Physicalism doesn't deny the existence of the non-physical. Indeed, the whole point of physicalism is to explain the non-physical in terms of the physical - and one doesn't try to explain things that don't exist.
I reject as false the view that every attribute is a physical attribute. (Poland, p.188)
Melnyk calls this "retentive realizationism." He reserves the option of "going non-retentive" if necessary, however. For example, he says, if it turns out that "life" cannot be explained as a functional property of physical systems, then the physicalist can deny that "life" exists, and replace it with some appropriate (physically realized) functional property that does exist. This is not as radical as it sounds. He points out that anyone objecting to this move would have to show that, in addition to such functional properties as being able to take in sustenance and transform it into parts of the body, and being able to reproduce, there is something called "life" that is real, while at the same time being above and beyond any such functional properties.
The difference is between explaining something and explaining it away. Take ghosts, for example. If you believe in ghosts, then you might explain them by saying, "Ghosts are the manifestation of spirits of the dead." If you don't believe in them, you might explain them away: "Ghosts are psychological effects brought about by a deep emotional connection with someone who has died."
Physicalism is in the business of explaining the non-physical, not explaining it away. Consider, for example, a chemical compound that is made of (realized by) some combination of atoms, or an organ - say, a liver - that is composed of some collection of cells. To say that the compound, or the liver, is so composed is not to say that it doesn't exist! Rather, the physical realization allows us to explain why the compound has the chemical properties it does, why the liver functions as it does, on the basis of the underlying structure of atoms/cells and their, more fundamental, properties.