10-Q 1 rytm-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to         

Commission file number 001-38223

RHYTHM PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware

46-2159271

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

222 Berkeley Street

12th Floor

Boston, MA 02116

(Address of principal executive offices)

(Zip Code)

(857264-4280

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share

RYTM

The Nasdaq Stock Market LLC (Nasdaq Global Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  .

The number of shares outstanding of the registrant’s Common Stock as of April 27, 2022 was 50,393,731.

RHYTHM PHARMACEUTICALS, INC.

FORM 10-Q

INDEX

    

Page No.

PART I

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations and Comprehensive Loss

4

Condensed Consolidated Statements of Stockholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

Item 4. Controls and Procedures

28

PART II

OTHER INFORMATION

29

Item 1. Legal Proceedings

29

Item 1A. Risk Factors

29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

85

Item 3. Defaults Upon Senior Securities

85

Item 4. Mine Safety Disclosure

85

Item 5. Other Information

85

Item 6. Exhibits

86

SIGNATURES

87

2

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

Rhythm Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

March 31, 

December 31, 

    

2022

    

2021

Assets

Current assets:

 

  

 

  

Cash and cash equivalents

$

78,537

$

59,248

Short-term investments

 

162,427

 

235,607

Accounts receivable, net

862

1,025

Prepaid expenses and other current assets

 

11,623

 

12,507

Total current assets

 

253,449

 

308,387

Property and equipment, net

 

2,722

 

2,813

Right-of-use asset

1,442

1,522

Intangible assets, net

8,527

4,658

Restricted cash

 

328

 

328

Other long-term assets

18,356

11,815

Total assets

$

284,824

$

329,523

Liabilities and stockholders’ equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

12,010

$

5,737

Accrued expenses and other current liabilities

 

25,199

 

30,084

Contract liability

9,440

7,000

Lease liability

 

625

 

606

Total current liabilities

 

47,274

 

43,427

Long-term liabilities:

 

  

 

  

Lease liability

 

1,781

 

1,945

Total liabilities

 

49,055

 

45,372

Stockholders’ equity:

 

  

 

  

Preferred Stock, $0.001 par value: 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2022 and December 31, 2021

 

 

Common stock, $0.001 par value: 120,000,000 shares authorized; 50,393,731 and 50,283,574 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

 

50

 

50

Additional paid-in capital

818,051

813,041

Accumulated other comprehensive loss

(629)

(1)

Accumulated deficit

 

(581,703)

 

(528,939)

Total stockholders’ equity

 

235,769

 

284,151

Total liabilities and stockholders’ equity

$

284,824

$

329,523

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

3

Rhythm Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(in thousands, except share and per share data)

(Unaudited)

Three months ended March 31, 

    

    

2022

    

2021

Product revenue, net

$

1,498

$

35

Costs and expenses:

Cost of sales

230

4

Research and development

32,510

19,911

Selling, general, and administrative

 

21,449

 

14,518

Total costs and expenses

 

54,189

 

34,433

Loss from operations

 

(52,691)

 

(34,398)

Other income:

 

  

 

  

Other income

 

 

100,000

Interest income, net

 

(73)

 

154

Total other income, net

 

(73)

 

100,154

(Loss) income before taxes

(52,764)

65,756

Provision for income taxes

22,006

Net (loss) income

$

(52,764)

$

43,750

Net (loss) income per share

Basic

$

(1.05)

$

0.92

Diluted

$

(1.05)

$

0.90

Weighted-average common shares outstanding

Basic

50,326,627

47,638,565

Diluted

 

50,326,627

 

48,501,697

Other comprehensive (loss) income:

Net (loss) income

$

(52,764)

$

43,750

Unrealized loss on marketable securities

 

(628)

 

(107)

Comprehensive (loss) income

$

(53,392)

$

43,643

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

4

Rhythm Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(Unaudited)

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

Deficit

    

Equity

Balance at December 31, 2021

 

50,283,574

$

50

 

$

813,041

 

$

(1)

$

(528,939)

 

$

284,151

Stock-based compensation expense

 

 

4,611

 

 

4,611

Issuance of common stock in connection with ESPP

61,518

399

399

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

48,639

Unrealized loss on marketable securities

 

 

 

 

(628)

 

(628)

Net loss

 

 

 

 

(52,764)

 

(52,764)

Balance at March 31, 2022

50,393,731

50

818,051

(629)

(581,703)

235,769

Balance at December 31, 2020

 

44,235,903

$

44

 

$

625,762

 

$

49

$

(459,327)

 

$

166,528

Stock-based compensation expense

 

 

5,191

 

 

5,191

Issuance of common stock in connection with ESPP

17,000

388

388

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

198,855

3,466

3,466

Issuance of common stock upon completion of public offering, net of offering costs

5,750,000

6

161,725

161,731

Unrealized loss on marketable securities

 

 

 

 

(107)

 

(107)

Net income

 

 

 

 

43,750

 

43,750

Balance at March 31, 2021

50,201,758

50

796,532

(58)

(415,577)

380,947

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

5

Rhythm Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

Three months ended March 31, 

    

2022

    

2021

Operating activities

Net (loss) income

$

(52,764)

$

43,750

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Stock-based compensation expense

 

4,611

 

5,191

Gain on sale of priority review voucher

(100,000)

Deferred tax provision

22,006

Depreciation and amortization

 

350

 

201

Non-cash rent expense

 

(65)

 

(61)

Changes in operating assets and liabilities:

 

  

 

  

Prepaid expenses and other current assets

 

950

 

1,651

Other long-term assets

 

(6,661)

 

Accounts payable, accrued expenses and other current liabilities

 

(53)

 

(6,269)

Net cash used in operating activities

 

(53,632)

 

(33,531)

Investing activities

 

  

 

  

Purchases of short-term investments

 

(39,479)

 

(297,542)

Maturities of short-term investments

 

112,128

 

51,842

Proceeds from sale of priority review voucher

100,000

Purchases of property and equipment

 

(127)

 

(12)

Net cash provided by (used in) investing activities

 

72,522

 

(145,712)

Financing activities

 

  

 

  

Net proceeds from issuance of common stock

161,731

Proceeds from the exercise of stock options

 

 

3,466

Proceeds from issuance of common stock from ESPP

 

399

 

388

Net cash provided by financing activities

 

399

 

165,585

Net increase (decrease) in cash, cash equivalents and restricted cash

 

19,289

 

(13,658)

Cash, cash equivalents and restricted cash at beginning of period

 

59,576

 

101,257

Cash, cash equivalents and restricted cash at end of period

$

78,865

$

87,599

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

6

Rhythm Pharmaceuticals, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share information)

1. Nature of Business

Rhythm Pharmaceuticals, Inc. (the “Company” or “we”) is a global, commercial-stage biopharmaceutical company committed to transforming the treatment paradigm for people living with rare genetic diseases of obesity, which are characterized by early-onset, severe obesity and an insatiable hunger or hyperphagia. Rhythm’s precision medicine, IMCIVREE (setmelanotide), for which for which we have exclusive worldwide rights, has the potential to restore dysfunctional melanocortin 4 receptor (MC4R) signaling due to impaired MC4R pathway function. MC4R pathway deficiencies result in the disruption of satiety signals and energy homeostasis in the body, which, in turn, leads to intense feelings of hunger and to obesity. IMCIVREE was approved in November 2020 by the U.S. Food and Drug Administration (FDA) for chronic weight management in adult and pediatric patients 6 years of age and older with obesity due to proopiomelanocrotin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency confirmed by genetic testing and in July and September 2021, respectively, by the European Commission (EC) and Great Britain’s Medicines & Healthcare Products Regulatory Agency (MHRA) for the treatment of obesity and the control of hunger associated with genetically confirmed loss-of-function biallelic POMC, including PCSK1, deficiency or biallelic LEPR deficiency in adults and children 6 years of age and above. IMCIVREE is the first-ever FDA-approved and EC- and MHRA-authorized therapy for patients with these rare genetic diseases of obesity. The Company’s supplemental New Drug Application (sNDA) to the FDA is assigned a Prescription Drug User Fee Act (PDUFA) goal date of June 16, 2022, for the treatment of obesity and control of hunger in adult and pediatric patients six years of age and older with Bardet-Biedl Syndrome (BBS) or Alström syndrome. A Type II variation application to the European Medicines Agency seeking regulatory approval and authorization for setmelanotide to treat obesity and control of hunger in adult and pediatric patients 6 years of age and older with BBS also is under review.  In addition, we are advancing a broad clinical development program for setmelanotide in patients with additional rare genetic diseases of obesity in an effort to expand the approved indications in the United States and Europe.

The Company is a Delaware corporation organized in February 2013 under the name Rhythm Metabolic, Inc., and as of October 2015, under the name Rhythm Pharmaceuticals, Inc.  The Company has wholly owned subsidiaries in the US, Ireland, the United Kingdom, France, Italy, the Netherlands and Canada.

The Company is subject to risks and uncertainties common to commercial-stage companies in the biotechnology industry, including but not limited to, risks associated with the commercialization of approved products, completing preclinical studies and clinical trials, receiving regulatory approvals for product candidates, development by competitors of new biopharmaceutical products, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Commercialization of approved products will require significant resources and in order to market IMCIVREE, the Company must continue to build its sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities.

There are many uncertainties regarding the COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how the pandemic will impact its patients, employees, suppliers, vendors, business partners and distribution channels. While the pandemic did not materially affect the Company's financial results and business operations for the three months ended March 31, 2022, the Company is unable to predict the impact that COVID-19 will have on its financial position and operating results in future periods due to numerous uncertainties. The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.

7

Liquidity

The Company has incurred operating losses and negative cash flows from operations since inception. As of March 31, 2022, the Company had an accumulated deficit of $581,703.  The Company has primarily funded these losses through the proceeds from the sales of common and preferred stock, asset sales as well as capital contributions received from the former parent company, Rhythm Holdings LLC. To date, the Company has minimal product revenue and management expects operating losses to continue for the foreseeable future. The Company has devoted substantially all of its resources to its drug development efforts, comprising of research and development, manufacturing, conducting clinical trials for its product candidates, protecting its intellectual property, pre-commercialization activities and general and administrative functions relating to these operations. The future success of the Company is dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations.

At March 31, 2022, the Company had $240,964 of cash and cash equivalents and short-term investments on hand.  In the future, the Company will be dependent on obtaining funding from third parties, such as proceeds from the issuance of debt, sale of equity, product sales and funded research and development programs to maintain the Company's operations and meet the Company's obligations. There is no guarantee that additional equity or other financings will be available to the Company on acceptable terms, or at all. If the Company fails to obtain additional funding when needed, the Company would be forced to scale back, terminate its operations or seek to merge with or be acquired by another company. Management believes that the Company's existing cash resources will be sufficient to fund the Company's operations into at least the fourth quarter of 2023.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company's unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or GAAP, and the applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification, or ASC, and Accounting Standards Updates, or ASU, of the Financial Accounting Standards Board, or FASB. As permitted under these rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted.

The accompanying condensed consolidated balance sheet as of March 31, 2022, the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021 and the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 and the related footnote disclosures are unaudited. In management's opinion, the unadited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2021 and include all adjustments, which are all normal recurring adjustments, necessary for the fair presentation of the interim financial statements. The results for the three months ended March 31, 2022 are not necessarily indicative of the results expected for the full fiscal year, any other interim periods, or any future year or period.

The accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the unaudited condensed consolidated financial statements. As of March 31, 2022, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date

8

of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Significant estimates relied upon in preparing these financial statements include accruals related to research and development expenses, assumptions used to record stock-based compensation expense, assumptions used to value the common stock received from RareStone Group Ltd., or RareStone, and the valuation allowance on the Company's deferred tax assets.  Estimates are periodically reviewed in light of changes in circumstances, facts and experience.  Changes in estimates are recorded in the period in which they become known.  Actual results could differ materially from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Rhythm Pharmaceuticals, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Off-Balance Sheet Risk and Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash and cash equivalents and short-term investments, which are maintained at two federally insured financial institutions. The deposits held at these two institutions are in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.

The Company is exposed to risks associated with extending credit to customers related to the sale of products. The Company does not require collateral to secure amounts due from its customers. At March 31, 2022, substantially all of the Company’s revenue was generated from a single customer in the United States.

The Company relies on third-party manufacturers and suppliers for the manufacture and supply of its product. The inability of the suppliers or manufacturers to fulfill supply requirements of the Company could materially impact future operating results. A change in the relationship with the suppliers or manufacturer, or an adverse change in their business, could materially impact future operating results.

Segment Information

Operating segments are defined as components of an entity about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company currently operates in one business segment, which is the development and commercialization of therapies for patients with rare diseases. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. The Company does not operate separate lines of business with respect to its product or product candidates. Accordingly, the Company has one reportable segment.

Accounts Receivable, net

Accounts receivable consists of amounts due from customers, net of customer allowances for cash discounts and any estimated expected credit losses. The Company's measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. To date, the Company has not experienced any credit losses. The Company's contracts with its customers have standard payment terms that generally require payment within 45 days. The Company analyzes amounts that are past due for collectability, and periodically evaluates the creditworthiness of its customers. At March 31, 2022, the Company determined an allowance for doubtful account was not required based upon our review of contractual payments and our customers’ circumstances.

9

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

Product Revenue, net

Subsequent to its regulatory approval, the Company began to sell IMCIVREE in the U.S. in March 2021 and in France in March 2022.  The product is distributed through an exclusive third-party logistics, or 3PL, distribution agent that does not take title to the product. Once the product is delivered to the Company’s exclusive specialty pharmacy provider, our sole customer in the U.S., the customer, or wholesaler takes title to the product.  The wholesaler then distributes the product to health care providers and patients.  In our exclusive distribution agreement with the 3PL company, the Company acts as principal because we retain control of the product.  The Company generally does not offer returns of product sold to the customer.

Revenue from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, upon transfer of title to the customer because at that point in time we have no ongoing obligations to the customer.  There are no other performance obligations besides the sale of product.  We classify payments to our customer or other parties in the distribution channel for services that are distinct and priced at fair value as selling, general and administrative expenses in our condensed consolidated statements of operations and comprehensive (loss) income.  Otherwise, payments to a customer or other parties in the distribution channel that do not meet those criteria are classified as a reduction of revenue, as discussed further below.  Taxes collected from the customer relating to product sales and remitted to governmental authorities are excluded from revenue.  Because our payment terms are generally forty-five days, the Company concluded there is not a significant financing component because the period between the transfer of a promised good or service to the customer and when the customer pays for that good or service will be one year or less.  The Company expenses incremental costs of obtaining a contract as and when incurred since the expected amortization period of the asset that we would have recognized is one year or less.

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price, or the transaction price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between us and our customers, health care providers and other indirect customers relating to the sale of IMCIVREE.  These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer).  Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.  Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract.  The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.  Actual amounts of consideration ultimately received may differ from our estimates.  If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

The following are the components of variable consideration related to product revenue:

Chargebacks:  The Company estimates obligations resulting from contractual commitments with the government and other entities to sell products to qualified healthcare providers and patients at prices lower than the list prices charged to our customers.  The government and other entities charge us for the difference between what they pay for the product and the selling price to our customers.  The Company records reserves for these chargebacks related to product sold to our

10

customers during the reporting period, as well as our estimate of product that remains in the distribution channel at the end of the reporting period that we expect will be sold to qualified healthcare providers and patients in future periods.

Government rebates:  The Company is subject to discount obligations under government programs, including Medicaid programs, Medicare and Tricare in the United States.  We estimate Medicaid, Medicare and Tricare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payer mix.  These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability that is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet.  For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program.  On a quarterly basis, we update our estimates and record any adjustments in the period that we identify the adjustments.

Trade discounts and allowances:  The Company provides customary invoice discounts on IMCIVREE sales to our U.S. customer for prompt payment that are recorded as a reduction of revenue in the period the related product revenue is recognized.  In addition, we receive and pay for various distribution services from our customer in the distribution channel.  For services that are either not distinct from the sale of our product or for which we cannot reasonably estimate the fair value, such fees are classified as a reduction of product revenue.

Product returns:  Our customers have limited return rights related to the product’s damage or defect.  The Company estimates the amount of product sales that may be returned and records the estimate as a reduction of revenue and a refund liability in the period the related product revenue is recognized.  Based on the distribution model for IMCIVREE and the price of IMCIVREE, the Company believes there will be minimal returns.

Other incentives:  Other incentives include co-payment assistance the Company provides to patients with commercial insurance that have coverage and reside in states that allow co-payment assistance.  The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue.  The estimate is recorded as a reduction of revenue in the same period the related revenue is recognized.

During the three months ended March 31, 2022 and 2021, we recorded product revenue, net, of $1,498 and $35, respectively.  The table that summarizes balances and activity in each of the product revenue allowance and reserve categories has not been included for the three months ended March 31, 2022 and 2021, due to the immateriality of the revenue recognized during the periods.

License Agreements

RareStone Group Ltd. 

 

In December 2021, the Company entered into an Exclusive License Agreement with RareStone Group Ltd., or the RareStone License. Pursuant to the RareStone License, we granted to RareStone an exclusive, sublicensable, royalty-bearing license under certain patent rights and know-how 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. RareStone has a right of first negotiation in the event that the Company chooses to grant a license to develop or commercialize the licensed product in Taiwan. The arrangement includes a license and an additional performance obligation to supply product upon the request of RareStone.

 

According to the terms of the RareStone License, RareStone has agreed to seek local approvals to commercialize IMCIVREE for the treatment of obesity and hyperphagia due to biallelic proopiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency, as well as Bardet-Biedl and Alström syndromes. Additionally, RareStone has agreed to fund efforts to identify and enroll patients from China in the Company’s global EMANATE trial, a Phase 3, randomized, double-blind, placebo-controlled trial to evaluate setmelanotide in five independent sub-studies in patients with obesity due to a heterozygous variant of POMC/PCSK1 or LEPR; certain variants of the SRC1 gene, certain variants of the SH2B1 gene, or PCSK1 N221D deletions within the MC4R pathway. According to the terms of the RareStone License, RareStone made an upfront payment to Rhythm of $7,000 and issued 1,077,586

11

ordinary shares in the Company. Rhythm will be eligible to receive development and commercialization milestones of up to $62,500, as well as tiered royalty payments on annual net sales of IMCIVREE. As of March 31, 2022, the Company received the upfront payment of $7,000, however the Company has not fulfilled its obligations related to the transfer of know how related to the license, and as such, the upfront payment was recorded as a contract liability on the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.  The RareStone equity was issued to Rhythm in February 2022, and recorded at its estimated fair value of $2,440 in other long-term assets and as a component of the contract liability on the condensed consolidated balance sheet at March 31, 2022.  The valuation of the RareStone equity is based upon a preliminary valuation and our estimates and assumptions related to this equity valuation are subject to change as we complete our procedures with respect to the valuation.

Cost of Product Sales

Prior to receiving approval from the FDA in November 2020 to sell IMCIVREE in the United States, the Company expensed all costs incurred related to the manufacture of IMCIVREE as research and development expense because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for the Company of regulatory approval of drug candidates.  Subsequent to receiving FDA approval in November 2020, the Company has capitalized a nominal amount of inventory related costs that were incurred subsequent to FDA approval. At March 31, 2022, the Company had $108 of inventory recorded as a component of prepaid and other current assets on the condensed consolidated balance sheet.

Cost of product sales will consist of manufacturing costs, transportation and freight, amortization of capitalized intangibles, royalty payments and indirect overhead costs associated with the manufacturing and distribution of IMCIVREE. Cost of product sales may also include periodic costs related to certain manufacturing services and inventory adjustment charges.

Intangible Assets, Net

Definite-lived intangible assets related to capitalized milestones under license agreements are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life. If our estimate of the product’s useful life is shorter than the remaining patent life, then a shorter period is used. Amortization expense is recorded as a component of cost of sales on the consolidated statements of operations and comprehensive loss.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, which consist primarily of property and equipment and finite lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the Company measures the impairment to be recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, less the cost to sell.  No events or changes in circumstances existed to require an impairment assessment during the three months ended March 31, 2022 and 2021, respectively.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1 — Quoted market prices in active markets for identical assets or liabilities.

12

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s cash equivalents and marketable securities at March 31, 2022 and December 31, 2021 were carried at fair value, determined according to the fair value hierarchy.  See Note 4 for further discussion.

The carrying amounts reflected in the consolidated balance sheets for accounts payable and accrued expenses and other current liabilities approximate their fair values due to their short-term maturities at March 31, 2022 and December 31, 2021, respectively.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net income (loss) per common share is computed by adjusting the weighted-average shares outstanding for the potential dilutive effects of common stock equivalents outstanding during the period calculated in accordance with the treasury stock method. For purposes of the diluted net income (loss) per share calculation, 781,404 stock options and 82,591 restricted stock units were considered to be common stock equivalents for the three months ended March 31, 2021.  For the three months ended March 31, 2022, the common stock equivalents have been excluded from the calculation of diluted net income (loss) per share, as their effect would be anti-dilutive for the period presented due to the net loss incurred.

The following table includes the potential common shares that were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive for the periods indicated:

Three Months Ended

March 31, 

    

    

2022

    

2021

Stock options

7,248,111

3,641,903

Restricted stock units

 

784,041

 

97,631

Performance stock units

935,885

Potential common shares

8,968,037

3,739,534

Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required.

Application of New or Revised Accounting Standards

From time to time, new accounting pronouncements are issued by the FASB and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In December 2019, the FASB issued ASU 2019-12, Income Taxes-Simplifying the Accounting for Income Taxes, or ASU 2019-12. ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The

13

standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. We have adopted ASU 2019-12 as of January 1, 2021 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

3. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

March 31, 

December 31, 

    

2022

    

2021

Research and development costs

$

12,164

$

17,480

Professional fees

 

3,494

 

2,163

Payroll related

 

3,131

 

8,371

Royalties

4,866

791

Other

 

1,544

 

1,279

Accrued expenses and other current liabilities

$

25,199

$

30,084

4. Fair Value of Financial Assets

As of March 31, 2022 and December 31, 2021, the carrying amount of cash and cash equivalents and short-term investments was $240,964 and $294,855, respectively, which approximates fair value. Cash and cash equivalents and short-term investments includes investments in U.S. treasury securities and money market funds that invest in U.S. government securities that are valued using quoted market prices. Accordingly, money market funds and government funds are categorized as Level 1.  The financial assets valued based on Level 2 inputs consist of corporate debt securities and commercial paper, which consist of investments in highly-rated investment-grade corporations.

The following tables present information about the Company's financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

Fair value Measurements as of

March 31, 2022 using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

Cash Equivalents:

 

  

 

  

 

  

 

  

Commercial Paper

$

$

49,477

$

$

49,477

Money Market Funds

17,505

17,505

Marketable Securities:

 

  

 

  

 

  

 

  

Corporate Debt Securities and Commercial Paper

162,427

162,427

Other Long-term Assets:

RareStone Common Stock

2,440

2,440

Total

$

17,505

$

211,904

$

2,440

$

231,849

Fair value Measurements as of

December 31, 2021 using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

Cash Equivalents:

 

  

 

  

 

  

 

  

Corporate Debt Securities and Commercial Paper

$

$

$

$

Money Market Funds

 

48,297

 

 

 

48,297

Marketable Securities:

 

  

 

  

 

  

 

  

Corporate Debt Securities and Commercial Paper

235,607

235,607

Total

$

48,297

$

235,607

$

$

283,904

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The estimated fair value of the shares of RareStone equity was determined using Level 3 inputs.  As of March 31, 2022, our RareStone equity represents our only Level 3 assets and liabilities carried at fair market value. The fair value measurement of the RareStone equity is sensitive to changes in the unobservable inputs used to value the financial instrument. Changes in the inputs could result in changes to the fair value of each financial instrument.

Our RareStone equity was valued at $2,440 at March 31, 2022. The Company determined the estimated fair values using a discounted cash flow model under the income approach and an option pricing allocation model for the period end March 31, 2022.

Inherent in  discounted cash flow and option pricing allocation models are assumptions related to the equity value of the entity, expected equity volatility, holding period, risk-free interest rate and discount for lack of marketability. The Company estimated equity volatility based on historical volatility of guideline public companies. The risk-free interest rate was based on the U.S. Treasury rates for a maturity similar to the expected holding period.

Changes in our level 3 secruities for the three months ended March 31, 2022 and 2021 are as follows:

Three months ended

March 31,

    

2022

    

2021

Beginning aggregate estimated fair value of Level 3 securities

$

$

Initial recording of RareStone equity

2,440

Ending aggregate estimated fair value of Level 3 securities

$

2,440

$

Marketable Securities

The following tables summarize the Company's marketable securities:

March 31, 2022

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

Assets

Corporate debt securities and commercial paper (due within 1 year)

$

163,056

$

$

(629)

$

162,427

$

163,056

$

$

(629)

$

162,427

December 31, 2021

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

Assets

Corporate debt securities and commercial paper (due within 1 year)

$

235,608

$

50

$

(51)

$

235,607

$

235,608

$

50

$

(51)

$

235,607

5. Right Of Use Asset and Lease Liability

The Company has a material operating lease for its head office facility and other immaterial operating leases for certain equipment.  The Company’s office lease has a remaining lease term of 3.3 years.  The Company measured the lease liability associated with the office lease using a discount rate of 10% at inception.  The Company estimated the incremental borrowing rate for the leased asset based on a range of comparable interest rates the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment.  As of March 31, 2022, the Company has not entered into any lease arrangements classified as a finance lease.

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The Company’s corporate headquarters is located in Boston, Massachusetts.  This facility houses the Company’s research, clinical, regulatory, commercial and administrative personnel.  The Company’s lease agreement commenced May 2019 and has a term of six years with a five-year renewal option to extend the lease. The Company has not included the five-year renewal option to extend the lease in its measurement of the right-of-use asset or lease liability.

The following table presents the maturities of the Company’s operating lease liability related to office space as of March 31, 2022, all of which is under a non-cancellable operating lease:

    

Operating Lease

2022

$

615

2023

 

834

2024

 

851

2025

502

Thereafter

 

Total operating lease payments

2,802

Less: imputed interest

396

Total operating lease liability

$

2,406

6. Intangible Assets, Net

As of March 31, 2022, the Company’s finite-lived intangible assets, which totaled $8,527 resulted from the capitalization of certain milestone payments made to Ipsen Pharma, S.A.S., or Ipsen, in accordance with the terms of the Company’s license agreement with Ipsen, in connection with the Company’s first commercial sale of IMCIVREE in the U.S. in March 2021 and in France in March 2022.

As of March 31, 2022, amortization expense for the next five years and beyond is summarized as follows:

2022

$

641

2023

 

855

2024

855

2025

855

2026

855

Thereafter

 

4,466

Total

$

8,527

The Company began amortizing its finite-lived intangible assets in April 2021 over an 11 year period based on IMCIVREE’s expected patent exclusivity period. Amortization expense totaled $130 for the three months ended March 31, 2022.  Amortization expense is included in cost of sales on the consolidated statements of operations and comprehensive loss.  

7. Income Taxes

The Company did not record a tax provision for the three month period ended March 31, 2022 as the Company generated sufficient tax losses during the period.  The Company recorded an income tax provision of $22,006 for the three month period ended March 31, 2021, primarily related to the sale of the PRV, offset by a tax benefit from ordinary losses generated by the Company during the period. The Company expects to have sufficient tax losses in the current year to offset income and thus no current year liability is expected.  The Company expects to maintain a full valuation allowance against its net deferred tax assets for the year.

8. Common Stock

As of March 31, 2022, an aggregate of 13,361,315 shares of common stock were reserved for future issuance under the Company’s stock plans, including outstanding stock options, restricted stock units, and performance stock units

16

that have been issued totaling 8,968,037 and 1,404,259 shares are available for future grants under the Company’s 2017 Employee Stock Purchase Plan.

On February 9, 2022, the Company’s board of directors adopted the Rhythm Pharmaceuticals, Inc. 2022 Employment Inducement Plan (the “Inducement Plan”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Stock Market LLC listing rules (“Rule 5635(c)(4)”). In accordance with Rule 5635(c)(4), awards under the Inducement Plan may only be made to a newly hired employee who has not previously been a member of the Company’s board of directors, or an employee who is being rehired following a bona fide period of non-employment by the Company or a subsidiary, as a material inducement to the employee’s entering into employment with the Company or its subsidiary. An aggregate of 1,000,000 shares of the Company’s common stock have been reserved for issuance under the Inducement Plan. The Company will continue to grant awards under the 2017 Plan pursuant to the terms thereof.

The exercise price of stock options granted under the Inducement Plan will not be less than the fair market value of a share of the Company’s common stock on the grant date. Other terms of awards, including vesting requirements, are determined by the Company’s board of directors and are subject to the provisions of the Inducement Plan. Stock options granted to employees generally vest over a four-year period but may be granted with different vesting terms. Certain options may provide for accelerated vesting in the event of a change in control. Stock options granted under the Inducement Plan expire no more than 10 years from the date of grant. As of March 31, 2022, no stock option awards have been issued under the Inducement Plan. As of March 31, 2022, no restricted stock unit awards have been granted under the Inducement Plan. As of March 31, 2022, 1,000,000 shares of common stock are available for future grant under the Inducement Plan.

On November 2, 2021, we entered into a sales agreement, or the Sales Agreement, with Cowen and Company LLC, or Cowen, as sales agent, pursuant to which we may, from time to time, issue and sell common stock with an aggregate value of up to $100,000 in "at-the-market" offerings, or the ATM. Sales of common stock, if any, pursuant to the Sales Agreement, may be made in sales deemed to be an “at the market offering” as defined in Rule 415(a) of the Securities Act, including sales made directly through The Nasdaq Global Market or on any other existing trading market for our common stock. As of March 31, 2022, there was $100,000 of common stock remaining available for sale under the ATM.

On February 9, 2021 the Company completed a public offering of 5,750,000 shares of common stock at an offering price of $30.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 750,000 additional shares of common stock. The Company received $161,731 in net proceeds after deducting underwriting discounts, commissions and offering expenses.

9. Related-Party Transactions

Expenses paid directly to consultants and vendors considered to be related parties amounted to $480 and $636 for the three months ended March 31, 2022 and 2021, respectively. Outstanding payments due to these related parties as of March 31, 2022 and December 31, 2021 were $45 and $50, respectively, and were included within accounts payable on the balance sheet.

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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: our financial performance, including our expectations regarding our existing cash, operating losses, expenses and sources of future financing; 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; our marketing, commercial sales, and revenue generation; expectations surrounding our manufacturing arrangements; the impact of the novel coronavirus, or COVID-19, pandemic 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, a commercial-stage biopharmaceutical company committed to transforming the treatment paradigm for people living with rare genetic diseases of obesity, which are characterized by early-onset, severe obesity and an insatiable hunger or hyperphagia. Rhythm’s precision medicine, IMCIVREE™ (setmelanotide), for which for which we have exclusive worldwide rights, has the potential to restore dysfunctional melanocortin 4 receptor (MC4R) signaling due to impaired MC4R pathway function. MC4R pathway deficiencies result in the disruption of satiety signals and energy homeostasis in the body, which, in turn, leads to intense feelings of hunger and to obesity. IMCIVREE is the first-ever therapy developed for patients with certain rare genetic diseases of obesity that is approved or authorized in the United States, European Union (EU) or Great Britain. IMCIVREE was approved by the U.S. FDA in November 2020 for chronic weight management in adult and pediatric patients 6 years of age and older with obesity due to proopiomelanocortin (POMC), proprotein convertase subtilisin/kexin type 1 (PCSK1) or leptin receptor (LEPR) deficiency confirmed by genetic testing demonstrating variants in POMC, PCSK1, or LEPR genes that are interpreted as pathogenic, likely pathogenic, or of uncertain significance. The European Commission (EC) and Great Britain’s Medicines & Healthcare Products Regulatory Agency (MHRA), in July and September 2021, respectively, granted marketing authorization to IMCIVREE for the treatment of obesity and the control of hunger associated with genetically confirmed loss-of-function biallelic POMC, including PCSK1, deficiency or biallelic LEPR deficiency in adults and children 6 years of age and above. These approvals were based on Phase 3 data demonstrating a statistically significant and clinically meaningful reduction of weight and hunger in patients 12 years old or older with severe obesity due to POMC, PCSK1 or LEPR deficiency. In addition to the United States and Europe/UK, we and our partners are seeking approval for IMCIVREE to treat patients with these genetic obesities in Israel, China, Hong Kong and Macau.  

Additionally, we are seeking regulatory approvals in the United States and Europe for setmelanotide to treat obesity and control hunger in patients with Bardet-Biedl syndrome (BBS) or Alström syndrome. In November 2021, we announced the U.S. Food and Drug Administration (FDA) has accepted for filing our supplemental New Drug Application (sNDA) for setmelanotide seeking to expand the approved label to include patients with BBS or Alström syndrome and granted us priority review for this sNDA. The FDA has assigned a Prescription Drug User Fee Act (PDUFA) goal date of

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June 16, 2022 for this sNDA. We are advancing physician and patient education and engagement efforts, patient identification and other strategies in support of a potential United States commercial launch of setmelanotide for the treatment of obesity and hyperphagia in patients with BBS and potentially Alström syndrome. Also a Type II variation application to the European Medicines Agency (EMA) seeking regulatory approval and authorization for setmelanotide to treat obesity and control of hunger in adult and pediatric patients 6 years of age and older with BBS also is under review.  We anticipate that the EMA’s Committee for Medicinal Products for Human Use (CHMP) will make its recommendation on the Company’s Type II variation application in the third quarter of 2022. We are advancing efforts to achieve market access for BBS in EU member countries and the UK, as well.

We also are advancing a broad clinical development program evaluating setmelanotide in several ongoing clinical trials, and we are leveraging what we believe is the largest known DNA database focused on obesity - with approximately 45,000 sequencing samples as of December 31, 2021 - to improve the understanding, diagnosis and care of people living with severe obesity due to certain variants in genes associated with the MC4R pathway. In April 2022, we enrolled the first patient in the pivotal Phase 3 EMANATE clinical trial, a randomized, double-blind, placebo-controlled trial to evaluate setmelanotide in four independent sub-studies in patients with obesity due to a heterozygous variant of the POMC/PCSK1 genes or LEPR gene or certain rare variants of the SRC1 gene or the SH2B1 gene. We also have initiated the Phase 2 DAYBREAK clinical trial designed to evaluate setmelanotide in patients who carry a confirmed variant in one or more of 10 additional genes with strong or very strong relevance to the MC4R pathway. Our broad clinical program evaluating setmelanotide in rare diseases of obesity also includes the ongoing exploratory Phase 2 Basket study, an ongoing Phase 2 study evaluating setmelanotide in patients with hypothalamic obesity, a Phase 3 study in pediatric patients with MC4R pathway deficiencies between the ages of 2 and 6 years old, and a potential registration-enabling study with our once-weekly formulation of setmelanotide. Additionally, as an FDA post-marketing requirement, we are currently evaluating the effects of setmelanotide on the QT interval corrected for heart rate, or QTc interval, in healthy volunteers.  We expect to announce preliminary data from the ongoing Phase 2 study in patients with hypothalamic obesity and new  data from the ongoing exploratory Phase 2 Basket Study in the middle of 2022.

There are currently no effective or approved treatments for these MC4R pathway related diseases. The FDA has acknowledged the importance of these results by giving setmelanotide Breakthrough Therapy designation for the treatment of obesity associated with genetic defects upstream of the MC4R in the leptin melanocortin pathways. The Breakthrough Therapy designation currently covers indications for POMC deficiency obesity, LEPR deficiency obesity, BBS and Alström syndrome.

Additional recent clinical, regulatory and commercial updates include:

On May 3, 2022, we announced that the first patients have been treated with IMCIVREE in France under the paid early access program. The French Haute Autorité de Santé (HAS) granted paid early access for IMCIVREE for patients with POMC, PCSK1 or LEPR deficiency obesity in January 2022.  In addition, we announced that we anticipate releasing preliminary data from the ongoing Phase 2 study in patients with hypothalamic obesity and new data from the ongoing exploratory Phase 2 Basket Study evaluating setmelanotide in patients with obesity due to a variant in the MC4 receptor in mid-2022.

On May 3, 2022, we also announced that six abstracts were accepted for presentation at the Endocrine Society Annual Meeting & Expo (ENDO), being held on June 11-14, 2022 in Atlanta, Georgia. Dr. Jesús Argente, Universidad Autónoma de Madrid in Spain, will deliver an oral presentation of 12-month data from long-term extension trials of setmelanotide in patients with obesity due to heterozygous variants in POMC, PCSK1, and LEPR. In addition, five abstracts will be delivered as poster presentations, including:

Long-term Efficacy of Setmelanotide in Patients With Obesity Due to POMC, PCSK1, and LEPR Biallelic Deficiency;
Setmelanotide in Patients with Heterozygous POMC, LEPR, SRC1, or SH2B1 Obesity: Design of EMANATE – A Placebo-Controlled Phase 3 Trial;
Long-term Efficacy of Setmelanotide in Patients with Bardet-Biedl Syndrome;
Body Mass Index and Weight Reductions in Patients with SRC1 Genetic Variant Obesity After 1 Year of Setmelanotide; and

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

On May 3, 2022, we also announced that on April 22, 2022, the CHMP recommended the EC approve a modification to the summary product characteristics (SmPC) for IMCIVREE for biallelic POMC, PSCK1 or LEPR deficiency that would allow for treating patients who have moderate or severe renal impairment with an adjustment for more gradual dose escalation and a lower maximum dose.  The final EC decision on this amendment is anticipated to come in July 2022, and this same dosing modification request is being considered as part of the scheduled review for BBS.

On May 2, 2022, we announced the presentation of new data supporting the potential for setmelanotide to treat the early-onset obesity, hyperphagia, and metabolic impairment associated with BBS.  This cumulative safety data from across the setmelanotide clinical development program demonstrated, that treatment was generally well tolerated consistent with prior clinical experience. These data were presented at the Pediatric Endocrine Society (PES) 2022 Virtual Annual Meeting, held April 28 - May 1, 2022.

On April 6, 2022, we announced the first patient was enrolled in its Phase 3 EMANATE trial. We also announced modifications to the trial design for EMANATE to focus on rare patient populations that we believe have the highest likelihood of success.  After receiving feedback from the FDA in April 2022 that indicated that additional clinical trials to support potential registration for non-rare patient populations would likely be required, we eliminated a fifth sub-study intended to evaluate setmelanotide in patients with a PCSK1 N221D variant. EMANATE now includes four independent sub-studies, evaluating setmelanotide in patients with obesity due to a heterozygous variant of the POMC or PCSK1 gene, the LEPR gene, the SRC1 gene or the SH2B1 gene. In the POMC/PCSK1 and LEPR sub-studies, we will focus enrollment on heterozygous variants classified as pathogenic and likely pathogenic, as initially planned. In addition, instead of enrolling across the entire spectrum of variants of uncertain significance (VUS), we will focus on patients with suspected pathogenic variants, or a subset of VUS, which are most likely to impair MC4R pathway function. We anticipate an enrollment period of 12-18 months to complete enrollment of approximately 400 patients in the trial.

Also on April 6, 2022, we announced modifications to the enrollment criteria in our Phase 2 DAYBREAK trial, which began enrolling patients in January 2022, to focus initially on rare variants associated with 10 prioritized MC4R-relevant genes, which we and key opinion leaders believe have the highest probability of success.  The trial is now expected to enroll approximately 100 to 200 patients with hyperphagia and severe obesity and a variant in one of these 10 genes. We decided to pause the enrollment of patients with variants in additional MC4R pathway genes and will evaluate expansion of DAYBREAK to these genes based on the early clinical data from the prioritized genes.

Our operations to date have been limited primarily to conducting research and development activities for setmelanotide. To date, we have not generated significant product revenue and have financed our operations primarily through the proceeds received from the sales of common and preferred stock, asset sales, as well as capital contributions from the former parent company, Rhythm Holdings LLC. 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 February 2021, we have raised aggregate net proceeds of approximately $611.4 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 PRV.  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. We will not generate significant revenue from product sales until we are able to successfully establish a marketing and commercialization infrastructure for IMCIVREE.  IMCIVREE became commercially available to patients 6 years of age and older with obesity due to POMC, PCSK1 or LEPR deficiency in the U.S. in the first quarter of 2021 and following marketing authorizations in the EU and Great Britain, we are pursuing a country-by-country strategy to establish market access and reimbursement for IMCIVREE in several countries. As noted above, during March, 2022, we treated the first patients with IMCIVREE in France under the paid early access program.  We expect to continue to fund our operations through the sale of equity, debt financings or other sources. We intend to build our own marketing and commercial sales infrastructure and we may enter into collaborations with other parties for certain markets outside the United States. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable

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

As of March 31, 2022 we had an accumulated deficit of $581.7 million. Our net losses were $52.8 million, and our net income was $43.8 million, for the three months ended March 31, 2022 and 2021, respectively. We expect to continue to incur significant expenses and increasing operating losses over the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

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; and
continue to operate as a public company.

As of March 31, 2022, our existing cash and cash equivalents and short-term investments were approximately $241.0 million. We expect that the changes to the EMANATE and DAYBREAK trials discussed above, coupled with a streamlining of our planned global network of clinical trial sites, will result in meaningful cost savings.  We expect that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses into at least the fourth quarter of 2023.

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.

Impact of COVID-19

We are closely monitoring how the continued spread of COVID-19 is affecting our employees, business, preclinical studies and clinical trials. In response to the COVID-19 pandemic, we have limited access to our executive offices with most employees continuing their work outside of our offices and travel has been restricted.  Based on current information we do not currently anticipate any disruption in the clinical supply of setmelanotide.  Our CMOs have indicated that they have appropriate plans and procedures in place to ensure uninterrupted future supply of clinical and commercial-grade setmelanotide, subject to potential limitations on their operations due to COVID-19.  As a result, we do not currently expect that the COVID-19 pandemic will have a material impact on our business, results of operations and financial condition.  At this time, however, there is still uncertainty relating to the trajectory of the pandemic and the impact of related responses, and disruptions caused by the COVID-19 pandemic have resulted and may in the future result in difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials and the incurrence of unforeseen costs as a result of disruptions in clinical supply or preclinical study or clinical trial delays. For example, we experienced interruption of key clinical trial activities, such as patient attendance and clinical trial site monitoring, in our Phase 3 clinical trial evaluating setmelanotide for the treatment of insatiable hunger and severe obesity in individuals with BBS or Alström syndrome. The impact of COVID-19 on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the

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pandemic, the impact of variants, evolving travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, the ultimate impact on financial markets and the global economy, the effectiveness of vaccines and vaccine distribution efforts and the effectiveness of other actions taken in the United States and other countries to contain and treat the disease. See “Risk Factors—The COVID-19 pandemic has and may continue to adversely impact our business, including our preclinical studies, clinical trials and our commercialization prospects.” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Financial Operations Overview

Revenue

To date, we have not generated significant revenue from product sales.  Our lead product candidate, IMCIVREE, was approved by the FDA in November 2020 for chronic weight management in adult and pediatric patients six years of age and older with obesity due to POMC, PCSK1 or LEPR deficiency confirmed by genetic testing. IMCIVREE became commercially available in the United States in the first quarter of 2021.  We recorded our first sales of IMCIVREE in the United States in March 2021 and we made our first sales in France during March 2022 under the paid early access program.  We expect our initial sales of IMCIVREE will be limited by the ultra-rare nature of the disease and limited number of diagnosed patients in the United States and throughout the rest of the world.

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 costs for IMCIVREE included in our cost of sales for the three months ended March 31, 2022 were insignificant.  We expect cost of sales to increase in 2022 as we continue to sell inventory that is produced after we began capitalizing IMCIVREE commercial inventory.  We continue to evaluate the impact of this previously expensed inventory on the future cost of product sales, however we do not expect there to be a signicant impact based on the cost structure of the product.

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.

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.

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The following table summarizes our current research and development expenses:

Three Months Ended

March 31, 

Research and development summary

    

2022

    

2021

Research and development expense

$

32,510

$

19,911

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

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, relating to our full-time employees not involved in R&D or commercial activities.  Other significant costs include rent, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

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

Three Months Ended

March 31, 

Selling, general and administrative summary

    

2022

    

2021

Selling, general and administrative expense

$

21,449

$

14,518

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We anticipate that our selling, general and administrative expenses will increase in the future to support continued and expanding development efforts,  commercialization of 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 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, 2021.  

Results of Operations

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

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

Three Months Ended

 

March 31, 

Change

 

    

2022

    

2021

    

$

    

%

 

(in thousands)

 

Statement of Operations Data:

Product revenue, net

 

$

1,498

 

$

35

$

1,463

NM

Costs and expenses:

Cost of sales

230

4

226

NM

Research and development

32,510

19,911

12,599

63

%

Selling, general, and administrative

 

21,449

 

14,518

 

6,931

48

%

Total costs and expenses

 

54,189

 

34,433

 

19,756

57

%

Loss from operations

 

(52,691)

 

(34,398)

 

(18,293)

53

%

Other (loss) income, net

 

(73)

 

100,154

 

(100,227)

(100)

%

(Loss) income before taxes

(52,764)

65,756

(118,520)

(180)

%

Provision for income taxes

22,006

(22,006)

(100)

%

Net (loss) income

$

(52,764)

$

43,750

$

(96,514)

(221)

%

NM=Not meaningful

Product revenue, net.  Product revenue, net increased to $1.5 million for the three month period ended March 31, 2022.  There was no significant product revenue in the comparative period.  The FDA approved our lead product candidate, IMCIVREE in November 2020 and we recorded our first sales of IMCIVREE in March 2021. We expect our sales of IMCIVREE will be limited by the ultra-rare nature of the disease and limited number of diagnosed patients in the United States and abroad for our approved indications.  To date, substantially all of our product revenue has been generated in the United States.  During March 2022, we completed our first sales of IMCIVEE in France through an early access program.

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Cost of sales. Cost of sales increased to $0.2 million for the three month period ended March 31, 2022.  There were no significant cost of sales in the comparative prior period. All of our inventory of IMCIVREE produced prior to FDA approval is available for commercial or clinical use.  Most of the manufacturing costs have been recorded as research and development expenses in prior periods.  Accordingly, the costs for IMCIVREE included in our cost of sales for the three months ended March 31, 2022 were insignificant and primarily reflect the amortization of our capitalized sales based milestone payment made to Ipsen Pharma S.A.S., or Ipsen upon our first commercial sale as well as a royalty due to Ipsen on our net product sales.  We expect cost of sales to increase as we sell inventory that is produced after we began capitalizing IMCIVREE commercial inventory.

Research and development expense. Research and development expense increased by $12.6 million to $32.5 million in 2022 from $19.9 million in 2021, an increase of 63%. The increase was primarily due to the following:

an increase of $9.4 million in our clinical trial costs associated with new and planned clinical trials, including our Phase 2 DAYBREAK and Phase 3 EMANATE trials, Phase 3 pediatrics trial, QTc study, Phase 2 hypothalamic obesity study, and increased enrollment in our long-term extension study; these increases were partially offset by activtivty in our BBS, basket as well as GO-ID studies;
an increase of $3.8 million due to increased purchases of clinical supply material;
an increase of $1.0 million in development milestones earned by Camurus AB, or Camurus related to development milestone achieved related to our weekly formulation; and
an increase of $0.4 million due to increased gene sequencing costs;

The above increases were partially offset by:  

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

Selling, general and administrative expense. Selling, general and administrative expense increased by $6.9 million to $21.4 million in 2022 from $14.5 million in 2021, an increase of 48%. The increase was primarily due to the following:

an increase of $3.3 million due to increased compensation and benefits related costs associated with additional headcount to support our expanding business operations as well as to build out our commercial operations in the United States and internationally;
an increase of $2.3 million related to marketing activities for IMCIVREE;
an increase of $1.0 million due to increased costs associated with office support and insurance costs for our expanding workforce; and
an increase of $0.2 million due to increased professional fees and consulting services to support the build out of our commercial operations in the United States and internationally as well as corporate legal and consulting support for our international expansion;

Other income, net. Other income decreased by $100.2 million. The decrease was primarily due to the sale of our PRV in February 2021. The sale of our PRV in the prior year was a non-recurring transaction.

Provision for income taxes. There is no provision for income taxes for the three months ended March 31, 2022, as we project to generate operating losses during the year. We recorded a provision for income taxes of $22.0 million as a result of the sale of our PRV during the three months ended March 31, 2021.

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Net loss. Net loss increased by $96.5 million to $52.8 million for the three months ended March 31, 2022, from net income of $43.8 million for the three months period ended March 31, 2021. The increase in net loss was a result of the non-recurring nature of our PRV sale in 2021, which resulted in $100.0 million of other income during the prior year period.

Liquidity and Capital Resources

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

Cash flows

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

Three Months Ended March 31, 

    

2022

    

2021

(in thousands)

Net cash provided by (used in):

Operating activities

$

(53,632)

$

(33,531)

Investing activities

 

72,522

 

(145,712)

Financing activities

 

399

 

165,585

Net increase (decrease) in cash, cash equivalents and restricted cash

$

19,289

 

(13,658)

Net cash used in operating activities

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

Net cash used in operating activities was $53.6 million for the three months ended March 31, 2022 and consisted primarily of a net loss of $47.9 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, depreciation and amortization and rent expense.  The change in operating assets and liabilities reflected a total use of cash of approximately $2.6 million from an increase in accounts payables and accrued expenses and other current liabilities primarily associated with our royalty payment owed to Ipsen, coupled with a decrease of $3.2 million in other long-term assets and prepaid expenses and other current assets.

Net cash used in operating activities was $33.5 million for the three months ended March 31, 2021 and consisted primarily of a net loss of $28.9 million adjusted for non-cash items, which consisted of non-cash stock-based compensation, the gain on the sale of the PRV, a deferred provision for income taxes, depreciation and amortization and rent expense.  The change in operating assets and liabilities reflected a total use of cash of approximately $6.3 million from an increase in accounts payables and accrued expenses and other current liabilities associated with our CROs, CMOs and consultants due to the timing of payments, offset by a decrease of $1.7 million in prepaid expenses and other current assets.

Net cash provided by (used in) investing activities

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

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

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Net cash provided by financing activities

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

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

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 enable us to fund our operating expenses into at least the fourth quarter of 2023. 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 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 pursuant to our license agreements;
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;
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.

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

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

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

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.

Contractual obligations

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

Recent Accounting Pronouncements

For a discussion of pending and recently adopted accounting pronouncements, see Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their cost.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the most recent fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any material legal proceedings.

Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. Additional risks and uncertainties that we currently do not know about or that we currently believe to be immaterial may also impair our business. You should carefully consider the risks described below and the other information in this Annual Report, including our audited consolidated financial statements and the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risks Related to Our Financial Position and Need for Capital

We are a commercial stage biopharmaceutical company with a limited operating history and have not generated significant revenue from product sales. We have incurred significant operating losses since our inception, anticipate that we will incur continued losses for the foreseeable future and may never achieve profitability.

We are a commercial stage biopharmaceutical company with a limited operating history on which to base your investment decision. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We were incorporated in February 2013. Our operations to date have been limited primarily to acquiring rights to intellectual property, business planning, raising capital, developing our technology, identifying potential product candidates, undertaking preclinical studies and conducting research and development activities, including clinical trials, for setmelanotide. To date, we have not generated significant revenue from product sales. We have obtained FDA approval for IMCIVREE for chronic weight management in adult and pediatric patients 6 years of age and older with obesity due to proopiomelanocortin, or POMC, proprotein convertase subtilisin/kexin type 1, or PCSK1, or leptin receptor, or LEPR, deficiency confirmed by genetic testing. IMCIVREE has also received marketing authorization from the European Commission and Great Britain’s Medicines and Healthcare Products Regulatory Agency, or MHRA for the treatment of obesity and the control of hunger associated with genetically confirmed loss-of-function biallelic POMC including PCSK1, deficiency or biallelic LEPR deficiency in adults and children 6 years of age and above. We have not obtained any other regulatory approvals for setmelanotide. We first commercialized IMCIVREE in the U.S. in the first quarter of 2021 and therefore do not have a long history operating as a commercial company. We have begun transitioning from a company with a research and development focus to a company capable of supporting commercial activities and we may not be successful in such transition. We have not yet demonstrated our ability to manufacture at commercial scale, or arrange for a third party to do so on our behalf, or conduct sales, marketing and distribution activities necessary for successful product commercialization. Consequently, any predictions made about our future success or viability may not be as accurate as they could be if we had a longer operating history.

Since our inception, we have focused substantially all of our efforts and financial resources on the research and development of setmelanotide, which is approved by the FDA and authorized by the European Commission and the MHRA, as noted above, and is in development to address patients with Bardet-Biedl syndrome, or BBS, Alström syndrome, and several other indications. We have funded our operations to date primarily through the proceeds from the sales of common stock and preferred stock, asset sales, as well as capital contributions from our former parent, Rhythm Holdings LLC, and have incurred losses in each year since our inception.

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Our net (losses) and net income were ($52.8) million and $43.8 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, we had an accumulated deficit of $581.7 million. Substantially all of our operating losses have resulted from costs incurred in connection with our development programs and from commercial and general and administrative costs associated with our operations. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital. We expect our research and development expenses to significantly increase in connection with our additional clinical trials of setmelanotide and development of any other product candidates we may choose to pursue. In addition, having obtained marketing approval for IMCIVREE, we expect to continue to incur significant sales, marketing and outsourced manufacturing expenses. We have and will continue to incur additional costs associated with operating as a public company, including as a result of no longer qualifying as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any significant revenue from setmelanotide. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:

continue to commercialize setmelanotide by building a commercial organization and/or entering into collaborations with third parties;
ensure setmelanotide is available to patients;
achieve market acceptance of setmelanotide in the medical community and with third-party payors;
continue to initiate and successfully complete later-stage clinical trials that meet their clinical endpoints;
continue to initiate and successfully complete all safety studies required to obtain U.S. and foreign marketing approvals for setmelanotide as a treatment for obesity caused by genetic deficiencies affecting the MC4R pathway; and
successfully manufacture or contract with others to manufacture setmelanotide.

Absent our entering into collaboration or partnership agreements, we have and expect to continue to incur significant sales and marketing costs as we prepare to commercialize setmelanotide. Even though IMCIVREE is FDA approved for chronic weight management in patients 6 years of age and older with obesity due to POMC, PCSK1 or LEPR deficiencies confirmed by genetic testing and authorized in the EU and Great Britain for the treatment of obesity and the control of hunger associated with genetically confirmed loss-of-function biallelic POMC including PCSK1, deficiency or biallelic LEPR deficiency in adults and children 6 years of age and above, and even if we successfully complete our pivotal and other clinical trials and setmelanotide is approved for commercial sale in additional indications, setmelanotide may not be a commercially successful drug. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate significant product revenue, we will not become profitable and will be unable to continue operations without continued funding.

We will need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

We are currently in the early stages of commercializing IMCIVREE for chronic weight management in patients with obesity due to POMC, PCSK1 or LEPR deficiencies in the U.S. and the EU and Great Britain and advancing setmelanotide through clinical development for additional indications in the United States and for potential approvals in

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other countries. Developing peptide therapeutic products is expensive and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance setmelanotide in additional clinical trials. We intend to use our available cash resources to advance the clinical development of setmelanotide, for disease-education and community-building activities, precommercialization activities for setmelanotide in BBS, patient identification, and commercialization activities related to IMCIVREE. Depending on the status of additional regulatory approvals and commercialization of setmelanotide, as well as the progress we make in any sales of IMCIVREE, we may still require significant additional capital to fund the continued development of setmelanotide and our operating needs thereafter. We may also need to raise additional funds if we choose to pursue additional indications and/or geographies for setmelanotide or otherwise expand more rapidly than we presently anticipate.

From August 2015 through August 2017, we raised aggregate net proceeds of $80.8 million through our issuance of series A preferred stock. In connection with our initial public offering, or IPO, in October 2017 and our underwritten follow-on offerings through February 2021, we raised aggregate net proceeds of approximately $611.4 million through the issuance of our common stock after deducting underwriting discounts, commissions and offering related transaction costs. Since inception, we have received a further $100.0 million from asset sales, specifically in connection with the sale of our Rare Pediatric Disease Priority Review Voucher, or PRV, to Alexion Pharmaceuticals, Inc. As of March 31, 2022, our cash and cash equivalents and short-term investments were approximately $241.0 million. We expect our cash and cash equivalents and short-term investments will enable us to fund our operating expenses into at least the fourth quarter of 2023. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or a combination of these approaches. We will also require additional capital to obtain additional regulatory approvals for, and to continue to commercialize, setmelanotide. Raising funds in the current economic environment, particularly in light of ongoing uncertainty related to the COVID-19 pandemic, supply chain issues and labor shortages, and international turmoil due to the Russian invasion of Ukraine, may present additional challenges. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize setmelanotide. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations, and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or other third parties at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to setmelanotide or technologies or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of setmelanotide or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially adversely affect our business, financial condition and results of operations.

Risks Related to the Development of Setmelanotide

Positive results from early clinical trials of setmelanotide may not be predictive of the results of later clinical trials of setmelanotide. If we cannot generate positive results in our later clinical trials of setmelanotide, we may be unable to successfully develop, obtain regulatory approval for, and commercialize additional indications for setmelanotide.

Positive results from any of our Phase 1, Phase 2, or Phase 3 clinical trials of setmelanotide, or initial results from other clinical trials of setmelanotide, may not be predictive of the results of later clinical trials. The duration of effect of

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setmelanotide tested in our Phase 1 and Phase 2 clinical trials was often for shorter periods than in our pivotal Phase 3 clinical trials. The duration of effect of setmelanotide has only been studied in long-term durations for a small number of patients in our Phase 2 and Phase 3 clinical trials and safety or efficacy issues may arise when more patients are studied in longer trials and on commercial drug. It is possible that the effects seen in short-term clinical trials will not be replicated in long-term or larger clinical trials. In addition, not all of our trials demonstrated statistically significant weight loss and there can be no guarantee that future trials will do so.

Positive results for one indication are not necessarily predictive of positive results for other indications. We have demonstrated statistically significant and clinically meaningful reductions in weight and hunger in Phase 3 clinical trials in obesity due to POMC, PCSK1 or LEPR deficiencies and BBS, and believe we have demonstrated proof of concept in Phase 2 clinical trials in impairments due to a variant in one of the two alleles in the POMC, PCSK1, or LEPR genes (HET obesity), as well as the SRC1 and SH2B1 genes, all genetic diseases of extreme and unrelenting appetite and obesity. We hypothesize that patients with other upstream genetic variants in the MC4R pathway may also respond with reductions in weight and hunger after treatment with setmelanotide. However, patients with other upstream genetic variants may not have a similar response to setmelanotide, and until we obtain more clinical data in other genetic variants, we will not be sure that we can achieve proof of concept in such indications.

We are actively working to advance additional genetic variants related to the MC4R pathway through our clinical development program. Our continued development efforts are focused on obesity related to several single gene related, or monogenic, MC4R pathway impairments: Bardet Biedl syndrome, or BBS; Alström syndrome; HET obesity due to a genetic variant in one of the two alleles of the POMC, PCSK1 or LEPR gene, or HETs; obesity due to steroid receptor coactivator 1, or SRC1, variants; obesity due to SH2B adapter protein 1, or SH2B1; hypothalamic obesity; and MC4R deficiency obesity. For example, in April 2022 we enrolled the first patient our pivotal Phase 3 EMANATE clinical trial of setmelanotide. The trial is a randomized, double-blind, placebo-controlled study with four independent sub-studies evaluating setmelanotide in patients with: heterozygous POMC/PCSK1 obesity; heterozygous LEPR obesity; certain variants of the SRC1; or certain variants of SH2B1 genes. After receiving feedback from the FDA in April 2022 that indicated that additional clinical trials to support potential registration for non-rare patient populations would likely be required, we eliminated a fifth sub-study intended to evaluate setmelanotide in patients with a PCSK1 N221D variant. Each of the four sub-studies will be entirely independent of the others and, if successful, is designed to support separate regulatory submissions to the FDA and EMA in each studied indication. However, the FDA and EMA may not view positive results in one sub-study, even if such results are statistically significant and clinically meaningful, as being sufficient for approval for any given indication.

Success in a basket trial, or any trial in one indication, may not predict success in another indication. In contrast, in the event of an adverse safety issue, clinical hold, or other adverse finding in one or more indications being tested, such event could adversely affect our trials in the other indications and may delay or prevent completion of such clinical trials.

Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in later stage clinical trials after achieving positive results in early stage development, and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, pre-clinical findings made while clinical trials were underway.

Additionally, setbacks may be caused by new safety or efficacy observations made in clinical trials, including previously unreported adverse events, or AEs. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA approval or a marketing authorization from the European Commission or foreign regulatory authorities. If we fail to obtain positive results in our Phase 3 clinical trials of setmelanotide, the development timeline and regulatory approval and commercialization prospects for setmelanotide and, correspondingly, our business and financial prospects, would be materially adversely affected.

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Interim, “topline” and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose preliminary or topline data from our preclinical studies and clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. We make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline or preliminary results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published or reported. As a result, topline data should be viewed with caution until the final data are available.

From time to time, we may also disclose interim data from our preclinical studies and clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects. Further, disclosure of interim data by us or by our competitors could result in volatility in the price of our common stock.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is material or otherwise appropriate information to include in our disclosure.

If the interim, topline, or preliminary data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business, operating results, prospects or financial condition.

The number of patients suffering from each of the MC4R pathway variants we are targeting is small and has not been established with precision. If the actual number of patients is smaller than we estimate, our revenue and ability to achieve profitability may be materially adversely affected.

Due to the rarity of our target indications, there is no comprehensive patient registry or other method of establishing with precision the actual number of patients with MC4R pathway deficiencies. As a result, we have had to rely on other available sources to derive clinical prevalence estimates for our target indications. In addition, we have internal genetic sequencing results from individuals with severe obesity that provide another approach to estimating prevalence. As of December 31, 2021, our database had approximately 45,000 sequencing samples. Since the published epidemiology studies for these genetic variants are based on relatively small population samples, and are not amenable to robust statistical analyses, it is possible that these projections may significantly exceed the addressable population, particularly given the need to genotype patients to definitively confirm a diagnosis.

Based on multiple epidemiological methods, we have estimated the potential addressable patient populations with these MC4R pathway deficiencies based on the following sources and assumptions:

POMC Deficiency Obesity. POMC Deficiency Obesity is defined by the presence of biallelic variants in the POMC or PCSK1 genes that are interpreted as pathogenic, likely pathogenic, or of uncertain significance (VOUS). Our addressable patient population estimate for POMC deficiency obesity is approximately 100 to 500 patients in the United States, with a comparable addressable patient population in Europe. Our estimates are based on:

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approximately 50 patients with POMC deficiency obesity noted in a series of published case reports, each mostly reporting a single or small number of patients. However, we believe our addressable patient population for this deficiency may be approximately 100 to 500 patients in the United States, and a comparable addressable patient population in Europe, as most of the reported cases are from a small number of academic research centers, and because genetic testing for POMC deficiency obesity is often unavailable and currently is rarely performed;
our belief, based on discussions with experts in rare diseases, that the number of diagnosed cases could increase several-fold with increased awareness of this deficiency and the availability of new treatments;
U.S. Census Bureau figures for adults and children, and Centers for Disease Control and Prevention, or CDC, prevalence numbers for adults with severe obesity (body mass index, or BMI, greater than 40 kg/m2) and for children with severe early-onset obesity (99th percentile at ages two to 17 years old); and
our internal sequencing yield for POMC deficiency obesity patients (including both POMC and PCSK1 gene diseases), defined as patients having biallelic variants in the POMC or PCSK1 genes that are interpreted as pathogenic, likely pathogenic, or of uncertain significance (VOUS), of approximately 0.05%.
LEPR Deficiency Obesity. LEPR Deficiency Obesity is defined by the presence of biallelic variants in the LEPR gene that are interpreted as pathogenic, likely pathogenic, or of uncertain significance (VOUS). Our addressable patient population estimate for LEPR deficiency obesity is approximately 500 to 2,000 patients in the United States, with a comparable addressable patient population in Europe. Our estimates are based on:
epidemiology studies on LEPR deficiency obesity in small cohorts of patients comprised of children with severe obesity and adults with severe obesity who have a history of early onset obesity;
U.S. Census Bureau figures for adults and children and CDC prevalence numbers for adults with severe obesity (BMI, greater than 40 kg/m2) and for children with severe early-onset obesity (99th percentile at ages two to 17 years old);
with wider availability of genetic testing expected for LEPR deficiency obesity and increased awareness of new treatments, our belief that up to 40% of patients with these diseases may eventually be diagnosed; and
our internal sequencing yield for LEPR deficiency obesity patients, defined as patients having biallelic variants in the LEPR gene that are interpreted as pathogenic, likely pathogenic, or of uncertain significance (VOUS), of approximately 0.09%.
Bardet-Biedl Syndrome. Our addressable patient population estimate for BBS is approximately 1,500 to 2,500 patients in the United States based on:
published prevalence estimates of one in 100,000 in North America, which projects to approximately 3,250 people in the United States. We believe the majority of these patients are addressable patients; and
our belief that with wider availability of genetic testing expected for BBS and increased awareness of new treatments, the number of patients diagnosed with this disorder will increase.
Alström Syndrome. Our addressable patient population estimate for Alström syndrome is approximately 500 patients in the United States. This estimate is based on:

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published prevalence estimates of one in 1,000,000 in North America, which projects to approximately 325 people in the United States. We believe the majority of these patients are addressable patients; and
our belief that with wider availability of genetic testing expected for Alström syndrome and increased awareness of new treatments, the number of patients diagnosed with this disorder will increase.
POMC, PCSK1, or LEPR Heterozygous Obesities; SRC1 and SH2B1 Obesities. Our potential setmelanotide-responsive patient population estimate for POMC, PCSK1, or LEPR heterozygous, SRC1 and SH2B1 obesity patients with at least one variant interpreted as pathogenic, likely pathogenic, or of uncertain significance (VUS) suspected pathogenic is approximately 53,000 patients in the United States. Our estimates are based on:
U.S. Census Bureau population data and CDC prevalence numbers for early onset obesity (120% the 95th percentile between the ages of 2-5 years);
our internal sequencing yield of patients with POMC, PCSK1, or LEPR heterozygous, SRC1 or SH2B1 variants interpreted as pathogenic, likely pathogenic, or of uncertain significance (VUS) of approximately 10-15%; and
a clinical response rate of 40% for patients carrying pathogenic or likely pathogenic variants, and 20% for patients carrying a variant of uncertain significance (VUS).

The clinical response rate used in this calculation is based on the clinical data currently available to us from our trials and may change as more data become available.

MC4R Deficiency Obesity. Our addressable patient population estimate for MC4R-rescuable deficiency obesity is approximately 10,000 patients in the United States. This estimate is based on:
U.S. Census Bureau population data and CDC prevalence numbers for early onset obesity (120% the 95th percentile between the ages of 2-5 years);
a comprehensive ongoing biochemical screening study indicating there may be a defined subset of individuals who carry MC4R variants that may be rescued by an MC4R agonist; and
our internal sequencing yield for MC4R deficiency obesity patients of approximately 2.0% prior to application of functional filters.
Hypothalamic obesity. Our addressable patient population estimate for hypothalamic obesity (HO) is greater than 4,500 patients in the United States. This estimate is based on:
an annual incidence of craniophryngioma (CP) of approximately 1.3 million per year in the United States, which projects to approximately 493 cases of CP per year based on a United States population of approximately 329 million;
approximately 62.5% (based on a published range of 50% to 75%) of CP patients develop HO;
20-year average survival after CP surgery of 75% (based on a published range of 66% to 85%);
allowing for patients that develop HO due to other factors besides CP, results in an estimated HO prevalence in the United States exceeding 4,500 patients; and
internal Company estimate is based on reported incidence of hypothalamic obesity following craniophryngioma and long-term survival rates.

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We believe that the patient populations in the EU are at least as large as those in the United States. However, we do not have comparable epidemiological data from the EU and these estimates are therefore based solely on applying relative population percentages to the Company-derived estimates described above.

Defining the exact genetic variants that result in MC4R pathway diseases is complex, so if any approval that we obtain is based on a narrower definition of these patient populations than we had anticipated, then the potential market for setmelanotide for these indications will be smaller than we originally believed. In either case, a smaller patient population in our target indications would have a materially adverse effect on our ability to achieve commercialization and generate revenues.

If we experience delays or difficulties in the enrollment and/or retention of patients in clinical trials, our regulatory submissions or receipt of additional marketing approvals could be delayed or prevented.

We may not be able to initiate or continue our planned clinical trials on a timely basis or at all for our product candidates if we are unable to recruit and enroll a sufficient number of eligible patients to participate in these trials through completion of such trials as required by the FDA or other comparable foreign regulatory authorities. Patient enrollment is a significant factor in the timing of clinical trials. Our ability to enroll eligible patients may be limited or may result in slower enrollment than we anticipate.

Our clinical trials will compete with other clinical trials that are in the same therapeutic areas as our product candidates, including general obesity, and this competition reduces the number and types of patients available to us, as some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Because the number of qualified clinical investigators and clinical trial sites is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at such clinical trial sites. In addition, there are limited patient pools from which to draw for clinical studies. In addition to the rarity of genetic diseases of obesity, the eligibility criteria of our clinical studies will further limit the pool of available study participants as we will require that patients have specific characteristics that we can measure or to assure their disease is either severe enough or not too advanced to include them in a study. Patient enrollment for our current or any future clinical trials may be affected by other factors, including:

size and nature of the patient population;
severity of the disease under investigation;
availability and efficacy of approved drugs for the disease under investigation;
patient eligibility criteria for the trial in question as defined in the protocol;
perceived risks and benefits of the product candidate under study;
clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new products that may be approved or future product candidates being investigated for the indications we are investigating;
clinicians’ willingness to screen their patients for genetic markers to indicate which patients may be eligible for enrollment in our clinical trials;
delays in or temporary suspension of the enrollment of patients in our planned clinical trial due to the COVID-19 pandemic;
ability to obtain and maintain patient consents;
patient referral practices of physicians;

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the ability to monitor patients adequately during and after treatment;
proximity and availability of clinical trial sites for prospective patients; and
the risk that patients enrolled in clinical trials will drop out of the trials before completion, including as a result of contracting COVID-19 or other health conditions or being forced to quarantine, or, because they may be late-stage cancer patients, will not survive the full terms of the clinical trials.

In addition, the pediatric population is an important patient population for setmelanotide, and our addressable patient population estimates include pediatric populations. However, it may be more challenging to conduct studies in younger participants, and to locate and enroll pediatric patients. These factors may make it difficult for us to enroll enough patients to complete our clinical trials in a timely and cost-effective manner. Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may also result in increased development costs for setmelanotide and any future product candidates and jeopardize our ability to obtain additional marketing approvals for the sale of setmelanotide. Furthermore, even if we are able to enroll a sufficient number of patients for our clinical trials, we may have difficulty maintaining participation in our clinical trials through the treatment and any follow-up periods.

Failures or delays in the commencement or completion of our planned clinical trials of setmelanotide could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

Successful completion of our ongoing and planned clinical trials is a prerequisite to submitting an NDA or NDA supplement to the FDA, an MAA to the EMA, and other applications for marketing authorization to equivalent competent authorities in foreign jurisdictions, and consequently, successful completion of such trials, at a minimum will be required for regulatory approvals and the commercial marketing of setmelanotide.

We do not know whether our planned clinical trials will begin or whether any of our clinical trials will be completed on schedule, if at all, as the commencement and successful completion of clinical trials can be delayed or prevented for a number of reasons, including but not limited to:

inability to generate sufficient preclinical or other in vivo or in vitro data to support the initiation of clinical studies;
delays in the completion of preclinical laboratory tests, animal studies and formulation studies in accordance with FDA’s good laboratory practice requirements and other applicable regulations;
the FDA or other equivalent competent authorities in foreign jurisdictions may deny permission to proceed with our ongoing or planned trials or any other clinical trials we may initiate, or may place a clinical trial on hold or be suspended;
delays in filing or receiving authorization to proceed under an additional investigational new drug application, or IND, or similar foreign application if required;
delays in reaching a consensus with the FDA and other regulatory agencies on study design and obtaining regulatory authorization to commence clinical trials;
delays in reaching or failing to reach agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
difficulties in obtaining Institutional Review Board, or IRB, and/or ethics committee approval to conduct a clinical trial at a prospective site or sites;

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since many already diagnosed patients are at academic sites, delays in conducting clinical trials at academic sites due to the particular challenges and delays typically associated with those sites, as well as the lack of alternatives to these sites which have already diagnosed patients;
inadequate quantity or quality of setmelanotide or other materials necessary to conduct clinical trials, including delays in the manufacturing of sufficient supply of finished drug product;
challenges in identifying, recruiting and training suitable clinical investigators;
challenges in recruiting and enrolling suitable patients to participate in clinical trials;
severe or unexpected drug related side effects experienced by patients in a clinical trial, including side effects previously identified in our completed clinical trials;
difficulty collaborating with patient groups and investigators;
failure by our CROs, other third parties or us to perform in accordance with the FDA’s or any other regulatory authority’s good clinical practice requirements, or GCPs, or applicable regulatory guidelines in other countries;
occurrence of adverse events associated with setmelanotide that are viewed to outweigh its potential benefits, or occurrence of adverse events in trial of the same or similar class of agents conducted by other companies;
changes to the clinical trial protocols;
clinical sites deviating from trial protocol or dropping out of a trial;
changes in regulatory requirements and guidance that require amending or submitting new clinical protocols;
changes in the standard of care on which a clinical development plan was based, which may require new or additional trials;
selection of clinical endpoints that require prolonged periods of observation or analyses of resulting data;
the cost of clinical trials of our product candidates being greater than we anticipate;
clinical trials of our product candidates producing negative or inconclusive results, which may result in our deciding, or regulators requiring us, to conduct additional clinical trials or abandon development of such product candidates; and
development of antibodies to the drug or adjuvants may result in loss of efficacy or safety events.

In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials. Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA or other equivalent competent authorities in foreign jurisdictions, the IRBs or ethics committees at the sites where the IRBs or the ethics committees are overseeing a clinical trial, a data and safety monitoring board, or DSMB, or Safety Monitoring Committee, or SMC, overseeing the clinical trial at issue or other equivalent competent authorities due to a number of factors, including, among others:

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical trial protocols;

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inspection of the clinical trial operations or trial sites by the FDA or other equivalent competent authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;