Rhythm Pharmaceuticals, Inc. (RYTM) Earnings Call Transcript & Summary

Good afternoon, and welcome once again to Cowen & Company's 41st Annual Health Care Conference. I'm Phil Nadeau, a biotech analyst here at Cowen. It's my pleasure to moderate a fireside discussion with Rhythm Pharmaceuticals. We're really happy to have with us today David Meeker, the CEO of Rhythm. These are truly exciting times for Rhythm with product on the market, positive Phase III data and other indications and very intriguing Phase II data in yet some more. So we're excited to talk through the story with David today. David, maybe we can just hand it to you to begin. Could you give a brief state of the company summary? What are Rhythm's biggest strengths, its challenges? And what do you think you need to do to create shareholder value over the next year or 2?

Yes. Thanks, Phil. I'm thrilled to be here. No, I think, Rhythms' -- obviously, I'm biased, but a really interesting story. You highlighted some of the features. Now when I think about strong opportunities, first question is, is there a problem to be solved? And I think, we're addressing a very clear unmet medical need in rare genetic diseases of obesity. We know obesity is a pandemic overall. 1/3 of U.S. is overweight and the other 1/3 is obese. And inside of that large population is a slice of individuals, some where there's a monogenetic driver of their obesity. So one, we have work going after, like I said, a very significant unmet medical need. The second is we have a drug that works, and the biology is extremely strong. So this MC4R pathway that -- which we are working on has been studied for a decade or more. It's well-known in terms of its link to both hunger, which is the major driver when this pathway is disrupted through a genetic defect. And it also regulates energy and metabolism or energy expenditure. So that combination of being hungry and burning less fuel leads to the weight gain that we see, the severe obesity. Third strength for Rhythm is we got an approved drug, as you highlighted. I think, looking back in my career, I mean, knowing how difficult it is to get a drug approved, hugely validating moment for us, so in November getting IMCIVREE approved. It's for a very small indication, the 3 genes it's approved for biallelic homozygous population. There's 500 to 2,000 patients in the U.S. And again, it's extremely rare, but -- so we'll get there over time in that group, but the approval is highly, highly validating for us. And fourth, we're well capitalized. I think, we just raised money. We sold a pediatric review, a priority review voucher. And so, we have in excess of $400 million. So we're well positioned to do what we need to do. The challenges going forward is it's a classic rare disease challenge. We -- these genes, each one of them is rare, ultra-rare in many cases, but in the aggregate, not so rare. But the reality is we have to build help the healthcare system see this problem. It's not like you're entering into a diabetes space where care pathways are well defined. This is a world where the system is not set up to find these patients or to take care of them, so that's a big challenge. And success for the next 12, 24 months is all about execution. We know what we need to do, we just have to execute.

In January, you released the results from IMCIVREE's basket trial. For those less familiar, could you briefly review the design of the trial and the key efficacy results in the SRC1 and SH2B1 populations?

Yes. Maybe, I'll just step back one step and then we'll get to the basket. So the way Rhythm approached this whole problem of the MC4 pathway was focusing initially on the 3 genes that we felt had the highest probability of responding, most closely linked to the receptor, this MC4 receptor, which is how our drug works, and these genes are upstream of that. So we had the profound results and we got approved. The basket study was our attempt to enlarge and understand in a more efficient way what other genes, upstream in that pathway might benefit from treatment with setmelanotide. So there was 5 genes: the 3 heterozygote populations for POMC, PCSK1 and LEPR; and then the 2 other genes you highlighted, SH2B1 and SRC1. The design was a very straightforward open-label trial. We -- every patient who entered, you had to have severe obesity to be eligible for the trial. The average weight of patients in our trial for two, the SH2B1; SRC1, they had BMIs of 44, 45. For the heterozygous population, it was BMI of 50. And just to remind people, what -- you are obese, by definitions, here in the U.S. if you have a BMI greater than 30. You are severely obese if you have a BMI greater than 40. And so, we were in the 45 to 50 range. So open-label trial, all patients put on drug. And the endpoint was simply the percentage of patients, number of patients, who lost 5% or more of their weight in the first 12 weeks on the drug.

And what were the results or what percent of patients lost greater than 5% of body weight in each group? And maybe, on the side effect profile, were there any notable or unexpected adverse events?

Yes. So the results, and this is where the genetics get interesting, is so for the heterozygote group, about 1/3 of the patients responded, 34% lost 5% or more, and that was a complete data set. We had 35 patients in that cohort. For the SRC1, it was 1/3. Again, about 30% of the patients responded. That was a smaller cohort, 13 patients had gotten to the end. And for SH2B1, 50% of the patients reached 5% or more, and that was 17 patients. So -- but what you need to understand is you look at numbers is for each gene, what we've done is we've looked and tried to understand which genes are linked to the pathway. And we can talk about a scoring criteria for how we do that. But if you have a genetic defect, it doesn't tell you what the mutation is in that gene, right? So you may have -- your variant, your mutation in that gene may leave you with -- be classified as benign or likely benign, meaning that your defect isn't causing loss of protein function. So in essence, you're normal. You have the genetic defect, but you're normal. Alternatively, you may have a genetic defect that is well-known to cause loss of function in that protein, so you'd be categorized as pathogenic or likely pathogenic. And then there's a big group in the middle, and that's what they call VUS, this variant of unknown significance, and it's just that. And it's not that this is a good or bad category. It's just -- there's no data or there's not enough data to project whether it's a benign or pathogenic side of the equation. So our response rates for the heterozygote as a group were 1/3. But if you look at the pathogenic -- likely pathogenic group, it was 50%. And if you look at the VUS group, it was 20%. And that experience, what it's teaching us and we firmly believe at this point, is there's a 3-step process to figuring out who's going to benefit from this drug. So one is, you need to have the problem, which is a history of early onset obesity and this issue of hunger. And we can talk more about that. But as I said, that's what this pathway mediates. So if you -- pathologic hunger, not the kind of hunger you and I experience some -- by missing a meal. And this severe obesity, so you got to have the problem. Second, you have to have a positive genetic defect. But that doesn't tell us that your pathway is broken necessarily and that you'll respond to setmelanotide. So the third step is really important is, let's just give you a trial on the drug. I mean, that's the practice of medicine. In 12 weeks and this 5% cutoff, which we prospectively defined for the basket trial, seems to be quite predictive in the sense that if you lose 5% or more, we would expect you to go on to lose more weight. And if you don't reach that 5% threshold, it's reasonable, not perfect, that you'd would be categorized as a non-responder and you should stop the drug. Side effects. The side effect profile for the drug, it's -- right now, we've treated, including our normal volunteer general obese population, we're almost 600 individuals who've had the drug. A small number that are out to 2 or 3 years, 4 years, but a large number with 1 year or less experience. Very clear, you've -- we've got GI disturbance, nausea and vomiting, which is the first month on the drug. And there, you're -- we're just hitting a pathway that hasn't been activated in a while. You get through the first month. Patients do fine and they stand the drug. And skin hyperpigmentation, we do interact with the MC1 receptor, which is the -- on the melanocyte, and it's what gets triggered when we're out in the sun and you get tanning. And so, we're activating that pathway endogenously, and you do get skin hyperpigmentation, which persists. It plateaus, it persists and reverses when you come off the drug. So those are the 3 primary side effects.

When the basket data were first released, investors were debating the significance of the excluded patients. Can you discuss the rationale for excluding the patients who didn't complete the full 16 weeks from the study? And had you left those in the analysis, how would the data have looked different?

Yes. So the basket trial, again, it was a bit of an evolutionary process. So we started the heterozygote group. Those 3 earlier got to the larger number, 35, and we had a complete set there, if you will. And so, we reported out all of the data, including 6 patients who had discontinued. So they're all included in that heterozygote analysis with 1/3 of the responders. There were 15 patients that dropped out of the SRC1, SH2B1 group combined. And there's an additional 12 patients who are still in the trial and ongoing. So that was a partial data set. So we only reported out the completers, and it did raise, Phil, as you highlighted, that obvious question. well, gee, are you guys leaving out some really important data that would change the conclusion? So in response to that, we've gone back and looked very specifically, obviously, at those patients who had dropped out. So of the 15 who had dropped out, 6 of the 15 patients had lost 5 kilograms or more at the time they dropped out. So this is in less than 12 weeks, right? So several patients dropped out before they hit visit 2. And we started -- this part of the trial, I guess, started later. As I said, we are kind of mid-COVID. And I have to say, of all our trials, this was our most pronounced COVID effect. So I think part of that discontinuation was we didn't have the handholding to sort of educate investigators and patients in the way we should have or might have. But anyway, we lost a few, just dropped out, no data. I can't draw any conclusions. But 6 of the 15, so it's the full 15 set, had lost 5 kilos. And their baseline weights, on average for that group, was 115 kilos. So you can -- if they had gotten to 6 kilos, they would have hit the 5%. And they were hitting that 5-kilo mark on their visit 3 to 5, right? I mean, the full trial was out through visit 6. So we're looking at that. And I would characterize those individuals as very clearly on a slope. A couple of the 6 had already hit the 5%, so they would have scored already. I think, likely all 6 would have hit, which would have been very consistent with the data that we had read out. So long answer to say, I don't think the 15 dropout some change our conclusions at all.

That's really interesting. Those are interesting statistics. What are the next steps here? Where are you moving, or what are you doing next in SRC1, SH2B1?

Yes. So like I said, strong Phase II data, encouraged by that, encouraged by the whole program, which is we're building a house here. I'd like to think about it, right? I mean, we got the first 3 genes, robust efficacy approved. We got Bardet-Biedl Phase III data, as you highlighted, in December. Very strong, we can talk about that. And now, we have these 5 more genes. So our confidence in the pathway, our confidence that things are working upstream and the pathway is growing, number one. Number two, the end game here at some point is to get a pathway indication. We actually did have an exploratory conversation with the FDA about that. Not ready to go there today. So the next step for these -- this Phase II basket is a classic Phase III trial. So we'll take these 5 genes into a double-blind, randomized controlled trial. And we're going to propose -- and we haven't finalized this with the FDA yet in terms of endpoints, but we're proposing a 6-month with a long-term extension. Everybody rolling over, but a 6-month double-blind placebo-controlled trial. Tough to keep people on placebo in this part. So I think that may be at the outer limit of what we can probably practically do. And then -- so that will be -- and then, the endpoint, Sorry. The endpoint will be the percentage of patients in the 2 groups that reach 10% or more weight loss at 6 months. So maybe just one comment on the 5% and the 10%.

Yes.

There's nothing biologic about 5% or 10%. We picked 5% as a threshold for determining responders, and it's held up quite well. But a, its view is clinically meaningful by medical professionals. It's a regulatory threshold. So for obesity drugs, if you clear 5%, that's been an approvable endpoint. And in this case, as we said, it seems to predict that you will go on to lose more weight. The 10%, we wanted to set the bar reasonably high. Our expectation is that there will be some reasonable percentage of patients in the treated group that get to 10%. And maybe, a few, if any, 0, in the placebo group that are able to get to 10% weight loss on their own.

That's really interesting. Can you discuss your genetic database and screening efforts? First, what are your estimates for the number of patients with these 3 conditions? And then, second, how are you using your screening efforts to build your database?

Yes. So -- okay. So let's start with the numbers. So the -- for these 5 genes, like we started the conversation. The first 3 genes approved 500 to 2,000 in the U.S. The Bardet-Biedl numbers, where we had the positive Phase III data, we think there's on the order of 2,500 patients in the U.S. So you can double these numbers or more ex-U.S. So that puts us in sort of a 5,000-patient opportunity, ultra-rare clearly by most definitions. So these 5 genes -- the target population in the United States, there's about 5 million individuals in the U.S. who have early-onset, childhood-onset obesity, right? And so, by definition, maybe some genetic claim. Obviously, if there's a hunger story, that's incredibly important. So that 5 million people would be the group that we think should be screened for their genetics. If they have a positive genetic test for one of these 5 genes, based on our data, our work done to date where we've sequence screened on the order of 37,000 individuals, the hit rate or prevalence rate for those 5 genes is 10% to 15%. So 500,000 to 750,000 people in the U.S. might have -- with that history, history of early onset obesity, might have a positive genetic test. That doesn't tell you you're going to be responders. We said and we know now, as I described, from this Phase II trial, the 20% to 50% response rates. When we apply that math, making the corrections for the pathogenic and VUS categories, we predict that there's on the order of 100,000 to 200,000 individuals who would be responders to setmelanotide. So we're going from -- part of the Rhythm story here is we're going from a classic ultra-rare, with all the challenges of rare, company to building an -- to an opportunity here of 100,000 to 200,000 individuals based on these 5 genes. And what we haven't talked about yet is, this additional opportunity of new genes in the next trial, which we can talk about in a minute, is 31 genes. And so that opportunity from a numbers standpoint, some percentage of that 31 genes, we do think, and I'll tell you why in a minute, will respond, so they would be additive to this 100,000 to 200,000 opportunity. So the other part of your question was on sequencing. And just what's -- again, I love efficiencies where you have them. And this is a classic situation where we're building this house. And we're working in an MC4 pathway, screening for patients with these genetic defects. And the way you do that is we're developing a panel of genes that we believe should be screened for. And so, we had a first generation of that panel. And we readout on the order of 40 genes. There's total of 100 genes in there, but we readout 40 that we think are of interest. Generation 3 will include up to 175 genes. And these aren't genes we're picking randomly. These are genes that have the potential to be linked to the pathway. Now we're focusing down on 36, the 5 that are going into Phase III here, plus another 31. And they're all picked because we think, the explanation for how you pick them, we're using this NIH scoring system, ClinGen scoring system, which is a -- essentially a ranking priority establishing system that incorporates all available data, so preclinical data. If there's a mouse model, you knock out the gene, you get an obese mouse, you score. If you have epidemiologic data that says this gene is more prevalent in an obese population than is in a lean population, you score. You have biochemical assay data, you score. So you put together all accumulated information, you rank the genes, and you get very strong, strong, moderate and weak. All of the genes we have studied to date, with the exception of one, Alströms, have scored in the very strong and strong category. Alström happened to score in the moderate, a separate story there. But the 31 genes that we are looking -- we've yet to study, but we are looking to study in this next basket study are picked because they fall in the strong and very strong category. So exactly like the genes that we already know have worked, the data supporting these genes is similar. So reasonable optimism that says, look, there's some -- I think, I said it's reasonable to expect some number of those genes will have responders in there, maybe a significant number.

And what will be the design of that next basket study? Will it be similar to the one that just read out or are there going to be any notable changes?

Yes, I think, one big notable change. So the original basket is a simple open-label. Everybody got a drug since -- at 5% or not. This next basket study with the 31 genes, everybody will go on drugs. So you have to have the problem, positive genetic test for one of these 31 genes, you will then get 12 weeks on the drug, 12 to 16 weeks, probably. If you lose 5% or more in that timeframe, you will be deemed a responder, and you will go into the next phase of the trial. If you don't, you're out, you stop. Not a responder don't need to continue the drug. For those responders, you will then, as you enter the trial, be randomized maybe 2:1 to either continue treatment or placebo, so in a sense, withdraw, treatment withdrawal on a placebo. So it's a blinded effort. What we do know our early experience with those other genes in our first POMC LEPR trial, we -- where we had profound responses, we had a period in the middle of 2 weeks where patients in a blinded fashion were switched to placebo. So they didn't know when that would happen in the trial. And not remarkably, biologically, you'd expect it. But there was a very dramatic instant return of hunger. So hunger goes down very quickly, it comes back very quickly. As you might expect, when you sit on this receptor, well, it takes time. But even in that 2-week period, those patients regained 5 kilos. So I think, this design will be a very powerful demonstration of whether or not it'll -- powerful demonstration of 2 things. One is the paradigm of does the 5% get us to this group that needs the drug? And then, the randomized withdrawal, I think, a powerful demonstration that in those patients we have deemed responders, they are truly benefiting and they lose that benefit the instant they come off the drug.

That is really interesting. Maybe moving on to BBS and Alström, you did announce Phase III results in December. Can you briefly recap the data that you produced? What percent of patients were responders? What was the change in weight in BMI-Z score?

Yes. So more complicated trials. So we combined Bardet-Biedl syndrome and Alström syndrome. So here's the story in Alströms. In both of those diseases, they're syndromes, so they have multi-organ involvement. So in the case of Bardet-Biedl, we have eye involvement, you have kidney involvement and have endocrine abnormalities. So they're both ciliopathies. And so, that's why we put them together. So cilium, having to do with impacting transmission of signals and so, again, pathway disrupted if your cilium function is not working. Bardet-Biedl, much more prevalent. So on the order of 2,500, the population of Alström patients in the U.S. at max, we think, is on the order of 500. So there were 32 Bardet-Biedl patients in the trial and 6 Alströms. And it took us a long time to enroll the Alström patients, again, just because they were so rare. The primary endpoint for the trial was patients 12 years and older, and there were patients who were younger than 12, they just weren't included in the primary analysis because we were trying to limit the impact of growth that occurs in childhood. I'll tell you in a minute how we got -- we tripped up on the fact that between 12 and 18, we had a large group of individuals who weren't still growing. But our primary endpoint was age greater than 12, Bardet-Biedl and Alström patients. So there was 31 out of the 38 fall in that category. And the response rate was 1/3, 34%. Now it turns out that the 3 Alström patients that qualified for the primary analysis were adults, did not respond. So if -- then we ask the question, okay, so it doesn't work in Bardet-Biedl. Then what are the numbers around Bardet-Biedl? So take out the 3. So for the 28 Bardet-Biedl patients, response rate was 38%, still a little higher. So then the question was it turned out that literally half of that 28 Bardet-Biedl patients were adolescents, very pubertal, where you'd expect to see the growth spurt and again, so a huge compounder. So -- and then we looked at the 2 populations, the adolescents -- sorry, the children, kids under 18, and the adults. So for the adults, there was 15 adults. 8 out of the 15 cleared 10%, so 50%, 53%. And 11 out of 15 cleared 5%, so 73%. So there's no question, from a -- is the drug working in Bardet-Biedl? We feel really good about that adult data and supporting the fact that we're getting good response rates. And those patients who cleared 5%. 10% was the primary endpoint. 5% is meaningful weight loss. They're a, they're not gaining, they're still losing, and you've got the hunger reduction. And so, I think, in the real world ultimately, that 5% and up is a world that we probably expect to live in. So then, we looked at the kids. So there were 16 kids, so including some who were less than 12, and looked at their BMI-Z score. So the Z score is what corrects for this growth. And it's -- the number is essentially the number of standard deviations away from the norm. So these on -- patients on average had BMI-Z scores of 3.75, so almost 4 standard deviations away from normal -- from the norm. And they reduced as a group to 2.98. And what we understand is this is still an early -- there haven't been drugs that to do this and you certainly can't do it as a rule with weight loss. But what we understand is between 0.1 and 0.3 change in your BMI-Z score is viewed as very clinically meaningful. So we were at 0.7 and feeling really good about that. So I think -- overall, I think we have very robust data in the Bardet-Biedl world here. We'll read out at the end of this first -- we won't report out, but we -- we'll read out the top line in December, but the full trial finishes at the end of the first quarter. And so, we'll be presenting that data subsequently. But there's more to come there, but I think we are very confident, again, in the primary data and key secondaries.

Last few minutes, we should discuss IMCIVREE's launch. Maybe, give us an update on kind of your strategy, how Rhythm is approaching IMCIVREE's first availability in the 3 initial indications.

Yes. So drug is available. We have it on the shelf and we have start points in the system. I've been very clear, as Phil knows better than anybody, setting expectation here, right, we expect tens of patients over the first 1 to 2 years. Again population is small. It makes no sense. If this was the only thing we had, of course, we would go after it and we tried to find the needle in the haystack. It makes no sense for Rhythm, given this opportunity, to spend a lot of resources, trying to find these needles today. The most efficient way to find them will be through sequencing, getting people to screen. And remember, that panel which has 175 genes on it, it includes the 3 genes. So every time they test looking for some patients to enroll in the clinical trial, they will be in looking for these patients. So we will find the 500 to 2,000 patients in the U.S. over time. It's not one of those rapid out of the gate. So we have no salesforce on the ground. We are completely focused on the clinical development here, which is getting up on the order of probably 100-ish sites that will be necessary to execute on our Phase III and this 31 gene Phase II. And our focus on screening will be through those sites. And out of that effort, of course, will come in patients who will be eligible for on-label approved IMCIVREE.

As you look out a number of years, the potential market that you could be addressing could be quite large with 100,000 to 200,000 patients in the U.S., probably similar numbers overseas. What's your most recent thinking on commercialization strategies? Would you consider partnering setmelanotide for any indications or geographies as it's launch develops?

Yes, I mean, the only place I would seriously consider today, and we're preliminarily exploring that, is China. We can't do China on our own. And there's lots of advantages to having a strong Chinese partner or a company with experience in China. So -- and I think, you can carve that out without compromising the overall value proposition, I mean, for an opportunity. That said, the rest of the world is completely approachable. And even though, it is a larger rare disease opportunity, it has all the elements of rare. You work through centers of excellence. You customize your approach. It's a highly efficient from a manpower number. We're in the process of building out our European organization. We have early discussions with distributors. Actually, some of those are close to final. So we'll selectively use some distributors. We'll have a big primary presence as well. And you work through, again, thought leaders, Europe and ex-U.S. much better organized than in the U.S., which again, makes it more approachable, not less. So today, I don't see a partnership role. I mean, never say never. And of course at some point, if this opportunity was large enough, then you might rethink that. But as a rule, I think this is very approachable by a company of Rhythm's size.

Well, that's perfect. With that, it looks like we are just out of time. So David, I'd like to thank you for a very interesting session. I thought this was a great discussion, and congrats on all the progress that you and the team have made over the last year.

Thank you, Phil.