NVSEF - Phathom Pharma CRLs Present A Special Situation Opportunity

2023-04-25 08:00:00 ET

Summary

• Phathom Pharmaceuticals, Inc. received a pair of CRLs that look fairly resolvable.
• If resolved, Phathom Pharmaceuticals will have vonoprazan launch in two indications, one very large, in Q4.
• They should have enough cash and loans to survive until approval.

Phathom Pharmaceuticals, Inc. ( PHAT ), which I covered in November in a positive article, had one approved drug and one upcoming PDUFA at that time. In January, the FDA put a spanner in their plans by refusing to approve their NDA for a label expansion for vonoprazan in erosive esophagitis. Then, three weeks later, the FDA raised a safety concern with vonoprazan for its approved indication as well. These events made the stock drop hugely, but it has now recovered considerably.

Vonoprazan has been approved for Helicobacter pylori (H. pylori) infection in adults. It is a next-generation P-CAB (potassium-competitive acid blocker) “superior to proton pump inhibitors, has a longer half-life than traditional PPIs, and requires less cycles of administration to achieve full effect,” as I wrote earlier. Standard of care for H. Pylori is lansoprazole-based triple therapy; however, in phase 3 trials, vonoprazan demonstrated non-inferiority on certain endpoints and superiority on certain others versus lansoprazole in patients with various strains of H pylori bacteria.

A second study, PHALCON-EE, showed that vonoprazan was non-inferior to the Novartis AG ( NVS ) - owned standard of care Prevacid in erosive esophagitis ("EE"). The drug was well-tolerated, except that there were 7 instances of covid-19 in the two vonoprazan arms, while there were none in the lansoprazole arm. Investigators considered these study-related, although not drug-related. Based on this data, they submitted an NDA and were given a PDUFA date of Jan 11, 2023, for a label expansion in EE.

This is where they had trouble. A week before the PDUFA, the FDA informed the company that there would be a delay to resolve the issue of a certain carcinogenic contaminant, a nitrosamine impurity called N-nitroso-vonoprazan ((NVP)), that was found in commercial batches of the drug. Nitrosamine comes in various forms and is often found in small quantities in certain types of foods. There are acceptable limits of this carcinogen, beyond which it gets dangerous. The company has been working with the FDA since August, when this carcinogen was detected, to resolve the issue by formulating an acceptable daily intake limit and determining ways to control the impurity.

Vonoprazan was approved for the H Pylori indication in May 2022, and the company planned to start selling in Q1. However, this has delayed that plan because while the FDA has determined a daily intake limit, they still want data “showing that levels of NVP remain below that limit throughout the shelf life of the product.”

On January 26, following good data (discussed below), the company noted in an investor meeting that they are "very confident in [their] ability to resolve [the] nitrosamine issue in [a] reasonable timeframe.” However, two weeks later, after the company received a formal CRL (actually, two CRLs, one also for H Pylori, see here , for a post approval supplement or PAS license) from the FDA requesting basically the same information, the stock went down as reality set it. And the reality was that there would be a few months’ delay before they could get approval for the EE indication. Luckily, though, in April we learned that they would be able to file an NDA in Q2.

Following a meeting with the FDA, the company said that they undertook mitigation measures, including a minor tablet reformulation, which will stop the growth of the NVP. This data was shared with the FDA along with stability data, and the FDA provided feedback on the expected stability data needed. Based on that feedback, the company expects to refile in Q2, and with a probable approval and launch in both indications in Q4.

Vonoprazan is in trials for two other indications, one of which, heartburn, saw a phase 3 trial meet its primary endpoint. The indication is properly called symptomatic non-erosive gastroesophageal reflux disease (sGERD or NERD). Both the 10mg and 20mg arms showed “significantly greater percentage of 24-hour heartburn-free days versus placebo.”

Financials

PHAT has a market cap of $464mn and a cash balance of $155mn. An additional $100 million is available under Phathom’s term loan with Hercules Capital. Research and development expenses for the fourth quarter 2022 were $15.9 million, while general and administrative expenses for the fourth quarter 2022 were $30.7 million, which is high, but was caused by the building of commercial infrastructure in expectation of vonoprazan’s commercial launch last year. At this rate, they have enough cash for 5-6 quarters, however, I am assuming the G&A costs will be substantially reduced in the next two quarters as they tone down their commercial plans in view of the delay. I wouldn’t rule out a dilution before launch, which will be an opportunity to double down, if the stock falls on dilution.

Bottom Line

Nitrosamine recall is a very common thing in the U.S. In the last few years, over 1400 products have been recalled due to the presence of nitrosamine. I strongly believe Phathom Pharmaceuticals, Inc. will get over it. They should get two products launched at the same time in Q4, and at least one of them is a very large market. They will have a third indication looking at an NDA, and they have enough cash to support all of this. Phathom Pharmaceuticals, Inc. stock is subdued as a result of this trouble, which presents an opportunity.

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