Rhythm Pharmaceuticals has shown notable stock performance, appreciating by 68% since last August, despite initial concerns about its lead drug, Imcivree. The drug is indicated for obesity caused by rare genetic disorders such as POMC, PCSK1, and LEPR deficiencies.
However, given the drug’s limited application, potential side effects, and the challenges in managing genetic tests to confirm suitability, is Rhythm Pharmaceuticals still a hot investment prospect?
Strategic Acquisitions and Pipeline Expansion
In January, Rhythm Pharmaceuticals bolstered its pipeline by acquiring global licensing rights for LB54640, a Phase 2 drug targeting leptin receptor deficiency and proopiomelanocortin, for $60 million upfront, an additional $40 million within 18 months of closing, and possibly another $205 million based on clinical and regulatory milestones.
Shortly after, Rhythm announced that Phase 3 hypothalamic obesity data is expected in the first half of 2025. This rare disorder, often resulting from hypothalamic damage due to brain tumors, trauma, or surgeries, affects an estimated under 10,000 individuals in the EU and US.
Phase 2 data showed Imcivree decreased mean BMI by 14.5% at 16 weeks and 25.5% at one year for patients with 12 months of data. This indication could potentially double the total addressable population for Imcivree.
Meanwhile, the Phase 3 EMANATE trial continues to enroll patients to broaden Imcivree’s application to include heterozygous mutations in POMC, PCSK1, and LEPR, as well as other genetic conditions like SRC1 and SH2B1 deficiencies.
A successful trial could expand the total addressable population to over 50,000. However, demonstrating efficacy in heterozygous mutations, which typically have less severe phenotypes, will require robust evidence and a clear-cut benefit-risk profile.
Financial Performance and Health
In February, Rhythm reported Q4 earnings with $24.2 million in revenue, missing analysts’ estimates by $1.18 million. R&D and SG&A costs were $29.892 million and $32.374 million, respectively, resulting in a net loss of $41.6 million for the quarter.
For Q1, revenue slightly increased to $25.97 million, still missing estimates by $0.93 million. After a one-time $92.4 million cost for the LB54640 acquisition, R&D costs rose to $36.265 million, and SG&A costs increased to $34.382 million. The net loss for Q1 was $141.372 million ($48.97 million excluding acquisition costs).
As of March 31, Rhythm had $53.428 million in cash and $147.771 million in short-term investments. With a current ratio over 4, the company can meet its short-term obligations. Additionally, Rhythm raised $150 million in April through convertible preferred stock financing, extending its cash runway into 2026.
Risk/Reward Analysis and Investment Consideration
Imcivree’s current indications are unlikely to significantly impact revenue. Thus, Rhythm’s future hinges on the drug’s ability to expand its patient population.
The chances of expanding Imcivree’s label to include hypothalamic obesity are strong, given the drug’s mechanism of action and the limited efficacy of existing treatments. This expansion could notably increase revenue potential.
The EMANATE trial, targeting a broader and less understood population, poses greater uncertainty. Demonstrating efficacy will require robust data, particularly for less severe and newer genetic conditions like SRC1 and SH2B1 deficiencies.
Rhythm Pharmaceuticals presents a high-risk, high-reward investment. While there is considerable operational and financial risk, the potential for significant returns is evident.
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Kris is a finance consultant, content marketer, and speaker specializing in helping brands and business owners navigate complex concepts and decisions. Since earning her Finance and Accounting degree, Kris has spent over half a decade writing about financial and technological concerns of brands spanning different life cycles.
