RYTM - Rhythm Pharmaceuticals: A Virtual Monopoly In Orphan Obesity Disorders

2023-08-04 15:08:00 ET

Summary

• Rhythm Pharmaceuticals, Inc. is focused on developing treatments for orphan obesity syndromes caused by defects in the MC4R pathway.
• Their product Imcivree is currently approved for treating Bardet Biedel syndrome, POMC, PCSK1, and LEPR deficiencies.
• Q2 2023 revenue more than doubled annually, and Rhythm Pharmaceuticals is conducting late-stage trials in additional orphan obesity indications.

Rhythm Pharmaceuticals, Inc. (RYTM) was founded in 2008 and is based in Boston, Massachusetts. The company is focused on developing treatments for orphan obesity syndromes caused by defects in the melanocortin-4 receptor (MC4R) pathway.

The only FDA-approved treatment for MC4R pathway-related obesity disorders

The MC4R pathway regulates hunger, caloric, intake, and energy expenditure, cause affecting body weight. The diseases of obesity caused by MC4R pathway defects are characterized by the early onset of severe obesity and insatiable hunger and affect more than 130,000 people in the U.S. and E.U. without any effective treatments.

The company's product Imcivree (setmelanotide) is a melanocortin-4 receptor agonist, which is designed to restore the impaired MC4 pathway function, caused by the genetic variants that occur upstream of the receptor.

The drug is currently approved in the U.S. and E.U. for treating Bardet Biedel syndrome ((BBS)), an orphan obesity disorder, which affects 4000 to 5000 patients in the US and a similar number in the EU. It is also approved in the U.S. and E.U. to treat POMC, PCSK1, and LEPR deficiencies, which together affect 600 to 2500 patients in the U.S., and a similar number in the EU.

Long-term phase 3 data in BBS showed a mean reduction in BMI of 9.5% at 52 weeks. In addition, there was also an improvement in metabolic parameters like total HDL, LDL, and triglyceride levels. There was a reduction in hyperphagia and obsessive focus on food, causing overall improved general health and emotional well-being. Phase 3 data in POMC and LEPR deficiencies also significantly reduced weight and hunger scores.

Q2 2023 revenue more than doubled annually and the target market may grow by >10x

Q2 2023 revenue was 19.22 million and was up 112% year over year. 86% of the revenue came from the U.S.

The company is conducting late-stage trials in additional orphan obesity indications, which may increase the target market size by 10 times. These include an ongoing phase 3 trial in hypothalamic obesity, which affects 5000 to 10,000 patients in the U.S. These patients are easier to diagnose than BBS due to a clear correlation with pituitary tumor surgery. The Phase 3 trial is expected to be fully enrolled by Q1 2024 and the data could be expected in H2 2024. Phase 2 trial in this indication showed >5% weight loss in 89% of patients and a mean 14.5% reduction in BMI at week 16. Another phase 3 trial is ongoing in heterozygous POMC /PCSK1 deficiency, heterozygous LEPR deficiency, SRC1 deficiency, and SH2B1 deficiency, which together affect 53,000 patients in the U.S.

The drug is currently administered daily as a subcutaneous injection. The company is working on developing a once-weekly subcutaneous formulation that is more convenient for patients.

Near-term catalysts are data from Phase 3 trials in obesity due to biallelic POMC, PCSK1, LEPR deficiency or BBS (VENTURE and SWITCH Phase 3 trials), and Phase 2 data from the DAYBREAK trial (variants in one of 31 additional genes with MC4R pathway relevance), all of which are expected in the second half of this year. Pharmacokinetic data on the weekly formulation could be available later this year. Phase 3 data in hypothalamic obesity could be released in the second half of next year.

Experienced management for effective commercialization

CEO David Meeker served as the CEO and President of KSQ Therapeutics, Executive Vice President and Head of Sanofi Genzyme, and CEO of Genzyme. Executive Vice President and Head of North America, Jennifer Chien served as the Chief Commercial Officer at Krystal Biotech (KRYS), and Vice President, Head of Genetic Diseases at Sanofi Genzyme. Executive Vice President, Head of International Yann Mazabraudserved as Chief Commercial Officer and Head of International at Trevi Therapeutics, and North America Head, Rare Diseases at Sanofi Genzyme. Chief Financial Officer Hunter Smith served as Vice President, Finance, and Chief Financial Officer of Celgene's Inflammation and Immunology Business Unit. Senior Vice President, Clinical Development Dana Washburn served as Executive Director and Global Medicine Leader at Alexion Pharmaceuticals, which became AstraZeneca Rare Disease following its acquisition.

Shares are undervalued considering the $1 billion+/year peak revenue potential for Imcivree

Cash reserves are $294M, which is enough till 2025, and there is no long-term debt. At an average price of $240,000/patient, the currently approved indications alone have a revenue opportunity of $1.2 billion/year just in the U.S. (without any competition). In addition, there is a high probability of expanding the revenue opportunity by over 10x over the next 6-12 months. The current enterprise value, EV of the company is just $723M, which is undervalued considering the sell-side analyst estimates of $1B/year revenue in 2025 (the average EV/sales for pharma companies is 4-5).

The average Wall Street analyst price target on the stock is $37 (or 64% upside potential). The most recent analyst price target is $42/share from Goldman Sachs issued yesterday after the earnings.

Shares were under pressure recently due to the threat of competition from off-label use of GLP1 agonists like Mounjaro, however, the management asserted in the recent Goldman Sachs conference that only 20% of patients with MCR4 pathway-related obesity respond to GLP1 agonists with an average weight loss of <10%. The stock is rebounding from the recent pullback and is a good buy here with a 1-2 year timeframe.

Risks in the investment include underwhelming data from ongoing trials, missing revenue estimates, and off-label use of other competing obesity drugs, which may affect the stock price. There is no guarantee that the company's drug will be able to meet the revenue estimates. Investing in emerging biotech/pharma companies is risky and may not be suitable for all investors. This note represents my own opinion and is not professional investment advice. Please conduct your own due diligence before making any investment decisions.

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