Rhythm Pharmaceuticals is Undervalued on the Verge of Inflection Points, Offering up to 150% Upside

Updated: Jun 5, 2020


Summary: Earlier this month, Rhythm Pharmaceuticals (NASDAQ: RYTM) filed an NDA for setmelanotide (a MC4R agonist) for the treatment of POMC and LEPR deficiency obesity, receiving a priority review and 11/27/2020 PDUFA date. POMC and LEPR deficiency obesity are extremely rare (100 - 500 and 500 - 2000 patients in the U.S., respectively) and severe disorders that result in exponential weight gain that cannot be reversed through diet, exercise, or current therapies. RYTM’s setmelanotide development program is rounded out with an additional pivotal P3 trial in Bardet-Biedl Syndrome (BBS) and Alstrom Syndrome (AS) (primary completion: 06/30/2020) and a P2 basket trial across 6 other genetically-defined rare obesity disorders implicating the MC4R pathway (see below diagram). Setmelanotide has demonstrated clinically meaningful weight loss in trials to date and we expect FDA approval in POMC and LEPR (~90% probability). We assign the BBS and AS program ~80% probability of P3 success and ~90% probability of approval (~70% cumulative probability of technical and regulatory success (PTRS)) given proof of concept from POMC and LEPR pivotal trials and positive P2 data in BBS and AS. Cumulatively, we are expecting setmelanotide to drive a $750 - 1,350M global (U.S. + EU) peak sales opportunity ($590 - 800M PTRS-adjusted) depending on indication expansion. We believe this supports a valuation of $1.6 - 2.2B using a peak sales multiplier of 2.5 - 3x, representing ~145% upside over the current ~$890M market cap.


Figure Taken From Rhythm Corporate Presentation (May 2020)


Key Takeaways

  • RYTM’s lead asset setmelanotide is anticipated to secure its first FDA approvals by November 2020 and possesses cumulative blockbuster sales potential across rare MC4R-associated genetic obesities.

  • Positive pivotal data in lead indications POMC and LEPR and strong P2 data in BSS and AS provides clinical evidence of the therapeutic benefit of MC4R agonism in this pathway, mitigating development risk for follow-on indications. Prior research we’ve conducted with physicians managing obese patients indicated that ≥10% weight loss from baseline is considered a highly potent effect: setmelanotide demonstrated an average of 25.4% and 12.4% weight loss in POMC and LEPR pivotal trials, respectively.

  • We forecast the cumulative setmelanotide peak sales to reach $1.3B ($800M PTRS-adjusted). Current pivotal programs (POMC, LEPR, BBS, and AS) alone collectively drive a ~$750M (~$590M PTRS-adjusted) peak opportunity, with the P2 indications contributing the additional $570M (~$200M PTRS-adjusted).

  • We therefore assign RYTM a $1.6 - 2.2B PTRS-adjusted valuation using a peak sales multiple of 2.5 - 3x, offering ~145% upside against a current market cap of ~$890 M.

  • As with all orphan drugs, commercial success will hinge on RYTM’s ability to shift clinical practice and drive patient testing and identification, and we are reassured through the efforts RYTM has already made to engage patient advocacy groups and clinicians.


Key Stock Drivers:

  • Late-stage asset in an area of high unmet need: Genetically-driven obesities are associated with high clinical unmet need given the clinical, social, and familial impacts of extreme obesity and lack of efficacious interventions today. An FDA-approved drug would therefore be anticipated to drive high clinical demand and benefit from favorable pricing and access.

  • Positive pivotal trial data and orphan designation confer high probability of approval: After one year, 8/10 POMC and 5/11 LEPR patients in pivotal trials achieved ≥10% weight loss from baseline, with an average weight loss of 25.4% (70.2 lbs) and 12.4% (36.8 lbs) in the POMC and LEPR trials, respectively. We thus predict a high probability (≥90%) of FDA approval by the November PDUFA date. Furthermore, these data help to validate that modulation of the MC4R pathway with setmelanotide is therapeutically useful, derisking RYTM’s other setmelanotide trials (BBS, AS, and others).

  • Multiple near-term inflection points: Key near-term inflection points include setmelanotide’s November 2020 PDUFA date, topline P3 readout for BBS and AS in 4Q20 or 1Q21, and an update from the P2 basket trial in other MC4R-associated rare genetic obesities. Beyond setmelanotide, RYTM also reported plans to file an IND for RM-853 for Prader-Willi Syndrome by 2020 EOY.

  • We forecast a $750 - 1,350M peak sales opportunity (PTRS-adjusted $590 - 800M) for setmelanotide, supporting a $1.6 - 2.2B PTRS-adjusted valuation: POMC and LEPR together represent a ~$230M (~$210M PTRS-adjusted) peak opportunity, with BBS and AS contributing ~$530 M (~$385 M PTRS-adjusted) and P2 indications adding an additional ~$570M (~$200M PTRS-adjusted).


Key Stock Risks:

  • Regulatory risk, while limited, exists given small clinical trials: While we do not consider setmelanotide’s small clinical trials to be a barrier to approval given precedent in orphan drug development, we acknowledge that the FDA may balk at the low number of treated patients and mandate additional data. However, even if this is the case, we hypothesize that the most likely outcome would be a conditional approval and required post-marketing study.

  • Identifying and activating patients for treatment will be challenging: Genetic testing for these indications is extremely low due to the absence of an approved therapy. As with most orphan drug developers, RYTM will have to invest extensively in clinician and patient awareness and access to testing to drive identification of therapy-eligible patients. This substantially increases the execution risk for setmelanotide even if regulatory approval is obtained. RYTM is laying the foundation for these critical efforts through relationships with disease-specific patient advocacy groups, putting medical teams in the field to engage clinicians, and sponsoring a genetic testing program for rare obesities. Nonetheless, patient identification likely presents the greatest downside risk for RYTM.

  • Reported epidemiology may be inaccurate: As with many orphan diseases, the epidemiology for setmelanotide’s target indications is far from definitively understood. Therefore, there is the risk that the sources used significantly overestimate the total addressable population.

  • Public and political pressure on drug pricing: setmelanotide, as an orphan drug, is expected to carry a high per-patient annual price. While historically orphan drug pricing has been extremely favorable, increased public scrutiny and “sticker shock” may constrain pricing potential in the future. We and other analysts forecast a launch price of $350 K / year in the U.S., in-line with many chronic orphan drugs, which we do not anticipate will trigger any broader scrutiny at launch given the small patient populations. However, the risk does exist that setmelanotide gets caught up in the larger conversation around value and cost-effectiveness, particularly in ex-U.S. markets.


Disclosure:

We own shares of Rhythm Pharmaceuticals. This article expresses our own opinions, not Rhythm Pharmaceuticals’ or any other party’s opinion. We are not receiving compensation for this report. We do not have a business relationship with the company mentioned in this report.



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