Delcath Systems, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed November 9, 2011. Delcath was a development-stage oncology pharmaceutical and medical device company developing its chemosaturation system for liver cancer. The company had obtained CE Mark authorization for European marketing but had not received FDA approval for U.S. commercial sale.
Financial Results and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | No revenue reported | No revenue reported |
| General and administrative expense | $5.7 million, versus $3.2 million | $15.1 million, versus $9.4 million |
| Research and development expense | $6.4 million, versus $4.3 million | $15.3 million, versus $11.8 million |
| Operating loss | $12.2 million, versus $7.4 million | $30.5 million, versus $21.2 million |
| Net loss | $8.3 million, versus $9.5 million | $15.6 million, versus $31.4 million |
| Loss per share | $0.18, versus $0.24 | $0.35, versus $0.83 |
| Net cash used in operating activities | Not provided for the quarter | $23.8 million, versus $16.9 million |
The nine-month net loss improvement was primarily due to a $14.9 million favorable change in the fair value of the warrant liability, compared with a $10.2 million unfavorable change in the prior-year period. This non-cash item substantially reduced reported losses but did not improve operating cash flow.
- Cash and cash equivalents were $41.0 million at September 30, 2011, compared with $45.6 million at December 31, 2010 and $51.8 million at September 30, 2010.
- Certificates of deposit totaled $3.7 million; total current assets were $45.7 million.
- Total assets were $49.0 million and stockholders’ equity was $40.5 million.
- Current liabilities were $8.2 million, including a $3.1 million warrant liability and $4.4 million of accrued expenses.
- The company reported no conventional debt outstanding at September 30, 2011.
- Capital expenditures were $2.3 million during the first nine months, and financing activities generated $23.7 million, primarily from equity issuance and exercises.
- Accumulated deficit was $131.7 million.
Material Changes Versus Prior Comparable Period
- Operating expenses increased substantially as the company expanded staffing, European commercialization activities, research and development, and FDA-related regulatory work. Full-time employees increased to 74 from 44.
- General and administrative expense increased 80% for the quarter and approximately 61% for the nine-month period.
- Research and development expense increased approximately 51% for the quarter and 30% for the nine-month period.
- Operating cash use increased $6.9 million, or 40.9%, year over year.
- The warrant liability declined from $18.0 million at December 31, 2010 to $3.1 million at September 30, 2011, producing $14.9 million of derivative instrument income.
- July 2011 equity financing of 5.0 million shares generated approximately $23.6 million after expenses. Approximately $39.75 million remained available under the company’s effective shelf registration as of July 31, 2011.
Guidance, Outlook, Risks and Unusual Items
- Management expected continuing and increasing net losses, operating cash requirements, capital expenditures, and commercialization costs.
- Management stated that available capital was sufficient to fund operating activities, but acknowledged that additional financing may be required to fully commercialize the product and fund development efforts.
- The company planned European commercialization in selected markets, including Germany, the United Kingdom, France, the Netherlands, Italy, and Spain. A second-generation system was expected to receive CE Mark authorization and become commercially available in Europe in 2012.
- The FDA issued a Refusal to File letter in February 2011 for the company’s NDA, requesting additional manufacturing, sterilization, statistical, and safety information. A pre-NDA meeting was scheduled for mid-January 2012.
- The company planned an expanded access program at several U.S. sites in early 2012 and continued regulatory filings in other international markets.
- Key risks included failure or delay in FDA approval, inability to commercialize in Europe, continued clinical and regulatory costs, dependence on additional financing, manufacturing and supply constraints, competition, intellectual-property costs, and uncertainty regarding future product demand.
- The warrant liability was a Level 3 fair-value measurement based partly on unobservable volatility assumptions. Future changes in the company’s share price and valuation assumptions could materially affect earnings without corresponding cash flows.
- The filing stated that the company had no legal proceedings and no additional risk factors reported in Part II, Item 1A, although extensive risk disclosures were incorporated through the company’s forward-looking statement discussion and prior filings.
Important Facts for Investors to Verify
- Whether the FDA accepted a resubmitted NDA after the planned January 2012 pre-NDA meeting and whether approval was ultimately obtained.
- The company’s actual European launch timing, sales volume, reimbursement environment, and ability to generate recurring revenue.
- Cash burn, remaining shelf-registration capacity, and the timing and terms of any additional equity, debt, or strategic financing.
- The underlying assumptions and volatility sensitivity of the $3.1 million Level 3 warrant liability and related non-cash earnings effects.
- Whether the second-generation system received CE Mark authorization and whether commercialization milestones were achieved in 2012.
- Clinical durability, safety, and regulatory relevance of the reported Phase III and Phase II results, particularly given the FDA’s prior Refusal to File.