Business context and reporting period
Phathom Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. It is a late clinical-stage biopharmaceutical company developing vonoprazan for gastrointestinal diseases; it had no approved products and had generated no revenue.
Vonoprazan is licensed from Takeda for the United States, Canada and Europe. Phathom is conducting Phase 3 trials for erosive esophagitis and H. pylori infection.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Revenue and margins are not applicable: the company has no product sales.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Research and development expense | $25.8 | $4.5 | $56.5 | $7.7 |
| General and administrative expense | $7.1 | $1.8 | $16.7 | $4.0 |
| Total operating expenses | $32.8 | $6.3 | $73.2 | $90.5 |
| Net loss | $34.1 | $68.1 | $75.3 | $157.1 |
| Net loss per share | $1.02 | $9.30 | $2.29 | $22.87 |
| Cash used in operating activities | Not separately stated | Not separately stated | $41.5 | $13.1 |
At September 30, 2020, cash and cash equivalents were $226.4 million; total current assets were $227.2 million and current liabilities were $27.7 million. Total assets were $230.9 million, total liabilities $74.5 million, and accumulated deficit $331.8 million. Gross term-loan principal was $50.0 million; debt carrying value, net of discount, was $46.6 million. The company reported no product revenue or profit.
Nine-month investing cash outflow was $0.9 million and financing cash inflow was $25.0 million, reflecting the March 2020 Term Loan B draw. Cash declined by $17.4 million during the period, to $226.4 million.
Changes versus prior comparable periods
Q3 operating expenses rose $26.5 million year over year, largely from higher clinical-trial and manufacturing activity and increased personnel and corporate costs. Q3 net loss was lower than in 2019 mainly because the prior-year quarter included substantial noncash fair-value expenses for warrants and convertible notes; 2020 still had a larger operating loss.
Nine-month operating expenses were lower than in 2019 because the prior period included $78.9 million of acquired in-process research and development expense for the Takeda license. Excluding that one-time item, 2020 operating expenses increased materially as Phase 3 development advanced. The lower nine-month net loss also reflects the absence of large 2019 fair-value losses on warrants and convertible notes. Operating cash use increased by $28.4 million year over year.
Outlook, risks and unusual items
- Management said its current operating plan and cash balance were expected to fund operations into the second half of 2022 and support completion of the ongoing Phase 3 trials. The filing cautions that forecasts may prove inaccurate; the financial-statement note separately states management believes working capital is sufficient for at least 12 months from issuance.
- After a March 2020 pause in enrollment related to COVID-19 and endoscopy restrictions, randomization restarted site by site on June 15. Management expected erosive-esophagitis enrollment completion in Q4 2020 and H. pylori enrollment completion in Q1 2021; anticipated topline results in H. pylori in Q2 2021 and erosive esophagitis in the second half of 2021; and projected regulatory submissions in 2021 and 2022, respectively. These are forward-looking estimates and subject to clinical, regulatory, COVID-19 and supply-chain risks.
- Phathom pays Takeda low-double-digit royalties on licensed-product net sales and may owe up to $250 million in sales milestones. A commercial supply agreement with Takeda carried a remaining minimum purchase obligation of approximately $2.4 million at quarter-end.
- The term loans mature May 1, 2024, bear interest at the higher of prime plus 1.75% or 7.25%, and include an 8.25% final payment fee. Substantially all assets other than intellectual property and certain other assets secure the loans; the company reported covenant compliance at September 30.
- On November 10, 2020, after quarter-end, the company entered an at-the-market sales agreement permitting up to $125 million of common-stock sales. Any sales could dilute existing holders; the company was not obligated to sell shares.
- The filing reported no material legal proceedings, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Phase 3 enrollment, data and regulatory-submission timelines were achieved, and how COVID-19 or supply constraints affected trial execution.
- Whether the stated cash runway remains adequate as trial, manufacturing and pre-commercialization spending increases; operating cash use was $41.5 million for the first nine months of 2020.
- Whether the $125 million ATM facility was used, at what prices, and with what resulting share dilution.
- The outstanding debt balance, interest and final-fee obligations, covenant status, and potential impact of the loan’s secured-asset provisions.
- Potential Takeda royalties and sales milestones, the minimum supply commitment, and any changes to the license or supply arrangements.