Description

Summary 

Delcath (DCTH) is an under the radar turnaround story in biotech.  Originally rejected by the FDA in 2013 due to deaths and a poor safety profile, the current system has significantly better side effect profile and no deaths.  Meanwhile, the capital structure has also been cleaned up, the board overhauled and a CEO search is underway.  With cash to get to key inflection points of pivotal data in late 20/early 21 we believe DCTH has significant upside with a $77 PT.  

Introduction

Delcath has is a drug-device combination for the treatment of liver metastasis (cancer that has progressed to the liver).  The Chemostat system is able to deliver targeted drugs directly to the liver and filter it out before recirculating the blood into the rest of the body.  We were short this company in their previous approval attempt at the FDA when the risk/reward was skewed negative.  However, they have improved the safety and treatment with the device so that it will now have a very attractive therapeutic benefit profile.  

DCTH in the past year has:

• Recapitalized the company with healthcare investors to have sufficient cash to get to key data readout
• Completed enrollment in their P3 FOCUS study
• Uplisted to Nasdaq Capital Market
• Fired the previous CEO and CFO and initiated search for new leadership.
• Overhauled the Board of Directors with experienced leaders
• Pivotal results are expected at YE or early 2021.
• The stock is trading at a $130M marketcap (~$73M fully diluted EV), but has the potential to do ~$200M+ in sales in the first indication, implying significant upside potential.  Furthermore, given the ability to deliver drugs directly to the liver, this device will work in other indications further expanding the market potential.  

Clinical Overview

The CHEMOSTAT system delivers melphalan directly to the liver and then filters it out before returning the blood to the patient.  The liver is a common site of cancer metastasis.  

The current indication that is being studied in the Phase 3 FOCUS study is ocular melanoma OM.  Ocular melanoma is a cancer of the eye that is diagnosed in approximately 2,000-2,500 patients annually in the United States.   50% of these patients will develop metastases and the vast majority (~90%) of these will have liver mets.  With such a small population, CHEMOSTAT has orphan drug designation from the FDA which grants additional exclusivity. 

The P3 FOCUS study is a pivotal study that if successful will support approval of the CHEMOSTAT system for the treatment of metastasis OM.  

As stated in the 10K

In January 2016, we entered into a Special Protocol Assessment agreement, or SPA, with the FDA on the design of a new Phase 3 clinical trial of Melphalan/HDS to treat patients with hepatic dominant ocular melanoma. This SPA represented an agreement with FDA that a specific Phase 3 trial would adequately address objectives that, if met, would support the submission for regulatory approval of Melphalan/HDS. The primary endpoint was overall survival, and secondary endpoints included progression-free survival, overall response rate and quality-of-life measures. In the summer of 2018, we amended the protocol for the trial which, after much discussion regarding improvement of the enrollment rate with FDA, resulted in the trial protocol design becoming a non-randomized, single-arm study with a different primary endpoint (objective response rate), which effectively terminated the SPA.

A Special Protocol Assessment is an agreement that the FDA makes with a company that is meant to ensure that if the trial is successful it will be sufficient to form the basis of approval.  Though having an SPA is nice, it is generally not worth the increased negotiations with the FDA and thus the majority of drug approvals do not have an SPA.  The SPA in this situation which mandated a control arm was not necessary and greatly slowed enrollment.  

CHEMOSTAT History

CHEMOSTAT was originally brought before the FDA in 2013.  They had run a randomized P3 study in melanoma patients with liver metastases.  The primary endpoint was hepatic progression free survival (hPFS). 

The study showed a strong benefit on hPFS, however there was no benefit seen in OS as the patients in the control arm were able to crossover to the treatment arm once they progressed.  

However, despite this improvement in hPFS there was significant side effects including death from the treatment.  

The FDA had safety concerns about the treatment.  

The FDA advisory committee convened to review the device voted 16-0 against approval saying that the risks outweighed the benefits due to the side effect profile.  

The FDA believed that one of the reasons for the poor tolerability of the device was a change in filters.  The original studies of the device used filters manufactured by Asahi, however these were changed to Clark once they became unavailable.  

The chart below shows that the rate of toxic death and the grade 3 and 4 adverse reactions were significantly higher with the Clark Cartridge vs. the Asahi one.  

Recognizing the issues with the filter DCTH tried to argue for approval if they had an improved filter.  However, the FDA requires the studies to be done with the actual marketed product.  

The FDA rejected the NDA application following the negative advisory committee vote.  

In September 2013, the FDA issued a complete response letter, or CRL, relating to our NDA. The FDA issues a CRL after the review of an NDA has been completed and questions remain that preclude approval of the NDA in its current form. The deficiencies identified by FDA in the CRL included, a statement that we had to perform additional “well-controlled randomized trial(s) to establish the safety and efficacy of Melphalan/HDS using overall survival as the primary efficacy outcome measure,” and which “demonstrates that the clinical benefits of Melphalan/HDS outweigh its risks.” The FDA also required that the additional clinical trial(s) be conducted using the product we intended to market, and that certain clinical, clinical pharmacology, human factors and product quality elements be addressed.

Chemostat Today

Due to the issues with the safety of the previous first generation cartridge, DCTH developed a second-generation filter to solve the issues with Clark Cartridge.  The new filter was found in testing to have better efficiency than the first generation.  This should translate into improved safety.  

Indeed studies with the new filter have shown significantly improved safety profile.  In the published P3 results using the first generation filter, the rate of grade 3 or 4 anemia was 60%.  

With the second generation filter the rate of grade 3 or 4 anemia was 29%.

Similarly, the rate of grade 3 or 4 was only 11% in another study utilizing the 2nd generation filter.

It is not just an improved filter that is leading to better safety outcomes.  Doctors and the technique for such a procedure will improve over time and the handling of the adverse effects improves as well.  For instance, the current protocol gives out G-CSF to all patients instead of as needed.  G-CSF stimulates the production of white blood cells and thus reduces the severity and incidence of neutropenia (low white blood cells).  

We believe this bodes well for the current P3 FOCUS study.  In their initiation on June 1st, 2020 Laidlaw noted that in their discussions with management there were no deaths from treatment in the FOCUS study.  At the Canaccord Conference on Aug 12, the interim CEO once again confirmed the lack of deaths.  This combined with the published data above on trials with the second generation filter strongly suggests that the risk/reward profile is now very attractive for approval.  

The newer studies with the new filter have also shown improved response rates.  The following slide from the corporate presentation highlights how the overall response rate (ORR) appears to be higher with the 2nd generation filter.  

Thus, the evidence points to CHEMOSTAT this time around being a better-tolerated treatment with improved efficacy.  Furthermore, since the study is a single-arm study, we do not have to worry about placebo response.  

Though there is some limited risk from running a single-arm study there are numerous examples of oncology approvals using such designs - especially when there is a high unmet medical need, which is the case here in OM with no approved therapies.  In fact, it is almost standard practice if a drug is effective enough to run it in a refractory population lacking approved treatment to garner the fastest path to market.  

Intellectual Property

DCTH has extensive IP surrounding their drug device platform.  Some of the patents are listed below.  The patent portfolio actually understates how long-tailed this asset is.  This is a drug-device that directly delivers drug to the liver… it would be impossible to do typical bioequivalence studies.  In addition, since the FDA approves drug and device combinations together this is very difficult for generics to pursue (look at Advair).  There is no real path for a generic version of this drug-device combination to be approved.  

New Management and Board

Management and the BoD has been overhauled this year.  Currently there are 5 members of the BoD, of which 3 have joined in the past 6 months.  Rosalind Advisors the top shareholder has 2 seats on the board.  

• On Feb 14th, they appointed Elizabeth Czerepak to the BoD.  
• Rosalind then got the right to name 2 directors and to reduce the number of BoD to six if they invested capital in the next fundraise.  
• On May 1st, DCTH did a $22M public offering with Rosalind participating.  Then on May 6th Rosaline appointed 2 directors.  
• On May 11th Dr. Taglietti resigned from the BoD - he was the head of the Compensation Committee.  
• The CEO J. Simpson resigned as CEO and from the BoD on May 22nd.  The CFO also resigned.  
• Mr. Rueckert resigned on June 2nd from the BoD - he was the chair of the Audit Committee.  
• On June 11th Czerepak was appointed chair of the Audit Committee.  
• The interim CEO right now is John Purpura, formerly the EVP of Global Operations at DCTH.  A search for a new/permanent CEO is currently underway.  
  

Valuation

EV/Revenue multiples for mature biotech is at 5x 2024 revenues.  With 1,500 cases of metastatic OM each year in the US and estimated pricing of $50,000 per treatment and 4 treatments per person yields a $300M market potential.  At 50% peak penetration that means $150M in sales.  At the 5x 2024 EV/Rev multiple this would imply $750 in EV at 100% probability of success.  With 6.5M shares outstanding and 4M warrants and a net cash position (including warrant conversion) of $65M that yields a $77 PT.  

Catalyst

• Readout from the P3 FOCUS study at year-end 2020/early 2021.
• Potential new CEO appointment