Description

Delcath Systems (NASDAQ:DCTH) is an interventional oncology company focused on the treatment of primary and metastatic cancers of the liver. The company’s HEPZATO platform delivers high-dose chemotherapy to the liver with the goal of minimizing broader exposure to a patient and reducing harmful side effects. It accomplishes this by isolating and delivering the high dose chemotherapy drug Melphalan directly to the liver and then filtering the chemo drug out of the blood before it returns. The liver is the second most common site of metastases after the lymph nodes. In particular, the liver is the predominant site of metastases for patients with metastatic ocular melanoma (“mOm”), colorectal adenocarcinoma, and neuroendocrine tumors. mOM, with an average survival of 6-months from diagnosis, is truly a horrible disease and is the first indication that Delcath is pursuing in the United States.

The company was formed in 1988 and went public in 2000. Investors have endured many failures and there are many who remain skeptical about the company’s current prospects. As someone who both published short sell research and managed short-biased hedge funds, I always appreciate and respect the bearish perspective. It is undeniable that under the original management team (replaced 2020), the company was a prolific capital raiser and serial disappointer, culminating in the 2013 rejection of HEPZATO due to safety concerns.

After receiving a complete response letter (CRL) in 2013, the company’s stock crashed and was ultimately de-listed. The company got back on track in 2018 by redesigning its trial (called “FOCUS”) to be a single-arm study and developing different filtering (Gen 2 filter) to address past safety issues. The 100-patient study was very slow to enroll due to a lack of capital, which was resolved in mid-2019 via two privately place preferred offerings. It was then further stalled by the pandemic, with the final patient enrolling in October 2020. The company appointed a new CEO, Gerard Michel, in October 2020 who was the former CFO at Vericel and Biodel. In December 2020, Delcath sold 1.46 m shares at $13.25, raising $19.3 m and the stock proceeded to rally another 90% before collapsing following the release of the FOCUS data. Since the high reached at $24.95, the stock has declined 86%. I believe that the FOCUS data was strongly supportive of eventual FDA approval but the negative spin propagated by influential long-term bears of the company, coupled with a biotech bear market, numerous timeline delays (primarily due to Covid-induced supply chain and CRO issues) as well as failure by management to raise more capital when the stock price was still above $10 has all contributed to a massive negativity towards the company. While understandable, I strongly believe that the re-submission of the NDA for the treatment of ocular melanoma “mOm” for HEPZATO to the FDA is on-target for a late December/early January submission. I anticipate an ADCOM meeting during the Spring with an FDA decision by the end of the summer 2023.

Since the introduction of the improved Gen 2 filter, the safety profile of HEPZATO has significantly improved. This has been demonstrated repeatedly in real world European usage as well as in the FOCUS trial . It is very important to note that safety issues, not the efficacy of the procedure itself, was the basis for the 2013 rejection. Consequently, I believe the likelihood of approval is high (albeit FDA decisions are never fully predictable). What makes the risk-reward so compelling, in my opinion, is that the current enterprise value (including the effects of a recent $6.2 m capital raise) is less than $40.0 m despite an imminent submission, the high likelihood of FDA approval, and the fact that mOm, which is a $250 m addressable market, represents the smallest opportunity for HEPZATO. In sum, I believe there is a huge asymmetric risk reward of 10-20x assuming HEPZATO is approved and it is shown to work in much bigger indications.

Delcath Systems has gone through the FDA review process once before. In 2013, an FDA Oncologic Drug Advisory Committee panel recommended against approval due to safety concerns. Over 90% of patients suffered grade 3-4 adverse events in the study using the device with a previous generation filter . There were 4 treatment related deaths in the pivotal phase 3 trial conducted from 2006 to 2009. Two were associated with bone marrow suppression; one was caused by progressive hepatic failure; one was caused by gastric perforation.

In response, the company changed the clinical trial protocol. Delcath updated protocols, including using granulocyte colony stimulating factor for all patients as a preventative measure to reduce toxic side effects and beta blockers in combination with norepinephrine to manage blood pressure. The company recruited patients with up to 50% tumor burden to lower the odds of clinical failure due to liver failure. Also, patients had to have a blood test close to baseline and the trial excluded patients with acute cardiac problems. Most importantly, the next-generation filter was introduced to address past toxicity issues. Initially, patients with a recent mOM diagnosis were offered to participate in FOCUS with a 50% chance they would get randomized to BAC with no hopes of crossing over to receive HEPZATO once their tumors progressed. Given the grim survival rate, most patients assigned to the BAC group chose not to remain in the study and instead many travelled to Europe to receive treatment. In 2018, after interactions with the FDA, Delcath revised the protocol to a single-arm study with ORR as the primary endpoint. Some detractors have raised this design change as a risk to approval, but over the past decade single-arm trials using ORR as a primary endpoint have been commonly implemented in oncology, particularly in cancers that are hard to treat, when the number of patients is small, and there are few, if any, approved treatments.

In March 2021, the initial FOCUS data release revealed that HEPZATO surpassed its primary endpoint of objective response rate by a very wide margin as measured by ORR . Objective Response Rate (“OR”) is defined as percentage of patients whose disease decreased and/or disappeared after treatment). HEPZATO’s ORR is 36.3 % vs 12.5% for Best Alternative Care (updated as of 4/22 and presented as a supplement to the lower checkpoint inhibitor ORR as a comparator). The FDA had also requested that patients be followed for at least 6 months to assess HEPZATO duration of response (“DOR” defined as time from confirmation of a partial response (PR), complete response (CR) or stable disease (SD), until the disease has been shown to progress following treatment). DOR in the treated population is currently 14 months, which is meaningful compared to the initial 6 months bogey. The disease control rate (“DCR” defined as percentage of patients whose disease shrinks or remains stable over a certain time period) and progression-free survival (“PFS” defines as time from randomization until disease progression or death) also performed well compared to BAC. Final data will be released in May 2023. Of critical importance, out of 91 patients receiving 356 treatments at the time of the readout, there were zero deaths from the device or the procedure with bone marrow suppression (22.3%) the most frequent adverse event.

After initially surging pre-market to over $30, the stock subsequently collapsed 44% during the trading day after a long time influential Delcath skeptic tweeted his opinion that “ORR of 29% (which was the prelim OR reported at the time, since updated to the aforementioned 36.2%) exceeded the predefined threshold for success of 21%… However…The ORR confidence interval is 20% to 40%, so the lower bound falls below the success threshold. Is this a concern?” In response to the tweet, the company issued a press release explaining that “A point estimate of 21.0% ORR was calculated as the requirement to demonstrate superiority over the checkpoint inhibitors given the planned trial size and this threshold was shared with investors. The checkpoint inhibitor ORR was calculated based on a meta-analysis covering 16 different publications and 476 patients. The pooled overall response rate was 5.5% with a 95% Confidence Interval of 3.6% - 8.3%. To achieve statistical significance at a 95% Confidence Interval the lower bound of the ORR for HEPZATO needs to exceed the 8.3% upper bound of the meta-analysis. A preliminary analysis of 87% of enrolled patients analyses by the Independent Review Committee yielded an ORR of 29.2% [95% CI: 20.1, 39.8] in the Intent to Treat population, which substantially exceeds the 21.0%-point-estimate requirement. For further clarity, since the 20.1% lower bound exceeds the 8.3% upper bound of the meta-analysis the predefined success threshold was met.”

In regard to Overall Survival (“OS”), it is a secondary endpoint of the FOCUS trial. The last data presented by Delcath showed OS of 19.25 months vs 14.1 months for Best Alternative Care . The data wont mature until May 2023 and given there are far more patients still alive in the HEPZATO arm vs BAC, I'd expect HEPZATO’s OS to improve when the final data is released. By comparison, Immunocore’s KIMMTRACK received FDA approval in February 2022. It is currently the first and only FDA approved therapy for mOm. The median OS in KIMMTRACK’s P3 trial was 21.7 months versus 16 months for patients in the control group, with an almost 50% lower risk of death. The 1-year survival rate was 73% for patients in the experimental arm vs. 59% in the investigator’s choice arm. KIMMTRACK is administered as a pill, not a drug/device combo, which made it easier to design the trial as a double-blinded study (since patients, unlike with HEPZATO, did not actually know whether or not they were in the control group and even if they did find out, they did not have the option to travel to Europe to receive treatment). Consequently, KIMMTRACK’s primary endpoint was powered to show statistically significant OS.

On Delcath’s Q3 2022 CC, CEO Michel made the following observation when comparing HEPZATO with Kimmtrack: “So we have other things we can pull upon, which some are quite obvious. I think the most compelling one is to look at OS (“Overall Survival”). Our OS is fairly similar to what Immunocore’s Kimmtrak (approved February 2022) showed, and we had sicker patients in terms of we had first, second, third line patients. We have writing parameters that we can compare to and will, based on their published data that demonstrates that our patients were further along in the disease process, yet we came in within spitting distance of their overall OS. And then if we look at one year OS, they were I believe 77% -- we were at 77%, excuse me, survival for a year. They were at 73%. So we have a number of things we can point to. We look at our older survival data, pre-KIMMTRAK, HEPZATO publication, we’re well, well over. Usually it's not over. It's well under a year in terms of survival. So that's well in our favor as well. So I think with our overall OS, we said 19.25 last time we gave an update, but that was versus the BAC that [indiscernible] now we have 14.5 months. We have that delta. That OS continues to mature. So it's definitely not the final number and it compares reasonably favorably with KIMMTRAK. We have the meta-analysis in terms of ORR, objective response rate, and our response rates are head to shoulders above anything else out there. Most response rates are single digit, and then the duration 14 months. So taken in totality, I think we're in great shape.” In sum, the HEPZATO FOCUS results compare well with the KIMMTRACK results.

Delcath has also found statistically significant differences in overall survival between patients who had complete response, partial response or stable disease and progressive disease in a retrospective analysis of patients treated with HEPZATO at three European centers. In a report published in the Journal of Cardiovascular Interventional Radiology, 101 patients, who were treated with a total of 212 HEPZATO procedures between 2014 and 2019 were analyzed. After a median follow-up time of 15-months, a complete response was reported in five patients, partial response is 55 and stable disease and third, resulting in an overall response rate of 59.4% and a disease control rate of 89.1%. The median progression-free survival was nine months and overall survival was 20-months. For example, patients with complete response or partial response, the median overall survival was 27-months. The patients with stable disease, the median overall survival was 21-months, and for patients with progressive disease, the median overall survival was six months. This correlation between response status and overall survival is critical since response rates do not always correlate with survival. As overall response rate is the primary endpoint of the FOCUS trial, from a regulatory perspective, any supportive data showing a correlation between overall response rate and survival is helpful. Delcath observed the same correlation in the FOCUS trial, which will be included in the FDA submission, and the company intends to share the details of that specific analysis at an upcoming medical conference (which conference has not yet been disclosed).

The KIMMTRACK launch has been very successful, generating $60m in US revenues in 9 months post launch. Delcath does not view KIMMTRACK as a direct competitor given the unmet need in mOm, the fact that neither solution is a cure, and that the mechanism of action is different. The company believes doctors will figure out a way to use them best in a combined fashion. In an effort to ensure suitable patients have access to the HEPZATO KIT during the NDA preparation and FDA review, Delcath opened two expanded access program or EAP sites, of which 8 HEPZATO procedures have been done to date. The company has seen some patients being referred to Moffitt Cancer Center who are using HEPZATO as a first line treatment in the belief that it stabilized the disease and preserved liver function before treatment with KIMMTRAK.

A significant market opportunity awaits Delcath in mOm. The company estimates the U.S. market opportunity for mOm is $250 m annually. Each year in the U.S. roughly 1,700 people are diagnosed with ocular melanoma. Patients lose vision in the affected eye and then have to wait a certain period of time to see if the melanoma will return. In about 50% of cases, it does return and usually metastasizes to the liver. Prior to the approval of KIMMTRACK, patients with mOM had 6-9 months to survive after diagnosis. The standard-of-care for mOM patients historically have been systemic chemotherapy and immunotherapy which help with stabilization but have not shown efficacy; moreover, surgery is often too difficult due to mOM’s structural complexity. KIMMTRACK has unsurprisingly had a very successful launch, but there is ample opportunity for both KIMMTRACK and HEPZATO.

Delcath believes that for Medicare patients, HEPZATO will primarily be reimbursed using pass-through status, initially with a miscellaneous ZE code before being assigned a unique ZE code. In Immunocore’s first full quarter, they obtained a unique ZE code and booked $20 million in revenue from U.S. KIMMTRAK sales, despite being restricted to less than 50% of the patient population given their mechanism of action.

Delcath’s sales and marketing expenses for marketing mOm should be modest. There are only 20 medical centers in the United States which Delcath will target, of which 8 are prepared to offer HEPZATO almost immediately following approval. Assuming a patient receives a total of 4 to 6 HEPZATO treatments priced @ $75k per (comparable to Ipilimumab and Nivolumab immunotherapy cancer treatment and to the $400k cost of KIMMTRACK), a reasonable estimate is for HEPZATO to generate $40 mill in the first 12 months (at 90% GM). Over time, I would expect the number of centers to increase from 8 initially to 20 and the number of treatments per center to rise and level out at approximately 12 to 14 monthly treatments, generating approximately $250 m in HEPZATO U.S. revenues annually.

Despite showing an excellent safety profile as well as a strong ORR, the stock price never recovered from the impact of the negative sentiment sparked by what I believe is an incorrect interpretation of the FOCUS trial results. Given the prior checkered history of the company, the illiquidity of the stock, and the onset of a biotech bear market, the company’s cash position has been sub-optimal ever since. Due to its small size, the company has had to rely on a small army of consultants and CROs in order to prepare its filing. Covid has further exacerbated timelines. Shutdowns slowed accessing, compiling, and analyzing the data required to provide a complete submission. Consequently, the company has been under siege the past 18 months and the current low valuation has resulted. While in hindsight the company should have bit the bullet and raised capital immediately after FOCUS (early 2021 in the mid teens), Delcath did secure a $20.0 m debt facility in August 2021 and recently did 2 small private placements, raising $11.2 m. Insiders, including the CEO, purchased shares in both offerings. I believe this will be sufficient to fund operations through the FDA decision. Assuming HEPZATO is approved, the company will undoubtedly be able to do a more substantial capital raise. While some of the funds would be needed for sales and marketing, the bulk of any capital raise would be primarily to fund additional clinical studies of other liver-dominant cancers where HEPZATO has shown promise in various European studies.

It is important to take a moment to explain why this investigator-initiated trial is a great interest to Delcath. Combination therapy is a radical approach since while liver failure due to hepatic (relating to the liver) metastatis is the leading direct cost of death for mOm patients, in other types of cancers that frequently metastasize in the liver (such as colorectal), extrahepatic (located or occurring outside the liver) metastasis do occur in treatment which HEPZATO alone can not effectively treat, while systemic immunotherapy has very limited efficacy on liver metastasis. Logically, combining therapies may lead to better control of both hepatic and extrahepatic disease.

The goal of the existing CHOPIN trial is to study the safety and potential synergistic effects of systemic immunotherapy (ipilimumab plus nivolumab or “IPI+NIVO”) when combined with Delcath’s proprietary liver-targeted HEPZATO treatment in metastatic uveal melanoma patients. According to a 6/22 press release, “Initial CHOPIN data suggests that combining Delcath’s proprietary PHP (HEPZATO)liver targeted therapy with systemic immunotherapy is tolerated and can potentially achieve promising overall disease control rates in patients that otherwise would have limited treatment options.” At the ASCO medical conference, researchers from the Leiden University of Medical Center in the Netherlands presented additional data on the ongoing CHOPIN trial. Efficacy results on seven patients treated with combination HEPZATO with IPI+NIVO were reported . The poster reported an objective response rate of 85.7% and a disease control rate of 100%. At a median follow-up time of 20.2 months, four patients had an ongoing response. The presentation reported a median progression-free survival of 22.4 months, and all patients were still alive. If similar results are seen in the current larger randomized Phase 2 portion of the trial and the combination continues to be well tolerated, then HEPZATO could potentially be used as a frontline therapy in tandem with IPI + NIVO.

Delcath also believes that HEPZATO could have use in other indications besides mOm, such as intrahepatic cholangiocarcinoma (“ICC”, 8k patients) and metastatic colorectal cancers (“CRC”, 30k patients)). Over the last few years, over 1,300 PHP procedures have been performed in Europe with Delcath’s device treating a wide range of liver cancers beyond mOm. Some of these studies focused on ICC at a number of centers in the EU and there is strong investigator interest. Delcath has started to investigate ICC, however, they had to pause starting a trial due to a lack of funding. ICC is a larger market than metastatic ocular melanoma and has some similarities in that many of these patients are treated at special centers and there is a high unmet need especially for patients who failed first-line therapy.

Delcath has already created a series of planned advisory boards review with protocols for both ICC and CRC trials. Delcath will likely initiate ICC trials first and then follow with one or more CRC trials. These initiatives have been on hold given Delcath’s limited resources, but with a $15 m to $20 m capital raise post mOm approval, I believe investors will begin to understand that HEPZATO is a leverageable platform for delivering high-dose chemotherapy (or potentially other medicines) to the liver with the goal of minimizing broader exposure to a patient and reducing harmful side effects. Adding ICC and colorectal patients with liver dominant disease would be 10x the target addressable market for metastatic ocular melanoma. In addition, the company believes there are several other tumor types that deserve exploration. The following chart illustrates this:

Another opportunity for Delcath is to expand access, increase usage, and most importantly obtain reimbursement in Europe for HEPZATO (branded outside the U.S. as CHEMOSTAT). Delcath received a CE Mark with the Gen-2 filter in Europe in 2012. The procedure is currently available in 23 centers in 4 countries, with the majority of procedures done in Germany and England. As stated, over 1300 procedures have been done in Europe. However, because HEPZATO never received FDA approval, achieving reimbursement has been very challenging. Reimbursement is available in Germany based on a hospital special request and in Great Britain on a limited basis. Once FDA approval occurs, that should open up broader reimbursement in Europe. CHEMOSTAT’s European revenues have been miniscule to date (currently annualizing at $3.2 m). The current business is primarily being driven by investigator word of mouth. The company has a very limited team in place with only a single account manager in England . Delcath has current plans to hire a salesperson in Germany, but the company needs to raise capital and then receive national reimbursement in European countries before the business can begin to scale. Delcath anticipates submitting for national coverage in the United Kingdom, Austria and the Netherlands by mid 2023. The company then intends to submit for national coverage in France, Italy, the Scandinavian markets and other select smaller markets in the EU.

I strongly believe that the re-submission of the NDA for mOm is on-target for a late December/early January submission. I anticipate an ADCOM meeting during the Spring with an FDA decision by the end of the summer 2023. What makes the risk-reward so compelling, in my opinion, is that the current enterprise value (including the effects of a recent $6.2 m capital raise) is less than $40.0 m despite an imminent submission, the high likelihood of FDA approval, the fact that mOm, which is a $250 m addressable market, represents the smallest opportunity for Hepzato. In sum, I believe there is a huge asymmetric risk reward of 10-20x assuming Hepzato is approved and it is shown to work in much bigger indications. 

Catalyst

 I strongly believe that the re-submission of the NDA for mOm is on-target for a late December/early January submission. I anticipate an ADCOM meeting during the Spring with an FDA decision by the end of the summer 2023. What makes the risk-reward so compelling, in my opinion, is that the current enterprise value (including the effects of a recent $6.2 m capital raise) is less than $40.0m despite an imminent submission, the high likelihood of FDA approval, the fact that mOm, which is a $250 m addressable market, represents the smallest opportunity for Hepzato. In sum, I believe there is a huge asymmetric risk reward of 10-20x assuming Hepzato is approved and it is shown to work in much bigger indications.