Business Context and Reporting Period
Delcath Systems, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company develops and commercializes its CHEMOSAT hepatic chemosaturation system for liver cancer. It transitioned from a development-stage company to a commercial organization in April 2012, with initial European commercialization underway.
The company had 95 full-time employees at September 30, 2012, compared with 74 one year earlier. Its common stock outstanding was 75.1 million shares as of November 6, 2012.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $39 thousand in 2012; none in 2011 | $146 thousand in 2012; none in 2011 |
| Gross profit | $39 thousand | $146 thousand |
| Operating loss | $12.2 million | $42.0 million |
| Net loss | $11.8 million, or $0.18 per share | $41.2 million, or $0.72 per share |
| Operating expenses | $12.2 million | $42.2 million |
| Cash used in operating activities | Not separately provided | $40.7 million |
Reported gross margin was effectively 100% because recognized and deferred product revenue had no recorded cost of goods sold. The company stated that components and labor for the kits were purchased or expensed before commercialization; future margins are expected to decline as those materials are exhausted and actual production costs are recognized.
At September 30, 2012, cash and cash equivalents were $28.3 million, compared with $25.8 million at December 31, 2011 and $41.0 million at September 30, 2011. Total current assets were $30.7 million, versus current liabilities of $9.7 million, including a $4.6 million warrant liability. The filing does not identify outstanding conventional debt.
Cash used in operations was funded primarily through equity financing. Investing activities provided $2.9 million, including $5.0 million from maturing certificates of deposit, while financing activities provided $40.2 million. Capital expenditures were $2.1 million. The company reported no cash paid for interest.
Material Changes Versus the Prior Comparable Period
- Revenue began in 2012 as European CHEMOSAT sales commenced; nine-month revenue was $146 thousand.
- Third-quarter net loss increased by $3.5 million to $11.8 million. The increase was primarily attributed to a $3.4 million year-over-year change in the fair value of the warrant liability.
- Nine-month net loss increased by $25.6 million to $41.2 million, driven by higher operating costs and warrant-related fair value effects.
- Third-quarter selling, general and administrative expense rose to $7.0 million from $5.7 million, reflecting European commercialization and staffing expansion.
- Third-quarter research and development expense declined to $5.3 million from $6.4 million, primarily because inventory purchases were capitalized after the company transitioned to commercial operations and because NDA preparation costs declined.
- Nine-month selling, general and administrative expense increased to $21.6 million from $15.1 million, while research and development expense increased to $20.6 million from $15.3 million.
- Cash used in operations increased by $16.9 million year over year, reflecting regulatory, commercialization, employee, and research and development spending.
- The company raised approximately $21.1 million of net proceeds in a May 2012 equity offering and had approximately $24.5 million remaining under its at-the-market equity program at September 30, 2012.
Guidance, Outlook, Risks, and Unusual Items
- The FDA accepted Delcath’s NDA for its chemosaturation system with melphalan for unresectable metastatic melanoma in the liver. The application received standard review with a PDUFA goal date of June 15, 2013. FDA approval had not yet been received.
- Delcath had signed 13 European training and launch agreements and established a presence in seven target markets. Applications for interim reimbursement had been submitted in Germany, Italy, and the United Kingdom, with responses expected by the first quarter of 2013.
- The company obtained authorization for the Generation Two hemofiltration cartridge in Europe and, after the quarter, satisfied requirements to affix the CE Mark to the CHEMOSAT system with doxorubicin, supporting potential expansion into certain Asian markets.
- Management expected continuing operating losses and stated that additional working capital would be required to fully commercialize the product or fund additional development efforts. Management believed available capital would fund operations for the next twelve months as of the filing date.
- Management identified risks involving regulatory approval, clinical and product development, manufacturing and supply, reimbursement, commercialization, intellectual property, competition, dependence on key personnel, and the ability to obtain additional financing.
- The company recorded a $1.0 million pre-tax derivative instrument benefit for the nine months from changes in warrant fair value. The $4.6 million warrant liability was classified as a Level 3 fair value measurement and may create earnings volatility.
- Approximately 3.0 million 2007 warrants were exercised during the third quarter, and the remaining 2007 warrants expired on September 21, 2012. Outstanding 2012 and 2009 warrants remained exercisable at September 30, 2012.
- Through November 6, 2012, the company sold approximately 1.7 million additional shares under its at-the-market program for approximately $3.0 million of net proceeds, leaving approximately $21.5 million available under the program.
- No legal proceedings were reported, and management stated that there were no material changes to previously disclosed risk factors.
Investor Verification Priorities
- Verify the timing and terms of FDA action on the NDA, including whether the June 15, 2013 PDUFA date was met and whether approval was granted.
- Assess cash burn, remaining cash runway, and the scale and dilutive impact of subsequent equity offerings or warrant exercises.
- Determine whether European sales and reimbursement approvals are growing sufficiently to offset commercialization and operating costs.
- Reconcile future gross margins as capitalized inventory is consumed and actual materials, labor, and overhead enter cost of goods sold.
- Monitor the $4.6 million warrant liability and its potential effect on reported earnings and shareholders’ equity.
- Evaluate whether additional financing will be required to support U.S. commercialization, clinical development, and international expansion.