 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 fourth quarter of 2023.

Management believes that the Company's existing cash and cash equivalents and short term investments will be sufficient to fund the Company’s operations into 2024, and that such existing cash and cash equivalents and short term investments, together with the second investment tranche under the Revenue Interest Financing Agreement, or RIFA, entered into with entities managed by HealthCare Royalty Management, LLC expected in the second half of 2022, will be sufficient to fund the Company's operations into at least the second half of 2024.

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 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 condensed consolidated balance sheet as of June 30, 2022, the condensed consolidated statements of operations and comprehensive (loss) income for the three and six months ended June 30, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 and the related footnote disclosures are unaudited.

In management's opinion, the unaudited 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 and six months ended June 30, 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.

As of June 30, 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

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, 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.

Significant estimates relied upon in preparing these financial statements include estimates related to determining our net product revenue, license revenue, accruals related to research and development expenses, assumptions used to record stock-based compensation expense, interest expense on our deferred royalty obligation, assumptions used to value the embedded derivative in our deferred royalty obligation, 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 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.

At June 30, 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.

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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 .

At June 30, 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

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.

We recognize revenue in accordance with Accounting Standards Codification ASC 606, Revenue from Contracts with Customers or ASC 606, which applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements, and financial instruments.

Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:

(i) identify the contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) we satisfy a performance obligation.

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.

We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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.

Subsequent to its regulatory approval, the Company began to sell IMCIVREE in the United States in March 2021 and in France and Germany in March 2022 and June 2022, respectively.

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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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.

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 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.

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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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.

During the three and six months ended June 30, 2022 and 2021, we recorded product revenue, net, of $ 2,312 , $ 274 , $ 3,810 , and $ 309 , 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 and six months ended June 30, 2022 and 2021, due to the immateriality of the revenue recognized during the periods.

License Agreements

We generate revenue from license or similar agreements with pharmaceutical companies for the development and commercialization of certain of our products and product candidates.

Such agreements may include the transfer of intellectual property rights in the form of licenses, transfer of technological know-how, delivery of drug substances, research and development services, and participation on certain committees with the counterparty.

Payments made by the customers may include non-refundable upfront fees, payments upon the exercise of customer options, payments based upon the achievement of defined milestones, and royalties on sales of products and product candidates if they are approved and commercialized.

If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize the transaction price allocated to the license as revenue upon transfer of control of the license.

We evaluate all other promised goods or services in the agreement to determine if they are distinct.

If they are not distinct, they are combined with other promised goods or services to create a bundle of promised goods or services that is distinct.

Optional future services where any additional consideration paid to us reflects their standalone selling prices do not provide the customer with a material right and, therefore, are not considered performance obligations.

If optional future services are priced in a manner which provides the customer with a significant or incremental discount, they are material rights, and are accounted for as separate performance obligations.

We utilize judgment to determine the transaction price.

In connection therewith, we evaluate contingent milestones at contract inception to estimate the amount which is not probable of a material reversal to include in the transaction price using the most likely amount method.

Milestone payments that are not within our control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received and therefore the variable consideration is constrained.

The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

At the end of each reporting period, we re-evaluate the probability of achieving development milestone payments that may not be subject to a material reversal and, if necessary, adjust our estimate of the overall transaction price.

Any such adjustments are recorded on a cumulative catch-up basis, which would affect license and other revenue, as well as earnings, in the period of adjustment.

We then determine whether the performance obligations or combined performance obligations are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees.

We evaluate the measure of progress, as applicable, for each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded within deferred revenue.

Contract liabilities within deferred revenue are recognized as revenue after control of the goods or services is transferred to the customer and all revenue recognition criteria have been met.

For arrangements that include sales-based royalties, including sales-based milestone payments, and a license of intellectual property that is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of when the related sales occur or when the performance obligation to which some or all of the royalties have been allocated has been satisfied (or partially satisfied).

RareStone Group Ltd.

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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.

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 POMC, PCSK1 or 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 four independent sub-studies in patients with obesity due to a heterozygous variant of POMC/PCSK1 or LEPR;

certain variants of the SRCI gene, and certain variants of the SH2B1 gene.

In accordance with the terms of the RareStone License , RareStone made an upfront payment to Rhythm of $ 7,000 and issued Rhythm 1,077,586 ordinary shares.

The Company is 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 estimated the fair value of the RareStone equity to be $ 2,440 based on a preliminary valuation.

Upon completion of the valuation procedures during the three month period ended June 30, 2022, the Company concluded the initial fair value of the RareStone equity to be $ 1,040 .

The $ 1,400 change in fair value upon finalizing our valuation of the RareStone equity resulted in an adjustment to the contract liability account within our condensed consolidated financial statements.

At June 30, 2022, the Company estimated the fair value of the RareStone equity to be $ 740 based upon a valuation.

The $ 300 decline in fair value is recodered as an a component of other comprehensive (loss) income in our the condensed consolidated statements of operations and other comprehensive (loss) income for the three month period ended June 30, 2022.

The Company will remeasure the fair value of the RareStone equity on a quarterly basis.

The Company received total upfront consideration of $ 8,040 comprised of an upfront payment of $ 7,000 , and the estimated fair value of the RareStone equity of $ 1,040 .

The Company determined that the RareStone License contains two performance obligations, the delivery of the license and the supply of clinical and commercial product.

The Company further determined the supply of commercial product to RareStone contains a significant future discount and estimates the discount to be $ 1,286 , which is recorded as a component of deferred revenue on the condensed consolidated balance sheet at June 30, 2022.

The discount related to commercial manufacturing supply will be deferred and recognized over the commercial supply period.

Based on a relative fair-value allocation between the license and the manufacture of clinical and commercial product, the Company recognized $ 6,754 of license revenue during the three and six months ended June 30, 2022 as the Company fulfilled its obligations in transferring the license to RareStone.

Deferred Royalty Obligation

We treat the debt obligation to HealthCare Royalty Management, LLC as discussed further in Note 10, “Long-term Obligations”, as a deferred royalty obligation, amortized using the effective interest rate method over the estimated life of the revenue streams.

We recognize interest expense thereon using the effective rate, which is based on our current estimates of future revenues over the life of the arrangement.

In connection therewith, we periodically assess our expected revenues using internal projections, impute interest on the carrying value of the deferred royalty obligation, and record interest expense using the imputed effective interest rate.

To the extent our estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, we will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of our deferred royalty obligation.

The assumptions used in determining the expected repayment term of the deferred royalty obligation and amortization period of the issuance costs requires that we make estimates that could impact the short-term and long-term classification of such costs, as well as the period over which such costs will be amortized.

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.

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 June 30, 2022, the Company had $ 1,690 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.

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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.

No events or changes in circumstances existed to require an impairment assessment during the three or six months ended June 30, 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 March 31, 2022 and December 31, 2021 were carried at fair value, determined according to the fair value hierarchy.

The Company’s cash equivalents and marketable securities at June 30, 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.

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, 640,318 stock options and 73,259 restricted stock units were considered to be common stock equivalents for the three and six months ended June 30, 2021.

For the three and six months ended June 30, 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

Six Months Ended

Stock options

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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.

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

The 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.

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Payroll related

Deferred financing fees

Accrued expenses and other current liabilities

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.

As of June 30, 2022 and December 31, 2021, the carrying amount of cash and cash equivalents and short-term investments was $ 235,596 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

March 31, 2022 using:

June 30, 2022 using:

Cash Equivalents:

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RareStone Common Stock

Derivative on Royalty Financing

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.

The estimated fair value of the shares of RareStone equity as of our initial recording date and June 30, 2022, as well as the estimated fair value of the derivative liability related to our RIFA with HealthCare Royalty was determined using Level 3 inputs.

The fair value measurement of the RareStone equity as well as the derivative liability are 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.

The embedded derivative liability associated with our deferred royalty obligation, as discussed further in Note 10, “Long-Term Obligations”, is measured at fair value using an option pricing Monte Carlo simulation model and is included as a component of the deferred royalty obligation.

The embedded derivative liability is subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a component of other expense, net.

The assumptions used in the option pricing Monte Carlo simulation model include:

(1) our estimates of the probability and timing of related events;

(2) the probability-weighted net sales of IMCIVREE, including worldwide net product sales, upfront payments, milestones and royalties;

(3) our risk-adjusted discount rate that includes a company specific risk premium;

(4) our cost of debt;

(5) volatility;

and (6) the probability of a change in control occurring during the term of the instrument.

Our RareStone equity was valued at $ 740 at June 30, 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 ended June 30, 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.

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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

Changes in our level 3 securities for the three months ended June 30, 2022 and 2021 are as follows:

Six months ended

Beginning aggregate estimated fair value of Level 3 securities

Initial recording of RareStone equity

Total realized and unrealized gains

Unrealized gain (loss) included in other comprehensive (loss) income

Ending aggregate estimated fair value of Level 3 securities

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The following tables summarize the Company's marketable securities:

March 31, 2022

June 30, 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 March 31, 2022, the Company has not entered into any lease arrangements classified as a finance lease.

As of June 30, 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 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:

The following table presents the maturities of the Company’s operating lease liability related to office space as of June 30, 2022, all of which is under a non-cancellable operating lease:

Operating Lease

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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.

As of June 30, 2022, the Company’s finite-lived intangible assets, which totaled $ 8,311 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:

As of June 30, 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 $ 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.

Amortization expense totaled $ 216 , $ 114 , $ 346 and $ 114 for the three and six months ended June 30, 2022 and 2021, respectively.

Amortization expense is included in cost of sales in the condensed consolidated statements of operations and comprehensive (loss) income.

The Company did not record a tax provision for the three and six months ended June 30, 2022 as the Company generated sufficient tax losses during the period.

The Company recorded a tax (benefit) of ($ 5,022 ) and recorded a tax provision of $ 16,984 for the three and six month periods ended June 30, 2021, respectively, primarily related to the sale of the Rare Pediatric Disease Priority Review Voucher, or 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.

As of June 30, 2022, an aggregate of 13,300,876 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 8,735,225 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)”).

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

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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"

As of June 30, 2022, 60,565 stock option awards have been issued under the Inducement Plan.

As of June 30, 2022, 30,295 restricted stock unit awards have been granted under the Inducement Plan.

As of June 30, 2022, 909,140 shares of common stock are available for future grant under the Inducement Plan.

On November 2, 2021, the Company entered into a sales agreement, or the Sales Agreement, with Cowen and Company LLC, or Cowen, as sales agent, pursuant to which the Company 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.

As of June 30, 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.

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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.

Expenses paid directly to consultants and vendors considered to be related parties amounted to $ 498 , $ 487 , $ 978 and $ 1,097 for the three and six months ended June 30, 2022 and 2021, respectively.

Outstanding payments due to these related parties as of June 30, 2022 and December 31, 2021 were $ 66 and $ 50 , respectively, and were included within accounts payable on the balance sheet.

Long-Term Obligations

On June 16, 2022, we entered into a RIFA with entities managed by HealthCare Royalty Management, LLC, collectively referred to as the Investors.

Pursuant to the RIFA and subject to customary closing conditions, the Investors have agreed to pay the Company an aggregate investment amount of up to $ 100,000 , or the Investment Amount.

Under the terms of the RIFA, we received $ 37,500 on June 29, 2022 upon FDA approval of IMCIVREE in BBS, referred to as the Initial Investment Amount, and are entitled to receive an aggregate of up to an additional $ 37,500 of the Investment Amount fifteen business days after IMCIVREE receives EMA approval in BBS, and a remaining $ 25,000 of the Investment Amount forty-five business days following achievement of a specified amount of cumulative net sales of IMCIVREE between July 1, 2022 and September 30, 2023.

As consideration for the Investment Amount and pursuant to the RIFA, we agreed to pay the Investors a tiered royalty on our annual net revenues, or Revenue Interest, including worldwide net product sales and upfront payments and milestones.

The applicable tiered percentage will initially be 11.5 % on annual net revenues up to $ 125,000 , 7.5 % on annual

net revenues of between $ 125,000 and $ 300,000 and 2.5 % on annual net revenues exceeding $ 300,000 .

If the Investors have not received cumulative minimum payments equal to 60 % of the amount funded by the Investors to date by March 31, 2027, or 120 % of the amount funded by the Investors to date by March 31, 2029, we must make a cash payment immediately following each applicable date to the Investors sufficient to gross the Investors up to such minimum amounts after giving full consideration of the cumulative amounts paid by us to the Investors through each date, referred to as the Under Performance Payment.

As the repayment of the funded amount is contingent upon worldwide net product sales and upfront payments, milestones, and royalties, the repayment term may be shortened or extended depending on actual worldwide net product sales and upfront payments, milestones, and royalties.

The Investors’ rights to receive the Revenue Interests will terminate on the date on which the Investors have received payments equal to a certain percentage of the funded portion of the Investment Amount including the aggregate of all payments made to the Investors as of such date, each percentage tier referred to as the Hard Cap, unless the RIFA is earlier terminated.

The total Revenue Interests payable by us to the Investors is capped between 185 % and 250 % of the Investment Amount paid, dependent on the aggregate royalty paid between 2028 and 2032.

If a change of control of occurs, the Investors may accelerate payments due under the RIFA up to the Hard Cap plus any other obligations payable under the RIFA.

The repayment period commenced on July 8, 2022 for the Initial Investment Amount, and expires on the earlier of (i) the date at which the Investors received cash payments totaling an aggregate of a Hard Cap ranging from 185 % to 250 % of the Initial Investment Amount or (ii) the legal maturity date of July 8, 2034.

If the Investors have not received payments equal to 250 % of the Investment Amount by the twelve-year anniversary of the initial closing date, we will be required to pay an amount equal to the Investment Amount plus a specific annual rate of return less payments previously received by Investors.

In the event of a change of control, we are obligated to pay Investors an amount equal to the Hard Cap in effect at the time, ranging from 185 % to 250 % plus any Under Performance Payment of the Investment Amount less payments previously received by Investors.

In addition, upon the occurrence of an event of default, including, among others, our failure to pay any amounts due to Investors under the deferred royalty obligation, insolvency, our failure to pay indebtedness when due, the revocation of regulatory approval of IMCIVREE in the U.S.

or our breach of any covenant contained in the RIFA and our failure to cure the breach within the prescribed time frame, we are obligated to pay Investors an amount equal to the Hard Cap in effect at the time of default ranging from 185 % to 250 % plus any Under Performance Payment of the Investment Amount less payments previously received by Investors.

In addition, upon an event of default, Investors may exercise all other rights and remedies available under the RIFA, including foreclosing on the collateral that was pledged to Investors, which consists of all of our present and future assets relating to IMCIVREE.

We have evaluated the terms of the RIFA and concluded that the features are similar to those of a debt instrument.

Accordingly, we have accounted for the transaction as long-term debt and presented it as a deferred royalty obligation on our condensed consolidated balance sheets.

We have further evaluated the terms of the RIFA and determined that the repayment of the Hard Cap in effect at the time which ranges from 185 % to 250 % of the Investment Amount, less any payments made to date, upon a change of control is an embedded derivative that requires bifurcation from the debt instrument and fair value recognition.

We determined the fair value of the derivative using an option pricing Monte Carlo simulation model taking into account the probability of change of control occurring and potential repayment amounts and timing of such payments that would result under various scenarios, as further described in Note 2, “Summary of Significant Accounting Policies” to our condensed consolidated financial statements.

The aggregate fair value of the embedded derivative liability was $ 1,590 as of June 30, 2022.

We will remeasure the embedded derivative to fair value each reporting period until the time the features lapse and/or termination of the deferred royalty obligation.

The carrying value of the deferred royalty obligation at June 30, 2022 was $ 34,273 based on $ 37,500 of proceeds, net of the fair value of the bifurcated embedded derivative liability upon execution of the RIFA, and debt issuance costs incurred.

The carrying value of the deferred royalty obligation approximated fair value at June 30, 2022 and was measured using Level 3 inputs.

The estimated fair market value was calculated using an option pricing Monte Carlo simulation model with inputs consistent with those used in determining the embedded derivative values as described in Note 2, “Summary of Significant Accounting Policies.” The effective interest rate as of June 30, 2022 was 24 %.

In connection with the deferred royalty obligation, we incurred debt issuance costs totaling $ 1,684 .

Debt issuance costs have been netted against the debt and are being amortized over the estimated term of the debt using the effective interest method, adjusted on a prospective basis for changes in the underlying assumptions and inputs.

The assumptions used in determining the expected repayment term

of the debt and amortization period of the issuance costs requires that we make estimates that could impact the short and long-term classification of these costs, as well as the period over which these costs will be amortized.

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

What changed 10-Q

Item 1. Financial Statements