Phathom Pharmaceuticals, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Phathom is a pre-commercial biopharmaceutical company developing and preparing to commercialize vonoprazan for gastrointestinal diseases. It had no product revenue.
Financial results and liquidity
| Metric | Q2 2022 | Six months 2022 | Comparison |
|---|---|---|---|
| Revenue | $0 | $0 | No revenue in either 2022 or comparable 2021 periods |
| Research and development expense | $18.8 million | $36.5 million | Down 13% and 14%, respectively, year over year |
| General and administrative expense | $26.5 million | $46.8 million | Up 93% and 75%, respectively, year over year |
| Operating loss | $45.4 million | $83.3 million | Versus $35.3 million and $68.9 million in 2021 |
| Net loss | $50.9 million | $91.6 million | Versus $36.6 million and $71.4 million in 2021 |
| Basic and diluted loss per share | $1.33 | $2.40 | Versus $1.00 and $1.96 in 2021 |
| Cash used in operating activities | — | $70.8 million | Compared with $78.1 million in 2021 |
Gross margin and other sales margins are not applicable because the company reported no revenue. At June 30, cash and cash equivalents were $207.4 million, versus $183.3 million at year-end 2021. Current assets were $209.3 million and current liabilities $21.1 million. Total liabilities were $220.5 million; stockholders’ equity was a deficit of $7.0 million, and accumulated deficit was $621.0 million.
Debt included $92.4 million of long-term debt, net of discount, and a $98.1 million revenue interest financing liability. The company received $100 million gross under that financing agreement in May, or $95.4 million net of transaction costs. Its $100 million Hercules term loan bears variable cash interest plus 3.35% payment-in-kind interest; the agreement permits additional borrowing subject to milestones and conditions.
Material changes and business developments
- FDA approved VOQUEZNA TRIPLE PAK and VOQUEZNA DUAL PAK for H. pylori infection on May 3, 2022. Phathom’s NDA for vonoprazan for erosive esophagitis was accepted, with an FDA action date of January 11, 2023.
- G&A expense increased chiefly from commercial, medical-affairs and other professional services and personnel costs as the company prepared for commercialization. R&D decreased mainly because of lower clinical-trial costs.
- Interest expense rose to $8.4 million for the first half, from $2.5 million in 2021, reflecting the Hercules loan and the new revenue interest financing, among other items.
- Common shares outstanding increased to 38.4 million from 30.5 million at December 31, 2021; the company recorded 7.36 million shares issued through cashless exercise of Takeda warrants.
Outlook, risks and contingencies
- Management said existing cash, potential remaining Hercules and revenue-financing proceeds, and anticipated product sales were expected to fund operations through 2024. This is an estimate dependent on assumptions; management also stated that it believed working capital was sufficient for at least 12 months from issuance of the financial statements.
- The filing describes trace levels of a nitrosamine impurity found in vonoprazan testing. Phathom was working with the FDA on additional testing, specifications and controls. These activities were expected to delay full launches of the H. pylori products and, if approved, the EE product to the first quarter of 2023; further delay or inability to resolve the issue could impair commercialization.
- Phathom expected losses and expenses to continue increasing, including from clinical development and commercial buildout. It depends entirely on vonoprazan and may need additional capital; funding may be unavailable or dilutive, and failure to obtain it could require delaying or reducing development or commercialization.
- The revenue interest investors are entitled to 10% of net sales of vonoprazan products, subject to step-downs, with payments generally capped at 200% of the investment amount. The agreement also includes minimum payment provisions and significant event-of-default and change-of-control payments.
- The Hercules loan is secured by substantially all company assets, including intellectual property, and includes cash and future revenue covenants. Phathom reported compliance with applicable covenants at June 30, 2022.
- Takeda is entitled to low-double-digit royalties and up to $250 million in sales milestones. A Sandoz supply agreement includes an approximately $3.8 million minimum purchase obligation for the first 24 months after launch of the final product.
- No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and timing of FDA review for the EE NDA, and resolution of nitrosamine testing, specifications and commercial supply requirements.
- Whether the H. pylori products launched on the stated schedule and generated sales, reimbursement coverage and market uptake sufficient to support the company’s runway.
- Availability and conditions for remaining Hercules and revenue-interest financing, and the effect of financing costs, covenants and potential dilution.
- Actual cash burn versus management’s estimate of funding through 2024, including projected clinical, manufacturing and commercialization spending.
- Future interest expense and repayment obligations, including the revenue-financing liability’s dependence on sales forecasts and potential minimum or event-triggered payments.