Delcath Systems, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
Delcath is an oncology specialty pharmaceutical and medical device company developing Melphalan Hydrochloride for Injection used with its hepatic delivery system. The product is not approved for sale in the United States. In Europe, the CHEMOSAT system is marketed as a CE-marked medical device for liver cancer treatments.
This unaudited report covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company had 9.4 million common shares outstanding as of May 6, 2014, after giving retrospective effect to a one-for-sixteen reverse stock split effective April 8, 2014.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $0.3 million | $0.4 million | Down $0.1 million |
| Product revenue | $0.3 million | $0.1 million | Up $0.2 million |
| Gross profit | $0.2 million | $0.4 million | Down $0.1 million |
| Gross margin | Approximately 70% | Approximately 92% | Lower |
| Operating loss | $5.1 million | $10.2 million | Improved $5.1 million |
| Net loss | $5.3 million | $12.8 million | Improved $7.6 million |
| Basic and diluted loss per share | $0.57 | $2.40 | Improved |
| Cash used in operating activities | $4.5 million | $10.9 million | Improved $6.5 million |
| Cash and cash equivalents at period-end | $31.3 million | $42.8 million | Down $11.6 million |
Selling, general and administrative expense declined to $3.8 million from $6.1 million, while research and development expense declined to $1.5 million from $4.5 million. The reductions primarily reflected lower NDA-related costs and workforce restructuring initiatives.
At March 31, 2014, total assets were $36.1 million, total liabilities were $6.4 million, and stockholders’ equity was $29.7 million. The company reported no conventional long-term debt in the presented balance sheet, but had a $2.4 million warrant liability and $1.4 million remaining in restructuring obligations.
Financing activities provided $4.5 million during the quarter, principally from the sale of approximately 1.0 million shares under the company’s at-the-market program. Approximately $40.4 million remained available under that program, and approximately $23.9 million remained available under the committed equity financing facility. Management stated that existing capital resources were expected to fund operations through the first half of 2015, but additional working capital would likely be required.
Material changes versus the prior comparable period
- Product revenue increased, but total revenue declined because Q1 2013 included $0.3 million of other revenue that was absent in Q1 2014.
- Gross margin decreased as costs of goods sold increased to $0.1 million from $0.03 million. Management expects continued margin volatility as production volumes, distributor use, material costs, and manufacturing efficiencies change.
- Operating expenses fell by approximately 50%, primarily because of lower NDA submission costs and the 2013 workforce restructurings.
- Net loss improved by approximately 60%, aided by lower operating expenses and a substantially smaller non-cash warrant fair-value expense.
- Operating cash burn decreased materially, although the company continued to rely on equity financing to support operations.
- Stockholders approved and the company completed a one-for-sixteen reverse stock split on April 8, 2014. The action reduced outstanding shares from approximately 150.9 million to approximately 9.4 million and was intended in part to maintain NASDAQ listing compliance.
- On April 24, 2014, NASDAQ notified the company that it had regained compliance with the $1.00 minimum bid-price requirement.
Guidance, outlook, risks, contingencies, and unusual items
The company planned to initiate enrollment in Phase 2 HCC clinical trials in the first half of 2014, subject to institutional review board approvals, with preliminary data from the first eleven patients expected in the first half of 2015 if enrollment proceeded as planned. The amended IND for the HCC program became effective on March 13, 2014.
U.S. commercialization remains dependent on regulatory approval. The FDA issued a complete response letter in September 2013 requiring additional well-controlled randomized trials using the product intended for marketing, with overall survival as the primary efficacy outcome. The Melphalan/HDS system therefore had not been approved for U.S. sale as of the filing.
European commercialization remained dependent on clinical adoption and reimbursement. During the quarter, CHEMOSAT treatments were performed in the United Kingdom, Germany, the Netherlands, and Spain. Since its European launch, the system had been used for 100 treatments on 70 patients at 17 cancer centers. Germany’s Value 4 reimbursement status allowed hospitals to negotiate reimbursement but did not mandate payment. U.K. funding initiatives remained subject to policy changes and delays.
The company has incurred losses since inception and expects continuing losses. It stated that failure to obtain additional capital when needed could force it to reduce or abandon development and commercialization activities. Key risks include regulatory approval, clinical-trial execution, product safety, reimbursement, manufacturing and supply constraints, limited commercialization experience, competition, intellectual-property protection, and dependence on key personnel.
Material contingencies included securities and derivative shareholder litigation concerning disclosures related to the Melblez NDA and manufacturing facilities. The company stated that it believed the claims lacked merit and intended to defend them vigorously. The relevant federal derivative action was stayed pending resolution of the related securities litigation motion to dismiss.
The company recorded a $0.2 million non-cash expense from the change in fair value of warrant liabilities during the quarter. The warrant liability was classified as Level 3 and totaled $2.4 million at March 31, 2014. A hypothetical 10% increase in the underlying share price would have increased the liability by approximately $0.3 million.
Important facts for investors to verify
- Whether the company secured the additional financing expected to be needed after the first half of 2015 and the resulting dilution or financing terms.
- Enrollment, safety, efficacy, and timing of data from the Phase 2 HCC clinical program.
- Any FDA interaction, trial requirements, resubmission plans, or approval prospects following the complete response letter.
- Actual European procedure volumes, pricing, reimbursement approvals, and cash collections, particularly in Germany and the United Kingdom.
- The status and potential financial exposure of the securities and derivative shareholder litigation.
- The effect of the reverse stock split and warrant exercises on the share count, warrant liability, and future dilution.
- Whether cash burn declines as projected and whether operating revenue becomes sufficient to offset ongoing clinical and commercialization costs.