Rhythm Pharmaceuticals Inc
NASDAQ:RYTM
Earnings Call Analysis
Q4-2023 Analysis
Rhythm Pharmaceuticals Inc
Rhythm Pharmaceuticals, a biopharmaceutical company, is making strides in the treatment of rare genetic disorders of obesity with its commercialized drug, named IMCIVREE, and a pipeline of potential therapies. The company is exploring treatment for Hypothalamic obesity (HO) and related disorders, using a molecule called LB54640, showing promise in Phase I studies. They are planning to gain insights from a Phase II SIGNAL trial, hoping this will help determine the effective dose range. In the commercial space, the company has experienced significant growth with over 100 new prescriptions and more than 70 reimbursements for IMCIVREE in the fourth quarter of 2023. However, they faced a setback in one state due to a request for additional diagnosis documentation from Medicaid, which impacted the number of reimbursed patients. Despite this, they observed an improving trend in prior authorization approvals and continued engagement of adult BBS patients with healthcare providers.
The company is broadening its reach internationally, particularly in Japan, Germany, Spain, Italy, and through its early access programs in France. It's reported that approximately 250 patients in Germany were identified with BBS, with strong patient support services. Reimbursement achievements in Spain and Italy will contribute to Rhythm's net sales growth, projected to increase in 2025. Despite these international advances, the U.S. remains the core driver for revenue growth with a majority of revenues, 76%, coming from this region.
Rhythm reported a quarterly net loss per share of $0.70 and revealed a robust balance with $276 million in cash, deemed sufficient to fund operations into the second half of 2025. They have made a significant commitment by paying $100 million to LG Chem for the global rights to LB54640, which will be accounted for in R&D expenses. Nonetheless, the company has refrained from offering revenue guidance for 2024, pinpointing the U.S., Germany, and to a smaller extent Spain and Italy as key markets. Large European markets such as the Netherlands and the U.K. are expected to join with reimbursement for BBS later in the year, but their sales will not notably contribute to the 2024 revenue.
The company has encountered an unexpected cluster of BBS patients in a particular state, leading to Medicaid's request for additional support in diagnoses, briefly affecting the mix of Medicaid reimbursed patients. This occurrence surprised the company, suggestive of a founder effect, where a higher concentration of patients is related to historical population genetics. Such a demographic anomaly is not anticipated in other states, and the company is collaborating with Medicaid to resolve this issue. The overall balance of patients is approximately 90% comprised of commercial and Medicaid plans, with Medicaid accounting for slightly more than commercial patients in the reimbursement mix.
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Ladies and gentlemen, thank you for standing by. Welcome to Rhythm Pharmaceuticals Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]Â I would like now to turn the conference over to David Connolly, Investor Relations and Corporate Communications. Please go ahead.
Thank you, Michelle. I'm Dave Connolly here at Rhythm Pharmaceuticals. For those of you participating on the contracting, our slides can be accessed and controlled by going to the Investors section on the Investors page of our website, ir.rhythmtx.com. This morning, we issued a press release that provides our fourth quarter and year-end 2023 financial results and a business update, which is available on our website. 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 Lee, Executive Vice President, Head of North America; Hunter Smith, our Chief Financial Officer; and Yann Mazabraud,, Executive Vice President and Head of International is on the line joining us from Europe. And on Slide 3, 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 reports on file with the SEC. In addition, any forward-looking statements represent our views as of only 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 Meeker, who will begin on Slide 5.
Thank you, Dave. Good morning, everyone, and thank you for joining the call. So 2023 was truly a transformational year for Rhythm, commercially, developmentally, financially and strategic as we have expanded potential indication to meaningful next-generation products. 2024 will be a year focused on execution, setting up an exciting year of milestone achievements in 2025. So on Slide 5, we've got the 3 boxes, which highlight the important aspects of Rhythm. And on the first box, HL remains the cornerstone of Rhythm Valley. We finished the year having overenrolled our Phase III trial. Now with all 120 patients in the primary analysis cohort dosed and this 120 will form the basis of the U.S. and EMA filings, keeping us firmly on track for first half 2025 top line readout. Execution in that trial remains strong with a high level of site and patient engagement. We're excited also to announce today, we have concluded extremely constructive interactions with the Japan regulatory authority, the PMDA, which will allow us to include 12 Japanese patients in the Phase III trial without requiring an independent study in Japanese patients. Japan is continuing to evolve their regulatory process to further facilitate the development of innovative medications for the Japanese population, and they were highly motivated to ensure that the Japan patients would be able to participate in the call in the Phase III trial. We were joined in our interactions by one of the leading experts in Japan who help them understand a severe unmet medical need and the potential benefit of setmelanotide .What's particularly interesting about Japan opportunity is that the prevalence of HO is 2x higher than in the U.S. with our initial epidemiology work suggesting there are 5,000 to 8,000 patients, which is about the same number as in the U.S., albeit with a population a little more than half the size of the U.S. So if this opportunity plays forward as we think it will, the Japan opportunity could become the second most valuable part of the overall Rhythm portfolio behind the U.S. HO opportunity. So Yann will expand more on that epidemiology and our plans going forward. Second, we made great progress advancing several programs, both our newly acquired daily small molecule from LG Chem and our weekly formulation 718 are progressing well. I'll comment further on those in a couple of slides. With regard to the pediatric program, I will show again 2 slides you've seen before, reminding you of the strength of that data and why we think it is so important. We have filed, as previously reported, to expand the use of insert patients between the ages of 2 and 5 in the U.S. -- sorry, in the EU, and we'll file in the U.S. in the first half of this year. Third, we had another solid quarter commercially with $24.2 million in revenue, over 100 new prescriptions and more than 70 approvals for reimbursement. We are excited about our recent reimbursement approvals for BBS in Spain and Italy. And with those 2 approvals, [ CIRI ] is now available commercially in 14 countries, including the U.S. and Canada. Revenues in the quarter were impacted by a change in policy made by a single Medicaid program in one state in response to a disproportionately high volume of prescriptions. The state has a favorable policy in place and continues to cover patients but is now requiring a higher level of documentation than previously required. For example, if a patient has eye findings consistent with the diagnosis of BBS, they will now require an ophthalmology console to confirm the diagnosis, whereas previously, it was simply the attestation of the prescribing physician. With this change in policy, 30 patients came off coverage early in the quarter and were transitioned to our bridge program, which is a free drug program provided while we work through coverage issues. There is no read through to any other Medicaid program as this situation is unique to a specific demographic in this state with a higher prevalence of BBS patients who came on to treatment early. The impact of 30 patients coming off reimbursed treatment early in the quarter and going on to the Bridge program was about $2 million. Importantly, despite this dip in U.S. patient numbers at the start of the quarter, the remainder of the U.S. story continues to grow as expected, and we finished the quarter in a very good place, and Jennifer will, of course, provide more color in her section. So moving to Slide 6. So more in Japan, Typically, Japanese regulatory authorities require PK studies to be conducted in Japanese subjects in advance of testing and investigational therapy in patients. However, following the extremely constructive discussions with Pan Pharmaceutical Medical Device Agency, or the PMDA, we have agreed on a plan to enroll 12 Japanese patients into our current Phase III trial. We will collect PK data in those 12 patients, and there will be no requirement to perform an independent study in Japanese subjects. Importantly, as I said, the additional cohort of Japanese patients and the timing for them to be added to and complete the study will have no impact on our time lines to complete the pivotal cohort, get to top line data and submit our filings in the United States and Europe. Specifically, we will file in the U.S. and EU on the results from the first 120 patients who finished the trial. The remaining patients, the approximately 10-plus patients who are part of the over-enrolled patient group outside of Japan and the 12 Japanese patients will be part of a second close, which will be used to support Japanese approval, and we will core seek orphan drug designation in Japan in parallel. So on Slide 7, this is just to remind you our Phase III trial design for HO, which you all know well. It's the Phase III trials enrolled patients aged 4 years and older with hypocalomic obesity, randomized 2:1 to setmelanotide therapy or placebo for a total of 60 weeks, which includes up to 8 weeks for dose titration. The primary endpoint for this trial is the mean percent change in BMI from baseline after approximately 52 weeks on a therapeutic regimen of setmelanotide compared with placebo. We are 99%, as we told you before, 99.5% powered to achieve a 10-point differential between the therapeutic arm and placebo and given our 12-month data showing consistent response across all patients who adhere to their prescribed therapy and the consistent safety profile of setmelanotide and other indications, we are quite confident in the outcomes. On Slide 8, I´ll speak a moment about LG Chem's molecule. We're particularly excited about the acquisition of the global rights for LB-54640, and yes, we will be working on an aim for that, which we announced early in January. We believe this drug candidate could provide patients with an important new treatment option and could be an important long-term value driver for our company. LG Chem, a highly regarded company with deep chemistry and early translational experience and expertise has developed an oral drug candidate that based on the early clinical data generated to date suggests they have identified a specific therapy for MC4R diseases that will not result in hyperpigmentation or have associated cardiovascular side effects. We have had a highly collaborative working interaction with the LG team as we move to transfer full responsibility for the program to rhythm. We anticipate the transfer to be largely complete within 3 months of signing and remain on track for that. In the meantime, we are jointly progressing the 2 trials with the primary focus being on site initiation of the signal trial for hypothalamic obesity, A parallel focus will be on developing a pediatric formulation, which will allow us to move to treating the younger patients who, as we know for both HL and genetic causes of MC4 path diseases are in need of treatment. On Slide 9, a little more about the molecule LB54640, as previously described, we were impressed by the robust preclinical package and by the data in their Phase I study in healthy volunteers with obesity, which showed the expected dose-dependent decrease in BMI at 4 weeks. Importantly, they did not see hyperpation or any cardiovascular signal, which is consistent with their preclinical work. Slide 10 shows the design of the SIGNAL trial, a Phase II 28-patient open-label trial -- sorry, placebo-controlled trial to evaluate the molecule in patients with hypophylamic obesity. The trial is designed to evaluate safety, tolerability, pharmacokinetics, weight loss efficacy with an efficacy endpoint, a mean percent change in BMI from baseline of 14 weeks. The trial is 4 arms, 3 different dose groups in placebo and would be followed by an open-label extension period of up to 52 weeks. This is very similar to the exception of placebo control to the trial we ran originally with setmelanotide in HO. We are fortunate to have a model such as HO, which appears to be quite sensitive to the effects of an MC4R agonist. So our expectation is that this relatively small trial will give us good insight into the efficacy, safety and importantly, the dose range, which we will look to develop as the program advances. On Slide 11, the 718 weekly program, as a high [ Metro ], is advancing well. The IND is filed, we have selected our CRO and are looking to dose our first patients in the first half of this year. And I can tell you that we are aiming to have those first patients dosed in March here. We're committing to the first half of this year. As a reminder, we will begin conventionally with single and in multiple ascending dose cohorts in normal volunteer patients with obesity, followed by a Part C, which will enroll HL patients followed for 28 days. Those patients will be eligible to enter into a long-term extension study once we complete our chronic toxicity studies, which are required to support longer dosing and those chronic toxicity studies are ongoing and running in parallel now. On Slide 12, on my last 2 slides, I want to revisit the data in pediatric patients we showed at our R&D Day in December. I find these results quite remarkable for a couple of reasons One is that despite the extremely young age, patients between the ages of 2 and 5 with either POMC deficiency or VBS, they were severely effective. That should not be a surprise given the genetic cause of the disease, which means in most cases, it has been present since birth. Despite the severity, we know from multiple anecdotes, these patients are not being recognized as having an underlying disease. And in the worst cases, the parents are blamed for their inability to control their child's food intake. As you can see on this slide, patients responded extremely well to treatment with a mean decrease in weight of more than 18% at 1 year. The Slide 13, I think this is where the real story lies in the individual results, which show a waterfall plot of the individual results for the 12 patients. Two takeaways. The Y axis shows the BMI-Z score, which is basically the number of standard deviation, the child is away from normal. The graph shows the change in BMIC score with treatment. For the first 2 groups, starting from left to right, POMC on the left-hand side of the graph, these children are experiencing a 5- to 7-point decrease in their BMI-Z scores from a starting point as high as 12. It is important to remember a BMIZ score changes greater than 0.2 is considered clinically meaningful. The BBS patients were not quite as severely affected, still showed a 1- to 2-point decrease. The only 2 patients who did not have a meaningful -- highly meaningful change in their BMIZ score was one patient who has lost to follow up early in the trial in a second patient who is noncompliant with the medication. Expanding the label to children 2 and above will not open up a significant additional market opportunity, it will add incrementally, of course, but it will reinforce the importance of thinking about genetic causes when confronted with early onset obesity, that will remind people the cumulative morbidity regains early and the earlier you intervene with a specific therapy, the better your chance to modify the long-term outcomes. And third, it reinforces the safety of the medication and that it can be given and should be given to children as young as 2 if clinically indicated. So as I said, we filed for our European label expansion, and we look forward to filing in the U.S. in Q3 of 2024. With that, I'll turn the call over to Jennifer.
Thank you, David. We continue to see solid commercial execution this quarter with new prescriptions, prescribers and reimbursement. Beginning on Slide 15, we remain pleased with the growth and consistent demand for IMCIVREE since launching in June of 2022, marking 6 full quarters and our first full calendar year. In addition, we continue to see gains in the depth and breadth of prescribers and positive reauthorization decisions. During the fourth quarter of 2023, we received more than 100 new prescriptions and more than 70 approvals for reimbursement from payers. As David mentioned earlier, these positive trends were offset by a challenge associated with one pair. One state Medicaid because of a higher-than-expected volume of prescriptions for BBS patients, which was above their estimated prevalence of BBS had requested additional documentation to support the diagnosis for previously approved and reimbursed patients. In the meantime, IMCIVREE coverage for these patients was rescinded. To ensure these patients did not have any gaps in treatment with IMCIVREE, we transition 30 patients to free drug through our bridge program. Therefore, during Q4, the total number of reimbursed patients dipped below where we exited Q3. This event was limited to one state where there appears to be a high prevalence of BBS patients, making this a unique situation. We are working with this Medicaid program and prescribers to ensure patients diagnosed with BBS continue to receive access to IMCIVREE therapy. It is important to note that this state Medicaid still has a policy in place to cover IMCIVREE. Going back to the 70 approvals in the quarter, we are seeing these come through faster and with fewer appeals than in prior quarters. Over 70% of approvals for reimbursement during the quarter came at the time of prior authorization or sooner, a trend that has shown incremental improvement each quarter since launch. Next slide. More than half of IMCIVREE prescriptions for BBS continue to come from adult patients accounting for 59% of BBS prescriptions launched to date. This is a positive trend as we believe many adult BBS patients who may have aged out of participating in the annual surveys of the group's registry or were lost to receiving specific care for BBS are re-engaging with their health care providers. As we've discussed, this is typical in our disease. We're the first approved therapy for a disease raises awareness and pays a way for re-engagement of the broader diagnosed patient population. Next slide. We see continued progress with additional first-time prescribers as well as repeat prescribers while the breakdown by specialty remains consistent. Adult and pediatric endocrinologists account for 45% of prescribers launched to date, consistent with launch-to-date metrics reported during the last few quarters. New to rhythm prescribers or physicians or territory managers had not previously called on prior to the prescription being received remains consistent at 28% of all prescribers. We are pleased to see the source of growth continue as we find new prescribers through our nonpersonal promotion efforts. In addition, first-time prescribers or those who wrote their first Simsbury script has stayed very consistent, averaging 48 new prescribers per quarter in 2023. And in Q4, we were consistent with this at 46 first-time writers, and we are seeing incremental increases in the depth of prescribers. 30% of prescribers launch to date have written 2 or more prescriptions, which marks an increase from prior quarters. Prescribers are seeing their patients benefit from IMCIVREE, and they remain interested to prescribe for additional BBS patients identified. Next slide. Overall, the payer mix for BBS remains consistent with almost 90% of prescriptions since launch falling under a commercial or Medicaid plan. We continue to see incremental improvement in securing access and reimbursement with regards to overall coverage by state Medicaid programs. As we've done in recent quarters, we look at Medicaid coverage measured through covered lives. We introduced this concept at the end of the first quarter when we reported that approximately 75% of Medicaid covered lives were in states with either a positive IMCIVREE policy or in a state where we have been able to gain positive coverage in at least one instance in the absence of an IMCIVREE policy. The remaining 25% of Medicaid lives were in states where we either had not yet had a prescription for IMCIVREE or we were still working to secure access for a prescription or finally where we had not been successful in gaining access through the appeals process. In Q2 and Q3, this breakdown shifted to 80-20. And at the end of this quarter, it was 85:15. Within this 85%, we have stronger coverage for IMCIVREE as we have increased the number of states with a specific IMCIVREE policy in place. Next slide. Lastly, we are seeing strong success in reauthorization as the vast majority of [ Riot ] have been approved. This is indicative of patients benefiting from IMCIVREE therapy as well as payers recognizing these benefits. Launch to date, we've had 110 approvals for reauthorizations for continued IMCIVREE therapy. Most of these come at the 1-year on therapy time point, but there are a few pairs whose policies call for reauthorization decisions at 3 or 6 months. As of the end of the fourth quarter, we've only had 10 denials since launch, and 6 of these denials have been approved through appeal, and we are working to get the remaining 4 approved as well. Overall, the fourth quarter and the first full year of BBS commercialization has been strong. We will continue focusing our efforts on expediting diagnosis of BBS patients and supporting access to IMCIVREE. With that, let me hand it over to Yann.
Thank you, Jennifer. 2023 was a very successful year for the international organization. with the BBS launch in Germany, the pre-EMA approval early access program in France for hypothalamic obesity, many commercial patients in new countries and all the work that led us to our recent announcements about reimbursement for BBS in Spain and in Italy. We are looking forward to a strong year in 2024 as well as we begin the year financing our development strategy in Japan. Slide 21. Japan will become a very important market for us. The per capita prevalence for hypothalamic obesity in Japan is 2 to 3x higher than the prevalence rates in the United States and Europe, through our discussion with local key experts with the Japanese pediatric neurosurgery society, data from the Japanese brain tumor registry and also a high-level hospital claims database analysis, -- it has been confirmed that there is a much higher prevalence of Craniofain Japan with the same frequency of obesity development as in the U.S. and in Europe. And we believe that there are between 5,000 and 8,000 patients with hypothalamic obesity living in Japan. There are more than 100 key hospitals or treatment centers in Japan that care for patients with craniopharyngiomas and other brand tumors that may cause hypothalamic obesity. -- Building relationship with this center will be key to our strategy, and we have already started to do it. In addition, Japan, like many European countries, is a single-payer system with an established history of recognizing rare disease and dedicating the resources to care for them. Japan is the third largest economy measured by GDP, and as David already said, in the long term, we believe that it will become the second most important market for rhythm behind the United States. In exploring this exciting opportunity, we consider multiple avenues to advance setmelanotide in Japan. We made the decision to move forward with a direct presence. And with that, Rhythm will truly become a global rare neuroendocrine disease company able to leverage our footprint in Japan for future opportunities. Next slide. Our work in Japan is off to a strong start. In our discussion with the Japanese PMDA, we had the benefit of one leading Japanese expert in hypothalamic obesity, who was able to emphasize the unmet medical need in Japan and the relevance of enrolling Japanese patients directly in our Phase III trial. Just last week, we held our first reason sponsored symposium in Nagoya City during the yearly congress of the Japanese society for hypothalamic and petrol tumors, and it was a very successful one. Slide 23. Meanwhile, our launch in Germany is progressing well, meeting our expectations with approximately 250 patients living with BBS already identified, and importantly, a subset of approximately 800 patients diagnosed with BBS in Germany, our teams remain focused on engaging with physicians caring for patients and with the many centers where they are treated. We are expanding the number of treatment centers and large hospitals we are engaging with. Now that we have more than 9 months into the launch, we have received prescriptions from 15 treatment centers, which are all within large and very well structured and resourced university hospitals. In addition, our Rhythm at home services program through which we provide patient support for each patient and their care levers has been quite successful. Our team set treatment expectation with physicians and offers verb-tailored services to patients with, for example, in-home visits when needed. And since December, prefilled syringes have been available for both BBS and POMC [ park ] patients. Next slide. We also recently announced that we achieved reimbursement for IMCIVREE Spain and Italy. In Italy, we received a positive reimbursement decision for BBS 2 weeks ago, and we have started to launch in [ Italy ] We believe that there are approximately 200 patients diagnosed and identified or under the care of a known physician. And our team in Italy is focused on engaging with physicians in hospitals and medical centers in 21 states throughout the country. In Spain, the recently announced positive reimbursement decision covers both BBS and familiar biased patients. There are approximately 100 patients with BBS identified, and our team there is engaging with physicians and health care centers in 17 states throughout the country to bring IMCIVREE to patients and family. In both countries, we now must navigate regional access and tender management at local hospital levels. It takes weeks for patients to begin treatment, and we will start to see commercial patients come online in both countries during the second quarter. We will begin to see increasing contribution to our net sales from each of these countries in 2025. Slide 25 and last slide. We continue to advance country by country with IMCIVREE now available for [ POMC ] and BBS in 12 countries outside the United States and Canada. In France, we have paid early access available for BBS as we negotiate with French authorities and pricing. We are in the midst of the negotiation now and hope to finalize it by the end of this year. For hypothalamic obesity in France, we have preapproval paid daily access as well. Both of these early access programs are administered patient by patient, it takes time, but we are building a strong foundation in terms of our relationship with the government authorities, payers, leading experts, key centers of excellence and patient association. Looking ahead, the next of the larger European markets to come in line with reimbursement for BBS are the U.K. and the Netherlands, both in the second half of the year. Now I will turn the call over to Hunter.
Thank you, Yann. Let's start with a snapshot of the Q4 P&L on Slide 27. We recorded $24.2 million in net product revenue in the fourth quarter versus $8.8 million during the same quarter last year, an increase of $15.4 million or 175%. For the full year, net product revenue totaled $77.4 million versus $16.9 million in 2022. Quarter-over-quarter, we saw an increase of $1.7 million or 8% in net product revenue, driven primarily by continued growth in the number of patients on IMCIVREE therapy in our international region. In the U.S., revenues were relatively flat quarter-over-quarter due to the shift of 30 patients to our Bridge program early in the quarter, as David and Jennifer mentioned. Given that the 30 patients lost reimbursement early in the quarter, that change represented approximately a little more than $2 million foregone potential revenue in the fourth quarter. Excluding that discrete event at the beginning of the quarter, drivers of revenue, i.e., prescriptions and reimbursement were as expected. This pattern is consistent with our belief that revenue growth in rare diseases is difficult to trend quarter-over-quarter, but in the long term and globally, slow and steady growth continues. In the fourth quarter, volumes of vials dispensed to patients were essentially the same as vials shipped to our specialty pharmacy, resulting in no significant impact on revenue from inventory growth at the specialty pharmacy. Gross to net for U.S. sales quarter-over-quarter increased to 85% from 83% in the third quarter, primarily due to a Medicaid rebate adjustment in the quarter, which was based on actual rebates paid as compared to rebate levels accrued. Our practice is to accrue for Medicaid rebates based upon expected payer mix and when actual Medicaid invoices are received, this may result in differences versus crude amounts. Cost of sales during the fourth quarter was $3.2 million or approximately 13.3% of net product revenue, representing a 2.6% increase quarter-over-quarter. Cost of sales consist primarily of product costs and our 5% royalty to Ipsen under our original licensing agreement for setmelanotide. R&D expenses were $29.9 million for the fourth quarter of '23 compared to $23.5 million during Q4 '22 and an 11% decrease compared to Q3 '23. SG&A was $32.4 million for the fourth quarter this year versus $26.3 million in the fourth quarter of '22, and an increase of 6.2% in the sequential quarter basis. For the fourth quarter, weighted average common shares outstanding were $59.2 million, an increase of approximately 1.3 million shares over last quarter, resulting primarily from the full weighting of this quarter of our equity issuance under the ATM program in Q3. Quarterly net loss per share was $0.70. A few highlights on Slide 28. Reported $276 million of cash and cash equivalents at December 31, 2023. This cash on hand is sufficient to fund all planned activities into the second half of 2025. On the net revenue for the quarter of $24.2 million, 76% of these revenues were generated in the United States. This proportion of revenue generated by our international region increased from 20% to 24% quarter-over-quarter, reflecting strong growth in BBS patients on therapy in Germany. Fourth quarter operating expenses, including stock-based compensation of $8.7 million for the quarter and $23.6 million for 2023. For '23, we guided to an OpEx range of a non-GAAP OpEx range, and our spend came within that range. Non-GAAP operating expenses for the year ending December 31, 23 were $219.9 million, inclusive of GAAP operating expenses of $261.8 million, minus $9.3 million in cost of sales and minus $32.6 million in stock-based compensation. Turning to Slide 29. I ask that you all pay attention to the left-hand side of the guidance -- the text box here and make sure this is modeled appropriately. We committed to pay $100 million in fixed cost to LG Chem for global rights LB54640. That was $40 million in cash in January, and we issued to them more than 430,000 Rhythm shares of common stock valued at $20 million at the same time. We have also committed to pay $40 million in cash 18 months from the close, which was in January. This $100 million will be accounted for in R&D expenses during Q1 2024. And when the achievement of development and commercial milestones becomes probable, we will recognize these costs as Rate expense as well. Also for '24, as we did for 2023, we offer guidance on non-GAAP operating expenses. We anticipate approximately $250 million to $270 million in non-GAAP OpEx, comprised of SG&A non-GAAP operating expenses of $105 million to $110 million, R&D non-GAAP operating expenses of $145 million to $160 million. This R&D amount includes $10 million to $15 million of development costs related to LB54640 -- this amount excludes both stock-based compensation and consideration paid to LG Chem in connection with the licensing of LB54640. The growth rate at the midpoint of this range is 18% year-over-year. Excluding the impact of LB54640, the growth rate would have been just under 15%. The Finally, we are not offering revenue guidance -- we have not offered revenue guidance in the past or not doing so again this year. IMCIVREE sales in the U.S. will continue to be the main driver of revenue growth for Rhythm. For revenues from our international region, Germany will continue to be the main driver, while Spain and Italy are coming online for BBS. It will take time to get up and running as we navigate the local hospital systems and their budgets. The Netherlands and the U.K. come on later in the year, and we do not expect sales in those regions to be a significant contributor for 2024. And with that, I'll turn the call back over to David.
Thanks, Hunter. So thanks all, that concludes the formal presentation. I hope what you're taking away from this is that Rhythm is maturing. We're firming up the components, which are driving the underlying value of Rhythm executing on our global strategy. We're executing on our developmental strategy where we're exploring all the incremental potential opportunities related to the MC4 pathway. And we're setting up, as I said, a year 2024. It's hard to believe we're already 2 months into the year, given the amount that's already happened. But 2024 will be about execution. And as I said, 2025 will have a series of really impactful milestone readouts for rhythm. So with that, I'll open it up for questions. Operator?
[Operator Instructions]Â The first question comes from Tazeen Ahmad with Bank of America your line is open.
Hey guys Goodmorning thanks for taking my question- David, I was hoping to get a little bit of color on the comments that you made in your prep remarks about the cluster of BBS patients in a particular state. Just given all the work you've done on this ultra-rare disease, -- was this something that you would have anticipated happening? And can you also give us color on what would cause a particularly large number of patients to be clustered in a close proximity. And how are you getting confidence you won't be seeing similar events in other states, as you said on the call? Thanks.
Yeah. Thanks, Tazeen. So it's a good question. So your first part of that was, did we have line of sight to this answer is no. What do we think is going on? There are pockets in every rare disease or many rare diseases where you have a concentration of patients related to a founder effect. The most publicly and clear example of this in the BBS world is in Newfoundland, Canada, where if you look at an expected prevalence for BBS of 1,000 to 75,000 and 100,000, the prevalence in that Canadian province is about 118,000 -- so that element, we know existsWe weren't expecting to see it in this state. But if you look at the demographics of the state, there -- the demographics do are consistent with the fact that you could have a founder effect, and we think that's what's going on. The second piece of this was that we also had physicians in that state who were very interested, very motivated early on, and we're writing scripts, as I said early. And so for this specific state Medicaid plan, they saw -- they were an early adopter in the sense that they had a policy in place early, and we're trying to do the right thing. But they saw a much higher level of scripts than what they had modeled in their plan and their expected prevalence. And Jennifer and I had a call with their leadership, which was incredibly constructive. I mean, they -- as I said, there's no antagonism or concerns about wanting to treat BBS in that sense. We basically just overwhelm them to a certain extent with -- relative to what they had expected to see. So long story short, that's what we think drove the disproportionate. The second part of your question, I mean, I'll let Jennifer speak to in terms of the other states here and why we see this as a very unique situation related to this one state Medicaid plan.
Yeah. So just in terms of the uniqueness of this particular stage, just as David iterated when you look at what the estimated prevalence could be based off of sort of more broad-based prevalence estimates. They didn't mount scripts really surpassed the expectation in terms of this particular Medicaid. I will reiterate, we still have a positive policy in place, and we're just working through the system. In contrast, not unusual. We're just a little over a year from launch in terms of BBS. If you look at every other state Medicaid in terms of estimated prevalence versus the number of scripts that we have received in other states. We are basically under just in terms of number of active patients versus what they might have projected in terms of potential for this product. So we really do feel confident that this is a unique situation where the numbers were a bit surprising. But once again, we're just working collaboratively together with the physicians and the Medicaid in terms of working this through.
Okay. thanks for all that color And maybe just one last quick question. What's your current mix of Medicaid patients on reimbursement?
And that question was the current mix of Medicaid. So we break out Medicaid versus.
On your current mix, what is the proportion of Medicaid patients.
Right. So we see that 90% of patients approximately are commercial versus Medicaid with Medicaid accounting for slightly more than commercial patients in that mix.
Okay thank you.
Please stand by for the next question. The next question comes from Jeffrey Hung with Morgan Stanley your line is open.
Hi, Goodmorning this is Catherine on for Jeff thank you so much for taking our question. We just had one with your MC4 agonist profile now consisting of the mellatide RM17 and now LB54640. Can you provide more color on how you're thinking about positioning and potential points of differentiation here? For example, do patients place more value on the ease of route of administration? Or are they emphasizing other aspects related to safety like hyperpigmentation?
Yeah Thanks, Catherine. So I think both of our next-generation therapies, potential therapies offer their own unique value proposition. So the weekly, both of them are hyperpigmentation sparing. So that's a huge issue for some patients, not all. It's not a huge percentage of patients, but what we're seeing is there's a very consistent number of percentage of patients that -- who are bothered by the hyperpigmentation, 100% of the patients will have some change in their skin pigmentation, but a much smaller percentage are bothered by it, but particularly non-Caucasian populations. It's an issue. So both of the next-generation products will offer that as a benefit. And then you have the convenience issue, which is one is a weekly injectable. The other is a daily oral, and that's really going to come down to patient preference. So your question about what's our strategy as we think about developing a portfolio of options for these patients is we'll be indifferent. Again, assuming that both of these molecules progress through development, will be indifferent. The goal is to offer patients physician the ability to choose a treatment, which gives their patient the best chance of getting the result that they want in a compliant tolerable well-accepted way. So that's it. No more than that. It will be dictated by the data, we'll see how they turn out. Again, if both products do well, they should clearly be better drugs in setmelanotide and then we'll reevaluate the role of setmelanotide in that world, of course, once -- as with always, you don't keep an inferior molecule out there if you've got clearly better alternatives.
Thank you.
Thank you.
One moment for our next question. The next question comes from Corinne Jenkins with Goldman Sachs your line is now open.
Good Morning, Maybe as a follow-on to that question. I guess how are you thinking about what a successful efficacy outcome looks like from the SIGNAL trial, particularly how does the oral form factor influence your view of what sufficient efficacy could be? And how do you think it will differ anything in particular like the efficacy front versus the injectables?
Yeah. Thanks, Corinne. So to be honest with you, I don't expect it to be better than setmelanotide and we did incredibly well with setmelanotide. And I think we're probably getting -- in terms of MC4 agonism, we're probably getting the desired effect, maybe at the maximum level you can achieve, what might allow either the weekly or a daily oral to do better, and that may show up more in the real world is in terms of compliance. We know in our HO Phase II trial compliance was extremely high in that trial overall. So assuming a similar level of compliance. I'm not sure we'll differentiate on efficacy. But -- so long answer to your question is we'll be looking for something that would be similar but not exactly the same, probably.
Okay thank you.
One moment for our next question. The next question comes from Derek Archila with Wells Fargo your line is open.
. Hey, Good Morning and congrats on the progress here. Just a couple of questions. So just first on the reauthorization denial. I guess what's the typical reason why that occurs? And how long does it take you to eventually get those approved? That's question one. And then question two, just any color that you can share on what you're seeing from a discontinuation rate in BBS thus far in the launch? Thanks.
Thanks for the question. Starting with the first one, in terms of the Rio denials, they sort of full into a couple of different categories. The first category may be that the patient has received benefits clinical benefits that were appreciated by the physician as well as the patients since their desire to continue on therapy, but they may be just shy in terms of reaching the 5% weight loss. Interesting enough, several of these patients as we went through the appeals process, actually did hit the 5%. So that's one category just in terms of overall clinical benefit versus that particular measurement. The other piece is simply sometimes the physician just needs to provide some additional information to be able to move the process forward and just working with the physician in terms of making sure the package is full or we've been able to get some of those appeals through as well. And the final category, I would say, is there are certain plans where we've been able to get an approval, but they didn't necessarily have a specific incept policy in place. Some of those also don't have a particular reauthorization policy in place. So we're having to rego through the process and the teams just work continuously just in terms of making sure that we are able to get those approvals moving forward and have been successful. On the question of discontinuation, overall, the discontinuation rate has increased from what we last reported, currently being approximately 20% of Rxs. We do expect this to increase, especially with a chronic lifelong therapy. And the reasons have remained consistent in terms of what we've outlined before, some personal reasons, some due to AEs, including Asia and hyperpigmentation. But I think that the main piece here for us is also there's opportunities for follow-up. We noticed that in terms of the discount, the highest prevalence of the discontinuations really are within the first 2 dispensers. So it's an opportunity for our teams to focus just in terms of making sure our patients are titrating appropriately and also following up in terms of maintaining them during this period of time. So that's an opportunity for us. The other piece is as patients discount, we have seen patients who have restarted just because of the sort of resurgence in terms of hyperphagia. And there's different examples of people coming back and maintaining on therapy EBIT after they have originally discontinued. So opportunities here just in terms of the teams to work through.
Very helpful. And then one more question. Just in terms of Part C data for 718, is that something we should expect this year? Thank you. Yeah.
Thanks No, I'd love it to be this year. I think as I indicated, that program is moving. We're incredibly focused on it. We're guiding in this to the first dosing in the first half here. I told you in my comments here, I'm really focused on getting that first patient dosed in March. If everything goes well, we should be comfortably enrolling HO patients in the back half of this year, but we won't have the readout until 2025.
Understood thank you.
Thanks Derek.
One moment for the next question. The next question comes from Phil Nadu with TD Cowen your line is now open.
Good Morning, congrats on progress and thanks for taking our questions. A couple on Japan and then one on commercial. In terms of Japan, just so we're clear on the primary end point necessary for Japanese filing. Is it an analysis of all the patients in the trial on the trial's primary endpoint. So the 120 that will be used to follow in the U.S. and Europe plus the 10 that are over enrolled plus the 12 in Japan? Or is there a special analysis that the Japanese regulators are requiring new done the Japanese population specifically?
Yeah, good question. So it will be both. It will be based on the full analysis of all patients treated, that will be the primary. We will analyze the Japanese patients independently, of course, and what they'll be looking for since we're not powered to have the stand-alone Japan cohort at 12 patients, of course, they'll be looking for consistency with the other results.
Got it. Okay. And then in terms of the Japanese market, would you anticipate pricing similar to what you've been able to achieve in the U.S.
Yann?
Yes. Thank you. So pricing in Japan is usually consistent with the European prices. The MOH either use a comparator model or cost plus pricing system is no comparator, so more in line with European prices, and they also look as references as the U.K., the German, the French price and the U.S. price of cost, so in that range.
Got it. Okay. And then last question. In terms of the 30 patients who discontinued commercial therapy and went on the bridge therapy because of the Medicaid issue, are all 30 of those patients back on commercial therapy now or any visibility on when they'll be able to return to commercial therapy.
Yeah. So the patients are still on our bridge program. And as we outlined, it is a bit of a process. in terms of needing to get specific input from specialists on different clinical manifestations to support the diagnosis. And as you can imagine, it takes quite a bit of time, sometimes to get those appointments overall. So we're still in process, and they are still in our bridge program at this point in time.
And maybe just to add a little bit, Phil. I mean, as Jennifer said, it's going to take time. So one, we don't expect them to drop back in next quarter. And secondly, there's elements of the BBS diagnosis are a bit subjective. So with the requirement for increased documentation, there's no guarantee that we get all 30 patients back on treatment, but we will for sure get some of them back on. But it's been the most important thing about this whole process, aside from the constructive interactions we've had with all the different parties and stakeholders is the rest of the U.S. is more than compensated and is running. And so this data is now -- it will be upside to our current equation. -- however it comes back and whatever timing it comes back in.
That´s very helpful thanks for taking our questions.
Thanks.
One moment for the next question. The next question comes from Whitney Ijem with Canaccord your line is open.
Hey guys thanks for taking the questions I have a few, but one quick follow up on the last comment on the work to get those 30 patients back on. Is there -- is the genetic diagnosis not enough here? Or are you seeing those patients didn't have genetics and there was more of a clinical diagnosis need?
So there's 2 components for this particular payer in terms of securing access, which is both the genetic component as well as the clinical diagnosis component. So both of those are in process and ongoing.
Got it. Got it. Okay. That's helpful. And then in Japan, -- have you -- is there any reason to expect, I guess, differential PK or safety and efficacy in the Japanese group there? Do you have data in any of your other trials in Japanese patients to speak to that?
No. I mean we have a very, very small number of Asian patients, which doesn't tell you exactly Japan, of course. There's nothing that stands out in the small number of patients that we have one. What is different is it's a smaller -- physically smaller population. And so we designed this trial for Western society and the cutoff for obesity of greater than 30 is well above what would be a cutoff greater than 25% in Japan as determining an individual who's overweight. So from patients to get into the trial, they need to meet our inclusion criteria that we set for the Western society. So that significantly narrows a bit. the population we'll be targeting for the trial. But in terms of your question about PK and differences, I mean, we have a ton of PK data in pediatrics, we have PK data down in very, very young kids. And there's a consistency in the way this drug performs. So there's no reason to believe that we're going to have a significant difference in how this drug is handled by the Japanese population.
Got it. Okay. And then last question. Should we be expecting an update on HO from the Phase II LTE this year with additional follow-up beyond the October update from last year?
I don't think so. I mean, we're in the process of putting out publications. We haven't planned necessarily another follow-up on the medium. -- we'll reevaluate that. If we did anything, it will be in the fall. But yes, it's not the current plan. I think we've given a good series of updates there for the moment.
Ok great, thank you very much.
Thank you.
One moment for the next question. The next question comes from Dae Gon Ha with Stifel your line is open.
Hey Good Morning guys thanks for taking my question and congrats on the progress. Maybe a few -- just kind of starting with the EU side of the BBS equation. I was wondering if Yann could comment on sort of the German launch progress. I think you mentioned 15 academic centers or large treatment centers. I didn't -- maybe I missed it, but did you mention how many patients are currently on therapy. And as we think about Spain and Italy launch, how could the dynamics there differ versus the German launch? And then switching over to the clinical side. If we think about the HO, I would kind of expect that the Phase III HO enrollment progress to kind of facilitate if not a tailwind to your other signal, if not 718 trial. So can we expect 125 data from all 3 of those studies? And if so, how should we think about the cadence between the 3?
Yann, do you want to go first?
Yeah Yes, I will start with Germany. So no, I have not given patients number, but I can comment on the launch for sure. So as I said, it's progressing well. We are meeting our expectations. The country is led by a very experienced GM and our field team does interact with all the key German centers. So again, in terms of field activity interactions, I think we are doing a very good job. What is important is that the feedback from the HCPs and the feedback from the patients through the HP is very good and the discontinuation rate that we observed is low. We also have kicked off 2 large patient identification programs. One for the adult population, one for the pediatric population, which will help us to identify new patients for 25 and beyond. So I don't have specific numbers for Germany, but I can tell you that it's going well. Spain and Italy, I can maybe speak about the 2 countries together because there are many common dynamics. So it will be slow and steady as usual or as often with rare disease. Both countries are single-payer systems and have a national negotiated price, which is very good. They are also very decentralized. So we have to engage with both regional payers and local hospitals in individual states. And that's why it will be slow and steady. Of course, we focus initially on where the identified patients are and in the fastest regions from a market access point of view. As I said earlier, there are 21 states in Italy and 16 in Spain. So we are focusing on the one with more patients and the fastest pace in terms of access. And in general, what I would say about Europe and Hunter mentioned that also is in slides for 2024, Germany will be the main driver. And both Spain and Italy will become more meaningful in 2025 when we will also have U.K. and the Netherlands kicking in.
And Dan, on the -- your clinical question, which is, yes, we enrolled incredibly well on the Phase III trial, and that does speak to demand interest in this trial. And that, for sure, will spill over into potential enrollments for both of our weekly program and the small molecule daily oral program. Until we get -- neither one of those programs have we dosed an HO patient, as I said, first, for the weekly, we've got to go through the healthy volunteer study for the small molecule, we're just getting those sites up and haven't quite gotten to the point where we're dosing. So until we get that part of the trial is established. I don't have line of sight to when exactly we would guide to readouts here. So I'm going to defer that. What we will commit to it, we'll for sure be 2025. As you can imagine, we're highly motivated to get it as soon as possible, but I have to leave it there at this moment.
cool thanks so much.
Please stand by for the next question. The next question comes from Joseph Stringer with Needham your line is open.
Hey Good Morning thanks taking our questions. First one on just looking at the NRx, it seem to be down slightly the last 2 quarters. Just wondering if you could comment on this trend. Do you feel like you'd reach a point in the U.S. where there'd be a relatively steady state quarterly new prescription ad? And what would that look like? And then secondly, on HO in Japan, can you maybe talk about the HO patient community and organization relative to what it is in the U.S., are there any significant differences in diagnosis or registries? And also, are there any differences in the outlook or attitude of how the physicians in Japan view using, say, the GLP weight loss drug to try and treat each compared to what positions in the U.S. view it as. Thank you.
So Joey, I'll start and then hand it over to Jennifer. I think we've tried to be pretty consistent in our messaging around scripts that we view that as the hardest thing to predict. So we expect variability. We feel very good about the level that we're at, both from the Rx growth and the reimbursed patients on therapy perspective. But we do think it's going to be consistently difficult to model, if you will. And so -- and Jennifer can obviously go into the details as to the why. But.
Yeah. What's interesting is, sometimes, when you look at some of the scripts that came in, it was like it could be up to 1 year from the first interaction for the physician to be educated and then to be really evaluating their patients to even come to a BBS patient diagnosis and then eventually go to a scrap witches -- what makes it difficult just in terms of really being able to predict quarter-over-quarter. What I will say is like we take a look at different metrics, including, as we outlined, sort of like the new number of prescribers to have been increased and educated in terms of awareness of BBS and that has remained consistent quarter-over-quarter as well as the ones that I have already prescribed and had a good experience with their patient. Hence, they are also interested in terms of putting any additional patients that come across, and that's what we want in terms of them really experiencing the benefits of this specific therapy for the BBS patient population. So we remain positive in terms of the opportunities for growth. There's still a ways to go in terms of really achieving the prevalence estimates that we have out there, and we're just going to continue to grow quarter-over-quarter.
And Yann, you want to provide a little more color on the patient situation in Japan?
Yes. So I can speak about HO in Japan and one of your question was also different or comparison with the U.S. So one thing that we have observed first is that when these patients in the U.S. and in Europe are most of the time under the care of endocrinologists after the surgery. In Japan, they are already followed closely by those 2 medical specialties, which I think is good because from a patient identification point of view, we have 2 medical specialties that we can speak to. But so we have observed that very early, and we will make sure that we are covering those 2 specialties very well. One of your questions was about registry. Yes, there are 2 registries existing led or under the umbrella of scientific societies and we have worked with those societies and with these registries to set up the prevalence numbers that I've given earlier. So yes, they exist. They are well filled, and we are already working for using them. Another good aspect from a patient point of view in Japan, as you know, there are very good data or hospital data. So we have used claims database analysis for the prevalence, but we will continue to use that also to identify where the largest centers are where the patients are. And of course, a lot of data that will help us from an economic cyclonic point of view. One of your question was about the use of other until the communication, I mean it's a bit early for us to say. But what we have observed 2 weeks ago during the symposium, there were a lot of questions from the audience to the speakers and to -- about that, what should they do. And so I can only report what we have heard. So the President of the Japanese society stood up and mentioned that given the very -- the specifics of HO and the mechanism of action of separate and the precision medicine aspect, they should consider a tile to treat these patients. So very early to say, but I think we observed and well observed and we are interacting with the market that sounds very promising for us.
Thank you.
Thanks so much for the color.
One moment for our last question -- the last question comes from Michael Higgins with Ladenburg Thalmann your line is now open.
Thank you, operator. And congrats as well, guys in the quarter. Given I have a quick one here. David, if you could confirm for us in marketing in Japan and reaching that patient population
Michael I missed it. Sorry, I confirm.
Hopefully, the call will go through here Just trying to clarify your marketing plan in Japan. Are you going to go alone, you're going to partner with others.
Yeah got it. Perfect. Yes. Thanks. Yann?
Yes. So as I said earlier, so we will go alone. We will establish an affiliate in Japan. We have already 2 people working for us in the ground. One person in my team is also dedicated to the market, and we will build the structure in the next month as needed. As you know, in Japan, there are some positions that are mandatory before filing. So we are currently looking for those. And as I also said, we are working with these to consultants to establish a relationship with the key opinion leaders and medical society. So yes, standalone and moving forward like that.
Yeah. And just to remind people, I think our overall strategy and the strategy here is being successful in rare diseases, particularly outside the U.S., it's all about the people you have on the ground. And we've done well with people like Yann, who have a deep experience. And for Japan, we're going to dip back into the Genzyme-Sanofi genome roster as well. I'm looking for some people we've worked with in the past, again, who have by familiarity with the Japanese market and like. So when Yann said, we feel we can do this alone. We've talked to partners, and we'll never say never on partnering, but I think this is approachable. And given the size and value of this to the overall rhythm picture, the bar to do anything else but go direct would be extremely high. So with that, I think that was the last question. Yes. Thanks, Mike. So thanks all again. So I think -- thanks again, everybody, for tuning in, and we very much look forward to reporting out again in another busy year coming up for Rhythm. Talk soon.
This concludes today's conference call. Thank you for participating. You may now disconnect.