What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-05-03 · 191 added, 103 removed, 182 unchanged (62% of the section changed)

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

We are a global, a 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.

We are a global, a 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 ® (or setmelanotide), for which we have exclusive worldwide rights, has the potential to restore dysfunctional MC4R pathway signaling and 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 is the first-ever therapy developed for patients with certain rare genetic diseases of obesity that is approved or authorized in the United States, European Union (EU) or Great Britain.

IMCIVREE was approved by the U.S.

FDA in November 2020 for chronic weight management in adult and pediatric patients 6 years of age and older with obesity due to proopiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency confirmed by genetic testing demonstrating variants in POMC, PCSK1, or LEPR genes that are interpreted as pathogenic, likely pathogenic, or of uncertain significance.

The European Commission (EC) and Great Britain’s Medicines & Healthcare Products Regulatory Agency (MHRA), in July and September 2021, respectively, granted marketing authorization to IMCIVREE for the treatment of obesity and the control of hunger associated with genetically confirmed loss-of-function biallelic POMC, including PCSK1, deficiency or biallelic LEPR deficiency in adults and children 6 years of age and above.

These approvals were based on Phase 3 data demonstrating a statistically significant and clinically meaningful reduction of weight and hunger in patients 12 years old or older with severe obesity due to POMC, PCSK1 or LEPR deficiency.

In addition to the United States and Europe/UK, we and our partners are seeking approval for IMCIVREE to treat patients with these genetic obesities in Israel, China, Hong Kong and Macau.

Additionally, we are seeking regulatory approvals in the United States and Europe for setmelanotide to treat obesity and control hunger in patients with Bardet-Biedl syndrome (BBS) or Alström syndrome.

In November 2021, we announced the U.S.

Food and Drug Administration (FDA) has accepted for filing our supplemental New Drug Application (sNDA) for setmelanotide seeking to expand the approved label to include patients with BBS or Alström syndrome and granted us priority review for this sNDA.

The FDA has assigned a Prescription Drug User Fee Act (PDUFA) goal date of

June 16, 2022 for this sNDA.

We are advancing physician and patient education and engagement efforts, patient identification and other strategies in support of a potential United States commercial launch of setmelanotide for the treatment of obesity and hyperphagia in patients with BBS and potentially Alström syndrome.

Also a Type II variation application to the European Medicines Agency (EMA) 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.

We anticipate that the EMA’s Committee for Medicinal Products for Human Use (CHMP) will make its recommendation on the Company’s Type II variation application in the third quarter of 2022.

We are advancing efforts to achieve market access for BBS in EU member countries and the UK, as well.

IMCIVREE is the first-ever therapy developed for patients with hyperphagia and severe obesity caused by certain rare MC4R pathway diseases that is approved or authorized in the United States, European Union (EU) or Great Britain.

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 a 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 EU 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.

In the fourth quarter of 2022, the European Commission is anticipated to make a final decision on our Type II variation application the application to expand the indication for setmelanotide to treat obesity and control of hunger in adult and pediatric patients 6 years of age and older with BBS.

In July 2022, the European Medicines Agency’s (EMA) Medicinal Committee for Products for Human Use (CHMP) adopted a positive opinion, recommending this expansion of the current indication for IMCIVREE to include BBS.

In addition to United States, EU and UK, we and our partners are seeking approval and or market access for IMCIVREE to treat patients with these MC4R pathway-related obesities in Argentina, Israel, China, Hong Kong and Macau.

Following FDA approval on June 16, 2022, we launched our commercial efforts to bring IMCIVREE to patients in the United States living with BBS.

We are advancing efforts to achieve market access for BBS in EU member countries and the UK as well, pending EC authorization and local approvals.

We also are advancing a broad clinical development program evaluating setmelanotide in several ongoing clinical trials, and we are leveraging what we believe is the largest known DNA database focused on obesity - with approximately 45,000 sequencing samples as of December 31, 2021 - to improve the understanding, diagnosis and care of people living with severe obesity due to certain variants in genes associated with the MC4R pathway.

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We also have initiated the Phase 2 DAYBREAK clinical trial designed to evaluate setmelanotide in patients who carry a confirmed variant in one or more of 10 additional genes with strong or very strong relevance to the MC4R pathway.

Our broad clinical program evaluating setmelanotide in rare diseases of obesity also includes the ongoing exploratory Phase 2 Basket study, an ongoing Phase 2 study evaluating setmelanotide in patients with hypothalamic obesity, a Phase 3 study in pediatric patients with MC4R pathway deficiencies between the ages of 2 and 6 years old, and a potential registration-enabling study with our once-weekly formulation of setmelanotide.

Our broad clinical programs evaluating setmelanotide in rare MC4R pathway diseases also includes the ongoing exploratory Phase 2 Basket study, an ongoing Phase 2 study evaluating setmelanotide in patients with hypothalamic obesity, a Phase 3 study in pediatric patients with MC4R pathway deficiencies between the ages of 2 and 6 years old, and a potential registration-enabling study with our once-weekly formulation of setmelanotide.

Additionally, as an FDA post-marketing requirement, we are currently evaluating the effects of setmelanotide on the QT interval corrected for heart rate, or QTc interval, in healthy volunteers.

We expect to announce preliminary data from the ongoing Phase 2 study in patients with hypothalamic obesity and new data from the ongoing exploratory Phase 2 Basket Study in the middle of 2022.

We also intend to seek input from the FDA on a pivotal Phase 3 trial in hypothalamic obesity, which we plan to initiate in early 2023.

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

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

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

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

Additional recent clinical, regulatory and commercial updates include:

On May 3, 2022, we announced that the first patients have been treated with IMCIVREE in France under the paid early access program.

The French Haute Autorité de Santé (HAS) granted paid early access for IMCIVREE for patients with POMC, PCSK1 or LEPR deficiency obesity in January 2022.

In addition, we announced that we anticipate releasing preliminary data from the ongoing Phase 2 study in patients with hypothalamic obesity and new data from the ongoing exploratory Phase 2 Basket Study evaluating setmelanotide in patients with obesity due to a variant in the MC4 receptor in mid-2022.

On May 3, 2022, we also announced that six abstracts were accepted for presentation at the Endocrine Society Annual Meeting & Expo (ENDO), being held on June 11-14, 2022 in Atlanta, Georgia.

Jesús Argente, Universidad Autónoma de Madrid in Spain, will deliver an oral presentation of 12-month data from long-term extension trials of setmelanotide in patients with obesity due to heterozygous variants in POMC, PCSK1, and LEPR.

In addition, five abstracts will be delivered as poster presentations, including:

● Long-term Efficacy of Setmelanotide in Patients With Obesity Due to POMC, PCSK1, and LEPR Biallelic Deficiency;

● Setmelanotide in Patients with Heterozygous POMC, LEPR, SRC1, or SH2B1 Obesity:

Design of EMANATE – A Placebo-Controlled Phase 3 Trial;

● Long-term Efficacy of Setmelanotide in Patients with Bardet-Biedl Syndrome;

● Body Mass Index and Weight Reductions in Patients with SRC1 Genetic Variant Obesity After 1 Year of Setmelanotide;

● Body Mass Index and Weight Reduction in Patients with SH2B1 Genetic Variant Obesity After 1 Year of Setmelanotide.

On May 3, 2022, we also announced that on April 22, 2022, the CHMP recommended the EC approve a modification to the summary product characteristics (SmPC) for IMCIVREE for biallelic POMC, PSCK1 or LEPR deficiency that would allow for treating patients who have moderate or severe renal impairment with an adjustment for more gradual dose escalation and a lower maximum dose.

The final EC decision on this amendment is anticipated to come in July 2022, and this same dosing modification request is being considered as part of the scheduled review for BBS.

On May 2, 2022, we announced the presentation of new data supporting the potential for setmelanotide to treat the early-onset obesity, hyperphagia, and metabolic impairment associated with BBS.

This cumulative safety data from across the setmelanotide clinical development program demonstrated, that treatment was generally well tolerated consistent with prior clinical experience.

These data were presented at the Pediatric Endocrine Society (PES) 2022 Virtual Annual Meeting, held April 28 - May 1, 2022.

On April 6, 2022, we announced the first patient was enrolled in its Phase 3 EMANATE trial.

We also announced modifications to the trial design for EMANATE to focus on rare patient populations that we believe have the highest likelihood of success.

After receiving feedback from the FDA in April 2022 that indicated that additional clinical trials to support potential registration for non-rare patient populations would likely be required, we eliminated a fifth sub-study intended to evaluate setmelanotide in patients with a PCSK1 N221D variant.

EMANATE now includes four independent sub-studies, evaluating setmelanotide in patients with obesity due to a heterozygous variant of the POMC or PCSK1 gene, the LEPR gene, the SRC1 gene or the SH2B1 gene.

In the POMC/PCSK1 and LEPR sub-studies, we will focus enrollment on heterozygous variants classified as pathogenic and likely pathogenic, as initially planned.

In addition, instead of enrolling across the entire spectrum of variants of uncertain significance (VUS), we will focus on patients with suspected pathogenic variants, or a subset of VUS, which are most likely to impair MC4R pathway function.

We anticipate an enrollment period of 12-18 months to complete enrollment of approximately 400 patients in the trial.

Also on April 6, 2022, we announced modifications to the enrollment criteria in our Phase 2 DAYBREAK trial, which began enrolling patients in January 2022, to focus initially on rare variants associated with 10 prioritized MC4R-relevant genes, which we and key opinion leaders believe have the highest probability of success.

The trial is now expected to enroll approximately 100 to 200 patients with hyperphagia and severe obesity and a variant in one of these 10 genes.

We decided to pause the enrollment of patients with variants in additional MC4R pathway genes and will evaluate expansion of DAYBREAK to these genes based on the early clinical data from the prioritized genes.

On August 2, 2022, we announced that more than 35 physicians have written more than 50 prescriptions for IMCIVREE in the first six weeks since IMCIVREE was approved by the FDA on June 16, 2022 for chronic weight management in adult and pediatric patients 6 years of age and older with obesity due to BBS.

On August 2, 2022, we announced we had completed enrollment in our Phase 3 study evaluating setmelanotide in pediatric patients with MC4R pathway deficiencies between the ages of 2 and 6 years old.

On July 22, 2022, we announced that the EMA’s 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.

On July 19, 2022, we announced that the French National Agency for Medicines and Health Products Safety (ANSM) and Haute Autorité de santé (HAS) granted post-marketing authorization AP1 (autorisation d’accès précoce), or early access authorization, for setmelanotide for chronic weight management in adult and pediatric patients 6 years old and older with monogenic or syndromic obesity due to BBS.

On July 18, 2022, we announced that the National Institute for Health and Care Excellence (NICE)in the United Kingdom has issued guidance that recommends IMCIVREE as an option for treating obesity and controlling hunger caused by POMC, PCSK1 or LEPR deficiency in people 6 years of age and over, which means IMCIVREE will be funded and available for use within 90 days in the National Health Service in England and Wales.

On July 12, 2022, we announced positive interim results from the Phase 2 clinical trial evaluating setmelanotide for the treatment of severe obesity and hyperphagia in people living with hypothalamic obesity.

We estimate that there are approximately 5,000 to 10,000 patients living with hypothalamic obesity in the United States.

The Phase 2 clinical trial is a multi-center, open-label, proof-of-concept study that enrolled 18 patients with hypothalamic obesity who are between 6 and 28 years old.

The Phase 2 clinical trial consists of 16 weeks of treatment with setmelanotide administered once daily by subcutaneous injection, including an initial period of dose titration.

The primary endpoint is the percentage of patients who achieve more than 5 percent reduction in body mass index (“BMI”) from baseline after 16 weeks of treatment, compared to a historic control of less than 5 percent in this population.

As of the data cutoff date of May 6, 2022, 11 patients were evaluable for assessment, including nine patients who completed 16 weeks of treatment and two patients who discontinued early.

Data highlights from the interim analysis of the full analysis set (n=11) include, as of the cutoff date of May 6, 2022:

• 100 percent of patients achieved a BMI decrease of more than 5 percent;

• 17.2 percent mean percentage change in BMI (range:

-37.2 percent, -6.7 percent);

• 15.8 percent mean change (range:

-34.9 percent, -6.7 percent) in body weight from baseline weight of 107.1 kgs (range:

39.0, 141.4 kgs) or 236.1 lbs;

• 15.9 kgs (range:

-28.2, -6.7) or -35.1 lbs mean weight loss from baseline.

Data highlights from the interim analysis of completers (n=9) include, as of the cutoff date of May 6, 2022:

• 19.5 mean percent change in BMI (range:

-37.2 percent, -10 percent);

• 17.8 mean percent change (range:

-34.9 percent, -10.7 percent) in body weight from baseline weight of 107.8 kg (range:

39.0 kgs, 141.4 kgs) or 236.1 lbs;

• 17.8 kgs (range:

-28.2, -9.5) or -37.7 lbs mean weight loss from baseline.

Setmelanotide also achieved a meaningful reduction in hunger scores.

The mean change in hunger score for patients older than 12 years old who completed 16 weeks on therapy (n=7) was -2.7 on a scale of 1-10, with 10 being most hungry.

Consistent with prior clinical experience in other rare MC4R pathway diseases, setmelanotide was observed to be generally well tolerated.

The most frequently reported treatment-emergent adverse events included nausea, vomiting, COVID-19, diarrhea and injection site reactions.

Of the 18 patients enrolled in this Phase 2 clinical trial, three discontinued due to adverse events, each of whom had achieved a reduction in BMI of more than 5 percent at the time they discontinued, and one patient was discontinued due to documented non-compliance to therapy.

In total, 14 of the 18 patients enrolled in this Phase 2 clinical trial remained on setmelanotide therapy as of July 11, 2022.

We plan to present the full data from the 18 patients enrolled in this Phase 2 clinical trial at an upcoming medical meeting in the fall of 2022.

Based on the positive interim results from the Phase 2 clinical trial, we intend to proceed to Phase 3 clinical development following consultation with regulatory agencies

On June 22, 2022, we announced the launch of IMCIVREE in Germany for patients with POMC, PCSK1 or LEPR deficiency obesity.

IMCIVREE is the first precision medicine designed to induce weight loss and control of hunger that has received a lifestyle exemption from the German Federal Joint Committee, which means it is now eligible for national coverage and reimbursement.

The Company also anticipates launching IMCIVREE in the U.K.

and Italy for patients with POMC, PCSK1 or LEPR deficiencies.

Also on June 22, 2022, we announced that the EC authorized a variation for IMCIVREE that allows for dosing in patients aged 6 years or older with POMC or LEPR deficiency who have mild, moderate or severe renal impairment.

On June 16, 2022, we announced that the U.S.

FDA approved IMCIVREE for chronic weight management in adult and pediatric patients 6 years of age and older with obesity due to BBS.

Also on June 16, 2022, we announced a non-dilutive revenue interest financing agreement, or RIFA with HealthCare Royalty Partners, LLC, or HealthCare Royalty, for a total investment amount of up to $100 million.

In exchange for the total investment amount to be received by Rhythm, HealthCare Royalty will receive a tiered royalty based on global net product sales generated by IMCIVREE.

For additional information, see Note 10, “Long-term Obligations” to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

On June 13, 2022, at the Endocrine Society Annual Meeting & Expo (ENDO), we presented new data from our long-term extension (LTE) trial, which showed continued body mass index (BMI) and weight reductions in patients with BBS or POMC or LEPR deficiency obesity (biallelic) receiving between 18 months and three years of setmelanotide therapy.

Also at ENDO, we presented initial data from the LTE trial demonstrating continued BMI and weight reductions in patients with SH2B1 or SRC1 deficiency obesity, or with POMC or LEPR insufficiency obesity (heterozygous).

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

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

To date, we have generated less than $10.0 million of revenue from product sales and we have financed our operations primarily through the proceeds received from the sales of common and preferred stock, asset sales, as well as capital contributions from the former parent company, Rhythm Holdings LLC.

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

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In December 2021, we entered into an Exclusive License Agreement with RareStone Group Ltd., and received $7.0 million in connection with the execution of that agreement.

In June 2022, we entered into the RIFA with entities managed by HealthCare Royalty and received proceeds of $37.3 million, net of certain transaction costs at closing.

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

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

in the first quarter of 2021 and following marketing authorizations in the EU and Great Britain, we are pursuing a country-by-country strategy to establish market access and reimbursement for IMCIVREE in several countries.

As noted above, during March, 2022, we treated the first patients with IMCIVREE in France under the paid early access program.

in the first quarter of 2021 and patients 6 years of age and older with obesity due to BBS during June 2022.

Following marketing authorizations in the EU and Great Britain, we are pursuing a country-by-country strategy to establish market access and reimbursement for IMCIVREE in several countries.

During March 2022, we treated the first patients with IMCIVREE in France under the paid early access program and we treated the first patients with IMCIVREE in Germany during June 2022.

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

We intend to build our own marketing and commercial sales infrastructure and we may enter into collaborations with other parties for certain markets outside the United States.

However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable

terms, or at all.

However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, or at all.

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

As of March 31, 2022 we had an accumulated deficit of $581.7 million.

Our net losses were $52.8 million, and our net income was $43.8 million, for the three months ended March 31, 2022 and 2021, respectively.

As of June 30, 2022 we had an accumulated deficit of $626.7 million.

Our net (loss) income was ($45.0) million, ($35.4) million, ($97.8) million and $8.4 million for the three and six months ended June 30, 2022 and 2021, respectively.

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

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● continue to operate as a public company.

As of March 31, 2022, our existing cash and cash equivalents and short-term investments were approximately $241.0 million.

We expect that the changes to the EMANATE and DAYBREAK trials discussed above, coupled with a streamlining of our planned global network of clinical trial sites, will result in meaningful cost savings.

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

As of June 30, 2022, our existing cash and cash equivalents and short-term investments were approximately $235.6 million.

We expect that our previously announced changes to the EMANATE and DAYBREAK trials, coupled with a streamlining of our planned global network of clinical trial sites, will result in meaningful cost savings.

We expect that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations into 2024 , and that such existing cash and cash equivalents and short-term investments, together with the second investment tranche under the RIFA expected in the second half of 2022, will enable us to fund our operating expenses into at least the second half of 2024.

Corporate Background

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

The impact of COVID-19 on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the

pandemic, the impact of variants, evolving travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, the ultimate impact on financial markets and the global economy, the effectiveness of vaccines and vaccine distribution efforts and the effectiveness of other actions taken in the United States and other countries to contain and treat the disease.

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

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

Financial Operations Overview

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

To date, we have generated less than $10.0 million of revenue from product sales.

Our lead product candidate, IMCIVREE, was approved by the FDA in November 2020 for chronic weight management in adult and pediatric patients six years of age and older with obesity due to POMC, PCSK1 or LEPR deficiency confirmed by genetic testing.

IMCIVREE became commercially available in the United States in the first quarter of 2021.

We recorded our first sales of IMCIVREE in the United States in March 2021 and we made our first sales in France during March 2022 under the paid early access program.

We recorded our first sales of IMCIVREE in the United States in March 2021 and we made our first sales in France during March 2022 under the

paid early access program.

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

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

Accordingly, the costs for IMCIVREE included in our cost of sales for the three months ended March 31, 2022 were insignificant.

Accordingly, the costs for IMCIVREE included in our cost of sales for the three months ended June 30, 2022 were insignificant.

We expect cost of sales to increase in 2022 as we continue to sell inventory that is produced after we began capitalizing IMCIVREE commercial inventory.

We continue to evaluate the impact of this previously expensed inventory on the future cost of product sales, however we do not expect there to be a signicant impact based on the cost structure of the product.

We continue to evaluate the impact of this previously expensed inventory on the future cost of product sales, however we do not expect there to be a significant impact based on the cost structure of the product.

Research and development expenses

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Three Months Ended

Six Months Ended

Research and development summary

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

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

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

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

Other significant costs include rent, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

Other significant costs include rent, legal fees relating to patent and corporate matters and fees for accounting, tax and consulting services.

The following table summarizes our current selling, general and administrative expenses:

Three Months Ended

Six Months Ended

Selling, general and administrative summary

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Results of Operations

Comparison of the three months ended March 31, 2022 and 2021

The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021, together with the changes in those items in dollars and as a percentage:

Comparison of the three months ended June 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021, together with the changes in those items in dollars and as a percentage:

Three Months Ended

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Product revenue, net

License revenue

Costs and expenses:

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Loss from operations

Other (loss) income, net

Other income, net

Loss before taxes

Benefit from income taxes

NM=Not meaningful

Product revenue, net .

Product revenue, net increased to $2.3 million for the three months ended June 30, 2022.

There was no significant product revenue in the comparative period.

The FDA approved our lead product candidate, IMCIVREE in November 2020 and we recorded our first sales of IMCIVREE in March 2021.

We expect our sales of IMCIVREE to continue to increase following the FDA approval for the treatment of patients with BBS in the United States during June 2022.

To date, substantially all of our product revenue has been generated in the United States.

During March 2022, we completed our first sales of IMCIVREE in France through an early access program.

During June 2022, we completed our first sales of IMCIVREE in Germany.

License revenue.

License revenue increased to $6.8 million for the three months ended June 30, 2022 and was entirely related to the license we granted to RareStone in December 2021 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.

We completed our activities required to transfer the license to RareStone during three month period ending June 30, 2022, which resulted in the recognition of the license revenue.

We do not expect to recognize additional license revenue related to the RareStone arrangement during 2022.

Cost of sales.

Cost of sales increased to $0.4 million for the three months ended June 30, 2022.

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

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

Accordingly, the costs for IMCIVREE included in our cost of sales for the three months ended June 30, 2022 and 2021 were insignificant and primarily reflect the amortization of our capitalized sales based milestone payment made to Ipsen Pharma S.A.S., or Ipsen, upon our first commercial sale in the United States and European Union, as well as a royalty due to Ipsen on our net product sales.

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

Research and development expense.

Research and development expense increased by $6.4 million to $31.5 million in 2022 from $25.1 million in 2021, an increase of 25%.

The increase was primarily due to the following:

● an increase of $4.6 million in our clinical trial costs associated with new and planned clinical trials, including our Phase 2 DAYBREAK and Phase 3 EMANATE trials, Phase 3 pediatrics trial, QTc study, Phase 2 hypothalamic obesity study, and increased enrollment in our long-term extension study;

these increases were partially offset by reduced activity due to the winding down of our BBS, Phase 2 Basket and GO-ID studies;

● an increase of $1.3 million in compensation and benefits due to the hiring of additional full-time employees in order to support the growth of our research and development programs and expansion of regulatory affairs operations;

● an increase of $0.7 million due to increased gene sequencing costs to support our expanded clinical programs;

● an increase of $1.0 million in costs associated with support for regulatory filings and for clinical supply material .

The above increases were partially offset by:

● a decrease of $1.2 million in costs associated with medical affairs.

Selling, general and administrative expense.

Selling, general and administrative expense increased by $6.9 million to $22.3 million in 2022 from $15.5 million in 2021, an increase of 44%.

The increase was primarily due to the following:

● an increase of $5.0 million related to increased costs associated with commercial operations, sales and marketing activities for IMCIVREE in connection with preparing for the U.S approval for BBS obtained in June 2022;

● an increase of $1.0 million due to increased compensation and benefits related costs associated with additional headcount to support our expanding business operations as well as to build out our commercial operations in the United States and internationally ;

● an increase of $1.0 million due to increased costs associated with office support and insurance costs for our expanding workforce.

Other income, net.

Other income increased by $0.1 million for the three months ended June 30, 2022.

The increase was primarily due to improving interest rates during the period.

Provision for income taxes.

There is no provision for income taxes for the three months ended June 30, 2022, as we project to generate operating losses during the year.

We recorded an income tax benefit of $5.0 million as a result of the sale of our PRV during the three months ended June 30, 2021.

Net loss increased by $9.6 million to $45.0 million for the three months ended June 30, 2022, from net loss of $35.4 million for the three months ended June 30, 2021.

The increase in net loss was a result of higher costs as noted above, offset by current period revenues, and the non recurring nature of the impact of a tax benefit related to the sale of our PRV in the prior year period.

Comparison of the six months ended June 30, 2022 and 2021

The following table summarizes our results of operations for the six months ended June 30, 2022 and 2021, together with the changes in those items in dollars and as a percentage:

Six Months Ended

(in thousands)

Statement of Operations Data:

Product Revenue, net

License revenue

Costs and expenses:

Cost of sales

Research and development

Selling, general, and administrative

Total costs and expenses

Loss from operations

Other income, net

(Loss) income before taxes

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Product revenue, net.

Product revenue, net increased to $1.5 million for the three month period ended March 31, 2022.

Product revenue, net increased to $3.8 million for the six months ended June 30, 2022 .

There was no significant product revenue in the comparative period.

The FDA approved our lead product candidate, IMCIVREE in November 2020 and we recorded our first sales of IMCIVREE in March 2021.

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

We expect our sales of IMCIVREE to continue to increase following the FDA approval for the treatment of patients with BBS in the United States during June 2022.

To date, substantially all of our product revenue has been generated in the United States.

During March 2022, we completed our first sales of IMCIVEE in France through an early access program.

During March 2022, we completed our first sales of IMCIVREE in France through an early access program.

During June 2022, we completed our first sales of IMCIVREE in Germany.

License revenue.

License revenue increased to $6.8 million for the three months ended June 30, 2022 and was entirely related to the RareStone license.

We completed our activities required to transfer the license to RareStone during six month period ending June 30, 2022 which resulted in the recognition of the license revenue.

We do not expect to recognize additional license revenue related to the RareStone arrangement during 2022.

Cost of sales.

Cost of sales increased to $0.2 million for the three month period ended March 31, 2022.

There were no significant cost of sales in the comparative prior period.

Cost of sales increased to $0.6 million for the six months ended June 30, 2022.

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

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

Accordingly, the costs for IMCIVREE included in our cost of sales for the three months ended March 31, 2022 were insignificant and primarily reflect the amortization of our capitalized sales based milestone payment made to Ipsen Pharma S.A.S., or Ipsen upon our first commercial sale as well as a royalty due to Ipsen on our net product sales.

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

Accordingly, the costs for IMCIVREE included in our cost of sales for the six months ended June 30, 2022 were insignificant and primarily reflect the amortization of our capitalized sales based milestone payment made to Ipsen Pharma S.A.S., or Ipsen, upon our first commercial sale in the United States and European Union, as well as a royalty due to Ipsen on our net product sales.

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

Research and development expense.

Research and development expense increased by $12.6 million to $32.5 million in 2022 from $19.9 million in 2021, an increase of 63%.

Research and development expense increased by $19.0 million to $64.0 million in the six months ended June 30, 2022 from $45.0 million in the six months ended June 30, 2021, an increase of 42%.

The increase was primarily due to the following:

● an increase of $14.0 million in our clinical trial costs associated with new and planned clinical trials, including our Phase 2 DAYBREAK and Phase 3 EMANATE trials, Phase 3 pediatrics trial, QTc study, Phase 2 hypothalamic obesity study, and increased enrollment in our long-term extension study.

these increases were partially offset by activtivty in our BBS, basket as well as GO-ID studies;

increases were partially offset by reduced activity due to the completion and winding down of our BBS, Phase 2 Basket, renal and GO-ID studies;

● an increase of $4.2 million due to increased purchases of clinical supply material;

● an increase of $1.0 million in development milestones earned by Camurus AB, or Camurus related to development milestone achieved related to our weekly formulation;

● an increase of $1.5 million in compensation and benefits due to the hiring of additional full-time employees in order to support the growth of our research and development programs and expansion of regulatory affairs operations;

● an increase of $1.2 million due to increased gene sequencing costs;

● an increase of $1.0 million in development milestones earned by Camurus AB, or Camurus, related to development milestone achieved related to our weekly formulation;

● an increase of $0.5 million to support regulatory filings.

The above increases were partially offset by:

● a decrease of $2.0 million in costs asscoated with medical affair consulting costs.

● a decrease of $3.2 million in costs associated with medical affairs.

Selling, general and administrative expense.

Selling, general and administrative expense increased by $6.9 million to $21.4 million in 2022 from $14.5 million in 2021, an increase of 48%.

Selling, general and administrative expense increased by $13.8 million to $43.8 million in the six months ended June 30, 2022 from $30.0 million in the six months ended June 30, 2021, an increase of 46%.

The increase was primarily due to the following:

● an increase of $7.3 million related to increased costs associated with commercial operations, sales and marketing activities for IMCIVREE in connection with preparing for the U.S approval for BBS obtained in June 2022;

● an increase of $4.4 million due to increased compensation and benefits related costs associated with additional headcount to support our expanding business operations as well as to build out our commercial operations in the United States and internationally ;

● an increase of $2.3 million related to marketing activities for IMCIVREE;

● an increase of $1.0 million due to increased costs associated with office support and insurance costs for our expanding workforce;

● an increase of $0.2 million due to increased professional fees and consulting services to support the build out of our commercial operations in the United States and internationally as well as corporate legal and consulting support for our international expansion ;

● an increase of $2.0 million due to increased costs associated with information technology, international office space, sponsorships and general corporate travel related expenses for our expanding workforce.

Other income, net.

Other income decreased by $100.2 million.

Other income decreased by $100.1 million in the six months ended June 30, 2022.

The decrease was primarily due to the sale of our PRV in February 2021.

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Provision for income taxes.

There is no provision for income taxes for the three months ended March 31, 2022, as we project to generate operating losses during the year.

We recorded a provision for income taxes of $22.0 million as a result of the sale of our PRV during the three months ended March 31, 2021.

Net loss increased by $96.5 million to $52.8 million for the three months ended March 31, 2022, from net income of $43.8 million for the three months period ended March 31, 2021.

The increase in net loss was a result of the non-recurring nature of our PRV sale in 2021, which resulted in $100.0 million of other income during the prior year period.

There is no provision for income taxes for the six months ended June 30, 2022, as we project to generate operating losses during the year.

We recorded a provision for income taxes of $17.0 million as a result of the sale of our PRV during the six months ended June 30, 2021.

Net (loss) income .

Net loss increased by $106.1 million to $97.8 million for the six months ended June 30, 2022, from net income of $8.4 million for the six months ended June 30, 2021.

The increase in net loss was primarily a result of the non-recurring nature of our PRV sale in 2021, which resulted in $100.0 million of other income during the prior year period, as well as higher costs in the current year as noted above.

Liquidity and Capital Resources

As of March 31, 2022, our cash and cash equivalents and short-term investments were approximately $241.0 million.

The following table provides information regarding our cash flows for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

As of June 30, 2022, our cash and cash equivalents and short-term investments were approximately $235.6 million.

The following table provides information regarding our cash flows for the six months ended June 30, 2022 and 2021:

Six Months Ended June 30,

(in thousands)

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

Net cash used in operating activities was $53.6 million for the three months ended March 31, 2022 and consisted primarily of a net loss of $47.9 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, depreciation and amortization and rent expense.

The change in operating assets and liabilities reflected a total use of cash of approximately $2.6 million from an increase in accounts payables and accrued expenses and other current liabilities primarily associated with our royalty payment owed to Ipsen, coupled with a decrease of $3.2 million in other long-term assets and prepaid expenses and other current assets.

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

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

Net cash used in operating activities was $92.4 million for the six months ended June 30, 2022 and consisted primarily of a net loss of $87.3 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, depreciation and amortization and rent expense.

The change in operating assets and liabilities reflected a total use of cash of approximately $4.5 million from a decrease in other long-term assets, prepaid expenses and other current assets coupled with a $0.6 million decrease in accounts payable, deferred revenue and accrued expenses and other current liabilities.

Net cash used in operating activities was $65.4 million for the six months ended June 30, 2021 and consisted primarily of a net loss of $63.4 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, the gain on the sale of the PRV, a deferred provision for income taxes, depreciation and amortization and rent expense.

The change in operating assets and liabilities reflected a total use of cash of approximately $0.6 million from an increase in accounts payables and accrued expenses associated with our CROs, CMOs, and consultants due to the timing of payments, coupled with an increase of $1.2 million in prepaid expenses.

Net cash provided by (used in) investing activities

Net cash provided by investing activities was $72.5 million for the three months ended March 31, 2022 and relates to the $112.1 million of maturities of short-term investments, offset by $39.5 million of purchases of short-term investments, and $0.1 million related to the purchase of property plant and equipment.

Net cash used in investing activities was $145.7 million for the three months ended March 31, 2021 relates to the $245.7 million of net purchases of short-term investments, offset by the $100.0 million in proceeds from the sale of the PRV.

Net cash provided by investing activities was $108.5 million for the six months ended June 30, 2022 and relates to $163.1 million of maturities of short-term investments, partially offset by $50.4 million of purchases of short-term investments, a $4.0 million milestone obligation payment under our license agreement with Ipsen and $0.2 million related to the purchase of property plant and equipment.

Net cash used in investing activities was $132.2 million for the six months ended June 30, 2021 and relates to $226.9 million of net purchases of short-term investments and $5.0 million for the acquisition of an intangible asset, partially offset by the $100.0 million in proceeds from the sale of the PRV.

Net cash provided by financing activities

Net cash provided by financing activities was $0.4 million for the three months ended March 31, 2022, which represents the net proceeds of the issuance of common stock from our 2017 Employee Stock Purchase Plan, or the ESPP.

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

Net cash provided by financing activities was $37.9 million for the six months ended June 30, 2022, which represents the net proceeds from the RIFA coupled with the net proceeds of the issuance of common stock from our 2017 Employee Stock Purchase Plan, or the ESPP.

Net cash provided by financing activities was $166.0 million for the six months ended June 30, 2021, which represents the net proceeds of $161.7 million from our common stock offering in February 2021 and $4.2 million of cash proceeds from the exercise of stock options and the issuance of common stock from the ESPP.

Revenue Interest Financing Agreement

On June 16, 2022, we announced a non-dilutive revenue interest financing agreement, or RIFA, with HealthCare Royalty Partners, LLC, or HealthCare Royalty, for a total investment amount of up to $100 million.

In exchange for the total investment amount to be received by Rhythm, HealthCare Royalty will receive a tiered royalty based on global net product sales generated by IMCIVREE.

For additional information, see Note 10, “Long-term Obligations” to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q .

Funding requirements

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

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

We expect that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations into 2024, and that such existing cash and cash equivalents and short-term investments, together with the second investment tranche under the RIFA expected in the second half of 2022, will enable us to fund our operating expenses into at least the second half of 2024.

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

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

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

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

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

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Contractual obligations

As of March 31, 2022, there were no material changes to our principal contractual obligations and commitments as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

As of June 30, 2022, apart from additional contractual obligations under our RIFA as disclosed in Note 10, “Long-Term Obligations”, to the unaudited condensed consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q, there were no other material changes to our principal contractual obligations and commitments as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Recent Accounting Pronouncements

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Quantitative and Qualitative Disclosures About Market Risk

As of March 31, 2022, there were no material changes to our quantitative and qualitative disclosures about market risks as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

As of June 30, 2022, there were no material changes to our quantitative and qualitative disclosures about market risks as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis