UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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RHYTHM PHARMACEUTICALS, INC.
FORM 10-Q
INDEX
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)
June 30, | December 31, | |||||
| 2024 |
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Assets | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Short-term investments |
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Accounts receivable, net | | | ||||
Inventory | | | ||||
Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Right-of-use asset | | | ||||
Intangible assets, net | | | ||||
Restricted cash |
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Other long-term assets | | | ||||
Total assets | $ | | $ | | ||
Liabilities, Convertible Preferred Stock and Stockholders’ equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities |
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Deferred revenue | | | ||||
Lease liability |
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Total current liabilities |
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Long-term liabilities: |
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Deferred royalty obligation | | | ||||
Lease liability, non-current |
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Derivative liability | | | ||||
Other long-term liabilities | | — | ||||
Total liabilities |
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Commitments and contingencies (Note 15) | ||||||
Series A convertible preferred stock, $ | | — | ||||
Stockholders’ equity: |
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Preferred Stock, $ |
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Common stock, $ |
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Additional paid-in capital | | | ||||
Accumulated other comprehensive (loss) income | ( | | ||||
Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities, convertible preferred stock and stockholders’ equity | $ | | $ | | ||
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
(in thousands, except share and per share data)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | ||||||||||||
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| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Revenues: | |||||||||||||
Product revenue, net | $ | | $ | | $ | | $ | | |||||
Total revenues | | | | | |||||||||
Costs and expenses: | |||||||||||||
Cost of sales | | | | | |||||||||
Research and development | | | | | |||||||||
Selling, general, and administrative |
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Total costs and expenses |
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Loss from operations |
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Other income (expense): |
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Other income (expense), net |
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Gain on settlement of forward contract | | — | | — | |||||||||
Interest expense | ( | ( | ( | ( | |||||||||
Interest income |
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Total other income (expense), net |
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Loss before income taxes | ( | ( | ( | ( | |||||||||
Provision for income taxes | | — | | — | |||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Accrued dividends on convertible preferred stock | ( | — | ( | — | |||||||||
Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Net loss per share attributable to common stockholders, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Weighted-average common shares outstanding, basic and diluted | | | | | |||||||||
Other comprehensive loss: | |||||||||||||
Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Foreign currency translation adjustment | ( | ( | ( | ( | |||||||||
Unrealized (loss) gain, net on marketable securities, net of tax |
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Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Rhythm Pharmaceuticals, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock & Stockholders’ Equity
(in thousands, except share data)
(Unaudited)
Accumulated | ||||||||||||||||||||||
Series A Convertible | Additional | Other | Total | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) | Deficit |
| Equity | ||||||||
Balance at December 31, 2023 |
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| $ | | $ | ( |
| $ | | ||
Stock-based compensation expense | — | — | — | — | | — | — | | ||||||||||||||
Issuance of common stock in connection with ESPP | — | — | | — | | — | — | | ||||||||||||||
Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units | — | — | | | | — | — | | ||||||||||||||
Issuance of common stock as consideration for LGC license | — | — | | — | | — | — | | ||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | ( | — | ( | ||||||||||||||
Unrealized loss on marketable securities | — | — | — | — | — | ( | — | ( | ||||||||||||||
Net loss | — | — | — | — | — | — | ( | ( | ||||||||||||||
Balance at March 31, 2024 | — | $ | — | | $ | |
| $ | |
| $ | ( | $ | ( |
| $ | | |||||
Issuance of Series A Preferred Stock, net of $ | | | — | — | — | — | — | — | ||||||||||||||
Stock-based compensation expense | — | — | — | — | | — | — | | ||||||||||||||
Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units | — | — | | — | | — | — | | ||||||||||||||
Accretion of preferred stock dividends | — | | — | — | ( | — | — | ( | ||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | ( | — | ( | ||||||||||||||
Unrealized loss on marketable securities | — | — | — | — | — | ( | — | ( | ||||||||||||||
Net loss | — | — | — | — | — | — | ( | ( | ||||||||||||||
Balance at June 30, 2024 | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Balance at December 31, 2022 |
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Stock-based compensation expense | — |
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Issuance of common stock in connection with ESPP | — | — | | — | | — | — | | ||||||||||||||
Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units | — | — | | — | | — | — | | ||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | | — | | ||||||||||||||
Net unrealized gains on short-term investments |
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Net loss |
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Balance at March 31, 2023 | — | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
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Issuance of common stock in connection with ESPP | — |
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Issuance of common stock in connection with exercise of stock options and vesting of restricted stock units | — |
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Issuance of common stock upon completion of public offering, net of offering costs | — |
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Foreign currency translation adjustment | — |
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Net unrealized gains on short-term investments | — |
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Net loss | — |
| — | — | — | — | — | ( | ( | |||||||||||||
Balance at June 30, 2023 | — | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
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)
Six months ended June 30, | |||||||
| 2024 |
| 2023 |
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Operating activities | |||||||
Net loss | $ | ( | $ | ( | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation expense |
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Depreciation and amortization |
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Non-cash interest expense | | | |||||
Non-cash accretion & amortization of short-term investments | ( | ( | |||||
Non-cash accretion of non-current liability | | — | |||||
Non-cash rent expense |
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Change in fair value of embedded derivative liability | ( | ( | |||||
Gain on settlement of forward contract | ( | — | |||||
Acquired IPR&D assets classified as investing activities | | | |||||
Changes in operating assets and liabilities: |
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Accounts receivable | ( | ( | |||||
Inventory | ( | ( | |||||
Prepaid expenses and other current assets |
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Deferred revenue | — | ( | |||||
Other long-term assets, net |
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Accounts payable, accrued expenses and other liabilities |
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Net cash used in operating activities |
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Investing activities |
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Purchases of short-term investments |
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Maturities of short-term investments |
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Acquisition of IPR&D assets | ( | ( | |||||
Purchases of property and equipment |
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Net cash provided by investing activities |
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Financing activities |
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Repayment of deferred royalty obligation | ( | ( | |||||
Proceeds from the exercise of stock options |
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Proceeds from issuance of common stock from ESPP |
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Gain on settlement of forward contract | | — | |||||
Proceeds from Series A Preferred Stock, net of issuance costs | | — | |||||
Net cash provided by (used in) financing activities |
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Effect of exchange rates on cash | ( | ( | |||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period | $ | | $ | | |||
Supplemental disclosure of non-cash investing and financing activities: | |||||||
Non-current liability issued in exchange for the acquisition of IPR&D | $ | | $ | — | |||
Issuance of common stock in exchange for IPR&D | $ | | $ | — | |||
Accretion of preferred stock dividends | $ | | $ | — | |||
Holdback payable associated with acquisition of IPR&D assets, in accrued expenses | $ | — | $ | | |||
Transaction costs associated with acquisition of IPR&D assets, in accounts payable | $ | — | $ | | |||
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 dedicated to transforming the lives of patients and their families living with rare neuroendocrine diseases. We are focused on advancing our melanocortin-4 receptor agonists, including our lead asset, IMCIVREE® (setmelanotide), as a precision medicine designed to treat hyperphagia and severe obesity caused by rare MC4R pathway diseases. While obesity affects hundreds of millions of people worldwide, we are developing therapies for a subset of individuals who have hyperphagia, a pathological hunger that leads to abnormal food-seeking behaviors, and severe obesity due to an impaired MC4R pathway, which may be caused by traumatic injury or genetic variants. The MC4R pathway is an endocrine pathway in the brain that is responsible for regulating hunger, caloric intake and energy expenditure, which consequently affect body weight. IMCIVREE, an MC4R agonist for which we hold worldwide rights, is the first-ever therapy developed for patients with certain rare diseases that is approved or authorized in the United States, European Union, and Great Britain, Canada, and other countries and regions.
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, the Netherlands, France, Germany, Italy, Spain 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. Even though the Company has an approved product, and even if the Company’s further product development efforts are successful, it is uncertain when, if ever, the Company will realize sufficient revenue from product sales to fund operations.
Liquidity
The Company has incurred operating losses and negative cash flows from operations since inception. As of June 30, 2024, the Company had an accumulated deficit of $
At June 30, 2024, the Company had $
7
collectively, the “Investors”), relating to the issuance and sale of
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, proceeds from out license arrangements, 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 through at least the next twelve months from the filing of this Quarterly Report on Form 10-Q with the SEC.
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 June 30, 2024, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2024 and 2023, the condensed consolidated statements of convertible preferred stock and stockholders’ equity for the three and six months ended June 30, 2024 and 2023 and the condensed consolidated statements of cash flows for the six months ended June 30, 2024 and 2023 and the related footnote disclosures are unaudited. In management's opinion, the unaudited 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, 2023 and include all adjustments, which are all normal recurring adjustments, necessary for the fair presentation of the interim financial statements. The results for the six months ended June 30, 2024 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 June 30, 2024, 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, 2023.
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 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 estimates related to determining our net product revenue, accruals related to research and development expenses, assumptions used to record stock-based compensation
8
expense, interest expense on our deferred royalty obligation, 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.
Reclassification of Prior Year Balances
Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported cash flows. Specifically, in the condensed consolidated statements of cash flows, the Company reclassified $
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
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
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. For the three months ended June 30, 2024 and 2023, approximately
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.
The Company relies on separate third parties to perform genetic testing in the United States and Europe, respectively. The inability of the vendors to fulfill testing services for the Company could materially impact future operating results and adversely impact our ability to further develop setmelanotide. A change in the relationship with the genetic testing service providers, or an adverse change in their business, could materially impact future operating results.
9
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 customary payment terms that generally require payment within 90 days. The Company analyzes amounts that are past due for collectability, and periodically evaluates the creditworthiness of its customers. As of June 30, 2024 and December 31, 2023, the Company determined an allowance for doubtful accounts was not required based upon our review of contractual payments and our customers’ circumstances.
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
In the United States (the “U.S.”), which accounts for the largest portion of our total revenues, the Company sells its product to
Revenue from product sales is 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 customers 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 consolidated statements of operations and comprehensive loss. 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 ninety days or less, 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, rebates, and co-pay assistance 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
10
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.
Government rebates: The Company is subject to discount obligations under government programs, including Medicaid programs, Medicare and Tricare in the United States as well as certain government rebates and pricing adjustments in certain international markets that we operate. 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 sheets. 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 certain of our customers 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 customers in the distribution channel. For services that are not distinct from the sale of our product, 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, 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.
Provisions for trade discounts, chargebacks and allowances are recorded as reductions to accounts receivable, and returns, government rebates, and other incentives are recorded as a component of accrued expenses.
License Agreements
LG Chem
In January 2024, we entered into a license agreement and share issuance agreement with LG Chem, Ltd. (“LGC”). Under the terms of the license agreement, we obtained worldwide rights to develop LGC’s proprietary compound LB54640 and assumed sponsorship of two ongoing LGC Phase 2 studies designed to evaluate safety, tolerability, pharmacokinetics and weight loss efficacy of LB54640. The SIGNAL trial is a randomized, placebo-controlled, double-blind study designed to enroll and evaluate approximately
11
We paid LGC $
In addition, under the terms of the license agreement, we agreed to pay LGC up to $
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 POMC, PCSK1 or 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
The Company initially estimated the fair value of the RareStone equity to be $
The Company received total upfront consideration of $
12
On October 28, 2022, we delivered written notice, or the October Notice, to RareStone that we have terminated the RareStone License for cause. In accordance with the Notice, we maintain that RareStone has materially breached its obligations under the RareStone License to fund, perform or seek certain key clinical studies and waivers, including with respect to our global EMANATE trial, among other obligations. On December 21, 2022, RareStone provided written notice to us that it objects to the claims in the Notice, including our termination of the RareStone License for cause. On March 16, 2023, we provided written notice, or the March Notice, to RareStone reaffirming our position that RareStone has materially breached its obligations under the RareStone License and that we have terminated the RareStone License for cause, and also requested documentation supporting RareStone’s purported dispute notice objecting to the claims in the Notice.
On May 10, 2023, RareStone provided written notice to the Company reaffirming its objections to the claims in our October Notice and March Notice, including to the Company’s termination of the RareStone License for cause. On November 29, 2023, RareStone wrote to us seeking to negotiate and execute a commercial supply agreement as contemplated under the Exclusive License Agreement, and on January 19, 2024, we responded in writing again reaffirming our position that RareStone has materially breached its obligations under the RareStone License and that we have terminated the RareStone License for cause.
Deferred Royalty Obligation
The Company treats the debt obligation to HealthCare Royalty Management, LLC as discussed further in Note 13, “Long-Term Obligations”, as a deferred royalty obligation, amortized using the effective interest rate method over the estimated life of the revenue streams. The Company recognizes interest expense thereon using the effective rate, which is based on our current estimates of future revenues over the life of the arrangement. In connection therewith, the Company periodically assesses its expected revenues using internal projections, imputes interest on the carrying value of the deferred royalty obligation, and records interest expense using the imputed effective interest rate. To the extent the Company’s estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, the Company will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of our deferred royalty obligation. The assumptions used in determining the expected repayment term of the deferred royalty obligation and amortization period of the issuance costs requires the Company to make estimates that could impact the classification of such costs, as well as the period over which such costs will be amortized.
Inventory
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. The Company values inventories at the lower of cost or estimated net realizable value. The Company determines the cost of inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. Raw materials and work in process includes all inventory costs prior to packaging and labelling, including raw materials, active pharmaceutical ingredient, and drug product. Finished goods include packaged and labelled products. Raw materials and work in process that may be used for either research and development or commercial sale are classified as inventory until the material is consumed or otherwise allocated for research and development. If the material is intended to be used for research and development, it is expensed as research and development once that determination is made.
Cost of Product Sales
Cost of product sales consists 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
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adjustment charges. Finally, cost of sales may also include costs related to excess or obsolete inventory adjustment charges, abnormal costs, unabsorbed manufacturing and overhead costs, and manufacturing variances.
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.
Acquired IPR&D and Milestone Expenses
In an asset acquisition, payments incurred prior to regulatory approval to acquire rights to in-process research and development projects are expensed as acquired IPR&D and recorded as a component of research and development expense in the condensed consolidated statements of operations and comprehensive net loss unless the project has an alternative future use. These costs include upfront and development milestone payments related to licensing arrangements, or other asset acquisitions that provide rights to develop, manufacture and/or sell pharmaceutical products. Where contingent development milestone payments are due to third parties, prior to regulatory approval, the payment obligations are expensed when the achievement of the underlying milestone becomes probable. Regulatory and commercial milestone payments made to third parties subsequent to regulatory approval are capitalized as intangible assets and amortized to cost of products sold over the remaining useful life of the related product.
Foreign Currency Translation
The majority of the Company’s operations occurs in subsidiaries that have the U.S. dollar denominated as its functional currency. The assets and liabilities of the Company’s subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Revenue and expense amounts for these subsidiaries are translated using the average exchange rates for the period. Changes resulting from foreign currency translation are included in accumulated other comprehensive income (loss) on the Company’s consolidated statement of stockholders’ equity. Net foreign currency exchange transaction gains (losses), which are included in other (expense) income, net on our consolidated statements of operations, were immaterial for the three and six months ended June 30, 2024 and 2023.
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.
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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 and derivative liability at June 30, 2024 and December 31, 2023 were carried at fair value, determined according to the fair value hierarchy. See Note 6 for further discussion.
The carrying amounts reflected in the condensed consolidated balance sheets for accounts payable and accrued expenses and other current liabilities approximate their fair values due to their short-term maturities at June 30, 2024 and December 31, 2023, respectively.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net 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 loss per share calculation, stock options, performance stock units and restricted stock units are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share is the same for all periods presented.
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 | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
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| 2024 |
| 2023 | 2024 |
| 2023 | ||||||
Stock options | | | | | |||||||||
Restricted stock units |
| |
| |
| |
| | |||||
Performance stock units | — | | — | | |||||||||
Common stock reserved for the conversion of Series A convertible preferred stock | | — | | — | |||||||||
Potential common shares | | | | | |||||||||
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 November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The standard requires disclosure of incremental segment information on an annual and interim basis and allows for multiple measures of a segment’s profit or loss provided that one of those measures is
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consistent with GAAP. The amendments in this update do not change how a public company identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments, but rather requires public entities to provide in interim periods all disclosures about a reporting segment’s profit or loss and assets that are currently required annually. ASU 2023-07 becomes effective for the annual period starting on January 1, 2024, and for interim periods starting on January 1, 2025. Early adoption is permitted. The Company is currently evaluating the disclosure requirements related to the new standard but does not anticipate a material impact to its net financial position.
3. Asset Acquisitions
LG Chem, Ltd.
On January 4, 2024, the Company entered into a license agreement and share issuance agreement with LG Chem, Ltd. (“LGC”). Under the terms of the license agreement, the Company obtained worldwide rights to LGC’s proprietary compound LB54640 and assumed sponsorship of two ongoing LGC Phase 2 studies designed to evaluate safety, tolerability, pharmacokinetics and weight loss efficacy of LB54640.
The total purchase consideration of $
In addition, under the terms of the license agreement, we agreed to pay LGC up to $
The assets acquired were In-Process Research and Development (“IPR&D”) assets. However, since the IPR&D assets were determined to have no alternative future use, the Company recognized the $
The Company determined that the additional contingent consideration did not meet the definition of a derivative as of the acquisition date. Therefore, the Company did not record a contingent consideration liability on the acquisition date. The Company will recognize any future contingent consideration payments related to the LGC transaction in the period in which the achievement of the underlying milestones becomes probable.
Xinvento B.V.
On February 27, 2023, the Company, through its wholly-owned Dutch subsidiary, Rhythm Pharmaceuticals Netherlands B.V., a Dutch private limited liability company (“Rhythm BV”), entered into a Share Purchase Agreement (the “Purchase Agreement”) with Xinvento B.V., a Dutch private limited liability company based in the Netherlands (“Xinvento”), and the other parties named therein, pursuant to which, and concurrently with the execution thereof, Rhythm BV acquired all of the issued and outstanding shares of Xinvento. The aggregate consideration at closing was approximately $
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In addition to the Closing Purchase Price, the Purchase Agreement provides for the payment of additional contingent consideration totaling up to $
The total purchase consideration of $
The assets acquired were IPR&D assets. However, since the IPR&D assets were determined to have no alternative future use, the Company recognized the $
The Company determined that the additional contingent consideration did not meet the definition of a derivative as of the acquisition date. Therefore, the Company did not record a contingent consideration liability on the acquisition date. The Company will recognize any future contingent consideration payments related to the Xinvento transaction in the period in which the achievement of the underlying milestones becomes probable.
4. Inventory
Inventory consists of the following:
June 30, | December 31, | |||||
| 2024 |
| 2023 | |||
Raw Materials | $ | | $ | | ||
WIP |
| |
| | ||
Finished Goods |
| |
| | ||
Total Inventory | $ | | $ | | ||
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
June 30, | December 31, | |||||
| 2024 |
| 2023 | |||
Research and development costs | $ | | $ | | ||
Professional fees |
|
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