Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) Q4 2022 Earnings Call Transcript

Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good day and thank you for standing by. Welcome to the Rhythm Pharmaceuticals Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Connolly, Executive Director of Investor Relations and Corporate Communications. Please go ahead.

David Connolly: Thank you, Michelle. I’m Dave Connolly, IR here at Rhythm Pharmaceuticals. For those of you participating on the conference call, our slides can be accessed and controlled by going to the Investors section on the Investors page of our website at ir.rhythmtx.com. And this morning, we issued a press release that provides our fourth quarter and year end 2022 financial results and business update, which is available on our website and as listed on Slide 2. And as listed on Slide 2 is our agenda. Here with me today in Boston are David Meeker, Chair, Chief Executive Officer and President of Rhythm Pharmaceuticals; Jennifer Chien, Executive Vice President — Executive Vice President, Head of North America; Hunter Smith, our Chief Financial Officer; and Yann Mazabraud, Executive Vice President, Head of International is on the line joining us from Europe.

And I’ll remind you that this call contains remarks concerning future expectations, plans and prospects, which constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent annual or quarterly report on file with the SEC. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent dates. We specifically disclaim any obligation to update such statements. With that, I’ll turn the call over to David, who will begin on Slide 5.

David Meeker: Thank you, David, and good morning, everyone. Thank you for joining the fourth quarter earnings call. And we are going to talk about earnings, which look good. And this week’s announced acquisition of Xinvento. However, before we do that, I want to reflect for a moment on this company’s journey. It was almost a decade ago when we published the first case reports in the , describing the remarkable effect of setmelanotide in two patients with POMC deficiency. Since then, we have learned so much about the MC4 receptor pathway, the associated genetic deficiencies, the importance of hyperphagia and energy expenditure in the development of obesity. At the same time, we started to learn about what it means to live with one of these rare diseases.

Complete lack of awareness in the part of the healthcare system, the relative shortage of experts, the almost complete lack of genetic testing, all compounded by the societal and medical bias, which confronts the individual and family living with obesity. As a mother one child with BBS said, when asked how bad can hyperphagia and obesity be when your child may be losing their site. A response, people are kind to blind people. So in Slide 5, the challenges of living with the rare disease were further highlighted this week as we mark Rare Disease Day at Rhythm as a guest speaker, a mother of two children with BBS who describe the incredible challenges of living with the hyperphagia. This severe preoccupation with food and the associated abnormal food seeking behaviors and how her child and her family’s life has been changed since starting in .

And Rare Disease Day leads into Obesity Care Week and World Obesity Day on March 4, which brings obesity to the forefront as a disease that requires a new way of thinking and new therapeutic option that work. Rhythm is at the center of these awareness events as we know obesity is not just one disease, but many diseases, some of them rare. And each disease deserves a careful evaluation and the right treatment. Slide 6. So, 2022 was a transformative year for Rhythm as we now embark on our next chapter as an established commercial stage company expanding geographically and now further diversifying our pipeline. The BBS launch, as you will hear from Jennifer and Yann, continues to go extremely well. Since FDA approval in June through the end of the year in the U.S. we have received more than 200 new prescriptions from 125 prescribing physicians with more than 100 patients approved for reimbursement.

Our confidence in this opportunity continues to grow. Internationally, IMCIVREE is now available on eight ex-U.S. markets for POMC and LEPR. France also includes BBS through paid early access. The success to date in both regions speaks to the quality of the teams we have. And we are continuing to execute on our strategy to expand the overall opportunity for setmelanotide. With strong proof of concept data in our Phase 2 hypothalamic obesity trial in 2022, Phase 3 trial sites are now being initiated and we have begun screening patients. This year we’ll also have data readouts in our Phase 3 pediatrics trial and Phase 3 switch study, evaluating the weekly formulation of setmelanotide and preliminary data from the open label Stage 1 portion of the Phase 2 DAYBREAK trial.

Monday, we were excited to announce the acquisition of Xinvento, a preclinical Dutch company with a suite of drug candidates for congenital hyperinsulinism, which we believe represents an outstanding fit with Rhythm and our expanded focus looking . This fits perfectly with our concentration of pediatric endocrinologists and we’ve already heard from some of them how they are excited about this development and look forward to working with us as we develop those compounds. We’re targeting being in the clinic in 2024. And as noted, we are well capitalized into 2025 and the Xinvento acquisition will have no impact on that forecast. Slide 7. So CHI is a disease where the available treatments are suboptimal, both in terms of safety, tolerability and importantly, effectiveness.

The unmet need is clear and I had the opportunity to get to know Claudine van der Sande, the CEO and Piet Wigerinck, the CSO as one of their scientific advisors. I was incredibly impressed by Claudine’s personal story, the thoughtful way she has pursued her mission and the great progress she and Piet have made in a short period of time. The fit with Rhythm was obvious. CHI is a genetic disease, which patients presenting during the neonatal period with hypoglycemic episodes, which may trigger seizures, loss of consciousness and with repetitive insults, brain damage and death. Biologically functioning beta cell, an increase in glucose levels triggers in front release and as glucose levels drop in front release is suppressed. In CHI, this process now functions and insulin release continues in the presence of low glucose levels resulting in further lowering of the blood glucose for life threatening levels.

The emergency treatment is dextrose and glucose infusion. We know from patient and family surveys conducted by the International Patient Organization that these hypoglycemic low blood sugar levels are occurring one or more times per day in 25% and one or more times per week in an additional 20% of patients despite being on standard of care. This is an ultra-rare disease where an incidence of approximately 1 in 30,000 individuals in the U.S., EU and Japan, respectively. Approximately 70% to 80% of these patients need medical treatment. In addition to patients with chronic hyperinsulinism, there’s another population of patients potentially twice as large with transient hyperinsulism in the neonatal period who we will potentially target as well.

We look forward to providing a more in-depth presentation on the science and our development plans later this year. Slide 8. Phase 3 trial for HO is actively screening patients. This is a double blind randomized controlled trial of 120 patients randomized two-to-one to setmelanotide or placebo. Patients will be dose escalated over eight weeks and then followed for an additional 52 weeks. The primary endpoint is% change in BMI. We expect it will take six to 12 months to enroll, probably skewing closer to the 12 month timeframe. Slide 10, as you know, this is a fundamentally different opportunity for Rhythm with an estimated 5,000 to 10,000 patients in the U.S. and EU, respectively, largely already identified based on their history of injury to the hypothalamus with associated impairment of the MC4 pathway and their need for ongoing hormonal replacement related to a pituitary injury.

We look forward to providing an update on the patients in the long term extension before the end of the year and anticipate that will be tied to an abstract presentation at a fall meeting. Slide 11. Multiple trials ongoing, these other programs are progressing well. Both the and weekly switch trials, as noted, we will read out top line data in the second half of this year. We’ll provide initial look at the Phase 2 DAYBREAK open label portion in the second half of this year and M&A is enrolling patients in each of its four independent of sub-studies. Slide 12, before I turn it over to Jennifer, we are formally updating our BBS prevalence numbers, which we talked about previously. As we have described, when we look at the identified patient numbers in Europe where the diagnostic rate is ahead of the U.S. and extrapolate that to the U.S. population, combined with the frequency of patients with a biallelic pathogenic variant for BBS being identified in our URO testing program, and our initial experience with launch, all of this gives us increased confidence that the target population is larger than originally anticipated.

It’s on the order of 4,000 to 5,000 patients in the U.S. and similarly in Europe. And with that, I’ll turn it over to Jennifer.

Jennifer Chien: Thank you, David. I’m going to be starting on Slide 13 today. We are excited about the current status of our U.S. IMCIVREE BBS launch. We remain focused on our efforts to see the diagnosis of patients with BBS and educate them on the availability of IMCIVREE. The only FDA approved therapy MC4R pathway, a root cause of hunger and obesity in people living with BBS. Through all the efforts of our cross functional team, we have seen continued progress and success across the journey from diagnosis of BBS patients, through to securing access and maintaining patients on therapy due to the benefits they receive. Next slide. We are pleased with the progress in achievements made in the second full quarter of launch. As we did last quarter, we will share with you today key metrics we believe reflects the progress of our launch, focusing on prescriptions, prescribers and care approvals for reimbursement.

Since IMCIVREE was approved of BBS by the FDA on June 16, 2022, and through the end of the fourth quarter of 2022, we have received more than 200 new prescriptions for BBS patients coming from more than 125 physicians. This breaks down to more than 100 new — 120 new prescriptions between June and the end of September and more than 80 in the fourth quarter. Given that 20 clinical trial patients had converted to commercial prescriptions during the third quarter, we are pleased to see the continued growth in quarter-over-quarter prescriptions. Importantly, we have received payer approval for more than 100 of these prescriptions since launch. The demand for IMCIVREE is strong. Physicians are writing the prescriptions and patients are experiencing benefit on drug.

On the next slide, we’ll take a closer look at IMCIVREE prescribers response. Not surprisingly endocrinology, both pediatrics and adults, remains a top specialty amongst our prescribers, at a combined 47%. Pediatricians remain second, accounting for 24% of prescribers. On the small pie chart on the right, you can see that approximately 22% of all IMCIVREE prescribers since launch are net to Rhythm. By this, we mean they have not been called on by a Rhythm territory manager prior to writing a prescription. Interestingly, these new to Rhythm prescribers skewed towards primary care for general pediatric. We believe this speaks to the success of our non-personal promotion efforts, which a broader physician and patient population. As well as motivated patients who likely became aware of IMCIVREE through our relationship with the BBS Foundation.

Photo by Hal Gatewood on Unsplash

Next slide. Hitting more than 100 payer approvals for reimbursement is quite a meaningful milestone for us at the end of the fourth quarter. Our payer mix for BBS prescription still remains with the vast majority coming from commercial plans and Medicaid and a small portion or 9% coming from Medicare. Time to payer approval remains approximately one to three months. There are certainly outliers, but this range represents the average. And we are starting to see subsequent prescriptions submitted to payers that have already approved reimbursement for IMCIVREE move faster to approvals. While the majority of the remaining prescriptions are in the prior authorization and appeal stages, we have moved patients to free drug or pass, our patient assistance program.

By statute, Medicare does not cover anti- obesity medication, so those patients are transitioned to (ph). Similar to other rare diseases, there are patients with small self-insured plans that are not providing coverage for IMCIVREE. Finally, Medicaid continues to be a mixed bag as some States offer coverage for IMCIVREE and others will make a decision on a case by case basis through the appeal process. Both of these categories make up the majority of Medicaid plan. There are, however, some states that currently outlined they will not cover IMCIVREE, and hence, we do also have some Medicaid patients on free drug. We continue to work persistently and explore alternative venues for reimbursement for all of our patients and have experienced early success transitioning patients off of PAC.

We remain committed in our payer education and outreach efforts to help them recognize BBS as a distinct disease that requires a targeted therapeutic approach. Next slide. On this slide, we show the age breakdown of BBS patients for whom we have prescriptions enhanced since launched. Adults account for 46% of prescriptions received, while prescriptions for children and adolescents account for over half the prescriptions received. And the vast majority, 95% of patients with prescriptions have consented to receiving direct connection and education from our patient services team, which we call Rhythm InTune. We are proud to offer this program. Our teams work side by side with patients and their families to help them gain insurance coverage and to support them through our education efforts from initiation and maintenance on therapy.

We are so pleased and inspired by the overwhelmingly positive feedback for patients and their physicians of Rhythm InTune. Next slide. While we are happy with the results of this launch to date, we still have more opportunity ahead of us and we are focused on optimizing our execution moving forward. Last month, we held our 2023 North America Team Meeting in Dallas to align on our strategy for this year. We have a great foundation in place to build on as 2022 really set the stage for patient identification, prescriptions and therapy initiation and maintenance as exhibited by the results from the first two quarters of commercial launch. And this year, we remain focused on accelerating hope for patients and their families by continuing to engage with our customers around the need to treat hyperphagia and severe early onset of obesity caused by MC4R pathway.

Educate that IMCIVREE is the right treatment option for patients with BBS. With a tremendous pain in place, with deep experience in rare diseases, we are focused on ensuring our engagement with customers, cultivate some positive experience with Rhythm and IMCIVREE. And lastly, with the conviction we have and the benefits that patients are receiving on therapy, we remain focused on expediting the identification of more patients with BBS who may benefit from IMCIVREE. With that, let me hand it over to Yann.

Yann Mazabraud: Thank you, Jennifer, and good morning. I will start with the Slide 20. So in the international regions, we had a very strong year and a very strong fourth quarter as well, making significant progress in securing access for IMCIVREE indications. And in parallel working intensely at market access execution for Bardet-Biedl syndrome. IMCIVREE is now available in eight countries outside the United States, and we are looking forward to continue the execution this year. As you can see on the picture, the international team came together mid-January to kick off the year with a focus on market access, patient identification, launch plans and operational excellence. Next slide. For POMC, PCSK1 and LEPR patients, we have identified approximately 100 patients being cared for in medical centers in EU4 and the UK.

And the estimated prevalence is approximately 600 to 2,500 patients in Europe. For POMC and LEPR, we are now fully launched in the UK, in Germany, in the Netherlands and in Italy. We achieved paid early access in France, same in Austria and Turkey, and we also have an early access program in Argentina in place. Compared to the United States, we know that the community and regional networks in Europe are better organized for these patients. While the numbers are still small, we are in positions to leverage that existing rare disease infrastructure. And we are already doing so. Next slide. For BBS, we have made significant progress since we received the marketing authorization from the EC in September last year. And like for POMC and LEPA indications, we are in positions to leverage the existing rare disease health care structure.

BBS is a larger population, we believe the EU prevalence estimate of 4,000 to 5,000 patients as David has detailed. We now have approximately 1,500 patients who are diagnosed and being cared for in EU4 and the U.K. In France, we achieved paid early access for BBS last year. This paid early access program called AP1 allows reimbursed early access for therapies where positive risk benefit balance is recognized and when no other therapeutic alternatives are available. With approximately 700 patients with BBS diagnosed in France, there is a clear unmet medical need there. In Germany, we are progressing in our discussion with the joint federal committee, the GBA, with very positive interaction so far, we are seeking the exemption from the lifestyle drugs reimbursement exclusion list as we successfully did for POMC and LEPR.

And we are looking forward to launching in the second quarter of 2023. In addition, we look forward to launching in the Netherlands in Q4 of 2023, in Italy and in Spain in the first half of 2024 and in the UK in the second half of 2024. We are very excited about all the progresses we are making in Europe. We are making steady progress with POMC and LEPR with BBS we are making tremendous strides with securing access. We look forward to launching in Germany this year and bringing several other countries online in 2024. Like for example Belgium and some Nordics countries. With that, I will pass the baton to Hunter.

Hunter Smith: Thank you so much, Yann. Turning to Slide 24. As we begin 2023, well capitalized with $333 million in cash on hand, sufficient to fund all planned operations into 2025 as we continue to grow as a global commercial stage biopharmaceutical company. This cash guidance includes the impact of projected milestones and R&D spending associated with the Xinvento acquisition. We recorded $8.8 million in net product revenue from IMCIVREE in the fourth quarter and $16.9 million for the calendar year 2022. Quarterly revenue marked an increase of $4.5 million or 105% over the third quarter of 2022, driven primarily by IMCIVREE sales for BBS in the United States, as well as increased POMC and LEPR sales in our international region.

U.S. sales represented 84% of total Q4 net product sales and 85% for the full year. Cost of goods sold for the fourth quarter was $1 million or about 11.7% of product revenue. Cost of goods sold consisted of $440,000 royalties due to Ipsen under our original licensing agreement, $400,000 product costs related to commercial sales and product distributed under patient assistance programs and about $200,000 related to the amortization of our previously capitalized sales based milestones. R&D expenses were $23.5 million and $108.6 million for the fourth quarter and calendar year 2022, respectively, on a quarter-over-quarter basis R&D expenses decreased by $8 million. On a sequential quarterly basis, this represented an increase of $2.4 million as compared to the third quarter of 2022, primarily driven by increased spending on clinical supply and materials.

Clinical trial costs remain largely unchanged as decreases in older studies offset increases in costs associated with the ramp up of activity for our pivotal Phase 3 hypothalamic obesity and M&A studies. SG&A expenses were $26.3 million for the quarter and $92 million for the year compared to Q4 2021, SG&A increased by $5.3 million, sequential quarterly basis versus Q3 2022, the increase was $4.4 million. The latter increase is primarily due to increased marketing costs related to BBS, increased special fees related to commercial, regulatory and international operations. For the fourth quarter, weighted average common shares outstanding of $56.3 million and quarterly net loss per share was $0.75. For the full year average common shares was $50.3 million with a net loss of $3.47 per common share.

Turning to Slide 25 for some comments about the outlook for the coming year. We enter the year well capitalized and we are executing our global strategy with disciplined investments in our programs designed to maximize benefit for patients while delivering shareholder value. That was our strategy. That was the example we said in 2022 and we expect 2023 to be no different. We have not offered revenue guidance in the past, we have no plans to do so in the future. Projecting rare disease launches is a challenging exercise and we don’t expect quarterly growth to be linear. We expect long term success based on Rhythm’s ability to bring potential IMCIVREE patients to diagnose. Our success to date increases our confidence in the long term opportunity in BBS and other potential indications.

As such, we remain focused on commercial execution to maximize the opportunity from IMCIVREE globally. Having said that, I will offer a few comments and some context for how to think about the drivers of revenue growth in the coming year. BBS is the primary driver of IMCIVREE revenue. So it’s worth reemphasizing that POMC and LEPR biallelic patients on drug in the first two years will number in the tens. In the last full quarter prior to the BBS launch, for example, the first quarter of 2022, net sales of IMCIVREE totaled $1.5 million, reflecting the ultra-rarity of POMC and LFPR patients. We expect the percentage contribution from our international region to increase over time, but the timing of this increase is largely dependent upon country level reimbursement decisions associated with the BBS indication.

Yann outlined this timeline earlier in the call. At present, the only country in which we expect full reimbursement for BBS for a significant portion of this year is Germany, the Netherlands and potentially Canada will come on in the second half of the year. Full reimbursement in other major markets such as France, Spain, Italy and the UK are expected in 2024. We will plan to keep you up to date on the projected timing of these reimbursement decisions as our visibility increases. Excluding the German BBS launch, therefore, the POMC and LEPR indication will remain the main driver of revenue in our international region in 2023. We also thought it would be helpful to give you more perspective about our forecast for operating costs given all the activity going on at Rhythm.

We expect approximately $200 million to $220 million in non GAAP operating expenses in 2023. This projection includes $120 million to $130 million for R&D expenses and $80 million to $90 million for SG&A. Both projections exclude stock based compensation. R&D will represent an increase of approximately 22% over 2022 using the midpoint of the range. This increase is driven primarily by our pivotal Phase 3 trial in hypothalamic obesity, a global trial for which we expect to open more than 20 sites. Enrollment in our Phase 3 M&A trial as we anticipate the vast majority of patients entering the trial this year and costs related to our Phase 3 de novo trial for the weekly formulation of setmelanotide. On the SG&A side, we expect an increase — we expect expenses between $80 million to $90 million for an increase of about 9% over 2022, again, using the midpoint of the range.

Our U.S. commercial operations are now at full strength. So the increase is driven primarily by annualization of these costs as they were growing during 2022 or the headcount was growing during 2022, as well as headcount increases in the international region and other support functions. All of these non GAAP estimates include non-cash stock compensation, which totaled $20 million in 2022. Lastly, we’re very excited about the Xinvento opportunity. Rhythm is paying a $5 million upfront fee and taking over development costs for the company’s portfolio of preclinical assets. In addition to the upfront, we agreed to pay $6 million in preclinical development milestone. There are no near term clinical milestones. The remaining milestone payable to Xinvento’s shareholders are based largely upon FDA and EC regulatory approval and successful future commercialization, totaling up to $125 million.

There’s a potential for an additional $75 million in the event of second molecule selected development approval. The economics of this transaction are success based and we at Rhythm are very excited to have Claudine and Piet join us on this high impact opportunity in the disease with a high unmet medical need. Now I will return the call over to David. Thank you.

David Meeker: Thank you, Hunter. So I’ll quickly share these last two slides before moving to questions. So Slide 27, as noted we have several trial starts and top line data readouts this year, which we talked about, as well as several market access milestones in a number of ex-U.S. markets with Yann detailed. Slide 28, just reminding you, we have three main areas for this year, maximizing the BBS commercial opportunity globally, executing on our Phase 3 trial in hypoglycemia obesity and continued expansion through clinical development for setmelanotide in these other trials and now our assets from the Xinvento acquisition, which again we look forward to moving forward as rapidly as possible. And with that, we’ll open it up for questions. Back to you, operator.

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Q&A Session

Operator: Our first question comes from Philip Nadeau with Cowen. Your line is now open.

Philip Nadeau: Good morning. Thanks for taking our questions and congrats on a successful quarter. First question is on the BBS launch. The pace at which you’re adding prescriptions is impressive. With 200 at year end and adding 80 a quarter, the simple math would say you’d be over 500 by the end of 2023, which is the vast majority of people who are in the BBS registry. Can you tell, one, whether you’re adding new patients to the prescriptions or are you giving patients — prescriptions who are not currently in the registry. And two, can you talk about new patient identification more broadly? Is it possible for this rate of prescriptions to continue even beyond 2023.

David Meeker: Thanks, Phil. Jen?

Jennifer Chien: Thanks for the question. So you asked about the CRIBBS registry. We have great relationships with the folks at the Marshfield Clinic. They are incredibly dedicated to the BBS patients under care. When we think about the CRIBBS registry, however, there are privacy policies in place. So we at this point really don’t have any visibility in terms of the overlap of the patients that are in the registry versus the patients at ACP that we have within our view at Rhythm. So that’s one piece. To your point in terms of the first question, I would say that we’ve been very happy with the level of the demand for this product. It speaks to the need and the differential impact in terms of the hyperphagia and the patient population for them to be seeking treatment, not only for their obesity, but the underlying hyperphagia now.

And so we are very much focused in terms of pull through of opportunities. There still remains opportunity in terms of the physicians that we already have identified with patients that they are treating with BBS and pulling through those patients onto therapy through our interactions and education efforts. And to your point, we continue to be ultra-focused in terms of identifying additional patients to add to our view. This include patients that are already diagnosed with BBS that are lost in the system and we have different mechanisms that we’re going about in terms of finding those patients, as well as educating those patient — potential patients out there as well as ACPs on the differential diagnosis for BBS and that could expedite patients to get to a proper diagnosis.

So there just remains a lot of opportunity out there.

Philip Nadeau: And is there any sense internally whether what we saw in the second half last year was a bolus? Or do you think that rate of prescriptions could continue actually even through 2023 given its impressive rate?

Jennifer Chien: Yes. I mean, I would say that there was certainly pent-up demand for any disease area where there’s no therapy that’s available for years and years and years and when something becomes available and it’s quite interesting for patients who work really trying to find a therapeutic option. We also had about 20 clinical trial patients that were converted to commercial scripts, so that was more in Q3. So with that said, I think the growth that we saw in Q4 was quite exciting to us. And as we move forward, we just have continued conviction about the needs. And once again, our focus is just around getting those patients to a quicker diagnosis of the journey — diagnostic journey , so long for these patients.