Delcath Systems, Inc. 10-Q Summary
Business Context and Reporting Period
Delcath is an oncology specialty pharmaceutical and medical-device company developing and commercializing the Delcath Hepatic Delivery System, marketed in Europe as the CHEMOSAT Delivery System for Melphalan. The system delivers high-dose chemotherapy to the liver while filtering systemic blood exposure. The filing covers the unaudited quarter and nine months ended September 30, 2013.
The company remained unprofitable and in a commercialization and clinical-development phase. At November 5, 2013, 126.3 million common shares were outstanding.
Financial Performance and Liquidity
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $0.1 million, versus $0.04 million in 2012 | $0.5 million, versus $0.1 million in 2012 |
| Gross profit | $0.05 million, versus $0.04 million | $0.07 million, versus $0.15 million |
| Gross margin | Approximately 68% | Approximately 15% |
| Operating loss | $6.7 million, versus $12.2 million | $27.5 million, versus $42.0 million |
| Net loss | $7.2 million, versus $11.8 million | $25.5 million, versus $41.2 million |
| Loss per share | $0.07 | $0.27 |
| Cash used in operating activities | Not separately provided | $28.9 million, versus $40.7 million |
Nine-month 2013 revenue included $0.3 million of previously deferred revenue recognized under the Chi-Fu Trading agreement; the balance was product revenue. Cost of goods sold was $0.4 million, including a $0.3 million reserve for expired, obsolete, and slow-moving inventory.
Cash and cash equivalents were $27.7 million at September 30, 2013, compared with $23.7 million at December 31, 2012. Financing activities provided $32.2 million during the first nine months, largely from equity issuances, offsetting operating cash burn. The balance sheet reported $4.9 million of current liabilities, $0.5 million of long-term liabilities, and a $0.9 million warrant liability. The filing does not provide a clear outstanding principal balance for conventional debt; interest expense relates partly to a revolving line facility fee.
Total assets were $33.3 million and stockholders’ equity was $27.9 million at September 30, 2013. The company stated that it believed available capital was sufficient to fund operations for the next twelve months, but also indicated that additional capital would be required to fund its clinical program and fully commercialize the product.
Material Changes Versus the Prior Comparable Period
- Revenue increased from $0.1 million to $0.5 million for the first nine months, but gross profit declined because of $0.4 million of cost of goods sold and the inventory reserve.
- Nine-month selling, general and administrative expense declined 22% to $16.9 million, and research and development expense declined 48% to $10.6 million. The reductions primarily reflected lower FDA NDA-related costs, restructuring, and operating efficiencies.
- Nine-month net loss improved by $15.7 million, or 38%, primarily because of lower operating expenses and changes in the non-cash fair value adjustment for warrant liabilities.
- Operating cash usage declined by $11.8 million year over year, but remained substantial relative to revenue.
- The company sold approximately 14.2 million shares for net proceeds of $20.8 million under an at-the-market program, 5.6 million shares for approximately $8.9 million net under its committed equity financing facility, and 6.4 million shares for approximately $2.2 million net under a March 2013 at-the-market agreement during the periods disclosed.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- FDA setback: On September 12, 2013, the FDA issued a complete response letter for the Melblez Kit NDA. The FDA required another well-controlled randomized trial or trials using overall survival as the primary efficacy outcome to establish that benefits outweigh risks. The company requested a Type A meeting and was evaluating its regulatory path.
- Clinical program: Management intended to initiate a Phase 2 HCC trial, subject to FDA agreement, by the first quarter of 2014, followed by a potential overlapping Phase 3 trial if results were favorable. Investigator-initiated trials in Europe were expected to begin in 2014.
- European commercialization: CHEMOSAT had CE Mark authorization and was being commercialized in Europe, but utilization remained dependent on obtaining reimbursement. Germany and the United Kingdom were identified as priority markets; reimbursement timing and outcomes remained uncertain.
- Restructuring: Workforce reductions during the first nine months affected 29 employees and generated approximately $2.6 million of severance and restructuring expense, with $1.7 million accrued at September 30. A further October reorganization eliminated 21 positions, or approximately 33% of the global workforce, and was expected to generate approximately $1.4 million of additional expense and reduce annual operating costs by approximately $10 million.
- Leadership transition: The company terminated its President and CEO, Eamonn P. Hobbs, in September 2013 and appointed Jennifer Simpson and Graham Miao as interim co-Presidents and co-CEOs. A board transition committee was established to assist with the CEO search and evaluate strategic options.
- Subsequent financing: Through November 5, 2013, the company sold approximately 2.1 million additional shares for approximately $0.6 million net. On October 28, 2013, it completed an offering of 21.0 million shares and warrants for up to 9.4 million shares, generating approximately $6.8 million of expected net proceeds.
- Litigation: The company disclosed a putative securities class action and several derivative shareholder actions alleging misleading disclosures and governance or oversight failures relating principally to the Melblez NDA and manufacturing facilities. The company and individual defendants denied wrongdoing; the securities action’s motion to dismiss was pending.
- Product risks: Clinical experience with earlier system versions included treatment-related deaths, stroke, myocardial infarction, severe bone marrow suppression, febrile neutropenia, hepatic injury, hemorrhage, and gastrointestinal perforation. The FDA and its advisory committee expressed significant safety concerns.
- Going-concern funding risk: The company has incurred losses since inception, does not generate positive operating cash flow, and stated that failure to obtain additional capital when needed could force it to curtail or abandon development and commercialization activities.
Important Facts for Investors to Verify
- Whether the FDA accepts the company’s proposed clinical and regulatory response to the complete response letter and the timing, design, cost, and results of any required randomized trial.
- Actual cash burn and remaining liquidity after the October 2013 financing, subsequent equity sales, restructuring costs, and planned clinical activities.
- Progress toward recurring European revenue and compelling reimbursement, particularly in Germany and the United Kingdom.
- Whether the anticipated $10 million annual cost savings are achieved and whether further restructuring charges arise.
- Potential dilution from future equity offerings, the committed equity facility, stock options, and outstanding warrants.
- Status and potential financial exposure of the securities and derivative shareholder litigation.
- Changes in warrant fair value, which can materially affect reported earnings despite being non-cash.