PHAT - Phathom Pharma: Time To Take Profits (Rating Downgrade)

2023-07-14 16:12:22 ET

Summary

• Phathom Pharmaceuticals, Inc. is trading near 52-week highs.
• Despite its potential, there are reasons, like a competitive market, why we should take profits on Phathom Pharmaceuticals.
• If it falls back without major negative reasons before approval, we can always double down.

When Phathom Pharmaceuticals, Inc. ( PHAT ) drops, people naturally tend to say - what the phat! Thus, despite its indecorous name, I am glad it has done very well in the past few months because there's only one reader who got a chance to say that. They must have bought it high. The stock is up 40% since I covered it , and if you had just bought PHAT in March, you would have been up over 100%.

The PHAT story is briefly this: Phathom is a Takeda (TAK) spinoff that has one molecule, vonoprazan, approved in H.pylori, and the same molecule had a PDUFA on Jan. 11 in erosive esophagitis ("EE"). EE is a large market with a total addressable market ("TAM") of $3bn in the U.S. alone. In a phase 3 trial, vonoprazan demonstrated non-inferiority to Novartis' Prevacid, the current standard of care. The drug also showed non-inferior safety. Despite that, the FDA raised a safety concern and put a CRL on the drug before the PDUFA. What's worse, it went ahead and put a CRL on the approved indication as well.

Vonoprazan is a next-generation P-CAB (potassium-competitive acid blocker) which has a better efficacy profile than proton pump inhibitors, with a longer half-life, and requires less cycles of administration to achieve full effect. In trials, it had no safety issues except 7 patients who contracted COVID-19 from the two drug arms, with none from the lansoprazole arm. Investigators determined that this was study-related, but not drug related. However, this was not what caused the problem.

What caused the problem was a carcinogenic nitrosamine impurity called N-nitroso-vonoprazan ((NVP)) found in commercial batches of the drug. NPV is a common enough carcinogen found in certain foods which is acceptable up to certain limits. The problem here was that the FDA now needs PHAT to formulate an acceptable daily intake limit and determine ways to control the impurity.

As for the approved indication of h.pylori, while the FDA has already determined an acceptable limit, the company still needs to show that "levels of NVP remain below that limit throughout the shelf life of the product."

After the company met the FDA, they undertook mitigation measures, including a small reformulation of the medicine which would reduce the NPV burden. This data and stability data was shared with the FDA, the FDA provided feedback, based on which the company has said it would file an NDA in Q2 and get approved in Q4.

In late May, Phathom resubmitted the NDA. Key data they provided includes :

Our resubmission includes three months of stability data required by the FDA to reinitiate their review and demonstrates the reformulation is proving effective in limiting the presence of NVP and controlling its growth well below the FDA's acceptable daily intake limit. As agreed with the Agency, we plan to provide the final six-month stability data during their review as it becomes available. The data we have collected so far, and our statistical modeling, reinforce our confidence that the reformulated vonoprazan tablets comfortably support the 24-month shelf life we originally requested.

The data they actually submitted contains 3 months of stability data from 6 batches of vonoprazan. This data demonstrated that their mitigation measures successfully controlled NVP growth rate during this period, keeping it much below the "acceptable daily intake limit of 96 ng/day or 2.4 ppm (parts per million) based on the maximum approved daily dose of 40 mg/day." Besides this, of course, the NDA contains previously submitted safety and efficacy data in EE from 1024 patients from the pivotal phase 3 PHALCON-EE trial.

Last month, the FDA accepted the NDA for review. They classified the NDA as a class 2 resubmission - which simply means it is a slightly more complex dataset than the one required for a class 1 resubmission, and requires 6 months of review. The FDA gave a PDUFA date of November 17, 2023.

If approved, vonoprazan will be the first molecule with a new mechanism of action to be approved in a GERD indication. Erosive esophagitis has over 20 million US patients, of whom only 9 million are diagnosed, and only 7 million treated. Current standards of care include Proton Pump Inhibitors (PPIs), of which lansoprazole or Prevacid is the go-to medicine. Prevacid was approved in 1995, 28 years ago, and has gone generic. There are a number of other PPIs, Histamine-2 Receptor Antagonists (H2RAs) and Prokinetic agents approved for EE. The most recent approval was over a decade ago. Thus, while vonoprazan does not actually claim superiority over prevacid, it is a new type of medication, and will find a niche. The problem is pricing, because prevacid and many other approved medications are now generic.

Financials

PHAT has a market cap of $842mn and a cash balance of $129mn. In the last quarter, they had $11.5mn and $18.5mn in R&D and G&A expenses, respectively. In this quarter, they launched a $130mn secondary offering. Given that fund, and a debt facility of $200mn secured in 2021, they have enough cash to last them over 8 quarters. That gives them more than enough time to launch their products and also go into revenue territory.

Risks

The highly differentiated market in EE is a risk factor here. Despite their new mechanism and all that, vonoprazan makes no claims for superiority over approved SoCs in either safety or efficacy. The narsamine presentation, although really a minor detail, also presents some obstacles.

PHAT is also trading quite high right now, near its 52-week highs.

Bottom Line

I am happy with my PHAT investment idea. What I was trying to address here was whether we should hold on to our shares until approval. I think, given what we discussed, that a good strategy would be to take some profits at these prices, and hold the rest of our shares for the approval and a possible further upside. We may even consider buying more shares if Phathom Pharmaceuticals, Inc. stock falls on inconsequential news.

For further details see: