Phathom Pharmaceuticals, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited combined financial statements include Phathom and YamadaCo, which merged in March 2019, presented as though combined from the start of 2018. Phathom is a late clinical-stage biopharmaceutical company developing vonoprazan for gastrointestinal diseases; it had no approved products or revenue.
Financial performance and position
| Metric | Q3 2019 | Nine months 2019 | Comparable 2018 |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Research and development expense | $4.5 million | $7.7 million | $0.006 million |
| In-process research and development expense | $0 | $78.9 million | $0 |
| General and administrative expense | $1.8 million | $4.0 million | $0.3 million / $0.8 million |
| Net loss | $68.1 million | $157.1 million | $0.3 million / $0.8 million |
| Net loss per share, basic and diluted | $(9.30) | $(22.87) | $(0.04) / $(0.14) |
| Net cash used in operating activities | Not stated for quarter | $13.1 million | $0.7 million |
At September 30, 2019, cash and cash equivalents were $74.5 million; current assets were $77.7 million and current liabilities $207.5 million. Total liabilities were $232.2 million and accumulated deficit $158.4 million. Cash used in investing activities for the nine months was $25.1 million; financing activities provided $111.9 million. No meaningful operating margin is applicable because the company had no revenue.
Debt included $25.0 million of gross bank term loans ($22.6 million net of discount) and $95.2 million of convertible notes at fair value. The bank debt bore a 7.25% rate at quarter-end, was interest-only through at least June 2021, and matures May 2024. An additional $25.0 million loan tranche was available subject to conditions.
Material changes and unusual items
- Year-to-date operating expenses rose substantially, primarily because of the $78.9 million Takeda license-related in-process R&D charge and increased vonoprazan clinical and personnel costs.
- Reported losses included large noncash fair-value charges: $59.1 million for warrant liabilities and $4.9 million for convertible notes over nine months. In Q3 alone, the warrant fair-value charge was $57.8 million and the note charge was $2.5 million.
- On May 7, 2019, Phathom licensed vonoprazan rights for the U.S., Canada and Europe from Takeda. Consideration included $25.0 million cash, shares valued at $5.9 million and warrants initially valued at $47.9 million. The agreement also provides for up to $250.0 million in sales milestones and tiered royalties.
- After quarter-end, the October 29, 2019 IPO generated approximately $191.4 million net proceeds from 10,997,630 shares sold at $19 per share. The May 2019 notes automatically converted into 6,107,918 common shares. Pro forma September 30 cash reflecting the IPO was $267.2 million; the notes were eliminated. The Takeda warrant was reclassified from liability to equity following an October share authorization increase.
Outlook, commentary and risks
- Management planned to begin two pivotal Phase 3 trials in Q4 2019: one for erosive esophagitis and one for H. pylori infection. It anticipated regulatory submissions in 2021 for H. pylori and 2022 for erosive esophagitis, subject to successful development and review.
- Management stated that cash, including IPO proceeds, was expected to fund operations for at least 24 months under its current plan. The risk-factor discussion separately describes funding for at least 12 months; the differing runway statements and underlying assumptions merit review.
- The EMA recommended adding a Week 4 endoscopy to the erosive esophagitis trial; Phathom chose not to add it, which could affect labeling or prompt additional trials. The FDA accepted three vonoprazan INDs in September 2019.
- Key risks include clinical-trial failure or delay, dependence on a single product candidate and on Takeda for licensed rights and supply, regulatory uncertainty, future financing needs, commercialization and reimbursement challenges, and the bank loan’s covenants and secured collateral. Management expects expenses and losses to increase as development advances.
- The company reported no material legal proceedings and stated disclosure controls were effective at the reasonable-assurance level; no material changes in internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- Whether Phase 3 trials began on schedule and their design, enrollment, results and regulatory implications, including the omitted Week 4 endoscopy.
- Actual cash burn and runway compared with management’s 24-month estimate, including the differing 12-month statement in the risk factors.
- Post-IPO fully diluted share count, note conversion and warrant treatment, and the potential dilution from outstanding warrants, options and equity plans.
- Takeda milestone and royalty terms, supply arrangements, and the conditions for accessing the additional $25.0 million loan tranche.
- The assumptions underlying Level 3 fair-value estimates and the final fair-value adjustment to notes at IPO closing, which the filing says was not included in its pro forma table.