Phathom Pharmaceuticals, Inc. ($PHAT)

All right. I think we're ready to go. Welcome to the last presentation of the day at the Barclays Miami Healthcare Conference. My name is Jenna Davidner. I'm one of the analysts on the specialty pharmaceuticals team here. And on the stage with me, I have Phathom Pharmaceuticals and representing the company is the CEO, Steve Basta; and the CFO, Sanjeev Narula. Thank you both for joining us.

Jenna, thanks for the invitation.

So let's start. There's a lot of things that has happened at the company over the past couple of years. And specifically, both of you are very new to the company. Sanjeev is even more recent. So starting with you, Steve, just talk us through what attracted you to this opportunity? And maybe when you got on board, what were some of the biggest initiatives that you undertook from day 1?

So thank you again for the invitation to join you today. I joined about a year ago, almost a year ago now. And first context of what attracted me to Phathom is this is an extraordinary product. First principles, if we're delivering a really good therapy that improves quality of life for patients, that's why we're in the health care business is to make a really big difference for patients. And when I first looked at this and started to do a little bit of research in the gastroesophageal reflux space, what you very quickly realize is even though there have been therapies available for 30 years or more for these patients, there is still an enormous population of patients that is experiencing significant pain, significant symptoms that are inadequately treated with current therapies and the opportunity to improve care for those patients is a fundamental improvement. And so what interested me first and foremost, was it's a great therapy that is a best-in-class treatment opportunity for patients. We can improve the lives of millions of patients. And then fundamentally, looking at the core of the business, revenue is growing really nicely. There was clear enthusiasm on the part of physicians to adopt the product. What we needed to do was bring a little bit more financial discipline to how we were launching the product so that we could reduce spend and get to profitability sooner and create really attractive returns for our investors. which enables the success that we're having in terms of growing the product.

Awesome. So in terms of some of these cost initiatives and your commercial strategy and just the trajectory of revenue through the year since you started, just talk about what those key efforts that you did, whether on the DTC or just maybe rightsizing the infrastructure and then layering on top of that, you've been able to maintain this growth rate. And it's worth commenting that if you think about Phathom spending in the first half of the year, the run rate versus the second half of the year is materially different. And so I just wanted to emphasize a little bit all that has gone on and yet ending the year a little bit above what even your guidance was. And so just maybe walk us through that and before we focus on the exciting things in '24.

Thank you. That's very helpful. 2025 really was a transformational year for us. When I came into the company, first thing I did was spend time with every group in the organization to understand what's working, what's not working, where are there opportunities in our business, where there are opportunities in our market and where can we find greater focus and efficiency. What became exceedingly clear even in the first few days, particularly with every conversation that I had with our sales team, and I met with each of the regional managers, met with each of the areas together, the consistency of commentary from the field was when we call on gastroenterologists, they really need our product. They want our product. They need it for their patients. It makes a big difference. They immediately see the logic. When we call on primary care physicians, they're slower to adopt. They're not sure whether or not their patients need an improved therapy. And so there's a greater perception of immediacy of need in the GI community. And then when you actually looked at our numbers, that was reflected in our numbers. 30% of our sales calls at launch for the first year of launch were going into gastroenterology, but 70% of our prescriptions were coming out of gastroenterology. So we were getting, in essence, a 4x return, meaning 4x the efficiency for every sales call that was going into GI practices versus every sales call that was going into primary care. That created the opportunity for a pivot and a focus to gain much greater efficiency. So what we were able to do was pivot the organization to focus on gastroenterology. It originally had been skewed much more toward a focus on primary care. We haven't eliminated primary care, but we're now -- we're getting close to 70% of our sales calls going into gastroenterology accounts, which is our more productive segment. Those sales calls in gastroenterologists are what drive growth. That is what is driving our business. So we maintained the strength of our sales organization. We maintained the focus on how do we grow our gastroenterology practices and their writing habits and frequency of writing, but we significantly reduced spend on numerous things that weren't driving revenue. So we had started the DTC program. It was actually a pretty broad expensive broadcast television DTC program. It was just too early. The call to action was ask your doctor about VOQUEZNA, but most primary care physicians hadn't yet adopted the product. So we were spending a significant amount of money trying to activate patients to go to primary care physicians who didn't yet know if they needed the product. Now there will come a day when that makes sense, where in the future, there's much more broad uptake in primary care, and there is an opportunity for us to drive growth in the business, but it was premature. So it was not providing a significant return on investment. So we were able to turn off significant spend that wasn't providing a positive ROI, double down on the key activity that was driving growth, and that's how we were able to deliver growth that exceeded even our internal plan and do so while cutting operating expenses by quite literally 50%. From the first half of the year to the second half of the year, we reduced operating expenses by 50% on a quarterly basis.

And in terms of kind of improving different aspects of the company, I wanted to turn this one to Sanjeev. And Sanjeev joined even more recently from last -- I was working with you, you were at a very large pharmaceutical company. So you bring a lot of very good experience. And earlier this year, there was the $130 million equity raise and people have been focused a little bit on the balance sheet and some of your debt obligations. So I just wanted to give you a chance to talk about that -- those proceeds and how you plan to deploy them and how that maybe increases your overall financial flexibility.

Thank you. Thank you, Jenna, for having me. Again, before I answer that, what attracted me, you asked that to Steve. One of the reasons that -- all the reasons that Steve mentioned about attracted me. I think there was another point company was at an inflection point. It still is an inflection point, where we're obviously helping a lot of patients, but we believe where a company could go with near-term sight on the profitability. And I could feel that I could make an impact on the company. That's one of the reasons that attracted me to come here. To talk about your question about the capital raise, that was a plan of a well-thought-out strategy that we worked on in terms of taking care of our cap structure and making a cap structure, which is sustainable and cost effective for the company for years to come. So what we did, we did a series of steps. We did a capital raise, which was obviously oversubscribed. And then what we've used those proceeds in a couple of ways. We've obviously strengthened the balance sheet, and we modified our term debt. The term debt, which is now modified to $175 million, we were able to push back the maturity to '29 and being able to pay that from the cash flow of the company. And the third thing we did is we have enough cash now on the balance sheet to take care of all our debt obligations and investing back in the business. So we have now a very sustainable cost-effective cap structure, which is going to help us to focus on the business, invest in the business and meet our obligations for all times to come.

Perfect. And as a culmination of all of these efforts and initiatives you guys have given at least for the first time at Phathom, a full year outlook at the beginning of the year. And so I just -- and I'll talk about it first, excluding the reclassification, just so we can look at it on an apples-to-apples basis. So in 2025, you were able to generate an incremental $120 million in revenue. And this year, excluding the reclassification, you're expected to add about $140 million at the midpoint. So what is giving you that confidence? And just walk us through like your philosophy on your company's first guidance.

So well, I'll answer the first pass of it, and then Sanjeev might add more in terms of sort of guidance philosophy. But what gives us the confidence that we can drive better growth on an absolute basis in 2026 versus 2025 is exactly what we were talking about earlier in terms of the refocus. We know that every sales call that we make on a gastroenterologist is more productive in terms of driving new-to-brand conversions, that is patients who are on a PPI converting them to VOQUEZNA. We convert more patients per sales call in gastroenterology than we do per sales call in primary care. So if you just do the simple math, in the first half of last year, the majority of our sales calls were going into primary care, which means they were going to the less productive segment. We are now going to be allocating much more of our sales force time in gastroenterology into more productive calls, which should lead to more new-to-brand conversions and therefore, more total prescription growth over the course of the year. So fundamentally, what drives our economics and our thinking about the absolute revenue growth is how many physicians are we able to grow in terms of their prescribing behavior and how many new-to-brand conversions do we drive? Because once we convert a patient, they tend to stay on the drug for a significant period of time. This drug has terrific persistence because it fundamentally reduces pain. That motivates a patient to want to stay on the therapy for a significant period of time. And that increased [indiscernible] that drives our confidence in the growth numbers.

And Jenna, the philosophy is very straightforward. How we measure internally ourselves is what we give guidance externally. So the guidance that is based on is achievable internal plan that you see that guidance is based on. It's not aggressive. It's not conservative. It is the plan that we believe and we're likely to achieve is how we look at it. And we provide transparency for that on the online items that we provided that.

Perfect. And a couple more on the guidance. So I got a few questions about the reclassification. And can you just talk about that decision and just how that benefits you or just what the rationale and what the change that's being made, like how we should think about that flowing through the model?

So it's no benefit to anybody. Economically, it's got absolutely 0 value. It is more a presentation change. When you were a small company, you look at these things, all of our cost was going into gross to net line. At the end of the year, we looked at that at the beginning of when we're making the budget, we realized certain costs, which are what I call it, fulfillment cost or a consignment fee they're more classified, they're better classified in cost of goods sold. So it's a line change from gross to net to cost of goods sold, 0 impact on the gross margin from an absolute purposes. So what you see, our revenue will go up slightly. Our COGS will go up slightly with no impact on gross margin, and we provided that transparency. It does not benefit anybody. Economically, there's no change. There is no change in the fundamentals of the business. It's just better classification and a more appropriate classification for a company of our size as we go forward. We felt appropriate to do this in the beginning of the year, so we can provide transparency in the guidance, which we already did.

Perfect. And then I just wanted to talk about the cadence a little bit because -- and you aren't alone, companies that are launching still in the earlier phases of launches, we get stuck in these weekly script numbers. And typically, the first quarter is a little bit light and then you also layer in some weather disruptions in -- at multiple points. And so I just think there was some elevated volatility around that. And I think you guys did a great job addressing on the call, just talking about 1Q. And then maybe can you also help us with the rest of the year? Like are there any other seasonal quarters, pretty stable sequential increases or anything you'd be willing to share?

So we were -- actually, when we gave the guidance at the end of January, we didn't anticipate any storms or anything like that. What we told you is exactly the normal cadence of the business. The way the business operates for us is approximately 40% of our business top line revenues in the first half, 60% in the second half approximately and first half being the slowest because of all the reasons that large brands go through when there is an insurance reset, deductibles reset from that perspective. And that's what we're seeing is playing out. What you're seeing in the scripts, we don't watch week-to-week, but they are in line with how our expectations are. And then clearly, as we go into March, April, May onwards, we'll expect the uptick to happen. This is what happened last year. This is what we expect to happen this year as well.

And then another important milestone that's happening this year is the transition to operating profitability. And so Steve, you kind of mentioned before just weighing, you scaled back DTC. It's not ruled off the table in the future. The expense run rate was cut in half in the second half of the year. So just thinking about the revenue outlook, and you've talked about $1 billion in peak sales for this product. Just how do you think about where you are in your expense journey and how that may -- how does that fit in with the long-term growth? And what will -- what would you expect like as you.

Let me take the first part.

Why don't...

Let me take the first part and then you can add in the future. But so if you think about last 2 quarters of last year, the company's expense base because of all the reasons that Steve mentioned about it earlier is, give or take, $50 million. It came in better than what we had preannounced results, $51 million to $53 million came in better. That's the going-in run rate to run this business with approximately 300 people field force. That's kind of how it is, and we've established that. What's going to happen is in 2026, a couple of things. It's going to be slightly higher than $50 million for 3 reasons. One, we're hiring some field force. We hired at the end of quarter 4. There is going to be a full year impact of that. Second, you'll see EoE trial, Phase II trial that we started in Q4. You're going to see a full year impact of that. Third is some marketing programs that we are doing. We're experimenting. There is going to be impact of that. But fundamentally, the expense level of the company is exactly going to be what we laid out in our guidance. The other thing we should keep in mind is we're not running to actually hold the expense level. We're running to make an optimum expense level. If we tomorrow feel there is a need to invest and that's going to drive the top line, we will be absolutely happy to do that from that perspective as long as it gives us the return.

Awesome. Yes. It just seems like with the opportunity, you have the core infrastructure that you need and maybe over time with different things like DTC, it might be more incremental depending on what you're seeing in the market as opposed to some big material change with your commercial.

Yes, I think that's right. I think the incremental discipline that we're bringing to how we think about spend is we will make additional marketing investments when we identify that they are positive ROI investments and positive ROI within the fine time frame. So if we determine that there's a $3 million investment in marketing that's going to generate $6 million of incremental revenue, we'll do that the next day. But that's a really straightforward conversation and because not only do we generate that $6 billion of revenue that year, but the patients you've converted stay on therapy and so it compounds over the course of multiple years. So you get significant advantage from it. So one of the things that we've built into our projection for this year is that we can pilot test several different ideas that enable us then to have much more predictability in thinking about our 2027 numbers and our 2028 numbers to know what incremental investments are going to drive growth in future years. So all of that work informs how we think about the next 2, 3, 4 years guidance, and that's built into our operating model for this year.

And we have the financial flexibility to dose those things without impacting, and that's what the cap structure provides us to do that.

And sticking on this $1 billion number, I also wanted you to frame the PPI and what some of those brands were at their peak because in the very beginning of this conversation, you talked about the efficacy of VOQUEZNA, and this is a very differentiated asset. I think it's the first time in -- at the time of approval, it had been a decade since anything new really came into this market.

I think actually several decades a significant period of time, you're quite right. So if you think about the PPI market, at peak, the PPI market is about $12 billion a year. Now that's at a much lower price point than today's price points for -- so this is an enormous market opportunity in terms of the patient population. There were 3 different PPIs simultaneously that were north of $3 billion in revenue. It's a significant market size. We're not going after the entire PPI market. Our target population is the 30% to 40% of patients who are on PPIs were still in pain. That's a multibillion-dollar opportunity. One way that we frame this for -- to make it easy for investors to get their head wrapped around how do we get to the first $1 billion in revenue. And I think there's potentially a second $1 billion in revenue beyond GI when we go back into primary care. And I'll talk to you about a little bit about that evolution. But in GI alone, when I think about in GI, that is gastroenterologists and the EPPs, the nurse practitioners and the PAs that practice out of gastroenterology practices. That universe represents 24,000 HCPs. Collectively, they write 20 million PPI scripts per year. If we can convert 20% to 25% of those scripts, that's $1 billion of revenue. So our opportunity to reach $1 billion of revenue just in prescriptions coming out of gastroenterology is can we convert 20% to 25% of those prescriptions. And we're never going to convert 70% or 80%. That's unrealistic. But is it realistic for us to convert 20% -- our top 300 writers today in GI, the early adopters who picked up this product 2 years ago and have been growing steadily quarter-over-quarter, they're already at that 20% level. So we know it's not 5 or 10 physicians, 300 physicians who are already converting 20% of their PPI scripts. They are still growing. They're going to get to 30% or 40% on their growth trajectory in future quarters. Can we expand that to a much broader population of the gastroenterology prescriber base to get to something that looks like 20% or 25%. That's 4 million to 5 million prescriptions per year for VOQUEZNA. We are annualizing today in Q3 and Q4 at about 1 million prescriptions per year, annualizing at about a $250 million run rate. So 4x that, 4 million to 5 million scripts per year gets you to $1 billion in GI. Here's the second billion opportunity. Second billion comes from the fact that patients who are prescribed VOQUEZNA in the GI practice don't stay in the GI practice. The patient who's having significant pain from GERD and is inadequately treated with a PPI in a primary care practice gets sent to a GI to get scoped just to assess, do they have Barrett's, do they have erosions? Do they have something that needs more aggressive treatment? Many of those patients are going to be converted to VOQUEZNA in order to manage their reflux. When they're adequately managed, when any erosions that they might have had a heal, they're going to be sent back to their primary care physician. Their future refills are going to come from a primary care physician. So that 20 million PPI prescription volume in GI, it's not a static group of patients. It's the patients that are circling that are cycling through GI practices and then they cycle back to primary care and the refills are coming out of primary care. That's also a way to educate primary care physicians about VOQUEZNA, make it much easier for them to write and convert additional patients, and that's the second $1 billion in revenue.

And just between the 2 indications that we focus on the most, the erosive and non-erosive are -- like how do you differentiate between the 2 in this growth trajectory. And I'm just curious on the non-erosive side, are those patients like if you're moving to that second billion, are doctors in the primary care setting seeing more on the NERD side? Or just help us understand how these 2 indications are trending.

So a primary care physician doesn't actually know whether their patient has erosion or not.

That's true.

I think that they're seeing a patient, they just know that a patient has GERD. They will try omeprazole first. They'll try [indiscernible]. If they're not adequately treated with a PPI, they may double their dose. They may add an H2 blocker, they're adequately treated, great. That's probably where that ends. If they're not adequately treated, they're still in pain. That's when they're going to be sending a patient over to a gastroenterologist. We also would like to have the primary care physician think about that's when you're actually switching them to VOQUEZNA at that point in time. That's not a conversation that's yet happening today. What's happening today is they get sent through a GI and it's at the GI that we're converting most of our patients. In the future, as primary care physicians become more comfortable with it, once you get out to 2027, '28, '29 and primary care physicians have a bolus of patients coming back, telling them how much better they feel when they're on VOQUEZNA, we're going to have an easier conversation converting primary care physicians to adopt much more broadly. But the conversion today is happening specifically within GI. The early starting point tends to be for a GI to start this product on their patients with erosive esophagitis. They then grow into using it in non-erosive reflux patients because the easy compelling need is those patients with the greatest severity need the most aggressive treatment. But once you start hearing from a patient how much better they feel, it's an easier conversation for us to open the conversation to your other patients that are still experiencing pain on a PPI, why aren't you offering VOQLIZNA to them? How do we broaden that thought process? And as they get more comfortable with the product, they broaden the population of patients with which they use this product. That's the natural cycle.

And this is a good thing and -- that we haven't touched on this yet, but I wanted to just ask one question on the LOE. The way the LOE situation unfolded, everything kind of worked out in the best case scenario with the 2032. And so just my question with the NCE dates and the GAIN Act exclusivity to 2032 just so investors have on their radar because at a certain point, a window opens up for ANDA filers. When would you see that window opening for a potential ANDA filing?

So the 2032 date was a very important date. That's actually when a first ANDA filing is permitted. That actually means that we're going to have exclusivity into 2033 or '34. Typical ANDA review time lines are 10 months on a first round review, 8 months for subsequent rounds. So the earliest realistic date for a generic launch would be first half of 2033. It's very possible if the generic filings that go in, the ANDA filings that go in require 2 or 3 rounds of review, you could easily be into 2034 before a generic launches. So when we think about our LOE date, that 2032 date is first filing. We actually know that we've got exclusivity into 2033 and maybe 2034.

Awesome. And then I guess to close things out, I wanted to get your take on -- we mentioned the volatility early in the year. There's been some really positive changes in the past 12 months and starting 2026 off on a very strong foot with this guidance that did better than people were thinking, implying very strong growth with your more targeted commercial strategy. So just in your mind, what do you view as the most dislocated aspect of the story relative to the fundamentals you're seeing and how confident you are in the outlook versus maybe how the stock has been trading to start off this year?

So I'm always cautious as a CEO in commenting on stock trading. Investors are allowed to make the decision as to when they want to buy and when they want to sell stocks. That's an investor call. Our obligation is to drive the business and get to profitability. I do think that there's an opportunity for us to create significant shareholder value over the coming years. I think that the transition to profitability is going to be a significant inflection point. The transition in 2027 to positive cash flow generation is going to be a significant value creation point and us demonstrating the continuity of our growth trajectory that not only -- there were questions last year was we were cutting expenses, would that harm our growth rate. I think we proved to folks that we could grow right through that. I think continuing that growth trajectory is going to give you more confidence in the story, and that should play out positively, but I will stop shy of predicting when.

We are focused on execution, but everything will sort itself out.

Awesome. And we'll leave it with that. Thank you very much.

Thank you.

Thank you very much.