[Edaily Reporter KIM SUNG-JIN ] LGCHEM,LTD(051910)Although LG Chem expanded its technology export contract for a rare obesity treatment to the 1 trillion won range, it has emerged that it was actually its U.S. partner, Rhythm Pharmaceuticals (hereinafter “Rhythm”), that first proposed renegotiating the contract. Rhythm proactively presented terms to LGCHEM,LTD and negotiated the contract details to reduce the burden of sales royalties, which could have risen to as high as 7% in the future. While industry observers view this as a deal where the interests of both companies aligned, they predict that the economic advantages and disadvantages could vary significantly depending on future pharmaceutical sales growth.

Rhythm Proposed to Open Negotiations First

Hunter Smith

,

Rhythm’s Chief Financial Officer (CFO), stated during a third-quarter earnings conference call held on the 3rd (local time) that “Rhythm

made the proposal

first” in response to a question from a securities analyst asking which company had initiated the contract renegotiation.

CFO Smith explained, “We anticipated that the royalty burden for the entire portfolio under the contract could rise to 5–7 percent depending on future approvals for Vivamelagon’s indications,” adding, “We agreed to pay additional funds to reduce this to 1 percent.”

Previously, LGCHEM,LTD announced that it had expanded the value of the technology export agreement for “Vivamelagon,” a rare obesity treatment candidate, signed with Rhythm, from the original $305 million to $855 million (approximately 1.1467 trillion won). In addition to the existing upfront payment of $100 million, LGCHEM,LTD agreed to pay an additional total of $350 million (approximately 469.4 billion won) by 2029. The remaining contract amount consists of contingent milestones tied to development, approval, and sales performance.

“Let’s Lower the Royalty Rate from 5–7% to 1%… Burden of Developing New Indications”

The core of this contract amendment is the royalty structure. Under the original agreement, the royalty rate that Rhythm was required to pay LGCHEM,LTD increased as additional

indications for

Vivamelagon were approved; however, the parties have agreed to uniformly lower this rate to 1%.

However, the criteria for sales milestone payments have also changed. Under the original agreement, milestone achievement was determined based solely on Vivamelagon sales; with this amendment, the criteria have been expanded to include total sales from Rhythm’s entire MC4R agonist portfolio, including “Temporarybri” (active ingredient: setmelanotide), which is already on the market, and “RM-718,” which is currently in development. Since Rhythm currently generates all of its revenue from Imibri, LGCHEM,LTD has effectively increased the likelihood of achieving milestones through sales of existing products even before the commercialization of Vivamelagon. However, the revenue threshold for milestone payments has been raised compared to the previous terms. Under the terms of the agreement, Rhythm will pay LGCHEM,LTD up to $200 million if it achieves annual portfolio revenue of $3 billion.

It is believed that Rhythm was concerned that maintaining the original contract would significantly increase its royalty burden. This is because, while the company needs to actively pursue the development of additional indications to expand VivaMelagon’s sales and therapeutic scope, the royalty rate increases with each added indication, which could have become an obstacle to development. For example, under the original structure, if Rhythm expanded the therapeutic indications for Vivamelagon to include Prader-Willi syndrome (PWS), the royalty burden it would have to pay to LGCHEM,LTD would also increase. Consequently, it was explained that focusing on RM-718, a new drug developed in-house, could be more economically advantageous than expanding Vivamelagon’s indications. To alleviate this burden, Rhythm reached an agreement with LGCHEM,LTD to lower the royalty rate to 1% in exchange for increasing the fixed payment amount.

The value of the 5–7% royalty rate LGCHEM,LTD gave up

is... So, what is the economic value of the royalties LGCHEM,LTD

gave up

? Rhythm’s net pharmaceutical sales last year were $194.8 million. Since the only MC4R treatment currently on the market is Imibri, this figure effectively represents the total revenue of its entire portfolio.

Applying a 1% royalty rate to this figure, LGCHEM,LTD’s annual revenue would amount to approximately $1.95 million. Applying the 7% rate that was potentially possible under the original contract would yield approximately $13.64 million, resulting in an estimated annual difference of $11.69 million. This gap widens when reflecting this year’s sales growth. Rhythm’s third-quarter sales of Timpibri totaled $92.1 million, an increase of approximately 80% compared to the same period last year. In essence, as Rhythm’s sales increase, the opportunity cost of lowering the royalty rate becomes greater.

LGCHEM,LTD agreed to receive a $200 million milestone payment if Rhythm achieves annual revenue of $3 billion; however, even if the 7% royalty rate—as previously estimated by Rhythm under the original contract—were applied to annual revenue of $3 billion, the royalty amount would total $210 million, exceeding the $200 million milestone payment. Furthermore, while the milestone payment is a one-time event, royalty payments are long-term and ongoing; therefore, if Rhythm had grown into a company with annual sales of $3 billion, the amount of royalties LGCHEM,LTD would have received could have reached astronomical levels.

Of course, this is a hypothetical calculation based on a percentage of revenue, not actual royalty payments. The 7% royalty rate is also based on the assumption that Rhythm would successfully expand the indications for Vivamelagon. Above all, given that the commercialization of Vivamelagon is still far from certain, some analysts suggest that LGCHEM,LTD chose to secure immediate, certain cash rather than take on future uncertainty.

A source familiar with technology export agreements in the biotech industry stated, “Although a 7% royalty is expected, this is an uncertain revenue stream that is not guaranteed,” adding, “They may have judged that receiving a large upfront payment immediately was more advantageous for them.”

Patent Protection Valid Through 2045… Royalty Payment Period Also a Variable Patent Protection Valid Through 2045… Royalty Payment Period Also a Variable

The royalty

payment period

is another key factor in evaluating the pros and cons of this contract amendment. When Rhythm signed the contract with LGCHEM,LTD in 2024, it specified the end date for royalty payments. Three conditions were attached: when patent protection expires, when a certain period has elapsed since the first sale, or when regulatory exclusivity ends.

From a patent perspective, Rhythm projected in its investor presentation materials last May that intellectual property protection for Vivamelagon could extend until 2045 if the patent term were extended. Considering that the royalty payment start date is set for January 1, 2029, this means royalty payments will be made for approximately 17 years.

Assuming the existing royalty rate of 7% remains unchanged, Rhythm’s cumulative revenue over 17 years would need to exceed approximately $5.8 billion to match the $350 million LGCHEM,LTD has now secured. Converting the cumulative revenue of $5.8 billion into average annual revenue yields approximately $343 million, which is not an impossible figure given that Rhythm’s annual revenue last year was close to $200 million.

Conversely, if sales do not increase significantly in the future, the $350 million that LGCHEM,LTD has secured will prove to be a more advantageous arrangement.

LGCHEM,LTD also explained, “Under the existing contract structure, expanding indications would have incurred additional royalty burdens, which could have distorted development decision-making,” adding, “Consequently, by simplifying the royalty structure, we have established a win-win structure that supports the continued development and expansion of Vivamelagon.”