Delcath Systems, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The unaudited financial statements were prepared under U.S. GAAP. Delcath is an oncology specialty pharmaceutical and medical-device company developing and commercializing the CHEMOSAT/Melblez Kit system for regional liver chemotherapy.
Business Context
- The company was pursuing FDA approval of the Melblez Kit for metastatic ocular melanoma in the liver and additional clinical development for hepatocellular carcinoma.
- Outside the United States, the Generation Two CHEMOSAT Delivery System was CE Marked and being commercialized in Europe, with emphasis on Germany, the United Kingdom and Italy.
- FDA review remained pending. The PDUFA target date was extended to September 13, 2013, and an FDA advisory committee voted 16-0 that the benefits of the Melblez Kit, as then presented, did not outweigh procedure-related risks.
- Through June 30, 2013, the system had been used on approximately 200 patients through clinical development and early European commercial experience.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $0.0 million in 2013 vs. $0.1 million in 2012 | $0.4 million in 2013 vs. $0.1 million in 2012 |
| Gross profit (loss) | $(0.3) million vs. $0.1 million | $0.0 million vs. $0.1 million |
| Operating expenses | $10.3 million vs. $15.4 million | $20.8 million vs. $30.0 million |
| Operating loss | $(10.6) million vs. $(15.3) million | $(20.8) million vs. $(29.9) million |
| Net loss | $(5.5) million vs. $(14.5) million | $(18.3) million vs. $(29.4) million |
| Loss per share | $(0.06) vs. $(0.26) | $(0.20) vs. $(0.57) |
| Weighted-average shares | 96.4 million vs. 54.8 million | 90.9 million vs. 51.6 million |
- Revenue remained immaterial and the filing does not present a meaningful sustainable operating margin. Second-quarter gross loss included a $0.3 million inventory reserve for expired, obsolete and slow-moving inventory.
- SG&A declined to $6.3 million in the quarter and $12.3 million for the six months, while R&D declined to $4.0 million and $8.5 million, respectively. The reductions primarily reflected lower NDA-related spending, European organizational efficiencies and workforce restructuring.
- The company recorded $5.1 million of non-cash income in the quarter and $2.8 million for the six months from changes in the fair value of warrant liabilities, materially reducing reported net loss.
- Cash and cash equivalents were $32.3 million at June 30, 2013, compared with $23.7 million at December 31, 2012. Total assets were $38.4 million and total stockholders’ equity was $33.1 million.
- Current liabilities were $5.3 million, including a $0.4 million warrant liability. The filing discusses a revolving line facility fee, but does not provide a clear outstanding debt balance.
Cash Flow, Capitalization and Liquidity
- Six-month operating cash use was $21.5 million, improved from $27.2 million in the comparable 2012 period.
- Investing cash use was $0.1 million, principally capital expenditures. Financing provided $30.0 million, primarily through equity sales and warrant exercises.
- During the six months, the company raised approximately $20.8 million net through an at-the-market offering and approximately $8.9 million net through its committed equity financing facility with Terrapin.
- At June 30, 2013, approximately $23.9 million remained available under the Terrapin facility and approximately $88.1 million remained available under the related shelf registration statement, including approximately $6.5 million reserved for potential warrant exercises.
- Management believed existing capital was sufficient to fund operations for the next twelve months, but stated that additional working capital would likely be required. The company has no history of positive operating cash flow and expects continuing losses.
Material Changes and Unusual Items
- The workforce was reduced by 27 employees. Restructuring charges totaled approximately $1.5 million, with $1.1 million accrued at June 30; approximately $0.9 million was expected to be paid through June 2014.
- Common shares outstanding increased to approximately 97.0 million at June 30, 2013 from approximately 76.8 million at December 31, 2012, reflecting substantial equity financing and warrant activity.
- The warrant liability declined from $3.4 million at December 31, 2012 to $0.4 million at June 30, 2013, generating non-cash fair-value income.
- Inventory declined to $0.9 million from $1.1 million after recording a $0.3 million reserve.
- Subsequent to quarter-end through August 5, 2013, the company sold approximately 4.6 million shares for net proceeds of approximately $1.8 million. The exercise price of all outstanding warrants was reduced to $0.37.
Guidance, Outlook and Risks
- Management expected to activate additional European treatment centers and continue pursuing reimbursement, particularly in Germany, the United Kingdom, the Netherlands, Spain and France.
- The company intended, subject to FDA agreement, to initiate a global HCC clinical trial program by the end of 2013, beginning with a Phase 2 trial and potentially followed by an overlapping Phase 3 trial.
- FDA approval was uncertain following the adverse ODAC vote. The FDA could request additional clinical or other data, impose conditions, or issue a complete response letter.
- Reported clinical risks included treatment-related deaths, stroke, myocardial infarction, severe bone-marrow suppression, febrile neutropenia, hepatic injury, hemorrhage and gastrointestinal perforation. The company stated that protocol amendments reduced certain observed risks, but it acknowledged that the procedure remained potentially life-threatening.
- European commercialization depended materially on obtaining adequate reimbursement. Reimbursement negotiations and permanent payment mechanisms remained incomplete in key markets.
- The company faced securities class-action and derivative shareholder lawsuits alleging misleading disclosures concerning the Melblez NDA and manufacturing facilities. The company denied wrongdoing and stated that it would defend the actions vigorously; the filing does not provide a clear potential loss amount.
Most Important Facts to Verify
- FDA disposition of the Melblez Kit NDA after the September 13, 2013 PDUFA target date and the effect of the 16-0 ODAC recommendation.
- Actual cash burn, financing needs and remaining availability under the Terrapin facility and the March 2013 at-the-market program.
- European procedure volumes, collection experience and progress toward permanent, adequate reimbursement.
- Clinical safety outcomes for the Generation Two system compared with earlier-generation clinical-trial data.
- Potential financial exposure and status of the securities and derivative shareholder litigation.
- Outstanding debt, if any, because the filing text does not provide a clear debt balance despite referencing a revolving facility fee.