Update: Delcath (DCTH-$2.99)
"The pessimist stares at the thorns, oblivious to the rose."-Khalil Gibran
The company’s recently held earnings conference call raised some investor concerns surrounding the upcoming U.S. launch of HEPZATO and the possible need to do an additional financing in mid 2024. Onboarding requirements for the launch are complex, which was discussed in excruciating detail, but the risks discussed were already known and planned for by management. Regarding the need for financing, Delcath currently has $40.5 m in cash and is burning approximately $10.0 m per quarter. The third tranche of warrants that will raise $25.0 m in cash will trigger for 20 days once quarterly revenues exceed $10 m. The holders will only convert if the stock is above the $6 exercise price when the revenue trigger occurs. There is a good possibility for the $10 m trigger to occur 3Q24 and if not, 4Q is almost a certainty, in my opinion. The stock price, of course, is a unknown and even if over $6, it is likely that if the trigger occurs 4Q, a bridge would be needed since the cash would not be received until around January 20, 2025. Nonetheless, with an approved product and a revenue ramp in progress (as compared to the $85.0 m pre-approval deal), I believe the risk to a lender is much reduced and therefore the company is much better positioned to raise capital through debt, a royalty deal, or by repricing the existing 3.6 m $10 warrants . I do not believe Delcath would reprice the $6 warrants .
Based on discussions with the company, I expect HEPZATO will be commercially available at a minimum of 5 hospitals by the second week of January. The reason for the slight delay from late 4Q to early 1Q24 is not Mephalan availability (supplied by Neopharma), but rather delays by Neopharma’s approved printer in supplying necessary packaging and labels.
On the conference call, management said “We are also working to get HEPZATO KIT approved through the various traditional hospital formulary and value analysis committees, and we have started that process in 13 hospitals. Currently, we have three EAP sites, Moffitt Cancer Center, Duke University and the University of Tennessee, which are fully trained. They can start treating commercial patients upon the availability of commercial product. In addition, we now have a further four sites, Mayo Clinic, Thomas Jefferson, Ohio State University and Stanford University that have completed the necessary steps to conduct their first commercial treatment under the guidance of a proctor once commercial product is available and formulary and Value Analysis Committee approvals are obtained.”
“Beyond those seven sites, another four sites, UCLA, Providence St. John's, Mass General and Piedmont Hospital, currently have the [training]preceptorships scheduled in November or December. In total, we expect at least 10 sites will have completed the required training to treat a commercial case by the end of January, contingent on scheduling a proctor team for that first case and the successful completion of the various Value Analysis Committee processes." Later in the call, management said it expects at least five target sites to start actively treating patients in 1Q24, that could grow to ten sites by the end of 2Q24 and exit 2024 with 15 sites. Regarding procedure volume, management expects to start from one treatment per month per site and grow to two treatments per month at each site by end of 2024.
In order for a hospital to offer HEPZATO, it needs to have completed the required training to treat a commercial case, contingent on scheduling a proctor team for that first case and the successful completion of the various Value Analysis Committee (“VAC”) processes. Delcath currently has 3 teams (Moffit and 2 teams from hospitals in Europe) which will be available as proctors. A proctor has to be present for a new site’s first procedure only. Neither a required proctor or a favorable VAC decision are new developments which had been unknown to the company. In fact, in regard to VAC, management stated on the conference call the following: “And so they recognize the need for the product that we're bringing and we're kind of moved outside of that 9 months, and we're probably closer to 3 months and even in some scenarios, maybe shorter than that."
CEO Michel and his management team did a masterful job, with limited financial resources, in successfully achieving FDA approval for HEPZATO when many naysayers had predicted failure. Yes, communication with investors could be improved and the bullish story explained without disproportionally focusing on every possible hurdle. Nevertheless, I am surprised that there remains so many doubters about management’s ability to execute at the operational level. I am very encouraged that Delcath has hired ex-Boston Scientific people who were involved in the marketing of Y90, a liver-directed treatment, with similarities in how the product is marketed. Additionally, substantial insider buying in recent weeks suggests that management has confidence that they will successfully execute the launch.
The guidance itself is extremely conservative, in my opinion. BTIG’s current FY24 quarterly revenue estimates estimates are $1.5 m (Q1), $3.6 m (Q2), $5.8 m (Q3), $10.9 m (Q4). H.C. Wainwright is inexplicably even lower with quarterly estimates of $2.3 m, $3.2 m, $4.0 m, and $4.9 m. Moffit, one of the 3 Expanded Access Program sites, currently performs 1 procedure per week. Once HEPZATO becomes commercially available in the second week of January, Moffitt alone should generate approximately $1.82 m in revenues for the quarter’s remaining 10 weeks. If VAC decisions are “closer to 3 months and even in some scenarios, maybe shorter than that”, assuming the decisions are favorable, then it is quite possible that 9 or 10 hospitals could be offering HEPZATO commercially at some point during 1Q24.
On a prior earnings call, a questioner asked, “Of the initial dozen or so sites that are either currently online or have expressed interest, do you have a sense of how many patients they represent?” Management replied, “In terms of the number of patients they represent, shooting from the hip, maybe 30% of those 10, maybe 40%, because we’re [indiscernible] when we focused on centers that already have a set of patients. But that really--you know, that’s only part of the equation. The other part of the equation is going out to medical oncologists where we’re not intending to open sites, and get in to refer to these treating sites.”
Many of the initial sites are in major metropolitan areas with a large number of mUm patients treated by a limited number of medical oncologists- Mass Gen, Piedmont (Atlanta), Jefferson (Philly), UCLA, and Stanford. Thomas Jefferson by far treats the largest number of metastatic uveal melanoma patients in the country. Organically, I believe it is reasonable to expect most, if not all, of these sites should be able to add 1 new patient per month (which represents potentially 4 treatments@$182k each, administered in 8 week intervals). Note that company guidance is based on 1 to 2 treatments (not patients) per month. If a site adds one new patient per month beginning in February, that site would be doing 4 treatments per month by Q3, well above current guidance. In that scenario, it would only take 6 or 7 sites to have a $10 mil rev quarter in Q3. Further improving the odds, Delcath is in the process of adding oncology representatives who will generate referrals to the hospital centers. Once implemented, patient referrals should accelerate.
Even applying current guidance of 1 to 2 treatments per month yields quarterly revenue estimates above Street estimates. Assuming the initial 5 sites do 2 procedures per month while the newer 5 sites do 1 procedure per month , quarterly revenues would be $8.1 m. If all 10 hospitals do 2 procedures per month, quarterly revenues would be $10.9 m. If hospital sites exceed 10, which I would expect by 2H24, then the estimates becomes even easier to beat.
There also seems to me concern from some investors that Delcath’s mUm opportunity could be blunted due to early promising Phase 2 trial data from IDEAYA Bioscience’s darovastertib/crizotinib combo. There have been numerous scientific articles published that have concluded that liver metastasis negatively impacts immunotherapy efficacy. This would support a combo therapy approach. Furthermore, once a liver is significantly compromised HEPZATO can not be used on a patient. This supports that HEPZATO should be used earlier rather than later during treatment. Given darovastertib/crizotinib is not a cure, that it is still several years away from potential approval, and that it is a systemic treatment while HEPZATO treats the liver only, I believe similar to Immunocore’s KIMMTRACK, HEPZATO and darovastertib/crizotinib are most likely to be used together.
In Europe CHEMOSTAT has been approved as a medical device since 2012. It is essentially HEPZATO without mephalan pre-loaded. There have been over 1300 procedures done on a variety of liver-dominant cancers and numerous studies have been published. Because of the approval path taken, Delcath can only charge $20k per procedure (if the company submitted HEPZATO as a drug/device combo , then pricing would be much higher). Given the company has been under capitalized, it never invested in any salespeople . Delcath has now added a sales rep in Germany and in England. Germany has some available reimbursement and once final FOCUS trial results are published in early 2024, Delcath will submit for national coverage in the United Kingdom. Nonetheless, Europe is not currently a management priority, but the flexibility doctors have to perform the procedure on various cancers has provided invaluable data and resulted in numerous published studies.
It was interesting to me that analysts on the recent earnings call were 100% focused on mUm and had zero question or interest in Delcath’s opportunity to use HEPZATO to treat other cancers. It is important to understand that HEPZATO is agnostic as to which cancer is the source for lesions metastasizing to the liver. Liver failure is the #1 cause of death in mUm and so it was a natural initial indication (plus the company’s founder’s daughter had mUm) to pursue for HEPZATO. However, many other cancers also spread to the liver including Cholangiocarcinoma (ICC), Liver-dominant Breast Cancer (mBC), Metastatic Neuroendocrine Tumors (mNET), Metastatic Pancreatic Cancer (mPC),Metastatic Colorectal Cancer (mCRC), and Hepatocellular Carcinoma (HCC) . I believe management will discuss in much deeper detail in 2H24 its plans for future expansion. A formal label expansion would require a regulatory submission supported by a clinical trial, but HEPZATO can be used off label if there is interest to do so and if insurance reimbursement is obtained. One way this might occur is if the National Comprehensive Cancer Network (“NCCN”) guidelines include HEPZATO as a treatment for a specific cancer. There have been several European studies published on the effectiveness of CHEMOSTAT in treating ICC. The company believes there is “a chance we could get on ICC guidelines [for NCCN] with existing publications or with a modest sized trial.” There are 3200 ICC patients in the United States so ICC has a TAM 3X that of mUm. It is doubtful that the current valuation reflects any belief that HEPZATO will be used in other cancers despite the evidence of such usage in Europe. Adding further confidence in my belief that investors underestimate the opportunity is the fact that the only other currently approved liver-directed therapies, TACE and Y90, are used 75k times annually in the US.
In sum, Delcath never seems to receive any love from investors. I am fully aware of the sad history PRIOR to new management taking over. But it simply is not the same company as before, yet somehow the stock price is lower today than the day prior to obtaining FDA approval. It has been a tough market for microcap healthcare stocks and clearly the hedge fund shareholders who participated in the $85.0 m financing have proven toxic as long-term shareholders. I definitely have considered whether these hedge funds have superior insights or knowledge which I am missing in my analysis. But when I review and review again the bull case and consider the bear concerns past and present (quality of FOCUS trial results, whether Neopharma mephalan issues was going to cause a CRL, whether the launch will be a failure, whether future financing needs are a major challenge), I remain as convinced as ever that Delcath has minimal downside and substantial upside potential at the current valuation based solely on the mUm opportunity. I look forward to the FY24 launch and believe it is very likely that current Street consensus estimates are too low and that investor concerns over the need for additional dilutive financing are overblown.