What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 150 added, 76 removed, 208 unchanged (52% of the section changed)

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the success, cost and timing of our product development activities and clinical trials;

our financial performance, including our expectations regarding

our existing cash, operating losses, expenses and sources of future financing;

our financial performance, including our expectations regarding our existing cash, operating losses, expenses and sources of future financing;

the sufficiency of our cash, cash equivalents and short-term investments to fund our operations;

the anticipated commercial sales milestone payment from Healthcare Royalty Partners;

our ability to hire and retain necessary personnel;

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and other statements identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “likely,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms are forward-looking statements.

These forward-looking statements are neither promises nor guarantees of future performance, and are subject to a variety of known and unknown risks and uncertainties, many of which are beyond our control, and other important factors which could cause actual results to differ materially from those contemplated in such forward-looking statements.

These forward-looking statements are neither promises nor guarantees of future performance, and are subject to a variety of

known and unknown risks and uncertainties, many of which are beyond our control, and other important factors which could cause actual results to differ materially from those contemplated in such forward-looking statements.

We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including but not limited to those set forth in Part II, Item 1A under the heading “Risk Factors” of this Quarterly Report on Form 10-Q.

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We are focused on advancing our lead asset, IMCIVREE ® (setmelanotide), as a precision medicine designed to treat hyperphagia and severe obesity caused by rare melanocortin-4 receptor (MC4R) pathway diseases.

While obesity affects hundreds of millions of people worldwide, we are advancing IMCIVREE for a subset of individuals who have hyperphagia, a pathological hunger, and severe obesity due to an impaired MC4R pathway, which may be caused by traumatic injury or genetic variants.

While obesity affects hundreds of millions of people worldwide, we are advancing IMCIVREE for a subset of individuals who have hyperphagia, a pathological hunger that leads to abnormal food-seeking behaviors, and severe obesity due to an impaired MC4R pathway, which may be caused by traumatic injury or genetic variants.

The MC4R pathway is an endocrine pathway in the brain that is responsible for regulating hunger, caloric intake and energy expenditure, which consequently affect body weight.

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

We have achieved market access for IMCIVREE for BBS or POMC and LEPR deficiencies, or both, in nine countries including the United States, and we continue to collaborate with authorities to achieve and or expand access in additional markets.

We have achieved market access for IMCIVREE for BBS or POMC and LEPR deficiencies, or both, in ten countries in addition to the United States, and we continue to collaborate with authorities to achieve and or expand access in additional markets.

In addition to initial commercial efforts, we are advancing what we believe is the most comprehensive clinical research program ever initiated in MC4R pathway diseases, with multiple ongoing and planned Phase 2 and Phase 3 clinical trials evaluating setmelanotide.

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In our Phase 2 trial evaluating setmelanotide as a treatment for hypothalamic obesity, as announced in November 2022, 16 of 18 patients achieved the primary endpoint with a body mass index (BMI) decrease greater than 5 percent on setmelanotide therapy, and we observed a 14.5 mean percent reduction in BMI across all patients.

On May 2, 2023, we announced that the first patients were dosed in our pivotal Phase 3 trial evaluating setmelanotide in patients with acquired hypothalamic obesity.

On August 1, 2023, we provided an update on progress of our pivotal, Phase 3 clinical trial evaluating setmelanotide in patients with acquired hypothalamic obesity.

The Phase 3 clinical trial is designed to enroll 120 patients aged 4 years or older randomized 2:1 to setmelanotide therapy or placebo for a total of 60 weeks, including up to eight weeks for dose titration.

The primary endpoint is the percent change in BMI after approximately 52 weeks on a therapeutic regimen of setmelanotide versus placebo.

Key secondary

endpoints include the proportion of patients who achieve ≥5% reduction in BMI from baseline in adults (≥18) or BMI Z-score reduction of ≥0.2 from baseline in pediatrics after approximately 52 weeks on a therapeutic regimen of compared with placebo, and mean change in the weekly average of the daily most hunger score in patients ≥12 years from baseline after approximately 52 weeks on a therapeutic regimen of setmelanotide versus placebo.

We anticipate completing enrollment in this trial in the first quarter of 2024.

Key secondary endpoints include the proportion of patients who achieve ≥5% reduction in BMI from baseline in adults (≥18) or BMI Z-score reduction of ≥0.2 from baseline in pediatrics after approximately 52 weeks on a therapeutic regimen of compared with placebo, and mean change in the weekly average of the daily most hunger score in patients ≥12 years from baseline after approximately 52 weeks on a therapeutic regimen of setmelanotide versus placebo.

We anticipate completing enrollment in this trial during the fourth quarter of 2023.

In addition, our ongoing pivotal Phase 3 EMANATE and Phase 2 DAYBREAK trials are designed to evaluate setmelanotide in several distinct, genetically defined MC4R pathway diseases.

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The Breakthrough Therapy designation currently covers indications for POMC deficiency obesity, LEPR deficiency obesity, BBS and, as of November 2022, hypothalamic obesity.

Additional recent clinical, regulatory and commercial updates include:

On February 27, 2023, we completed the acquisition of Xinvento B.V.

(Xinvento), a Netherlands-based biotech company focused on developing therapies for congenital hyperinsulinism (CHI).

At closing, Rhythm BV, pursuant to a Share Purchase Agreement, or the Purchase Agreement, with Xinvento, acquired all of the issued and outstanding shares of Xinvento for aggregate consideration of $5 million, as adjusted pursuant to the terms of the Purchase Agreement and subject to the distribution and payment terms set forth therein.

In addition, the Purchase Agreement provides for the payment of additional consideration totaling up to $206.0 million upon achievement of certain development, regulatory and commercial milestones by Xinvento.

CHI is a rare genetic disease in which cells secrete excess insulin, causing hypoglycemia, which can result in serious health outcomes including seizures, coma, permanent brain damage and death.

We plan to expand our pipeline into CHI, a rare disease that is well aligned with our corporate strategy and our focus on rare endocrinology indications.

On May 2, 2023, we announced that we had received more than 300 new prescriptions for IMCIVREE for BBS from more than 175 physicians in the United States with reimbursement approvals for more than 160 of those prescriptions from FDA approval between June 16, 2022 to March 31, 2023.

More than 100 of the total new prescriptions were written in the first quarter of 2023.

On April 24, 2023, we also announced the commercial launch of IMCIVREE in Germany for the treatment of obesity and control of hunger associated with BBS with federal reimbursement.

The German Federal Joint Committee (G-BA) previously ruled that IMCIVREE is eligible for reimbursement by Statutory Health Insurances for BBS based on its unanimous vote to exclude IMCIVREE from its lifestyle exemption list for patients with BBS.

On March 27, 2023, we announced the publication of research in the peer-reviewed journal Advances in Therapy that demonstrated setmelanotide improved hyperphagia and reduced obsessive focus on food and body weight in patients

with BBS and the publication of an assessment of the substantial impact of severe hyperphagia on patients’ quality of life in the open-access journal Obesity Science and Practice .

Additional recent clinical, regulatory, corporate and commercial updates include:

On August 1, 2023, we announced that more than 425 prescriptions for IMCIVREE for BBS were written in the United States from FDA approval through June 30, 2023, from more than 250 physicians and with reimbursement approvals for more than 250 of those prescriptions.

More than 125 of the total new prescriptions were written in the second quarter of 2023.

On August 1, 2023, we provided an update on progress of our pivotal, Phase 3 clinical trial evaluating setmelanotide in patients with acquired hypothalamic obesity.

Based on the initial pace of patient screening and site activations, we now expect to complete enrollment in the fourth quarter of 2023.

Also on August 1, 2023, we announced that in July 2023, we achieved a commercial sales milestone under the Revenue Interest Financing Agreement (RIFA) with HealthCare Royalty Partners LLC (HealthCare Royalty Partners) entered into in June 2022.

In connection with the achievement of the milestone, we became eligible for a final investment tranche of $24.4 million net of debt issuance costs from HealthCare Royalty Partners.

We previously received two tranches totaling $72.3 million net of debt issuance costs under the RIFA.

Also on August 1, 2023, we announced that we anticipate submitting an investigational new drug application, or IND, for RM-718, a new, weekly, MC4R-specific agonist, by the end of 2023.

RM-718 is designed to be more targeted, potent and MC1R sparing, with the potential to not cause hyperpigmentation.

This new product candidate is being developed as a weekly injection administered through an autoinjector, for which we have composition of matter patent protection into 2041, including patent term adjustment and patent term extension.

Also on August 1, 2023, we announced that IMCIVREE is now commercially available in Canada following the May 2023 approval by Health Canada of IMCIVREE for weight management in adult and pediatric patients 6 years of age and older with obesity due to BBS or genetically-confirmed biallelic pro-opiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1), or leptin receptor (LEPR) deficiency due to variants interpreted as pathogenic, likely pathogenic or of uncertain significance.

On July 19, 2023, we announced two new publications detailing the burden of hyperphagia and obesity for adult caregivers, families and patients living with Bardet-Biedl Syndrome (BBS) based on results of The CAREgiver Burden in BBS (CARE-BBS) study were published in the peer-reviewed journal, The Orphanet Journal of Rare Diseases .

On June 17, 2023, at the Endocrine Society Annual Meeting & Expo (ENDO), we presented new data from the long-term extension portion of our Phase 2 trial evaluating setmelanotide in patients with hypothalamic obesity.

The data showed sustained and deepening reductions in weight and body mass index (BMI) in patients receiving at least six months of setmelanotide therapy.

As of a data cutoff of November 30, 2022, 13 patients had achieved a 21.0 mean percent

reduction in BMI at month six from baseline, which progressed from a 16.8 mean percent reduction at week 16 across these 13 patients.

We also expect to achieve the following near-term milestones:

● Present data analyses from the Phase 2 and long-term extension trials in hypothalamic obesity in the fall of 2023;

● Complete regulatory review by Health Canada and, pending approval, make IMCIVREE commercially available in Canada for the treatment of BBS, or POMC, PCSK1 or LEPR deficiencies in the second half of 2023;

● Initiate a Phase 3, randomized, double-blind trial in patients naïve to setmelanotide therapy (“de novo study”) to evaluate the weekly formulation of setmelanotide in patients with BBS in the second half of 2023;

● Announce preliminary data from the open-label part of the Phase 2 DAYBREAK trial from one or more genetically defined cohorts in the second half of 2023;

● Announce topline data from the ongoing Phase 3, open-label pediatrics trial evaluating one year of setmelanotide therapy in patients with MC4R pathway deficiencies between the ages of two and six years old in the second half of 2023;

● Announce topline data from the ongoing Phase 3 switch trial evaluating a weekly formulation of setmelanotide in the second half of 2023;

● Provide an update on early-stage R&D efforts in the fourth quarter of 2023, including details of the CHI pre-clinical development program and IND expected in 2024.

● Announce data from the ongoing Phase 3 switch trial evaluating a weekly formulation of setmelanotide in the second half of 2023;

● Complete patient enrollment in the pivotal Phase 3 clinical trial in hypothalamic obesity in the fourth quarter of 2023;

● Provide an update on pre-clinical development programs, including RM-718 and our congenital hyperinsulinism (CHI) program, in the fourth quarter of 2023, with INDs anticipated for RM-718 by the end of 2023 and for CHI in 2024;

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

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in February 2021.

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 Revenue Interest Financing Agreement, or RIFA, with entities managed by HealthCare Royalty Partners, LLC, or HealthCare Royalty, and received cumulative proceeds of $73.2 million, net of certain transaction costs at closing.

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 Partners, collectively referred to as the Investors, and received cumulative proceeds of $73.2 million, net of certain transaction costs at closing.

Additionally, there is $25.0 million of additional proceeds available to us under our RIFA if certain sales-based milestones are achieved during 2023.

We gave notice to the Investors on July 28, 2023 that we have achieved the specified sales-based milestones under the RIFA, and as such, expect to receive proceeds of $24.4 million, net of debt issuance costs, in the third quarter of 2023.

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.

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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, 2023 we had an accumulated deficit of $762.2 million.

Our net losses were $52.2 million and $52.8 million, for the three months ended March 31, 2023 and 2022, respectively.

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

We expect our expenses will increase substantially in connection with our ongoing activities, as we:

As of June 30, 2023 we had an accumulated deficit of $808.9 million.

Our net loss was $46.7 million, $98.9 million, $45.0 million and $97.8 million, for the three and six months ended June 30, 2023 and 2022, respectively.

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

Our expenses may increase in connection with our ongoing activities, as we:

● continue to conduct clinical trials for setmelanotide;

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● take into account the levels, timing and collection of revenue earned from sales of IMCIVREE and other products approved in the future, if any;

● advance our pre-clinical development programs, including RM-718 and our CHI program;

● continue to operate as a public company.

As of March 31, 2023, our existing cash and cash equivalents and short-term investments were approximately $294.6 million.

We expect that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations into 2025.

As of June 30, 2023, our existing cash and cash equivalents and short-term investments were approximately $253.6 million.

We expect that our existing cash and cash equivalents and short-term investments, together with the anticipated $24.4 million milestone payment net of debt issuance costs from HealthCare Royalty Partners, will be sufficient to fund our operations into 2025.

Corporate Background

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

Accordingly, the product cost component related to IMCIVREE included in cost of sales for the three months ended March 31, 2023 and 2022 was insignificant.

We expect cost of sales to increase in 2023 as we continue to sell inventory that is produced after we began capitalizing manufacturing costs for IMCIVREE commercial inventory.

We do not expect there to be a significant impact to our cost of sales based on the cost structure of the product.

Accordingly, the product cost component related to IMCIVREE included in cost of sales for the three and six months ended June 30, 20232022 was insignificant.

We expect cost of sales to increase in 2023 as we sell inventory that is produced after we began capitalizing manufacturing costs for IMCIVREE commercial inventory and experience increased enrollment in our patient assistance programs.

Research and development expenses

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● facilities, depreciation, and other expenses, which include rent and maintenance of facilities, insurance and other operating costs.

● Acquired in process research and development costs associated with the acquisition of Xinvento B.V., or Xinvento.

We expense research and development costs to operations as incurred.

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Three Months Ended

Six Months Ended

Research and development summary

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Three Months Ended

Six Months Ended

Selling, general and administrative summary

Selling, general and administrative expense

We anticipate that our selling, general and administrative expenses will increase in the future to support continued and expanding commercialization efforts for IMCIVREE in the United States and the European Union as well as increased costs of operating as a global commercial stage biopharmaceutical public company.

We anticipate that our selling, general and administrative expenses will increase in the future to support our continued and expanding commercialization efforts for IMCIVREE in the United States and the European Union as well as increased costs of operating as a global commercial stage biopharmaceutical public company.

These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, compliance with local rules and regulations in the United States and foreign jurisdictions, exchange listing and Securities and Exchange Commission (SEC) expenses, insurance and investor relations costs, among other expenses.

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Results of Operations

Comparison of the three months ended March 31, 2023 and 2022

The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022, together with the changes in those items in dollars and as a percentage:

Comparison of the three months ended June 30, 2023 and 2022

The following table summarizes our results of operations for the three months ended June 30, 2023 and 2022, 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

Total revenues

Costs and expenses:

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Product revenue, net .

Product revenue, net increased by $10.0 million to $11.5 million for the three months ended March 31, 2023 from $1.5 million for the three months ended March 31, 2022, an increase of 666%.

During the three months ended March 31, 2023 and 2022, a substantial amount of our product revenue, or 83% and 98%, respectively, has been generated in the United States.

Product revenue, net increased by $16.9 million to $19.2 million for the three months ended June 30, 2023 from $2.3 million for the three months ended June 30, 2022, an increase of 731%.

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 in June 2022 and ten other countries since then.

During the three months ended June 30, 2023 and 2022, a substantial amount of our product revenue, or 86%, respectively, has been generated in the United States.

License revenue.

License revenue decreased from $6.8 million for the three months ended June 30, 2022 to zero, or a decrease of 100%.

The license revenue recognized in 2022 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 the 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 2023.

Cost of sales.

Cost of sales increased by $1.2 million to $1.4 million for the three months ended March 31, 2023, an increase of 518%.

Cost of sales increased by $1.9 million to $2.2 million for the three months ended June 30, 2023, an increase of 492%.

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

Accordingly, the product cost component related to IMCIVREE included in our cost of sales for the three months ended March 31, 2023 and 2022 was insignificant.

Accordingly, the product cost component related to IMCIVREE included in our cost of sales for the three months ended June 30, 2022 was insignificant.

Cost of sales primarily reflects a royalty due to Ipsen Pharma S.A.S., or Ipsen, on our net product sales and the amortization of our capitalized sales-based milestone payment made to Ipsen, upon our first commercial sale in the U.S.

Specifically, the $1.2 million increase in cost of sales for the three months ended March 31, 2023 was due to $0.5 million of additional royalties due to our growth in sales, $0.6 million attributed to product cost primarily associated with higher sales volume and product distributed for our patient assistance program, and $0.1 million of additional amortization.

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

and EU, the cost of product, as well as costs associated with our patient assistance programs.

Specifically, the $1.9 million increase in cost of sales for the three months ended June 30, 2023 was due to $0.8 million of additional royalties due to our growth in sales, $0.8 million attributed to product cost primarily associated with higher sales volume and $0.3 million of product costs for our patient assistance program.

We expect cost of sales as a percentage of product revenue, net to be in a range of 11% to 13% during 2023.

Research and development expense.

Research and development expense increased by $5.4 million to $37.9 million in 2023 from $32.5 million in 2022, an increase of 17%.

Research and development expense increased by $2.1 million to $33.5 million for the three months ended June 30, 2023 from $31.5 million for the three months ended June 30, 2022, an increase of 7%.

The net increase was primarily due to the following:

● the purchase of in-process research and development assets of $5.4 million from Xinvento;

● an increase of $2.4 million in our clinical trial costs associated with increased activity in our Phase 2 DAYBREAK and Phase 3 EMANATE trials as well as our long-term extension and Phase 3 hypothalamic obesity trials.

These costs were partially offset by reduced activity due to the completion and winding down of our Phase 2 hypothalamic obesity study, QTc trial, BBS trial, Phase 2 Basket trial, Phase 3 pediatrics trial and our renal study and our de novo and switch trials;

● an increase of $1.6 million in salaries, benefits and stock-based compensation related to the hiring of additional full-time employees in order to support the growth of our research and development programs;

● an increase of $0.6 million due to increased safety and toxicology costs;

● an increase of $0.6 million due to increased gene sequencing costs to support our expanded clinical programs.

The above increases were partially offset by:

● a decrease of $2.8 million in our clinical trial costs associated with the impact of study design amendments to our reduced activity due to the completion and winding down of our Phase 2 hypothalamic obesity study, Phase 2 DAYBREAK, QTc trial, BBS trial, Phase 2 Basket trial, Phase 3 pediatrics trial and our renal study, long-term extension and switch trials.

These decreases were partially offset by increased activity in our Phase 3 EMANATE trials, and Phase 3 hypothalamic obesity study;

● a decrease of $3.1 million in costs associated with the manufacturing of clinical material.

Selling, general and administrative expense.

Selling, general and administrative expense increased by $7.7 million to $30.0 million for the three months ended June 30, 2023 from $22.3 million for the three months ended June 30, 2022, an increase of 35%.

The increase was primarily due to the following:

● an increase of $6.3 million due to increased salaries, benefits and stock-based compensation 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 $2.5 million related to professional services costs, including legal and tax services;

● an increase of $1.2 million due to increased costs associated with information technology, international office space, sponsorships and general corporate travel related expenses for our expanding workforce.

The above increases were partially offset by:

● a decrease of $1.8 million related to costs associated with sales and marketing activities for IMCIVREE in preparation of BBS launch during the prior year.

Other income (expense), net.

Other income (expense), net was ($0.1) million for the three months ended June 30, 2023.

Total other income (expense), net for the three months ended June 30, 2023 consists of $3.1 million of interest expense related to our RIFA with HealthCare Royalty Partners, a $0.1 million fair market value adjustment related to our RIFA embedded derivative and $0.1 million of net realized foreign currency loss.

The expense was offset by interest income of $3.2 million earned by our short-term investments.

Net loss increased by $1.7 million to $46.7 million for the three months ended June 30, 2023,

from net loss of $45.0 million for the three months ended June 30, 2022.

The increase in net loss was a result of

higher current period operating costs and expenses, as noted above, partially offset by increased revenues.

Comparison of the six months ended June 30, 2023 and 2022

Six Months Ended

(in thousands)

Statement of Operations Data:

Product revenue, net

License revenue

Total revenues

Costs and expenses:

Cost of sales

Research and development

Selling, general, and administrative

Total costs and expenses

Loss from operations

Other income (loss), net

Product revenue, net .

Product revenue, net increased by $26.9 million to $30.7 million for the six months ended June 30, 2023 from $3.8 million for the six months ended June 30, 2022, an increase of 706%.

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 in June 2022 and in ten other countries since then.

During the six months ended June 30, 2023 and 2022, a substantial amount of our product revenue, or 85% and 90%, respectively, has been generated in the United States.

License revenue.

License revenue decreased by $6.8 million for the six months ended June 30, 2023 to zero, or a decrease of 100%.

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 2023.

Cost of sales.

Cost of sales increased by $3.0 million to $3.7 million for the six months ended June 30, 2023, an increase of 501%.

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

Accordingly, the product cost component related to IMCIVREE included in our cost of sales for the six months ended June 30, 2022 was insignificant.

and EU, the cost of product as well as costs associated with our patient assistance programs.

Specifically, the $3.0 million increase in cost of sales for the six months ended June 30, 2023 was due to $1.3 million of additional royalties due to our growth in sales, $1.3 million attributed to product cost primarily associated with higher sales volume and $0.4 million of product costs for our patient assistance program.

We expect cost of sales as a percentage of product revenue, net to be in a range of 11% to 13% during 2023.

Research and development expense.

Research and development expense increased by $7.5 million to $71.5 million for the six months ended June 30 2023 from $64.0 million for the six months ended June 30, 2022, an increase of 12%.

The net increase was primarily due to the following:

● an increase of $5.7 million in our research and development costs related to in process research and development asset acquired in the Xinvento acquisition;

● an increase of $4.1 million in salaries, benefits and stock-based compensation related to the hiring of additional full-time employees in order to support the growth of our research and development programs;

● an increase of $2.3 million due to increased gene sequencing costs to support our expanded clinical programs;

● an increase of $1.4 million in our next generation assets;

● an increase of $0.6 million due to increased safety and toxicology costs.

The above increases were partially offset by:

● a decrease of $4.8 million in costs associated with the manufacturing of clinical material;

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

● a decrease of $0.4 million in our clinical trial costs associated with decreased activity in our long-term extension trials as well as the completion and winding down of our Phase 2 hypothalamic obesity study, QTc trial, BBS trial, Phase 2 Basket trial, Phase 3 pediatrics trial and our renal study and our de novo and switch trials partially offset by increased activity in our Phase 2 DAYBREAK, Phase 3 EMANATE and our Phase 3 hypothalamic obesity trials.

Selling, general and administrative expense.

Selling, general and administrative expense increased by $3.2 million to $24.6 million in 2023 from $21.4 million in 2022, an increase of 15%.

Selling, general and administrative expense increased by $10.9 million to $54.7 million for the six months ended June 30, 2023 from $43.8 million for the six months ended June 30, 2022, an increase of 25%.

The increase was primarily due to the following:

● an increase of $2.6 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 $9.3 million due to increased salaries, benefits and stock-based compensation 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 $2.8 million related to professional services costs;

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Other income (expense), net.

Other income (expense), net increased by $0.4 million to $0.4 million for the three months ended March 31, 2023.

Total other income (expense), net for the three months ended March 31, 2023 consists of interest income of $3.4 million primarily due to improved interest rates, partially offset by $3.0 million of interest expense related to our RIFA with HealthCare Royalty and a $0.1 million fair market value adjustment related to our RIFA embedded derivative.

Net loss decreased by $0.6 million to $52.2 million for the three months ended March 31, 2023,

from net loss of $52.8 million for the three months ended March 31, 2022.

The decrease in net loss was a result of

higher product revenue, net and other income (expense), net, offset by higher current period costs and expenses, as noted above.

Other (income) expense, net was $0.2 million for the six months ended June 30, 2023.

Total other (income) expense, net for the six months ended June 30, 2023 consists of interest income of $6.4 million primarily due to improved interest rates, partially offset by $6.2 million of interest expense related to our RIFA with HealthCare Royalty Partners.

The fair market value adjustment related to our RIFA embedded derivative for the six months ended June 30, 2023 was de minimis.

Net loss increased by $1.1 million to $98.9 million for the six months ended June 30, 2023, from net loss of $97.8 million for the six months ended June 30, 2022.

The increase in net loss was a result of higher current period operating costs and expenses, as noted above partially offset by increased revenues.

Liquidity and Capital Resources

As of March 31, 2023, our cash and cash equivalents and short-term investments were approximately $294.6 million.

The following table provides information regarding our cash flows for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

As of June 30, 2023, our cash and cash equivalents and short-term investments were approximately $253.6 million.

The following table provides information regarding our cash flows for the six months ended June 30, 2023 and 2022:

Six Months Ended June 30,

(in thousands)

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

Net cash used in operating activities was $36.4 million for the three months ended March 31, 2023 and consisted primarily of a net loss of $52.2 million adjusted for non-cash items of $9.9 million, which consisted of non-cash stock-based compensation, depreciation and amortization, rent expense and the change in the fair value of our embedded derivative liability.

Our net loss also includes $5.4 million of acquired IPR&D assets, which are classified as investing activities.

The change in operating assets and liabilities provided cash of approximately $0.4 million primarily driven by a net increase in accounts payable and accrued expenses of $5.2 million due to the timing of payments, offset by increases in accounts receivable and inventory of $4.5 million and a net increase in prepaid expenses and other assets of $0.3 million.

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 $52.8 million, adjusted for non-cash items of $4.9 million, 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 $5.8 million from an increase in other long-term assets of $6.7 million, offset by a decrease of $0.9 million in prepaid expenses.

Net cash used in operating activities was $77.5 million for the six months ended June 30, 2023 and consisted primarily of a net loss of $98.9 million adjusted for non-cash items of $22.6 million, which consisted of non-cash stock-based compensation, depreciation and amortization, rent expense and the change in the fair value of our embedded derivative liability.

Our net loss also includes $5.7 million of acquired In-Process Research and Development (IPR&D) assets, which are classified as investing activities.

The change in operating assets and liabilities used net cash of approximately $6.1 million, primarily driven by a net increase in accounts payable and accrued expenses of $5.8 million due to the timing of payments, offset by increases in accounts receivable and inventory of $10.9 million and a net increase in prepaid expenses and other assets of $1.9 million.

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 of $10.5 million, 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 provided by investing activities

Net cash provided by investing activities was $18.5 million for the three months ended March 31, 2023 and relates to $92.7 million of maturities of short-term investments, partially offset by $69.6 million of purchases of short-term investments.

Net cash provided by investing activities was $66.7 million for the six months ended June 30, 2023 and relates to $217.2 million of maturities of short-term investments, partially offset by $145.1 million of purchases of short-term investments.

We also used approximately $5.4 million to acquire Xinvento’s IPR&D assets and $0.1 million to the purchase of property plant and equipment.

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 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) provided by financing activities

Net cash used in financing activities was $0.1 million for the three months ended March 31, 2023, which comprised of a $1.3 million RIFA payment partially offset by $1.2 million of cash proceeds from the exercise of stock options and the issuance of common stock from our 2017 Employee Stock Purchase Plan, or the ESPP.

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

Net cash used in financing activities was $1.1 million for the six months ended June 30, 2023, which comprised of $2.7 million of RIFA payments partially offset by $1.6 million of cash proceeds from the exercise of stock options and the issuance of common stock from our 2017 Employee Stock Purchase Plan, or the ESPP.

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

Revenue Interest Financing Agreement

On June 16, 2022, we announced a non-dilutive Revenue Interest Financing Agreement, or RIFA, with HealthCare Royalty, for a total investment amount of up to $100 million.

On June 16, 2022, we announced a non-dilutive Revenue Interest Financing Agreement, or RIFA, with HealthCare Royalty Partners, 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.

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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 be sufficient to fund our operations into 2025.

We expect that our existing cash and cash equivalents and short-term investments, together with the anticipated $24.4 million milestone payment, net of debt issuance costs from HealthCare Royalty Partners, will be sufficient to fund our operations into 2025.

Our cash and cash equivalents are maintained at financial institutions in amounts that exceed federally-insured limits.

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● the costs, timing and outcome of regulatory review of our setmelanotide program;

● the obligations owed to Ipsen, Camurus and Takeda pursuant to our license agreements;

● the obligations owed to Ipsen, Camurus and Takeda Pharmaceutical Company Limited pursuant to our license agreements;

● the obligations owed to Xinvento pursuant to our purchase agreement

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Contractual obligations

As of March 31, 2023, apart from additional contractual obligations under our acquisition of Xinvento as disclosed in Note 3, “Asset Acquisition”, 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, 2022.

As of June 30, 2023, apart from additional contractual obligations under our acquisition of Xinvento as disclosed in Note 3, “Asset Acquisition”, 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, 2022.

Quantitative and Qualitative Disclosures About Market Risk

As of March 31, 2023, 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, 2022.

As of June 30, 2023, 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, 2022.

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