RHYTHM PHARMACEUTICALS, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the “safe harbor” created by those sections. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding: the marketing and commercialization of IMCIVREE (setmelanotide), and the timing of commercialization; 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; the sufficiency of our cash, cash equivalents and short-term investments to fund our operations; our ability to hire and retain necessary personnel; patient enrollments and the timing thereof; the timing of announcements regarding results of clinical trials; our ability to protect our intellectual property; ongoing activities under and our ability to negotiate our collaboration and license agreements, if needed, and the impact of termination; our marketing, commercial sales, and revenue generation; expectations surrounding our manufacturing arrangements; the potential financial impact, growth prospects and benefits of our 22 Table of Contents 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. 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. Except as may be required by law, we have no plans to update our forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q . We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made . Overview We are a global, commercial-stage biopharmaceutical company dedicated to transforming the lives of patients and their families living with rare diseases. 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 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. IMCIVREE, an MC4R agonist for which we hold worldwide rights, is the first-ever therapy developed for patients with certain ultra-rare diseases that is approved or authorized in the United States, European Union (EU) and Great Britain. IMCIVREE is approved by the U.S. Food and Drug Administration (FDA) for chronic weight management in adult and pediatric patients 6 years of age and older with monogenic or syndromic obesity due to: (i) proopiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency as determined by an FDA-approved test demonstrating variants in POMC, PCSK1, or LEPR genes that are interpreted as pathogenic, likely pathogenic, or of uncertain significance (VUS); or (ii) Bardet-Biedl syndrome (BBS). 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. 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. We are developing setmelanotide to address additional patients with acquired hypothalamic obesity. 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. 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 . 3, 2023. 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 23 Table of Contents 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. We also are conducting a Phase 3 pediatrics trial evaluating daily setmelanotide in patients between the ages of two and six and a Phase 3 switch trial evaluating a weekly formulation of setmelanotide. We are leveraging what we believe is the largest known DNA database focused on obesity - with approximately 60,000 sequencing samples as of December 31, 2022 - to improve the understanding, diagnosis and care of people living with severe obesity due to certain variants in genes associated with the MC4R pathway. Our sequencing-based epidemiology estimates show that each of these genetically defined MC4R pathway deficiencies number in the rare or ultra-rare category, according to established definitions of rare disease patient populations. Our epidemiology estimates are approximately 4,600 to 7,500 for U.S. patients in initial FDA-approved indications, including obesity due to biallelic POMC, PCSK1 or LEPR deficiencies, and BBS. Epidemiology estimates for patients with hypothalamic obesity is between 5,000 and 10,000 in the United States, based on our analysis of published literature and our epidemiology estimates for the indications being studied in our Phase 3 EMANATE trial suggest that approximately 53,000 U.S. patients with one of these genetically driven obesities have the potential to respond well to setmelanotide. There are currently no effective or approved treatments for these rare MC4R pathway related diseases. The FDA has acknowledged the importance of these results by giving setmelanotide Breakthrough Therapy designation for the treatment of obesity associated with genetic defects upstream of the MC4R in the leptin melanocortin pathways. The Breakthrough Therapy designation currently covers indications for POMC deficiency obesity, LEPR deficiency obesity, BBS and, as of November 2022, hypothalamic obesity. Additional recent clinical, regulatory, corporate and commercial updates include: 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 24 Table of Contents 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. 1. 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: ● Complete patient enrollment in the pivotal Phase 3 clinical trial in hypothalamic obesity in the fourth quarter of 2023; ● 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; ● 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 2 and 6 years old in the fourth quarter of 2023; and ● 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. To date, we have not generated sufficient cash flows from product sales and we have financed our operations primarily through the proceeds received from the sales of common and preferred stock, royalty interest financing, asset sales, collaboration and license agreements, as well as capital contributions from the former parent company, Rhythm Holdings LLC. From August 2015 through August 2017, we raised aggregate net proceeds of $80.8 million through our issuance of series A preferred stock. 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. 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 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- 25 Table of Contents 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 may enter into collaborations with other parties for certain markets outside the United States. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, or at all. 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 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. Our expenses may increase in connection with our ongoing activities, as we: ● continue to conduct clinical trials for setmelanotide; ● engage contract manufacturing organizations, or CMOs, for the manufacture of clinical and commercial-grade setmelanotide; ● seek regulatory approval for setmelanotide for additional indications; ● expand our clinical, regulatory, commercial and corporate infrastructure and expand operations globally; ● engage in the sales and marketing efforts necessary to support the continued commercial efforts of IMCIVREE globally; ● 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; and ● continue to operate as a public company. 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 We are a Delaware corporation organized in February 2013 under the name Rhythm Metabolic, Inc., and as of October 2015, under the name Rhythm Pharmaceuticals, Inc. Financial Operations Overview Revenue 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. IMCIVREE became commercially available in the United States in the first quarter of 2021. We recorded our first sales of IMCIVREE in the United States in March 2021 and we made our first sales in France during March 2022 under the paid early access program. IMCIVREE was approval by the FDA and the EC in adult and pediatric patients six years 26 Table of Contents 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. Cost of sales All of our inventory of IMCIVREE produced prior to FDA approval is available for commercial or clinical use. Most of the manufacturing costs have been recorded as research and development expenses in prior periods. Accordingly, the 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 Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery and genetic sequencing efforts, and the clinical development of setmelanotide, which include: ● expenses incurred under agreements with third parties, including CROs that conduct research and development and preclinical activities on our behalf, and the cost of consultants and CMOs that manufacture drug products for use in our preclinical studies and clinical trials; ● employee-related expenses including salaries, benefits and stock-based compensation expense; ● the cost of lab supplies and acquiring, developing and manufacturing preclinical and clinical study materials; ● the cost of genetic sequencing of potential patients in clinical studies; and ● 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. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The capitalized amounts are expensed as the related goods are delivered or the services are performed. The following table summarizes our current research and development expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, Research and development summary 2023 2022 2023 2022 Research and development expense ​ $ 33,570 ​ $ 21,116 ​ $ 105,059 ​ $ 85,082 ​ We are unable to predict the duration and costs of the current or future clinical trials of our product candidates. The duration, costs, and timing of clinical trials and development of setmelanotide will depend on a variety of factors, including: ● the scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and development activities; ● the rate of enrollment in clinical trials; 27 Table of Contents ● the safety and efficacy demonstrated by setmelanotide in future clinical trials; ● changes in regulatory requirements; ● changes in clinical trial design; and ● the timing and receipt of any regulatory approvals. A change in the outcome of any of these variables with respect to the development of our product candidates would significantly change the costs and timing associated with its development and potential commercialization. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our setmelanotide and other development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses to commercialization and there can be no guarantee that we can meet the funding needs associated with these expenses. Selling, general and administrative expenses Selling expenses consist of professional fees related to preparation for the commercialization of setmelanotide, as well as salaries and related benefits for commercial employees, including stock-based compensation. As we further implement and execute our commercialization plans to market setmelanotide in new territories and as we explore new collaborations to develop and commercialize setmelanotide, we anticipate that these expenses will materially increase. General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, relating to our full-time employees not involved in R&D or commercial activities. Other significant costs include rent, legal fees relating to patent and corporate matters and fees for accounting, tax and consulting services. The following table summarizes our current selling, general and administrative expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, Selling, general and administrative summary 2023 2022 2023 2022 Selling, general and administrative expense ​ $ 30,475 ​ $ 21,938 ​ $ 85,158 ​ $ 65,715 ​ 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. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. 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 28 Table of Contents 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. There were no significant changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Results of Operations 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, ​ Change ​ 2023 2022 $ % ​ ​ (in thousands) Statement of Operations Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Product revenue, net $ 22,504 $ 4,284 ​ $ 18,220 ​ 425 % Costs and expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of sales ​ ​ 2,412 ​ ​ 497 ​ ​ 1,915 ​ 385 % Research and development ​ ​ 33,570 ​ ​ 21,116 ​ ​ 12,454 ​ 59 % Selling, general, and administrative ​ 30,475 ​ 21,938 ​ 8,537 ​ 39 % Total costs and expenses ​ 66,457 ​ 43,551 ​ 22,906 ​ 53 % Loss from operations ​ (43,953) ​ (39,267) ​ (4,686) ​ 12 % Other income (expense), net ​ 158 ​ (1,594) ​ 1,752 ​ (110) % (Loss) income before taxes ​ ​ (43,795) ​ ​ (40,861) ​ ​ (2,934) ​ 7 % Provision for income taxes ​ ​ 368 ​ ​ — ​ ​ 368 ​ 100 % Net loss ​ $ (44,164) ​ $ (40,861) ​ $ (3,303) ​ 8 % ​ Product revenue, net . 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 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 $2.4 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 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 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. 29 Table of Contents Research and development expense. 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 $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; ● 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 $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: ● an increase of $4.5 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 $3.4 million related to professional services costs, including legal and tax services; and ● 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 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; and ● 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. Net loss increased by $3.3 million to $44.2 million for the three months ended September 30, 2023, 30 Table of Contents 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, ​ Change ​ 2023 2022 $ ​ % ​ ​ (in thousands) Statement of Operations Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Product revenue, net ​ $ 53,194 ​ $ 8,094 ​ $ 45,100 ​ 557 % License revenue ​ ​ — ​ ​ 6,754 ​ ​ (6,754) ​ (100) % Total revenues ​ ​ 53,194 ​ ​ 14,848 ​ ​ 38,346 ​ 457 % Costs and expenses: ​ ​ ​ ​ ​ Cost of sales ​ ​ 6,069 ​ ​ 1,105 ​ ​ 4,964 ​ 449 % Research and development ​ ​ 105,059 ​ ​ 85,082 ​ ​ 19,977 ​ 23 % Selling, general, and administrative ​ 85,158 ​ 65,715 ​ 19,443 ​ 30 % Total costs and expenses ​ 196,286 ​ 151,902 ​ 44,384 ​ 29 % Loss from operations ​ (143,092) ​ (137,054) ​ (6,038) ​ 4 % Other income (expense), net ​ 415 ​ (1,572) ​ 1,987 ​ (126) % Loss before taxes ​ ​ (142,677) ​ ​ (138,626) ​ ​ (4,051) ​ 3 % Provision for income taxes ​ ​ 368 ​ ​ — ​ ​ 368 ​ 100 % Net loss ​ $ (143,046) ​ $ (138,626) ​ $ (4,420) ​ 3 % ​ Product revenue, net . 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 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 nine months ended September 30, 2023 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 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 $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 nine 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 $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. 31 Table of Contents Research and development expense. 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 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; and ● 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 $2.8 million in costs associated with less manufacturing of clinical materials; Selling, general and administrative expense. 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 $6.8 million related to professional services and consulting costs; and ● 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. The above increases were partially offset by: ● a decrease of $2.5 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 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; and The above increase was partially offset by: 32 Table of Contents ● 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. 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 September 30, 2023, our cash and cash equivalents and short-term investments were approximately $299.3 million. Cash flows The following table provides information regarding our cash flows for the nine months ended September 30, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2023 2022 ​ (in thousands) Net cash (used in) provided by: ​ ​ ​ ​ ​ Operating activities $ (106,774) ​ $ (139,428) Investing activities (28,305) ​ 68,804 Financing activities 71,945 ​ 196,463 Effect of exchange rates on cash ​ 50 ​ ​ — Net (decrease) increase in cash, cash equivalents and restricted cash $ (63,084) ​ 125,839 ​ Net cash used in operating activities 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 $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 $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. 33 Table of Contents 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 We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the clinical development of and seek marketing approval for setmelanotide for future indications and build out our global organization. In addition, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. 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 2026. Our cash and cash equivalents are maintained at financial institutions in amounts that exceed federally-insured limits. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all. We may need to obtain substantial additional funding in connection with our research and development activities and any continuing operations thereafter. If we are unable to raise capital when needed or on favorable terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts. Our future capital requirements will depend on many factors, including: ● 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; ● the costs, timing and outcome of regulatory review of our setmelanotide program; ● 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 ● the extent to which we acquire or in-license other product candidates and technologies; ● the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; 34 Table of Contents ● our ability to establish and maintain additional collaborations on favorable terms, if at all; and ● the costs of operating as a public company, including those resulting from losing our emerging growth company status. Although IMCIVREE has been approved by the FDA and authorized by the EC and Great Britain in certain indications, IMCIVREE may not achieve commercial success. In addition, developing our setmelanotide program is a time-consuming, expensive and uncertain process that may take years to complete, and we may never generate the necessary data or results required to obtain future marketing approvals and achieve product sales. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. 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. All of these factors could impact our liquidity and future funding requirements, including but not limited to our ability to raise additional capital when needed on acceptable terms, if at all. The duration of this economic slowdown is uncertain and the impact on our business is difficult to predict. See “Risk Factors— Unfavorable global political or economic conditions could adversely affect our business, financial condition or results of operations.” Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, involves agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties or other means, we may have to relinquish valuable rights to our setmelanotide program on terms that may not be favorable to us. 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. ATM program ​ 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. ​ 35 Table of Contents Contractual obligations 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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.