Delcath Systems, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2013. Delcath develops oncology drug-delivery systems that administer high-dose chemotherapy to the liver while limiting systemic exposure. Its CHEMOSAT Delivery System for Melphalan was commercially available in Europe, while the U.S. Melblez Kit remained subject to FDA review.
The unaudited financial statements are presented in accordance with U.S. GAAP. The company had 96.7 million common shares outstanding as of May 7, 2013.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $0.4 million | $0 |
| Product revenue | $0.1 million | $0 |
| Other revenue | $0.3 million | $0 |
| Cost of goods sold | $0.03 million | $0 |
| Gross profit | $0.35 million | $0 |
| Gross margin | Approximately 92% | Not meaningful |
| Operating expenses | $10.6 million | $14.6 million |
| Operating loss | $10.2 million | $14.6 million |
| Net loss | $12.8 million | $14.9 million |
| Basic and diluted loss per share | $0.15 | $0.31 |
| Net cash used in operating activities | $10.9 million | $14.2 million |
Cash and cash equivalents were $42.8 million at March 31, 2013, compared with $23.7 million at December 31, 2012. Total assets were $49.5 million and stockholders’ equity was $38.4 million. Current liabilities were $11.1 million, including a $5.5 million warrant liability. No material funded debt balance is reported on the March 31, 2013 balance sheet; the company incurred interest expense related to an ongoing revolving line facility fee.
Cash increased by $19.1 million during the quarter, primarily because $30.0 million of net proceeds from stock sales and warrant exercises exceeded operating cash usage and capital expenditures. Inventory was $1.2 million, accounts receivable were $0.1 million, and property, plant and equipment, net, was $3.8 million.
Material changes versus the prior comparable period
- Revenue began in 2013 as the company transitioned from development-stage operations to early commercialization. Of the $0.4 million reported, $0.3 million represented recognition of previously deferred revenue under the Chi-Fu research and distribution agreement.
- SG&A declined 18% to $6.1 million, reflecting workforce restructuring and lower European expansion costs.
- R&D declined 37% to $4.5 million, primarily because the prior-year period included substantially higher NDA submission costs and inventory purchases that were previously expensed as R&D.
- Net loss improved by $2.0 million, or 14%, despite a $1.9 million increase in the non-cash change in fair value of the warrant liability.
- Operating cash burn improved by $3.3 million year over year.
- The company raised approximately $20.9 million through an at-the-market equity program and approximately $9.0 million through its committed equity financing facility. Approximately 14.2 million and 5.6 million shares, respectively, were sold. Shares related to the committed facility were issued on April 1, 2013 and were reported as common stock to be issued at quarter-end.
- The warrant liability increased from $3.4 million at December 31, 2012 to $5.5 million at March 31, 2013, generating $2.3 million of pre-tax non-cash expense.
Guidance, outlook, risks and unusual items
- The FDA extended the PDUFA goal date for the Melblez Kit NDA to September 13, 2013. On May 2, 2013, after quarter-end, the FDA’s Oncologic Drugs Advisory Committee voted 16–0 that benefits of the product using the Generation 1 filter did not outweigh procedural risks. The FDA is not bound by the recommendation, but the company stated it would discuss potential requirements for approval involving the Generation 2 filter. FDA approval is uncertain.
- If approved, management expected to begin U.S. marketing in the first quarter of 2014, initially targeting hospitals experienced with the Phase 3 trial and major cancer centers.
- Management intended to pursue a Phase 3 HCC trial, subject to FDA agreement, with a targeted initiation by the end of 2013. European commercialization and reimbursement development remained key priorities.
- The company had trained and activated nine of 16 European cancer centers as of March 31, 2013. Reimbursement remained under development and varied by country, creating uncertainty regarding utilization and revenue growth.
- Management believed existing capital was sufficient to fund operations for the next twelve months, but stated that additional capital would be required to support full U.S. commercialization or additional development programs. The company has incurred losses since inception and expects continuing losses and additional financing needs.
- Risks include FDA and other regulatory approval, clinical and product safety outcomes, reimbursement, manufacturing and supply capabilities, commercialization execution, intellectual property, dependence on key personnel, dilution from future equity financing, and the company’s ability to raise capital after the decline in its stock price following the advisory committee decision.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2013.
Important facts for investors to verify
- FDA’s final action on the Melblez Kit NDA, including whether the Generation 2 filter addresses the advisory committee’s safety concerns.
- Actual cash burn, remaining cash runway, and the timing and terms of any additional financing.
- European procedure volumes, center activation, reimbursement approvals, pricing, and gross-margin development.
- Conversion or expiration of the approximately $5.5 million warrant liability and potential dilution from outstanding warrants, options, and future equity issuance.
- Progress, design, cost, and regulatory acceptance of the planned HCC clinical trial.
- Whether early product revenue represents recurring commercial demand or primarily non-recurring deferred-revenue recognition.