What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-01 · 136 added, 127 removed, 231 unchanged (53% of the section changed)

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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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expectations surrounding our manufacturing arrangements;

the potential financial impact, growth prospects and benefits of our acquisition of Xinvento B.V.;

the impact of the novel coronavirus, or COVID-19, pandemic and the current economic slowdown on our business and operations and our future financial results;

the potential financial impact, growth prospects and benefits of our

acquisition of Xinvento B.V.;

the impact of the current economic slowdown on our business and operations and our future financial results;

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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or (ii) Bardet-Biedl syndrome (BBS).

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.

The European Commission (EC) Great Britain’s Medicines & Healthcare Products Regulatory Agency (MHRA) and Health Canada 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 ten countries in addition to the United States, and we continue to collaborate with authorities to achieve and or expand access in additional markets.

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

Fourteen of these patients transitioned from this Phase 2 trial into our open-label, long-term extension trial and they remain on therapy, as of November .

Twelve of these 14 patients had achieved a 25.5% reduction in mean BMI from baseline at one year on setmelanotide therapy.

On November 7, 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.

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.

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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.

On November 7, 2023, we announced that more than 100 international patients across 11 countries cumulatively have initiated reimbursed IMCIVREE therapy, as of October 27, 2023.

On November 7, 2023, we provided an update on progress of our pivotal, Phase 3 clinical trial evaluating setmelanotide in patients with acquired hypothalamic obesity.

Approximately two-thirds of planned patients have been screened with a very low screen-failure rate observed.

We also affirmed our expectation to complete enrollment in the fourth quarter of 2023.

This Phase 3 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.

On November 2, 2023, we announced that the Canadian Agency for Drugs and Technologies in Health (CADTH) recommended IMCIVREE ® (setmelanotide) be reimbursed by CADTH-participating public drug plans for weight management in adult and pediatric patients 6 years of age and older with obesity due to BBS.

During The Obesity Society’s Annual Meeting at ObesityWeek ® October 14 - 17, 2023 in Dallas, we and our collaborators delivered a total of six presentations, including data showing that setmelanotide therapy resulted in sustained and deepened weight loss in patients with severe obesity caused by rare MC4R pathway diseases.

Long-term extension study data in patients with hypothalamic obesity (n=12) demonstrate a 25.5% reduction in mean BMI from baseline on setmelanotide therapy at one year.

We also presented data that showed intervention with setmelanotide may reduce the risk of future metabolic syndrome, cardiovascular disease (CVD) and type 2 diabetes mellitus (T2DM) in patients with obesity due BBS or due to POMC or LEPR deficiency obesity;

and research that showed severity of obesity was associated with increased prevalence of cardiac, endocrine/diabetes, and renal outcomes early in life based on an analysis of 318 pediatric patients with BBS enrolled in the Clinical Registry Investigating BBS (CRIBBS).

During the 61st Annual European Society for Paediatric Endocrinology (ESPE) meeting September 21-23, 2023 in The Hague, Netherlands, we delivered four oral presentations, including data presentations on the effects of setmelanotide on the metabolic syndrome severity score in pediatric patients with BBS and in pediatric patients with

POMC or LEPR deficiencies, as well as genetic testing results we believe deepen the understanding of the genetics of obesity from its Rare Obesity Advanced Diagnosis™ (ROAD) testing program.

On September 6, 2023, we announced that a new International Classification of Diseases, Tenth Revision (ICD-10) diagnosis code for BBS, as approved by the Centers for Disease Control and Prevention (CDC), was to take effect Oct.

This BBS-specific code may improve patient identification and yield data to improve understanding of disease progression, and diagnostic and treatment journey.

On September 19, 2023, we announced that the European Medicines Agency (EMA) issued a positive opinion on the Company’s orphan drug designation request for setmelanotide as a treatment for acquired hypothalamic obesity.

On August 7, 2023, we announced that the French National Agency for Medicines and Health Products Safety (ANSM) and French National Authority for Health (HAS) granted pre-marketing early access authorization AP1 (Autorisation d’Accès Précoce), for IMCIVREE ® (setmelanotide) for patients with lesional hypothalamic obesity.

Products included in the AP1 programs are fully covered by France’s National Health System and Rhythm can expect to be reimbursed for any patients receiving treatments through this program.

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;

● 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 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;

● 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 2024.

● Complete submission to the U.S.

Food and Drug Administration of an investigational new drug application for RM-718, a new, weekly, MC4R-specific agonist, by the end of 2023.

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

● Announce preliminary data from the open-label part of the Phase 2 DAYBREAK trial from approximately five genetically-defined cohorts in the fourth quarter of 2023;

● Provide pharmacokinetic and tolerability data from the ongoing Phase 3 switch trial evaluating a weekly formulation of setmelanotide in the fourth quarter of 2023.

On November 7, 2023, we also announced plans to provide an update on our MC4R pathway programs during a breakfast event for investors and analysts on December 6, 2023 in Boston.

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

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

Since our initial public offering, or IPO, on October 10, 2017 and our underwritten follow-on offerings through October 2022, we have raised aggregate net proceeds of approximately $742.6 million through the issuance of our common stock after deducting underwriting discounts, commissions and offering related transaction costs.

Since our initial public offering, or IPO, on October 10, 2017 and our underwritten follow-on and at-the-market offerings through September 2023, we have raised aggregate net proceeds of approximately $791.5 million through the issuance of our common stock after deducting underwriting discounts, commissions and offering related transaction costs.

We also received $100.0 million from an asset sale, specifically in connection with the sale of our Rare Pediatric Disease Priority Review Voucher, or PRV, to Alexion Pharmaceuticals, Inc.

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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 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.

In June 2022, we entered into the RIFA, with entities managed by HealthCare Royalty Partners, collectively referred to as the Investors, and through September 30, 2023 have received cumulative proceeds of $96.7 million, net of certain transaction costs.

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 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.

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 have built our own marketing and commercial sales infrastructure in the United States

and are in the process of building a similar infrastructure in several European markets and the United Kingdom.

We have built our own marketing and commercial sales infrastructure in the United States and are in the process of building a similar infrastructure in several European markets and the United Kingdom.

We may enter into collaborations with other parties for certain markets outside the United States.

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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 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.

As of September 30, 2023 we had an accumulated deficit of $853.1 million.

Our net loss was $44.2 million, $142.7 million, $40.9 million and $138.6 million, for the three and nine months ended September 30, 2023 and 2022, respectively.

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

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● continue to operate as a public company.

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.

As of September 30, 2023, our existing cash and cash equivalents and short-term investments were approximately $299.3 million.

We expect that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations into 2026.

Corporate Background

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Financial Operations Overview

To date, we have generated less than $55.0 million of revenue from product sales.

To date, we have generated approximately $73.0 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.

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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.

IMCIVREE was approval by the FDA and the EC in adult and pediatric patients six years of age and older with obesity due to BBS in June and September 2022, respectively.

IMCIVREE was approval by the FDA and the EC in adult and pediatric patients six years

of age and older with obesity due to BBS in June and September 2022, respectively.

Following these approvals for BBS, we expect our sales of IMCIVREE will continue to grow as we identify and treat more patients with this disease and obtain reimbursement throughout the international markets in which we operate.

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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 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.

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

We expect cost of sales to continue to increase during the remainder of 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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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Research and development summary

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Selling, general and administrative summary

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These items are monitored and analyzed by us for changes in facts and circumstances on an ongoing basis, and material changes in these estimates could occur in the future.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the

carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

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Results of Operations

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:

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

The following table summarizes our results of operations for the three months ended September 30, 2023 and 2022, together with the changes in those items in dollars and as a percentage:

Three Months Ended

September 30,

(in thousands)

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Product revenue, net

License revenue

Total revenues

Costs and expenses:

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Other income (expense), net

(Loss) income before taxes

Provision for income taxes

Product revenue, net .

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%.

Product revenue, net increased by $18.2 million to $22.5 million for the three months ended September 30, 2023 from $4.3 million for the three months ended September 30, 2022, an increase of 425%.

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.

During the three months ended September 30, 2023 and 2022, a substantial amount of our product revenue, or 80% and 81%, respectively, has been generated in the United States.

Cost of sales.

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

Cost of sales increased by $1.9 million to $2.4 million for the three months ended September 30, 2023 from $0.5 million for the three months ended September 30, 2022, increase of 385%.

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 June 30, 2022 was insignificant.

Accordingly, the product cost component related to IMCIVREE included in our cost of sales for the three months ended September 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.

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.

Specifically, the $1.9 million increase in cost of sales for the three months ended September 30, 2023 was due to $0.9 million of additional royalties due to our growth in sales, $0.9 million attributed to product cost primarily associated with higher sales volume and $0.1 million of amortization of our capitalized sales-based milestone payment.

We expect cost of sales as a percentage of product revenue, net to be in a range of 10% to 12% during 2023 and the foreseeable future.

Research and development expense.

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%.

Research and development expense increased by $12.5 million to $33.6 million for the three months ended September 30, 2023 from $21.1 million for the three months ended September 30, 2022, an increase of 59%.

The net increase was primarily due to the following:

● 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 $5.3 million in our clinical trial costs associated with increased activity in our Phase 2 DAYBREAK and Phase 3 EMANATE trials as well as our Phase 3 hypothalamic obesity trial.

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

● an increase of $2.0 million due to increased preclinical research costs related to RM-718;

● an increase of $2.1 million due to increased gene sequencing costs to support our expanded clinical programs;

The above increases were partially offset by:

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

● an increase of $1.9 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 $1.1 million related to professional services and consulting costs associated with our expanding clinical and pre-clinical programs.

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%.

Selling, general and administrative expense increased by $8.5 million to $30.5 million for the three months ended September 30, 2023 from $21.9 million for the three months ended September 30, 2022, an increase of 39%.

The increase was primarily due to the following:

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● an increase of $3.4 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.

● an increase of $0.6 million related to costs associated with ongoing sales and marketing activities for IMCIVREE after receiving FDA approval in June 2022.

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

Other income (expense), net increased by $1.8 million to $0.2 million for the three months ended September 30, 2023 from ($1.6) million for the three months ended September 30, 2022.

The increase was primarily due to the following:

● an increase of interest income of $2.6 million earned on our short-term investments, based on a higher average investment balance from proceeds from our equity and debt offerings, as well as higher interest rates;

● an increase of other income from the change in fair value of our RIFA embedded derivative and net foreign currency gains of $0.2 million.

The above increases were partially offset by:

● an increase of $1.0 million of interest expense related to our RIFA with HealthCare Royalty Partners, based on a higher average deferred royalty obligation balance during the quarter ended September 30, 2023 as compared to the quarter ended September 30, 2022.

Net loss increased by $3.3 million to $44.2 million for the three months ended September 30, 2023,

from a net loss of $40.9 million for the three months ended September 30, 2022, an increase of 8%.

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 nine months ended September 30, 2023 and 2022

Nine Months Ended

September 30,

(in thousands)

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Loss from operations

Other income (loss), net

Other income (expense), net

Loss before taxes

Provision for income taxes

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%.

Product revenue, net increased by $45.1 million to $53.2 million for the nine months ended September 30, 2023 from $8.1 million for the nine months ended September 30, 2022, an increase of 557%.

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.

During the nine months ended September 30, 2023 and 2022, a substantial amount of our product revenue, or 84% and 86%, 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%.

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

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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%.

Cost of sales increased by $5.0 million to $6.1 million for the nine months ended September 30, 2023 from $1.1 million for the nine months ended September 30, 2022, an increase of 449%.

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.

Accordingly, the product cost component related to IMCIVREE included in our cost of sales for the nine months ended September 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.

Specifically, the $5.0 million increase in cost of sales for the nine months ended September 30, 2023 was due to $2.3 million of additional royalties due to our growth in sales, $2.1 million attributed to product cost primarily associated with higher sales volume and $0.6 million of amortization of our capitalized sales-based milestone payment.

We expect cost of sales as a percentage of product revenue, net to be in a range of 10% to 12% during 2023 and the foreseeable future.

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%.

Research and development expense increased by $20.0 million to $105.1 million for the nine months ended September 30 2023 from $85.1 million for the nine months ended September 30, 2022, an increase of 23%.

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 $5.7 million in our research and development costs related to in process research and development assets acquired from Xinvento, BV;

● an increase of $6.6 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 $3.3 million due to increased gene sequencing costs to support our expanded clinical programs;

● an increase of $4.9 million in our clinical trial costs associated with increased activity in our Phase 2 DAYBREAK and Phase 3 EMANATE trials as well as our Phase 3 clinical trial in hypothalamic obesity.

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

● an increase of $1.7 million in our next generation assets;

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

● an increase of $0.6 million due to increased preclinical research costs related to RM-718.

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.

● a decrease of $2.8 million in costs associated with less manufacturing of clinical materials;

Selling, general and administrative expense.

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%.

Selling, general and administrative expense increased by $19.4 million to $85.2 million for the nine months ended September 30, 2023 from $65.7 million for the nine months ended September 30, 2022, an increase of 30%.

The increase was primarily due to the following:

● an increase of $14.2 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;

● an increase of $6.8 million related to professional services and consulting costs;

● an increase of $0.9 million due to increased costs associated with information technology, international office space, sponsorships and general corporate travel related expenses for our expanding workforce.

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Other income (expense), net.

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.

Other income (expense), net increased by $2.0 million to $0.4 million for the three months ended September 30, 2023 from ($1.6) million for the three months ended September 30, 2022.

The increase was primarily due to the following:

● an increase of interest income of $9.1 million earned on our short-term investments, based on a higher average investment balance from proceeds from our equity and debt offerings, as well as higher interest rates;

The above increase was partially offset by:

● an increase of $7.1 million of interest expense related to our RIFA with HealthCare Royalty Partners, based on a higher average deferred royalty obligation balance during the quarter ended September 30, 2023 as compared to the quarter ended September 30, 2022.

Net loss increased by $4.4 million to $143.0 million for the nine months ended September 30, 2023, from a net loss of $138.6 million for the nine months ended September 30, 2022, an increase of 3%.

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 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,

As of September 30, 2023, our cash and cash equivalents and short-term investments were approximately $299.3 million.

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

Nine Months Ended September 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 $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.

Net cash used in operating activities was $106.8 million for the nine months ended September 30, 2023 and consisted primarily of a net loss of $143.0 million adjusted for non-cash items of $34.7 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 $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 $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 $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 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.

For additional information, see Note 12, “Long-term Obligations” to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

The change in operating assets and liabilities used net cash of approximately $4.1 million, primarily driven by net increases in accounts receivable and inventory of $13.2 million from our increasing revenues and a net increase in prepaid expenses and other assets of $0.8 million, offset by a net increase in accounts payable and accrued expenses of $9.9 million due to the timing of vendor and employee bonus payments.

Net cash used in operating activities was $139.4 million for the nine months ended September 30, 2022 and consisted primarily of a net loss of $138.6 million adjusted for non-cash items of $18.8 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 $19.6 million from a decrease in accounts payable, deferred revenue and accrued expenses and an increase in prepaid expenses and other current assets.

Net cash (used in) provided by investing activities

Net cash used in investing activities was $28.3 million for the nine months ended September 30, 2023 and relates to gross purchases of short-term investments of $314.2 million and cash used to purchase Xinvento’s IPR&D assets for $5.7 million in February 2023.

These cash uses were offset by maturities of short-term investments of $291.7 million.

Net cash provided by investing activities was $68.8 million for the nine months ended September 30, 2022 and relates to $224.6 million of maturities of short-term investments, partially offset by $151.5 million of purchases of short-term investments, a $4.0 million milestone obligation payment under our license agreement with Ipsen and $0.3 million related to the purchase of property plant and equipment.

Net cash provided by financing activities

Net cash provided by financing activities was $71.9 million for the nine months ended September 30, 2023, and consisted of net proceeds of $48.9 million from the issuance of common stock, net proceeds of $24.4 million from the final investment tranche of our deferred royalty obligation and proceeds of $3.5 million from the exercise of stock options, vesting of restricted stock units and the issuance of common stock from Employee Stock Purchase Plan.

These proceeds were offset by $4.8 million of repayments of our deferred royalty obligation.

Net cash provided by financing activities was $196.5 million for the nine months ended September 30, 2022, and consisted of net proceeds of $117.0 million from the issuance of common stock, proceeds of $75.0 million from our Revenue Interest Financing Agreement and proceeds of $4.5 million from the exercise of stock options, vesting of restricted stock units and the issuance of common stock from Employee Stock Purchase Plan.

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, 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.

We expect that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations into 2026.

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

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Our future capital requirements will depend on many factors, including:

● the cost to commercialize setmelanotide, by building an internal sales force or entering into collaborations with third parties and providing support services for patients;

● the cost to continue to commercialize setmelanotide, by building an internal sales force or entering into collaborations with third parties and providing support services for patients;

● the scope, progress, results and costs of clinical trials for our setmelanotide program;

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Adequate additional financing may not be available to us on acceptable terms, or at all.

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

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.

Further, the global economy, including credit and financial markets, has recently experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, rising interest and inflation rates, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability.

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If we are unable to raise additional funds through equity, debt financings or other means, when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our setmelanotide program that we would otherwise prefer to develop and market ourselves.

Revenue Interest Financing Agreement

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.

For additional information, see Note 12, “Long-term Obligations” to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

November 2, 2021, we entered into a Sales Agreement with Cowen and Company, LLC, or Cowen, pursuant to which we may issue and sell shares of our common stock, having an aggregate offering price of up to $100.0 million, from time to time through an “at the market” equity offering program under which Cowen acts as sales agent, or the ATM Program.

During the three months ended September 30, 2023, we sold approximately two million shares of our common stock in the ATM Program for gross proceeds of approximately $50.0 million and net proceeds of approximately $48.9 million, after deducting sales agent fees.

Contractual obligations

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.

As of September 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 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.

As of September 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