Company: PHAT
Filing Date: 2025-03-06
Form Type: 10-K
Source: 0000950170-25-034183
Chunk: 256

Company: Phathom Pharmaceuticals, Inc.
Filing Date: 2025-03-06
Form: 10-K
Item: Item 1B
Chunk 256
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 below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

    Reserve for Product Returns

    Description of the Matter
    During the year ended December 31, 2024, the Company’s net product revenues were $55.3 million. As explained in Note 1 of the financial statements, net product revenue includes estimates of variable consideration for which reserves are established, including the reserve for product returns. The Company provides customers a return credit in the amount of the purchase price paid by customers for all products returned in accordance with the Company’s returned goods policy. The Company estimates its provision for sales returns based on available industry data, 

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    including visibility into the inventory remaining in the distribution channel, and adjusts the transaction price with such estimate at the time of sale to the customer. Auditing the Company’s measurement of the reserve for product returns was challenging due to (1) the significant judgment required in determining the estimated returns rate and inventory in the distribution channel that will not ultimately be sold to the end user and returned, and (2) the limited returns history on which the estimated returns rate is based. The reserve for product returns is sensitive to the level of inventory in the distribution channel, which could exceed future market demand and be subject to return.

    How We Addressed the Matter in Our Audit
    To test the reserve for product returns, we performed audit procedures that included, among others, testing the accuracy and completeness of the underlying data used in the calculations and evaluating the assumptions used by management to estimate the Company’s reserves. We tested the industry data used in the calculation of the estimated returns rate by inspecting industry publications. In addition, we tested the Company’s analysis of inventory held at various stages in the distribution channel. We obtained third-party confirmation of prescription data and tested inventory in the distribution channel reported by significant customers. We also inspected agreements with significant customers to validate the rights of return and performed inquiries with management, including the Commercial and Legal departments, regarding any changes to the terms and conditions of customer contracts. We also performed a sensitivity analysis over the Company’s returns rate to assess the effect of changes in assumptions.

/s/ Ernst & Young LLP                                                                    

We have served as the Company’s auditor since 2019. 

Iselin, New Jersey

March 6, 2025

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PHATHOM PHARMACEUTICALS, INC.

Balance Sheets 

(in thousands, except share and par value amounts)

    December 31,202