Delcath Systems, Inc. 2021 Form 10-K Summary
Business context and reporting period
Delcath is an interventional oncology company developing treatments for primary and metastatic liver cancers. Its lead U.S. product candidate, HEPZATO KIT, combines melphalan hydrochloride with a hepatic delivery system; it has not been approved for sale in the United States. In Europe and select other markets, the device-only CHEMOSAT system is commercially available for use with separately sourced melphalan.
The filing covers the fiscal year ended December 31, 2021, with comparative results for 2020. The company had approximately 55 full-time employees as of March 9, 2022 and its common stock trades on Nasdaq under the symbol DCTH.
Financial highlights
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Product revenue | $1.3 million | $1.2 million | Increase of approximately $0.1 million |
| Other revenue | $2.3 million | $0.5 million | Increase of approximately $1.8 million |
| Total revenue | $3.6 million | $1.6 million | Increase of approximately $1.9 million |
| Gross profit | $2.9 million | $1.0 million | Increase of approximately $1.9 million |
| Gross margin | Approximately 81% | Approximately 63% | Improved |
| Research and development expense | $13.8 million | $11.2 million | Increase of 23.2% |
| SG&A expense | $13.6 million | $11.1 million | Increase of 22.5% |
| Operating loss | $24.5 million | $21.3 million | Loss increased |
| Net loss | $25.6 million | $24.2 million | Loss increased by $1.4 million |
| Basic and diluted loss per share | $3.59 | $8.35 | Improved due primarily to higher share count |
| Cash used in operating activities | $22.6 million | $22.9 million | Slightly lower use |
The $1.7 million increase in other revenue largely reflected accelerated recognition of previously deferred license revenue after the termination of the medac agreement. The company recorded $0.7 million of cost of goods sold in 2021 versus $0.6 million in 2020.
At December 31, 2021, cash and cash equivalents were $22.8 million and restricted cash was $4.2 million, for total cash, cash equivalents and restricted cash of $27.0 million, compared with $28.8 million at year-end 2020. Total assets were $33.1 million and total liabilities were $21.2 million. Stockholders’ equity declined to $12.0 million from $22.1 million.
Debt included approximately $11.0 million of net Avenue term-loan debt and $4.6 million of net convertible notes. The Avenue facility carries interest at 10.95% at year-end, is secured by substantially all company assets, including intellectual property, and matures in August 2024. The company also had $0.6 million of current loan principal due in 2022 and $10.4 million of loan principal due after the next twelve months, before considering other contractual terms.
Material changes versus the prior comparable period
- Revenue increased primarily because of accelerated recognition of $1.7 million of deferred license revenue related to the medac termination and modestly higher product revenue.
- Research and development expense rose $2.6 million, driven by increased compensation, $1.2 million of additional stock-based compensation, FOCUS trial costs and NDA preparation.
- SG&A expense rose $2.5 million, primarily because of a $3.0 million increase in stock-based compensation, partly offset by lower professional fees.
- Interest expense increased to $1.2 million from $0.2 million following the Avenue financing. The 2020 non-cash warrant-liability expense of $2.8 million did not recur in 2021.
- Common shares outstanding increased to 7.9 million at December 31, 2021 from 6.0 million at December 31, 2020, reflecting preferred-stock conversions, warrant exercises and ATM issuance.
- The company entered into the Avenue Loan Agreement in August 2021 for up to $20 million of aggregate principal, with an initial tranche of $15 million and $4.0 million placed in a restricted account subject to release conditions.
Clinical, regulatory, outlook and unusual items
In December 2021, Delcath reported that the FOCUS trial met its prespecified objective-response-rate endpoint in metastatic ocular melanoma. The independent review committee reported a 31.4% overall response rate in the intent-to-treat population versus a 21% success threshold. In evaluable patients, response rate was 35.2% for HEPZATO versus 12.5% for best alternative care, median progression-free survival was 9.03 months versus 3.12 months, and disease control rate was 73.6% versus 37.5%.
Management planned to request a pre-NDA meeting with the FDA and, subject to FDA feedback and completion of data analysis, submit a revised NDA for HEPZATO by mid-2022. The filing emphasizes that the current FOCUS study is a non-randomized, single-arm study and that an earlier SPA was terminated; FDA approval is therefore uncertain and additional data or trials may be required.
The medac European license dispute was a significant unusual item. Delcath invoiced medac for a €1.0 million milestone, medac disputed the obligation, and both parties asserted termination rights. Delcath initiated arbitration, which was stayed temporarily for settlement discussions. Following a transition period, Delcath assumed direct European sales, marketing and distribution of CHEMOSAT on March 1, 2022. Medac reserved potential claims for damages, and the ultimate outcome is unresolved.
CHEMOSAT received European Medical Device Regulation certification on February 28, 2022 and was reclassified from Class IIb to Class III. Delcath also reported interim reimbursement in Germany and reimbursement approval in the United Kingdom and Germany, but broader country-by-country reimbursement remains uncertain.
The independent auditor included an explanatory paragraph expressing substantial doubt about the company’s ability to continue as a going concern. Management expects continuing losses and stated that additional capital is required. The company identified approximately $5.2 million of near-term obligations for accounts payable, accrued expenses and lease liabilities, $0.6 million of loan principal payments and potentially $0.5 million of severance payments. It expects to require additional equity or debt financing to fund operations, clinical programs, regulatory submissions and commercialization.
Key risks include FDA rejection or delay of HEPZATO, clinical and procedure-related safety risks, limited revenue, dependence on additional financing, reimbursement uncertainty, COVID-19 effects on clinical and commercial activity, supply and manufacturing constraints, reliance on third parties, competition including KIMMTRAK for metastatic uveal melanoma, intellectual-property risks and potential liabilities from the medac arbitration.
Most important facts for an investor to verify
- Financing runway: Verify post-filing cash balances, restricted-cash availability, operating cash burn and the timing and terms of any subsequent equity or debt financing.
- Going-concern status: Review whether subsequent financing or operating developments have alleviated the auditor’s substantial doubt about continuity of operations.
- FDA pathway: Confirm whether the revised HEPZATO NDA was submitted, accepted for review and granted any special designation, and identify any FDA requests for additional studies or safety information.
- FOCUS evidence: Review the complete clinical study report, safety profile, duration of response and the planned 24-month exploratory survival analysis.
- European commercialization: Assess CHEMOSAT sales after Delcath assumed direct distribution, country-specific reimbursement, margins and required commercial infrastructure.
- medac dispute: Monitor arbitration, settlement discussions, potential damages claims and the collectability of the disputed €1.0 million milestone.
- Debt and dilution: Review Avenue covenant compliance, collateral terms, conversion rights, maturity payments, outstanding warrants, options and potential share dilution.
- Manufacturing and supply: Verify availability of melphalan and critical components, supplier concentration, regulatory compliance and the effect of supply-chain or geopolitical disruptions.