Business Context and Reporting Period
Delcath Systems, Inc. is a development-stage oncology pharmaceutical and medical-device company developing its chemosaturation system for delivering high-dose chemotherapy, initially melphalan, to the liver while limiting systemic exposure. The unaudited Form 10-Q covers the three and six months ended June 30, 2011. The company had no revenue and had not achieved profitability.
- The company obtained authorization to affix the CE Mark in April 2011, permitting marketing of the system in the European Economic Area for intra-arterial administration of melphalan to the liver with extracorporeal filtration.
- The system was not approved for commercial sale in the United States. The FDA issued a Refusal to File for the company’s December 2010 NDA, citing manufacturing, validation, statistical and safety-information deficiencies.
- As of August 1, 2011, 47,993,732 common shares were outstanding.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating loss | $(10.5) million | $(8.3) million | $(18.3) million | $(13.8) million |
| Net loss | $(5.5) million | $(7.7) million | $(7.3) million | $(21.8) million |
| Loss per share | $(0.13) | $(0.21) | $(0.17) | $(0.60) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(14.3) million | $(10.9) million |
- General and administrative expense was $5.2 million for the quarter and $9.4 million for the six months, compared with $3.7 million and $6.2 million, respectively, in the prior-year periods.
- Research and development expense was $5.2 million for the quarter and $8.9 million for the six months, compared with $4.6 million and $7.5 million, respectively.
- The six-month net loss benefited from a $11.0 million decrease in the fair value of the warrant liability. This non-cash gain substantially reduced reported net loss but did not improve operating cash flow.
- Cash and cash equivalents were $31.1 million at June 30, 2011, down from $45.6 million at December 31, 2010 and up from $23.9 million at June 30, 2010. The company also held no certificates of deposit at June 30, 2011, compared with $1.5 million at year-end 2010.
- Total current liabilities were $11.0 million, including a $7.0 million warrant liability. The filing reports no debt outstanding at June 30, 2011.
- Accumulated deficit was $123.4 million at June 30, 2011; cumulative net loss since inception was approximately $121.9 million.
- Stock-based compensation was approximately $1.2 million in the second quarter and $2.5 million in the first six months, contributing to operating expenses but not requiring current-period cash payment.
Material Changes Versus the Prior Comparable Period
- Second-quarter net loss decreased by approximately $2.2 million year over year, primarily because the warrant-liability fair-value adjustment improved by approximately $4.4 million, partly offset by a $2.2 million increase in operating expenses.
- Six-month net loss decreased by approximately $14.5 million, primarily because the warrant-liability fair-value adjustment improved by approximately $19.0 million, partly offset by approximately $4.5 million of higher operating costs.
- Operating losses increased 26% for the quarter and 33% for the six-month period, reflecting increased staffing, expanded research and development, FDA-related regulatory work and preparation for European commercialization.
- Employees increased to 51 at June 30, 2011 from 32 at June 30, 2010.
- Operating cash use increased approximately 31.6% year over year for the first six months, to $14.3 million.
- On July 20, 2011, after quarter-end, the company sold 5.0 million common shares and received approximately $23.5 million in net proceeds.
Guidance, Outlook, Risks and Unusual Items
- Management expected total costs, capital expenditures and operating cash use to continue increasing during 2011 as the company pursued European commercialization and prepared its FDA resubmission.
- Management believed existing capital was sufficient to fund operations through 2011, but acknowledged that additional financing may be required to fully commercialize the product, pursue additional indications and conduct future clinical trials.
- The company intended to resubmit its NDA by December 31, 2011, including additional hospitalization data and clarified safety information. It also intended to request Priority Review, although neither filing acceptance nor approval was assured.
- The CE Mark enabled European commercialization, but the company had limited commercial experience, no established European sales infrastructure and faced reimbursement, physician adoption, melphalan supply and country-specific regulatory risks.
- The FDA had not approved the product in the United States. A further Refusal to File, substantive FDA review failure or additional clinical, manufacturing or safety requirements could delay or prevent U.S. commercialization.
- The warrant liability was a Level 3 fair-value measurement subject to significant assumptions, including stock-price volatility and expected warrant life. Changes in valuation may materially affect earnings without corresponding cash effects.
- The company’s only product was the Delcath chemosaturation system. It had no operating revenue, recurring losses and negative operating cash flow, creating dependence on future equity financing, strategic arrangements or other capital sources.
- Key additional risks included sole-source or limited-source suppliers, manufacturing and quality-system compliance, product liability, clinical-trial execution, intellectual-property protection, reimbursement and market acceptance.
Important Facts for Investors to Verify
- Whether the planned FDA NDA resubmission occurred by December 31, 2011 and whether the FDA accepted the application for substantive review.
- The timing and economics of European commercial launches, actual product sales and reimbursement coverage following the CE Mark authorization.
- Cash-burn rates and liquidity after the July 2011 equity offering, including the expected runway beyond 2011.
- The extent to which future reported earnings are affected by non-cash warrant-liability revaluations rather than operating performance.
- Manufacturing readiness, melphalan supply arrangements, supplier concentration and compliance with applicable FDA, EEA and quality-system requirements.
- Future dilution from equity offerings, stock options and approximately 2.5 million outstanding warrants associated with the 2007 and 2009 transactions.