RYTM - Rhythm Pharmaceuticals: Growth Uncertainty And A 'Sell' Recommendation

2023-08-02 15:48:37 ET

Summary

• Rhythm Pharmaceuticals' lead drug, Imcivree, has been approved for treating obesity due to specific genetic disorders.
• The company reported Q2 2023 revenue of $19.2 million, causing a 28% stock jump.
• Despite positive developments, I maintain a "Sell" recommendation due to concerns about limited application, potential side effects, and uncertainties surrounding the drug.

Introduction

Rhythm Pharmaceuticals ( RYTM ) develops and sells treatments for rare obesity-related genetic disorders, using its lead drug, Imcivree (setmelanotide), targeting specific deficiencies such as POMC, PCSK1, LEPR, and Bardet-Biedl syndrome.

I previously analyzed Rhythm Pharmaceuticals and its lead drug, Imcivree, approved for treating obesity due to specific genetic disorders. As of September 2022, it was approved in the US and EU. Despite its efficacy, in my view, its application is limited to a small patient pool, and there are concerns about reliability, potential unblinding in trials, unclear safety profile, and the possibility of worsening depression. Rhythm also faces challenges managing genetic tests to confirm the drug's suitability. Considering these factors, my assessment was to "Avoid" Rhythm's stock, with "Sell" being the closest available representation of my opinion. Since my "Sell" recommendation, shares of RYTM are up approximately 37%.

Recent developments: Rhythm Pharmaceuticals' Q2 2023 revenue of $19.2M beat projections, causing a ~28% stock jump. Bank of America upgraded the stock, citing strong Imcivree demand, despite a widened net loss.

The following article discusses Rhythm Pharmaceuticals' financial performance, recent clinical developments, and stock analysis. It includes my "Sell" recommendation due to lingering concerns and uncertainties.

Financial Performance & Stock Evaluation

As of June 30, 2023, Rhythm Pharmaceuticals' Q2 financial results showed a cash position of $253.6 million, down from $333.3 million at the end of 2022. Global sales of Imcivree generated $19.2 million in revenue, a significant increase from $2.3 million in Q2 2022, with 86% generated in the U.S. No license revenue was recorded following the termination of an agreement with RareStone. R&D expenses increased to $33.5 million, while SG&A expenses rose to $30 million, primarily due to increased headcount and professional services. Net loss widened slightly to $46.7 million from $45 million in Q2 2022.

Per Seeking Alpha data, RYTM stock shows mixed prospects. Earnings estimates project positive growth, with significant increases in EPS and sales expected through 2025. However, earnings revisions are uncertain with more downward than upward revisions. The stock's valuation appears potentially overvalued, with high EV/Sales and a D+ rating in valuation. Revenue growth is strong at 627.94% YoY, but profitability presents challenges with negative returns on equity and assets. Momentum also gives a mixed picture, with declines in the short term, but a positive return over a 1-year period.

Clinical Developments

Rhythm Pharmaceuticals has made significant progress in its clinical developments. The company expects to complete enrollment for its Phase 3 trial evaluating setmelanotide in patients with acquired hypothalamic obesity by Q4 2023. The trial will involve 120 patients over 60 weeks. Rhythm also plans to submit an investigational new drug application for RM-718, a more targeted and potent MC4R-specific agonist, by the end of 2023. The company announced two new publications on the burden of hyperphagia and obesity in BBS and presented data at the ENDO meeting, showing sustained weight and BMI reductions in patients treated with setmelanotide.

My Analysis & Recommendation

In conclusion, Rhythm Pharmaceuticals' 30% stock increase following recent developments can be attributed to beating Q2 revenue projections and progressing in clinical trials. The upgrade from Bank of America and the promising data from ongoing research undoubtedly play a role in this positive market reaction.

However, my personal skepticism remains. Despite these encouraging signs, I'm still weary of Imcivree and its limited application. The potential side effects, unclear safety profile, and the challenges in managing genetic tests to confirm the drug's suitability continue to linger as concerns. While the earnings beat and ongoing clinical developments are certainly positives, they do not entirely mitigate these reservations in my eyes.

Until further clinical data provides me with compelling evidence to shift my stance, I will maintain my "Sell" recommendation. The risks, in my opinion, are still significant, and I believe that investors should carefully weigh the potential against the ongoing uncertainties, discussed in detail in my previous analysis , surrounding Rhythm's drug. This view may differ from the broader market sentiment, but it's based on a thorough analysis of available information and a careful consideration of potential future challenges.

Risks to Thesis

When the facts change, I change my mind.

My "Sell" recommendation on Rhythm Pharmaceuticals' stock isn't without its own risks and could prove incorrect. First and foremost, the company's ongoing clinical developments might yield more positive results than I anticipate, enhancing the drug's profile and widening its application. The commercial success of Imcivree may grow beyond the current market expectations, potentially due to expanded approvals or unforeseen demand within the niche it serves.

Furthermore, partnerships, acquisitions, or unexpected breakthroughs in research could provide additional momentum for the stock. Management's execution of the business strategy may also prove more effective in addressing some of the concerns I have cited.

Finally, broader market dynamics, such as a general uptrend in biotech or a change in the regulatory environment, could drive the stock higher irrespective of my reservations. These factors underscore the complexity of the investment landscape and the inherent uncertainty in any investment thesis.

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