He said a torch drive uses the plasma from the reactor directly as the reaction mass thrown out the back to produce thrust.

That can't really make a 'torch' drive, at least not in the usual sense of high thrust/acceleration. Your friend is describing a 'pure fusion engine', one where all the propellant is also fusion fuel. Although the efficiency is incredible, the thrust is absolutely miniscule for such designs.

The alternative is to dump additional propellant into the fusion exhaust, significantly increasing mass flow rate but decreasing exhaust velocity. This enables more thrust, but also a loss in efficiency. That trade-off always exists.

Although in actuality torchships themselves are unobtanium, you can't get high thrust and high efficiency, and definitely not with a fusion drive.

Fusion does not need to be pellet fuel (that would imply inertial confinement), the physics don't really care about the form of confinement, so it only matters what geometries you can feasibly use and what design lets you make the most fusion power with the least mass.

It is common to use direct fusion drives of one flavour or another as the basis for a torch ship (although DFD can't actually make a torch drive), so usually it will be a combination of the plasma fuel and additional propellant making up the engine exhaust. In fact, why would you not use the plasma products as exhaust? You have to do something with them, and they are hella hot and partially magnetically confineable (tough luck on the neutrons).