Delcath Systems, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the Delcath Systems, Inc. Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to James Carbonara. Thank you, please go ahead, sir.

Thank you. And once again, welcome to Delcath Systems second quarter 2020 earnings call. With me on the call are John Purpura, Interim Chief Executive Officer, Christine Padula, Principal Accounting Officer, Dr. Johnny John, VP of Medical Affairs, and Dr. Gilad Aharon, Director. I’d like to begin the call by reading the Safe Harbor statement. This statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. Both statements made on this call, with the exception of historical facts, should be considered forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in forward-looking statements due to various risks and uncertainties. The discussion of such risks and uncertainties which could cause actual results to differ from those expressed or implied in the forward-looking statements can be found in the company’s annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q, as well as in other reports that the company files from time to time with the Securities and Exchange Commission. The forward-looking statements included in this earnings call are made only as of the date of this call. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent knowledge, events, or circumstances. Now I would like to turn the call over to John Purpura. John, please proceed.

Thank you, James. And thanks to everyone for joining us today. We will arrange our comments by providing a strategic overview, highlights of our second quarter performance, an operational update, and our financial results before having our Q&A. So first up, a strategic overview. This second quarter has been truly transformational for Delcath and the culmination of a 12-month process of restructuring, recapitalization, and refocusing the company. This included, among other things, management and board transitions. Delcath is now fully restructured with a clean balance sheet and cap table, fully recapitalized with $51.5 million raised over the past 12 months through Q2, led by fundamental healthcare-focused funds to allow us to complete our Phase 3 registration FOCUS trial of our therapeutic treatment platform Melphalan/HDS in liver-dominant metastatic ocular melanoma, for which we have an orphan drug designation, and we expect to file our new drug application with the FDA by mid-2021. I can truly say that working towards the possibility of making Melphalan/HDS available as the only labeled metastatic ocular melanoma specific product for U.S. patients, who currently have limited therapeutic options, is our organization’s top focus and priority. During the second quarter, we completed a $22 million capital raise in conjunction with an uplisting to NASDAQ. Our current cash resources, in addition to expected cash milestones in the coming quarters from our European commercialization partner Medac, provide us with a runway through multiple value inflection points, expected by mid-year 2021. With Melphalan/HDS potentially FDA approved by the second half of 2021 as the only metastatic ocular melanoma specific therapy in the U.S., Delcath has begun pre-commercialization activities, which intend to accelerate in the coming quarters. These include initial market sizing, physician, hospital, and payer surveys. While Melphalan/HDS is a platform technology with a potential broad applicability across multiple liver-dominant metastatic cancers, we are looking at metastatic ocular melanoma, which in over 90% of cases is liver dominant, as our initial commercial indication on which to build upon. Our initial medical oncology surveys have highlighted their views of the high unmet medical need for this patient population, the lack of effective therapies, the desire for novel effective therapeutic approaches, and if it were to be approved, the potential frontline positioning of Melphalan/HDS in this patient population. Our initial hospital and payer surveys confirmed the expectation of attractive ultra-orphan oncology pricing dynamics for our therapy, in line with the relatively low incidence of this patient population and the high unmet medical need. Delcath estimates that there are currently about 1,500 annual new cases of liver-dominant metastatic ocular melanoma in the U.S. Assuming parity pricing with other ultra-orphan oncology therapies, we believe that the U.S. metastatic ocular melanoma market opportunity is indeed in the hundreds of millions of dollars and represents a compelling commercial opportunity for a relatively small organization to capitalize upon. As mentioned before, Melphalan/HDS is a platform interventional oncology technology with broad potential applicability in multiple liver-dominant as well as other organ metastases. Interventional oncology, in recent years, has rapidly become an integrated specialty component of comprehensive oncology care. It is fully accepted and demanded by knowledgeable oncologists, where it has become an integral part of the treatment referral pattern. From a business standpoint, we have seen the interventional oncology market expand rapidly in recent years with a consolidation of strategic assets among a number of key players. We believe that Melphalan/HDS represents an exciting new technology in the interventional oncology armamentarium, which is mechanistically unique, clinically differentiated, and of high commercial value. While we believe that metastatic ocular melanoma is a commercially sizable market on which substantial value can be built, we intend to work towards expanding the U.S. opportunity well beyond this initial indication. During the quarter, we received feedback from the FDA regarding potential protocol modifications to our Phase 3 study in intrahepatic cholangiocarcinoma (ICC), offering the company both guidance and suggestions on a path forward. At the same time, as part of the recent strategic restructuring and refocusing of the company, we have initiated a comprehensive review of all available clinical and commercial data to guide us on the optimal pipeline projects to strategically pursue as we look to spend our precious R&D dollars in the coming quarters. Specifically, with over 1,000 commercial procedures performed in the EU, in 13 different tumor types using our technology in recent years, where our product is approved by the brand name CHEMOSAT under a CE mark, we have ample data to help guide us. Some of these potential programs, in addition to ICC, include metastatic neuroendocrine tumors, liver-dominant breast cancer, and metastatic colorectal cancer. As part of the initial evaluation, we have worked during the quarter to better define the U.S. patient incidence numbers for each of these potential settings. Further, we are in the process of engaging with our clinical advisors to review data generated in recent years in these settings, with the goal of reaching the best risk-reward conclusions on our pipeline projects. We look forward to updating you in the coming months on our strategic decisions as we look to initiate new trials. Now turning to our operational updates. Early this year, as with other global trials, our Phase 3 registration FOCUS study in liver-dominant metastatic melanoma has been impacted by COVID-19. The pandemic caused the closure of clinical sites to data monitoring as hospitals restricted access to non-essential staff members and visitors. Importantly, however, throughout these months, the trial protocol has remained intact. We have managed to keep ongoing trial patients who were being treated at the beginning of the pandemic on protocol. Faced with potential data timeline reporting uncertainty, we have taken steps to ensure progress on our new drug application key deliverables during this pandemic. Those include, among other things, required non-clinical studies, chemistry, manufacturing controls (CMC) work to ensure that any potential delays will not affect our timelines to NDA submission by mid-2021. At the same time, we are pleased to report that the majority of our clinical study sites are on a trajectory of reopening to data monitoring visits, starting in Europe, and more recently in the U.S. In addition, we have implemented a number of steps to increase data monitoring efforts in light of the impact of the pandemic. Based on the current trajectory of sites reopening, our goal is to report our Phase 3 top-line data by the end of 2020 or early 2021, with a re-filing of our NDA with FDA by mid-year 2021. Lastly, as mentioned before, Melphalan/HDS is approved in Europe under a CE mark with the brand name CHEMOSAT. In late 2018, we signed a royalty-bearing partnership agreement with Medac, a leading private German pharmaceutical company, to become our commercialization partner in the EU. While over 1,000 commercial procedures have been done using CHEMOSAT in Europe, overall market penetration is still low, partly due to the lack of product reimbursement in the majority of countries; a prerequisite for enhanced reimbursement will depend on the FOCUS study results, which our partner awaits. Further, as part of our recent restructuring, we have taken steps during the current quarter to review Medac’s performance proactively to ensure optimal execution and growth trajectory country by country, with an emphasis on tactical execution. We expect these interactions to continue more frequently, with our goal of ensuring that the European opportunity expands significantly in accordance with its real potential. To conclude, we believe Melphalan/HDS is a unique, differentiated, high-value interventional oncology asset representing an exciting opportunity for the treatment of metastatic cancers of high unmet medical need. In the last 12 months, Delcath has emerged as a late-stage interventional oncology company with a series of potential near-term transformative value inflection points. We are focused on pursuing the initial approval of our platform technology Melphalan/HDS in liver-dominant metastatic ocular melanoma, which we believe would represent a U.S. commercial opportunity in the hundreds of millions of dollars. We are further strategically focused on follow-on indications for which our technology is applicable. Our goal is for this technology to become available as part of the armamentarium of integrated cancer care for patients who have limited treatment options. We are excited about the opportunities ahead and look forward to updating you on the progress in the months to come. At this point, I'll now turn it over to Christine for a more in-depth view of our financials.

Thank you, John, and good afternoon to everyone. I'd like to provide everybody a summary of our second quarter 2020 financial results. Our product revenue for the first three months ended June 30, 2020, was approximately $262,000 as compared to $221,000 for the prior year results of sales of our CHEMOSAT procedures in Europe. Our selling, general, and administrative expenses were approximately $2.3 million compared to $2.7 million in the prior year quarter. Research and development expenses for the second quarter were $2.2 million compared to $1.7 million in the prior year quarter. Our total operating expenses for the second quarter were $4.5 million compared with $4.4 million in the prior year quarter. We recorded a net loss for the three months ending June 30, 2020, of $4.3 million compared to the net loss of $6.0 million in the same period in 2019. On a highlight on our balance sheet, at June 30, 2020, we had cash, cash equivalents, and restricted cash totaling $16.2 million as compared to cash, cash equivalents, and restricted cash totaling $10.2 million at December 31, 2019, and $1.4 million at June 30, 2019. During the three months ended June 30, 2020, and June 30, 2019, we used $7.9 million and $3.2 million respectively, of our cash in operating activities. In Q2 2020, we made a number of one-time cash payments that are not indicative of our usual cash usage trend, totaling approximately $3.3 million. This included compensation payable subsequent to the resignation of executives and a director, and several paths payable. At this point, we believe our cash resources and anticipated milestone payments to be received are adequate to fund our operating activities into mid-2021. That concludes my financial remarks. I will now ask the operator to open the lines for Q&A.

Your first question in the queue comes from Scott Henry with Roth Capital.

Thank you and good afternoon. A couple of questions. First, there's mention of the expected cash milestones from Medac. Have you given a sense of magnitude of what range those would be in?

So those... Hi, Scott, this is John Purpura. How are you? Good to hear you. Those milestones are not very substantial, but they're substantial enough to allow us to declare that we have enough cash runway through NDA filing.

Okay, thank you. That's helpful. And with regards to the ongoing trial in COVID-19, did you lose any patients to follow up or were there any dropouts as a result of what's going on? I doubt it would. But…

So the effort has been a Herculean effort to keep patients on protocol and throughout the comings and goings of the waves of the pandemic, to actually keep the patients within the treatment window has been a Herculean effort. But we've managed to do that. Dr. John, who is also on the line, can give you some further details regarding that. Back to John?

Yes, thank you, John. So we have managed to keep all ongoing patients to continue on the protocol and have treatment based on the window prescribed by the protocol. All treatment patients that were ongoing at the time of the pandemic hit, which would be mid-March, have continued and they've been treated on the protocol-stipulated timelines for treatment. So we're very fortunate to have continued that.

Okay, great. Thank you for that color. And then with pre-commercialization going on right now, can you give me a sense of how I should think about spending for the next couple of quarters? Should it maybe just have a slight upward trend? And also, how should we think about spending during perhaps the first year of launch? Any sort of parameters or color you can give would be great.

So we're maintaining our current spend on a quarterly basis, Scott, of about $4.5 to $5 million per quarter. And as expenses come and go, we’ll have certain expenses go down due to the ending of the FOCUS trial, and other expenses go up. So our guidance is roughly $5 million a quarter.

Okay, that's helpful. And then when we do get to the product launch, have you put any parameters in terms of what resources you would utilize there?

So the company has a former Chief Commercialization Officer, John Sylvester, on our board, and John's unique presence, providing commercialization guidance is a significant addition to the restructured board, but also in terms of how we're moving forward in this pre-commercialization phase. So as all these commercialization pieces are coming together, we're taking guidance from various sources. As we proceed through the coming months, that will become clearer, and we'll be able to update you on future calls.

Okay, I look forward to that. Final question. Just when we think about expanded indications and the timing of that, would that be something you would wait to pursue until after the filing? Or would you even wait until approval, just trying to think about when we might get updates there?

So there is the strategic assessment of exactly which indication to pursue, especially given the number of treatments in the European commercial experience of over 1,000, plus our clinical work in the U.S. and KOL and other Medical Advisory Board discussions. We have to decide which is the best way to spend our R&D dollars. The timing of that, of course, cannot interfere with the NDA submission and the rollup of FOCUS trial data. We are trying to parallel path multiple strategic events. Whether or not that starts after the NDA is submitted or approved, has yet to be seen.

Okay, great. Thank you for taking the questions.

Your next question is from Yale Jen with Laidlaw and Company.

Good afternoon and thanks for taking the question.

Hello, Yale. How are you?

I'm fine. How you doing?

Very well. Thanks.

And in the prepared remarks, you mentioned that you have spoken with the FDA, receiving some feedback from their comments on the intrahepatic cholangiocarcinoma. Are there any specific details you can reveal?

Well, yes, we did receive feedback from the FDA regarding our Phase 3 ICC program that gives us the path forward should we choose to proceed. This is part of our comprehensive strategic review that has already started even prior to FDA feedback. We are focused on better defining the potential and market opportunities for which we have an interest in pursuing for additional clinical development. As it turns out, this is highlighted in our corporate deck relevant ICC incidence rates; the annual incidence for the U.S. is somewhat smaller than we originally perceived. At the same time, the annual incidence for liver-dominant metastatic ocular melanoma was somewhat larger than we originally perceived. So, in light of these data, as well as additional clinical evidence emerging in the EU from various centers and the 1,000 treatments we've conducted there, management is considering its options in relation to the clinical trial initiation, to be able to understand and pursue the most clinically and commercially attractive follow-on indications. This is a strategic reassessment that we're looking forward to executing in the coming months.

Okay, great. That's very helpful. And another question is that if you are eventually going to file, assuming the positive data, will you do so in a rolling submission pathway or not?

The rolling submission pathway for an original NDA filing, this is categorized as a resubmission, pursuant to a receipt of a complete response letter way back when. So, we have the review clock, a PDUFA assigned review clock on a resubmission of six months. Within that six-month window, we expect to be in front of an Advisory Committee or ODAC. This six-month window could potentially put the approval of our resubmission towards the end of 2021. There's no plan at this point to go with a rolling submission or a rolling resubmission to the FDA.

And you mentioned that you were potentially going to a Pennsylvania ODAC meeting or ACOM meeting. Is that the assumption at this moment?

We anticipate that. Well, there has been absolutely no confirmation from the FDA that will be the case. However, we always will anticipate it and we'll be prepared for it.

Okay, and…

That would occur probably in the month four or five of the review.

Okay, great. And then maybe the last question here is that as you go through the assessment of different indications, are we to understand that while different tumors vary, once they are metastatic to the liver they are overall similar to some extent, implying that Melphalan or other chemotherapy agents could be effective? Can you just provide clarity on that?

That's a great question, Yale. So, this therapy Melphalan/HDS is the treatment of the liver. Delcath’s R&D departments released a published paper on the apoptotic effect of Melphalan on liver hepatocytes several years ago. It is actually quite an effective compound in many different cancers of the liver. What's interesting in relation to the various disease states is the effect of potentially extra-hepatic disease and the control of the disease in the liver, which is usually the life limiter. While there are other agents out there, one might envision, for example, one might say oxaliplatin because it's colorectal. However, the disease organ that we're focusing on is the liver, and we believe Melphalan to be the best compound of choice for disease in the liver. While there may be other organs and other compounds to address those, we believe Melphalan hydrochloride to be the best compound for addressing cancers of the liver.

Okay, great. That's very important. I appreciate that. Again, congrats on the progress, and I'm looking forward to speaking with you guys.

Absolutely, Yale, anytime.

That concludes the Q&A session and this earnings call. Thank you everyone for joining. You may now disconnect your lines.

Thank you.