RHYTHM PHARMACEUTICALS INC
For the period ended Dec 31, 2024. Filed Feb 28, 2025.
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FY2024 · Filed Feb 28, 2025
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Rhythm Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Rhythm Pharmaceuticals, Inc. (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2025 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| Accrued and Prepaid Research and Development Expenses related to Phase 3 EMANATE, Phase 3 evaluation of setmelanotide on acquired hypothalamic obesity and Phase 2 evaluation of bivamelagon on acquired hypothalamic obesity clinical trials | ||
| Description of the Matter | | The Company’s accrued expenses and other current liabilities related to research and development costs were $17.9 million at December 31, 2024. In addition, the Company’s prepaid expenses and other current assets and other long-term assets related to research and development costs were $7.6 million and $6.2 million, respectively, at December 31, 2024. As discussed in Note 2 of the consolidated financial statements, the Company’s research and development |
| expenses are based on the Company’s estimates of the progress of the related studies or clinical trials, including the phase or completion of events, invoices received, and contracted costs, which results in an accrual or prepayment at the balance sheet date.Auditing certain of the Company’s accrued and prepaid research and development expenses for clinical trials was complex and judgmental, as accounting for the costs associated with these clinical trials required significant estimates of the level of services performed and the associated costs incurred by service providers. Additionally, due to the long duration of these clinical trials and the timing of invoicing received from third parties, the actual amounts incurred are not always known prior to the issuance of the Company’s financial statements. | ||
| How We Addressed the Matter in Our Audit | | To evaluate the prepaid and accrued research and development costs for these clinical trials at December 31, 2024, our audit procedures included, among others, testing the completeness and accuracy of the underlying data used in the estimates and evaluating the significant judgements and estimates made by management to determine the recorded prepaid and accrued amounts. To test the significant judgments and estimates, we corroborated the progress of research and development activities through discussion with the Company’s research and development personnel that oversee the research and development projects and inspected the Company’s contracts with third parties and any pending change orders to assess the impact on amounts recorded. In addition, we tested estimates of costs incurred to date by confirming actual costs incurred with the relevant third parties and through review of invoices received by the Company. We also analyzed fluctuations in prepaid and accrued amounts by vendor and by trial throughout the period subject to audit, evaluated the costs incurred per trial, site and/or patient for reasonableness and tested subsequent invoices received from third parties |
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| Allowances for Rebates under the Medicaid Drug Rebate Program | ||
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| Description of the Matter | | As discussed in Note 2 to the Company’s consolidated financial statements, the Company recognizes revenue from product sales based on amounts due from customers net of allowances for variable consideration. Variable consideration includes, among others, rebates mandated by law under Medicaid. The Company includes an estimate of variable consideration in its transaction price at the time of sale, when control of the product transfers to the customer. The Company estimates its Medicaid Drug Rebate Program accruals based on monthly sales, historical experience of claims submitted by the various states and jurisdictions, contractual rebate rates and estimated lag time of the rebate invoices. Rebate accruals inclusive of estimated amounts payable for claims not yet received or processed as part of the Company’s Medicaid program are recorded within accrued expenses and other current liabilities on the Company’s consolidated balance sheet.Auditing the allowances for rebates owed pursuant to the Medicaid Drug Rebate Program in the U.S. was complex and judgmental due to the complexity of the government mandated calculations. The allowances for rebates owed pursuant to the Medicaid Drug Rebate Program in the U.S. are sensitive to these calculations. |
| How We Addressed the Matter in Our Audit | | Our audit procedures to test the allowances for rebates owed pursuant to the Medicaid Drug Rebate Program included, among others, procedures to assess the methodology used to determine the allowance, procedures to test the completeness and accuracy of the underlying data used in the analysis and procedures to test the significant assumptions utilized. To assess the methodology used to determine the allowance, we involved our government pricing specialists to assist in evaluating the Company’s methodology and calculations to measure certain estimated rebates. To test the completeness and accuracy of the underlying data used in the Company’s analysis, we compared the data used in the Company’s calculations to third-party invoices, historical claims data and actual cash payments through the date of the Company’s financial statements. To test the significant assumptions used in the analysis, we involved our government pricing specialists to assist us evaluating the calculations to measure certain estimated rebates. |
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/s/Ernst & Young LLP
We have served as the Company’s auditor since 2015.
Boston, Massachusetts
February 28, 2025
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