PHAT - Phathom Pharma Is A Buy Before July PDUFA

2024-01-01 06:41:03 ET

Summary

• Phathom Pharmaceuticals' stock is down 35% from its August highs and is now trading at $9.
• The company has two approved indications for its drug vonoprazan and an upcoming PDUFA.
• Phathom has a cash balance of $213mn and a cash runway of 8-9 quarters, making it an attractive investment opportunity.

In July, I said it was time to take profits on Phathom Pharmaceuticals ( PHAT ) after a glorious run since April. Later, I said that the stock is a buy again at $8, and I bought some shares in early November. The stock is now down 35% from those August highs, and is trading at $9, prompting the question: is it still a buy?

PHAT is a developer of treatments for gastrointestinal diseases. Phathom was spun off from Takeda to develop vonoprazan, a "next-generation P-CAB (potassium-competitive acid blocker) drug that is superior to proton pump inhibitors, has a longer half-life than traditional PPIs, and requires less cycles of administration to achieve full effect." Vonoprazan was approved in 2022 to treat h. Pylori infection. Last time, it was running two phase 3 trials targeting two acid-related GI disorders, Erosive GERD (erosive esophagitis) and Non-Erosive GERD ((NERD)).

In my article from November last year (2022), I covered data from the PHALCON-EE trial:

In another phase 3 study called PHALCON-EE, vonoprazan demonstrated non-inferiority - in erosive esophagitis ('EE'), a type of gastroesophageal reflux disease (GERD) - to current standard of care Prevacid, currently owned by Novartis ( NVS ). In certain secondary but critical measures, it showed superiority, in fact.

Data came from the phase 3 PHALCON-EE trial with 1000 EE patients enrolled across the US and EU. These patients were randomized to 20 mg vonoprazan in a healing phase and either 10 or 20 mg in a maintenance phase. The study compared these drug arms directly with Prevacid or lansoprazole. Data showed that in the healing phase, vonoprazan had a healing rate of 93% compared to 85% in Prevacid at 8 weeks (p<0.0001). In an exploratory superiority test, the p-value was also <0.0001. Although vonoprazan did not do as well in heartburn at Day 3, it met the primary and all secondary endpoints in the maintenance phase, demonstrating superiority in maintenance of healing (79% for vonoprazan 10 mg, 81% for vonoprazan 20 mg, and 72% for Prevacid).

Phathom took this data to the FDA but received a safety-related CRL because small quantities of a carcinogenic nitrosamine impurity called N-nitroso-vonoprazan (NVP) were discovered in the product. Not only that, the FDA also issued a CRL (a post-approval supplement or PAS license) for the approved h. pylori indication as well. In order to resolve the issue, the FDA wanted data to show that NVP present in the molecule was under acceptable limits, and they also wanted stability data to show that this acceptable limit was maintained throughout its shelf life for the dosage that was being requested in the NDA.

Long story short, the h.pylori indication CRL was resolved in October, with the product becoming commercially available from December. The EE CRL was resolved in November. So the product now has two labels, one in h.pylori and the other in EE, also known as erosive GERD.

There is now a new PDUFA date of July 19, 2024, for the other indication, non-erosive GERD. The NDA is supported by "positive data from the PHALCON-NERD-301 study, a Phase 3 study evaluating the efficacy and safety of vonoprazan for the daily treatment of adults with Non-Erosive GERD ((NERD))."

Of the estimated 38 million adults living with NERD in the USA, about 15 million are treated annually with prescription medicines like Lansoprazole (Prevacid). However, this phase 3 trial did not directly compare vonoprazan with another approved treatment, unlike what they did with the EE trial.

Data in a 4-week trial with a 20-week extension in 772 adult patients in the U.S., vonoprazan at 10 mg and 20 mg once daily demonstrated effectiveness and safety in non-erosive gastroesophageal reflux disease ((NERD)). Both doses met the primary endpoint of the mean percentage of heartburn-free days, showing superiority over the placebo (45%, 44%, and 28%, respectively). Patients on vonoprazan 10 mg and 20 mg maintained heartburn-free days at 63% and 61%, respectively, during the 20-week extension. Adverse events were comparable between vonoprazan and placebo, with nausea, abdominal pain, and constipation being the most common (reported at or below 3%). During the extension, common adverse events remained low (reported at or below 5%).

There are 29 phase 3 studies that have been done or are ongoing for the NERD indication. None of the studies are too relevant for today's US population, given that studies done by some of the "Western" companies like AstraZeneca and Janssen are either old (2010) or done in foreign countries (Japanese). All the other studies are done by Japanese companies like Takeda or Eisai. Thus, there is a major unmet need here, and the data, while good, cannot also be compared with anything else relevant. Therefore, I am expecting approval in July.

Financials

PHAT has a market cap of $522mn and a cash balance of $213mn. The company filed for a $500mn mixed-shelf offering in November. In December, it also expanded its preexisting loan facility with Hercules Capital for up to an additional $100 million in non-dilutive capital, subject to certain future revenue milestones. Research and development expenses for the third quarter 2023 were $12.3 million, while general and administrative expenses were $23.4 million. At that rate, they have a cash runway of 8-9 quarters. They should also be adding a revenue stream from the next quarter. While the July catalyst will pull up the stock price, revenue will work as leverage if positive but will be a drag if negative. This is the only risk to investing in PHAT with the July catalyst in mind.

Bottom Line

Given the current low prices and derisked profile, I am going to invest in PHAT, maybe double down if the stock goes south on initial lower-than-expected revenue, and play the July catalyst.

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