Phathom Pharmaceuticals, Inc. (PHAT) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Rahul Sood from Morgan Stanley Investment Banking. Before we begin today, I would like to read a quick disclaimer. Please note that this webcast is for Morgan Stanley's client and appropriate Morgan Stanley employees only. The webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, I would like to welcome members of the Phathom Pharmaceuticals management team here with us today. We're joined by Terrie Curran, President and Chief Executive Officer; Azmi Nabulsi, Chief Operating Officer; and Todd Branning, Chief Financial Officer of Phathom Pharmaceuticals. Team, welcome, and I appreciate the time of you being with us here today and participating in this fireside chat.

Thanks, Rahul. And thanks to Morgan Stanley for inviting us to this fireside chat today, and hello, everybody online. My name is Terrie Curran. I'm the CEO of Phathom Pharmaceuticals. I'd like to share a brief introduction to the company with you. You can follow along, there was a deck attached to the invitation. So the presentation is there. There's also a more extended presentation on our website, if you'd like to take a look at that. And then we can take some questions at the end. So Phathom is a clinical stage company, our lead asset, Vonoprazan, is a potassium competitive acid blocker or P-CAB. Phathom was formed in May of 2019 and went public in October of 2019. If you move to Slide 3, please. For many years, P-CAB has long been the Holy Grail for acid-related disorders. At Phathom, we have the rights of Vonoprazan in the U.S., Europe and Canada. Vonoprazan is potentially a first-in-class, best-in-class P-CAB in these markets. And it's largely derisked from both a clinical and from a commercial perspective. Vonoprazan has been studied in more than 18 Phase III studies. It's approved in 13 countries and is generating revenue in Japan of more than USD 650 million and is still growing at more than 20%. So it has really performed exceptionally well in Japan. P-CAB is, like Vonoprazan, the next generation of anti-secretory agents. And Vonoprazan has a distinct mechanism that's really designed to address proton pump inhibitor shortcomings. Unlike PPIs, Vonoprazan inhibits both active and inactive proton pumps. It's stable in acid and has a long plasma half-life. So it can cover the full 24-hour dosing interval, regardless of which state the proton pumps are in. And this really translates to the clinical profile that we see, a very rapid onset of action within a day as well as more potent and durable acid control. Next slide is Slide 4. And this just gives you an overview of our initial Phase III development program. We're focused on 2 indications initially, specifically healing of Erosive Esophagitis. So that's maintenance of healing and relief of heartburn. And secondly, the eradication of Helicobacter pylori infection. We dosed the first patient in each of those studies in Q4 of 2019. And we have agreement from the regulators that with the breadth of existing data from Japan, that one large Phase III study in each indication will be sufficient for submission in both the U.S. and in Europe. We did pause screening and randomization of both trials for 2 months in March of this year. And that was in response to COVID, specifically the society's recommendation to pause elective endoscopies. I'm really pleased, super excited that we've now resumed randomization, and the trials are up and running again. Azmi is now going to address the prevalence of GERD and HP in the community and really articulate the unmet need that exists for patients suffering from these diseases. Over to you, Azmi.

Yes. Thank you, Terrie. So if you look at Slide 5, there are 2 disease states where Vonoprazan addresses the unmet need very, very nicely. The first on Slide 5, which is Erosive Esophagitis. First, I want to highlight that Erosive Esophagitis is very prevalent disease worldwide, definitely in the west. So in the U.S., an over 12 months period, last 12-month period, over 6 billion doses of PPIs were prescribed, and this is prescription, not even including over the counter. So it's very highly -- PPIs are very highly utilized in the management of the disease. However, about 30% of patients on PPIs are not adequately managed with PPIs. So there is a lot left to address. And the key areas for those unmet needs, either symptoms return, or the lesions in the Erosive Esophagitis state do not heal. So what is needed is a molecule that can be rapid in its efficacy, can be potent and can be durable over time. And we've seen from Vonoprazan from the data that came from Asia that Vonoprazan controls healing or result in healing in patients with Erosive Esophagitis much faster than PPIs. Actually from about week 2, we start seeing separation and the effect between Vonoprazan and PPIs and also works better than PPIs based on the Japan studies in the patient with more severe disease. And in addition, the maintenance of healing is much better with Vonoprazan compared to lansoprazole, which is a PPI. Actually, the recurrence rate we're going to present after 6 months are in the low single digits, while with lansoprazole can go as high as 39% in those patients with more severe disease. So in summary, Erosive Esophagitis is very prevalent, not well adequately controlled with PPI. Then lansoprazole really comes in as in Asia, and the intent is to bring it in to meet very unmet need in that space. Now on Slide 6. This is the -- I'll talk now about H. pylori. So if you look at Slide 6 here. H. pylori is another disease state where there is significant unmet need. So H. pylori is very prevalent worldwide as well. And the -- if left untreated, can lead to very serious cycles such as gastric cancer. And the dilemma with H. pylori is that since the introduction of treatment for it in the '80s, the eradication rate with current treatment has been declining over time to where it is now, it's about 80%, actually, a little bit under 80%. So this is not optimal. And it's becoming a big concern in public health officials and regulators and physicians in the U.S. and Europe as it has been in Asia because that shows the higher resistance of H. pylori to current treatment, especially clarithromycin. So what we need is either better antibiotics, which is nothing in the horizon or a molecule that can enhance the efficacy of existing antibiotics. And Vonoprazan does this very nicely because Vonoprazan consistently raises the PH level to 6 to 7 level. And at that level, the H. pylori is most vulnerable because that's the highest state of replication. But also in addition to that, the antibiotics are modifications at that level of PH. So 2 work together to produce higher efficacy. And that's why we see from the Japan Phase III studies, the triple regimen of Vonoprazan less amoxicillin less clarithromycin resulted in over 90% eradication rate. And actually, when you look at that data closely, we see that Vonoprazan helped clarithromycin to overcome some of the resistance from H. pylori. So this is a step forward in the field. And that's why you see in Japan now, over 90% of this market segment is where Vonoprazan is being utilized. So essentially, the whole H. pylori treatment almost in Japan is utilizing the triple regimen with Vonoprazan. So that's, again, the unmet need in those 2 disease states and what Vonoprazan can, and hopefully, we'll be able to show, can bring to the table in the U.S. and Europe. And I'll now pass it on to Terrie.

Thanks, Azmi. So I think you heard a little bit about the prevalence of both GERD and H. pylori as well as the unmet need and how P-CABs can potentially address some of the shortcomings of PPIs. For the last couple of minutes of the slides, I'll just now pivot and discuss one of the commercial considerations, and we're evaluating the opportunity for Vonoprazan, and that is market access. We've spent some time digging into the category and really reviewing the market access environment. We're fortunate enough to have a case study in Dexilant. If you look to Slide 7, there's some information there about Dexilant, which is the last branded PPI in the U.S. market. And Dexilant is a slower release formulation of Prevacid, a popular PPI. And while the PK has improved, Dexilant has minimal differentiation versus PPIs. And despite this limited clinical differentiation and limited promotional support, it became a $0.5 billion brand. And we think the success and the success in Japan is largely due to the need for patients and physicians to have an alternative other than surgery and really highlights, in this case, the willingness of payers to include Dexilant on the formulary as a result. On the following slide, it just gives an analysis there of formulary access for Dexilant. Out of interest, Dexilant's price is at a WACC of around $10 a day. And at that price, they are able to secure relatively strong formulary access. For example, among the top 5 plans, 2 out of 3 commercial lives had unrestricted access without steps or prior authorizations. But we believe that given the relative value that Vonoprazan brings, we expect to have significantly more leverage over pricing and market access. So in summary, we believe that there's a significant unmet need in this very large category for a new innovative, effective anti-secretory agent with rapid, potent and durable activity, and that would potentially translate to a very sizable commercial opportunity. So thank you for your attention, and I'll turn it back to you, Rahul.

Terrie and Azmi, thank you so much. That was a pretty comprehensive walk through. I wanted to have a discussion with you around -- we -- you touched a little bit about COVID, that there was a brief pause in the clinical trials because of COVID. Could you tell us where things stand today? And how are the trials progressing? Any lingering impact from COVID on the clinical programs?

Sure. I'll provide some comments and then I'll ask Azmi who leads the clinical team to also provide some color. So I think the team has done a really outstanding job restarting the 2 Phase III trials and is really making phenomenal progress. During the pause, they were really engaged with the sites daily. It's not only to ensure that patients that had been randomized stayed on trial, but also they continue to work with the sites and the investigators to identify new selection -- new patients selection to put into the database so that when we did restart, we weren't kind of starting from ground zero. We're very encouraged by the restart at the sites and ongoing enrollment around the country and in Europe. Europe is also online and doing very well. The investigators were really keen to get going, and they've now got equipment in place and processes to help them navigate COVID. I think one of the things for us is that unlike studies like Crohn's or in UC, we have very little competition for subjects because there's very few trials for EE or HP. So we're finding that patients and clinicians, the investigators, the nurses are really motivated to get started again. While we continue to monitor the situation closely, we're very confident that we will read out our top line data for both trials in 2021. But maybe I'll pause there and Azmi, perhaps you want to give some more color around how we're progressing.

Sure. I just want to highlight, too, that we were very pleased to see the response from our site, our interaction with them been during the past, but even continue is to ensure that they have what they need to keep moving at the right pace. And most of our sites are not academic sites. They're private centers and they're businesses essentially. And we're pleased to see that, essentially, they invested heavily to be sure that their clinical and research operation continue without any interruptions or minimal interruptions. And that paid dividends for the study, ability to continue and proceed very nicely. Our patients are relatively healthy patients. So we didn't have restrictions for those patients from coming into the clinic where they need to. So -- and our study is not very expensive in procedures. So that helped as well. So all of that brings us to -- we have a conclusion of all of it that our studies are performing within the parameters that they were designed to perform. So we don't see any necessary to have any major amendments or contact the FDA for any special attention to any of the study conduct parameters. So we're proceeding with the original plan, and we're maintaining targets for readout of next year.

Very well. Switching gears to commercial preparedness here a bit. Terrie, you talked about the success that Vonoprazan is enjoying in Japan. I think it's reaching sales of circa $600 million, somewhere in that ZIP code. Could you talk about the commercial dynamic for Vonoprazan in Japan? What are the -- and in U.S., what are the similarities? And where would you expect some differences to be?

Sure. You're right. I mean the revenue in Japan was more than $650 million in the last 12 months and continuing to grow. They actually just took the market leadership position overall from Nexium. And as Azmi mentioned in his comments that they're now the leader, value over 90% of the H. pylori segment. So they're really a tremendous success story. There are some similarities between the Japanese market and the U.S. and some important differences that could lead to even greater success in the U.S. Takeda launched TAKECAB, which is the brand name of Vonoprazan in Japan into a largely genericized market with one branded competitor in Nexium. So the U.S. market is largely genericized. And similarly, there is only one branded product remaining in Dexilant. In terms of the label and expectations for the label in the U.S., they have a broad label for EE, healing, maintenance, heartburn as well as HP. So we expect that the label will be similar. We'll have a broad label. In terms of the business and the split between EE as a percentage of the total and HP similar around 70-30, 80-20. So there are some of the similarities we see within the marketplace. Some of the differences. Clearly, the population in the U.S. is around 3x that of Japan. In Japan, patients pay around 30% of the branded prescription, whereas in the U.S., there's co-pay support. So in Japan, that limits access to some patient groups. And in Japan, the government puts a limit on all products with the quantities that are prescribed in the first year of launch. So when you look at the ramp of sales in Japan, you'll see that, that first year is a little damper, and then that really picks up in the second and third year, and that's really that dynamic that's kind of playing into those revenues. So all in all, we really see that the U.S. dynamics are such that Vonoprazan has the potential to be a blockbuster. We're really excited when we see the continued revenue and growth out of Japan and the continued data kind of supporting our thesis.

That's very helpful. I guess one follow-on question to that would be, is there -- the 2 disease states, is there a bias towards a certain age or talking about in terms of prevalence? Is it more from the prescription patterns you've seen? Are there any kind of patterns that can be seen in the age demographic of the patients there?

Yes. It seems to be kind of 30 to 55. It's pretty broad.

Got it. Okay. Great. So can you discuss the competitive landscape in the U.S.? And Part B, what is your strategy to drive the coverage with the payers here?

Sure. So first of all, some of the market dynamics. So as I mentioned, the U.S. market is largely genericized with one remaining branded PPI, Dexilant. In terms of what's on the horizon, there's virtually no competition in GERD with very limited competition in HP. Ironwood has a product that works against bile acid. So it's targeting a very different patient population. However, having said that, potentially be complementary to a P-CAB. And then RedHill has a product that they've just launched for HP, which is a fixed-dose combination of already available components, so rifabutin, amoxicillin and lansoprazole. So from an access perspective, we've really spent time evaluating the Dexilant example that I mentioned and looking at them as kind of pricing analog. We're doing pretty significant or extensive market research with payers, just to understand the kind of price elasticity within the category. Dexilant, as I mentioned, is a slow release formulation of Prevacid. And so while the PK has improved, Dexilant has minimal differentiation to PPIs. And despite that -- and despite having very limited promotional support, it became $0.5 billion product. So we've used that 950 a day price, that Dexilant utilized as kind of a benchmark to test in market research. And at that price point, they're able to secure a relatively strong access position, with the majority of commercial lives having access. And we think given the relative clinical potential Vonoprazan brings a novel mechanism, superiority to onset, superior asset control and duration, we expect significantly more leverage over pricing and access. So from a strategic point of view, a price-point point of view, that's where we're continuing to do work. In parallel to that, we now have a team. We've just appointed our first regional medical liaison, and he's now recruiting a team. That will be engaging with both payers as well as clinicians to really lay the foundation for the value proposition for Vonoprazan, and we'll also be doing some studies, some HUR studies looking at the value that Vonoprazan brings to the marketplace that we can share with payers as we go to market.

That's very helpful. Staying on the commercialization theme here, can we discuss your plans for your -- for building out a sales force? And where does that stand and be the targeting strategy that you might use?

Sure. It's been quite an interesting valuation when we've looked at this category. As you know, it's really a category that's characterized by a lack of competition that I mentioned and really lack of innovation since the late '80s when the PPIs were launched. And so when we talk to physicians and patients, they're really hungry for new therapies. And this kind of character of the marketplace really plays into how we're thinking of commercialization. We're planning on a 3-phase launch in the U.S., we plan to launch H. pylori first in 2022, with approximately 60 reps and their focus will be on high-prescribing GI docs. And then we'll expand with an additional 150 reps in that kind of around that number at the EE launch. And then the third phase, we'll expand to PCPs to a total of 400 reps. We've looked at other comps and other field force footprints to determine whether this is kind of in the ballpark and continuing to do more work on targeting and deciling the physicians that we're going to focus on. But when we looked at comps of the sales force sizing, they included companies like Amarin or Felix, they've got around 350, 400 reps. So we believe that it's possible to have sufficient reach given the lack of competition and given the high concentration of the prescriber base, there's about 6% of the prescribers in the U.S. write 50% of the scripts. So I think those 2 particular dynamics are really kind of driving how we think about the field footprint. We would, of course, have other strategies in place in terms of the medical team that we're building as well as some of the digital and PR components of the plan that will kind of supplement the field force. We would expect to be bringing them on board by the end of 2021. So that's for the U.S. and then in Europe, we're conducting additional market research now, the really sizing the core 5 markets in Europe, to understand 2 things, the pricing dynamics and reimbursement, a; and then secondly, to really understand and validate some of the sizing assumptions that have kind of fed into sizing the opportunity in Europe. So that work is ongoing.