Delcath Systems, Inc. Q3 FY2020 Earnings Call

Greetings, and welcome to the Delcath Systems Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow after the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Carbonara of Hayden Investor Relations. Thank you, sir. You may begin.

Thank you, and once again welcome to Delcath Systems third quarter 2020 earnings call. With me on the call are Gerard Michel, Chief Executive Officer; John Purpura, Chief Operating Officer; Dr. Johnny John, VP, Medical Affairs; and Christine Padula, Principal Accounting Officer. 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. All statements made on this call, with the exception of historical facts, may 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. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in forward-looking statements, please see risk factors detailed in the company’s annual report on Form 10-K. Those contained in 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. Any 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 Gerard Michel. Gerard, please proceed.

Thank you everyone for joining today. As many of you know, this is my first earnings call since joining Delcath in October. In addition to the expected updates on clinical progress and financial results, I will first explain why I found the Delcath opportunities so compelling that I chose to join the company. I think this will be useful for investors to know the story well and especially valuable for the many investors who are either looking at the story for the first time or taking a second look after ceasing the fall of the company years ago. And the obvious first question when looking at any opportunity, whether a career move or an investment opportunity, is whether the company is offering or developing a product or service that addresses a real unmet need. I believe that Delcath clearly has such a product. The drug-device combination Melphalan/HDS and the standalone CE mark device CHEMOSAT available in the EU are designed to administer high-dose chemotherapy to the liver while controlling systemic exposure and associated effects. The lead indication is metastatic ocular melanoma, and while an orphan indication with an estimated 1,200 to 1,500 patients here in the U.S., there is no standard-of-care and the existing treatments have not been shown to offer significant benefit to patients. Upon diagnosis of liver metastasis, patients have a very poor prognosis from this devastating disease. What is clear is that there is an unmet need. The next key question is whether the ongoing studies will demonstrate adequate efficacy. The trial's primary endpoint is overall response rate. In our submission to the FDA, we based the outcome of the trial on the hypothesis that Melphalan/HDS is more efficacious than immuno-oncology agents, which is one category of treatments frequently used in patients with metastatic ocular melanoma, given their approved label for metastatic melanoma. For analytical purposes, the FOCUS trial should demonstrate an overall response rate of at least 21% to show superiority over the response rate calculated from a meta-analysis conducted on immuno-oncology trials in metastatic ocular melanoma. It is important to note that all previously published studies, even the first pivotal trial with the first-generation filter, exceeded this targeted overall response rate. In these studies, the overall response rates varied from 27% to 72%, with the last three studies using the second-generation device ranging from 47% to 72%. While these last three published studies were all single or dual-center studies, which often have higher response rates, and the latest study focused on earlier-stage patients who generally seem to have a better response rate, we fully expect the trial results to be somewhere within the range of all four studies and be well in excess of the 21% target overall response rate. All of this information was critical to my conclusion that Delcath is nearing the end of a development program, which leads to an efficacious product addressing an unmet need. While the lead indication is an ultra-orphan indication, we believe Melphalan/HDS will eventually have a role in treating other solid tumors of the liver in the U.S., as it already does in the EU. In addition to ocular melanoma, the liver is the predominant site of metastasis for colorectal cancer and gastrointestinal neuroendocrine tumors. Complete surgical resection might represent a curative option in patients with isolated hepatic metastasis. The resection is not possible in most patients because of the number, location, or size of the hepatic metastasis. Hepatic metastasis can also co-occur with many other malignancies, such as breast cancer, renal cell carcinoma, cutaneous melanoma, and soft tissue sarcoma. The liver is often the life-limiting organ for cancer patients, and overall survival is usually under 12 months. There have been a variety of studies and case reports in many of these tumor types that support further investment to investigate the possible efficacy of Melphalan/HDS in a broader set of tumor types, thereby dramatically expanding the market potential for Melphalan/HDS. Of course, turning this potential into reality will take time, and the first step is approval in a single indication, which is currently our primary focus. A second critical factor I examined carefully before deciding to join Delcath is whether there is adequate evidence to conclude that the safety of the second-generation Melphalan/HDS device is meaningfully improved over the device studied in the pivotal trial conducted 10 years ago. In that trial, four deaths occurred due to the treatment, and despite the clear signals of efficacy, the risks associated with the device led the FDA to conclude that the benefits of the product did not outweigh the risks with the first-generation product. The safety issues were multifactorial, but there were two that are most noteworthy. The first was patient selection. In the first pivotal trial, many patients had extensive liver disease and were not restricted by volume of tumor burden in the liver. These patients accounted for a disproportionate percentage of the adverse events. We now know that, like most key chemotherapeutic regimes, some patients are just too sick to tolerate treatment. Patients were treated in the first pivotal trial that would have been excluded from many other liver-directed therapies and systemic chemotherapeutic agents. A second, and perhaps the most important change, was improving the filtration efficiency and consistency. The previous generation filter, whose manufacturer was outsourced, was inconsistent in its filtration efficiency and had an unacceptable rate of hematological toxicities due to both the design of the filter and inadequate manufacturing controls. To this end, the company changed the design of the filter, in-sourced the manufacturing of the filter, and developed validated physical and functional release specifications for the filter and its critical sub-components. The evidence for the improved safety is again in the public domain. I will not go through the safety findings of each of the three published studies previously mentioned, but I will mention results from the most recent study at Leiden University Medical Center. A publication reporting the results of the study noted that all the adverse events were well-manageable or self-limiting, and there were no treatment-related deaths. The investigators also noted that the hematological and hypnotic toxicity percentages were significantly lower compared to studies using the earlier generation of CHEMOSAT, which utilized a different filter system. Finally, based on a validated quality of life tool used in the trial, the investigators concluded that CHEMOSAT is well tolerated with maintenance of quality of life, with only a mild and temporary impairment of physical functioning noted six weeks after the second CHEMOSAT treatment. It is important to note that there has not been a single treatment-related death in over 1,000 treatments in Europe, and then in the FOCUS trial, which still has nine patients undergoing treatment. 356 treatments have been given to 91 patients, and we can confidently state that the adverse event profile is within the range as seen in the published studies. This study is utilizing an independent data safety monitoring board, which has met seven times as planned during the course of the trial, and there has never been a need to pause the trial for reasons of unacceptable safety risk or a safety concern. In summary, given the totality of the safety and efficacy data available, I reached the conclusion that the FOCUS trial is likely to produce the data necessary to support a compelling case that Delcath Melphalan/HDS has a high probability of approval to treat metastatic ocular melanoma, and given the multiple smaller studies and case reports in other tumor types, Melphalan/HDS has significant potential to expand into larger markets over time. While compelling, that in itself was not adequate to convince me to join Delcath. Beyond just the data, an important question is whether the team is in place to execute. While the team is lean and key positions need to be filled, John Purpura, our COO, and Dr. Johnny John, our Vice President of Clinical and Medical Affairs, have done an excellent job planning and executing on all aspects of the development program, including manufacturing process validation, regulatory strategy, and clinical development. I would not have joined if I was not confident in their capabilities. In addition, we have a strong experience and reinvigorated board with a wealth of experience supporting the management team. Since my arrival, John Purpura, Johnny John, and I have set the company's near-term priorities as follows. One, complete the FOCUS trial and submit an approvable NDA; two, prepare for the commercialization of Melphalan/HDS in the United States; three, raise the awareness of Delcath in the investor community; and four, prioritize additional indications for Melphalan/HDS and then design and execute a development plan for the higher value indications. I will touch briefly upon each of these priorities. Starting with the FOCUS trial and NDA submission, Delcath enrolled and started treating the final patient on October 2, 2020. The next milestone is the release of top-line data, which we project will occur early in 2021. In that release, we intend to share the primary endpoint, overall response rate, as well as duration of response and an evaluation of safety. We are currently projecting submission of the NDA to the FDA in the first quarter of 2022, which would still allow for a 2020 launch. The primary gating item to our submission is data monitoring, which requires site access. Due to the increased rates of COVID-19 cases, many sites have recently increased access restrictions. While we are utilizing remote monitoring where feasible, not all sites are equipped to support remote monitoring, and not all data can be remotely monitored. In addition, when lockdowns end, the number of days of access is being reduced due to high demand from multiple sponsors. Our projections assume the current and future access restrictions are limited in duration to a few months. Given the rapidly changing landscape, it is difficult to project a submission date with a high degree of confidence, and our assumptions could prove to be overly optimistic or pessimistic. In an effort to minimize the delays, we are attempting to negotiate increased site access when restrictions are lifted and also intend, subject to FDA feedback, to adjust our monitoring plans to focus on the CRF pages most important to the efficacy and safety endpoints, a strategy that we believe is consistent with current FDA guidance on monitoring. I must stress that the team's focus is not primarily speed but quality. Our goal is not to submit an NDA as quickly as possible but to submit an approvable NDA in a timely manner. Regarding the second priority, commercialization planning is underway, with a well-known consulting firm helping lay the groundwork to ensure appropriate patient access and reimbursement. In addition, we expect to announce some significant hires over the coming few months in commercial roles. One small but exciting step towards commercialization is the choice of a trade name. In September, the FDA conditionally accepted the name HEPZATO kit for use in the U.S. Going forward, we will use HEPZATO or HEPZATO kit when referring to Melphalan/HDS, the combination drug device product. I look forward to providing additional updates and details on our pre-launch activities in the coming quarters. Our third priority is to raise awareness within the investor community. Delcath has not received much attention for many years for a variety of reasons. It is not the first company that has had some missteps, been forgotten, and then continued to be overlooked. Look, despite the mounting evidence of significant progress and value creation, to raise awareness, Delcath will need to deliver on its milestones and the management team will need to be transparent and accessible to the investor community. To that end, I plan on getting out on the virtual road on a regular basis and maintaining an open line of communication with our current and potential shareholders, consistent with our efforts to raise awareness. Last week, we hosted a key opinion leader call with Dr. Mark Burgmans, Head of Interventional Radiology at the Leiden University Medical Center in the Netherlands, and investigator in this study that I previously mentioned, which included the use of CHEMOSAT in earlier stage ocular melanoma patients. Our fourth strategic priority is the prioritization of additional indications for HEPZATO and the subsequent design and execution of development plans for the higher value indications. Over the next six months, we will review the incidents, unmet needs, available efficacy data, and develop requirements for a broad set of liver cancers to select a portfolio of follow-on indications that will maximize the value of HEPZATO and CHEMOSAT platform. A key part of that process will be convening disease-specific advisory boards to ensure that we choose the highest potential indications and, as importantly, the optimum development plan. In 2017, we initiated the ALIGN trial, a global Phase III clinical trial for intrahepatic cholangiocarcinoma, based on promising data generated from commercial treatments in Europe. Presently, we have paused work on the ALIGN trial while we revisit the protocol to determine changes that may boost recruitment rates. In the interim, the clinical team is focusing its efforts on the FOCUS trial inclusion and the subsequent NDA filing. In summary, I believe HEPZATO is a clinically differentiated, high-value platform with the potential to address multiple cancer indications of high unmet medical need. I am committed to leading the organization towards its goal of making HEPZATO the first product specifically labeled for metastatic ocular melanoma patients, a population that currently has limited therapeutic options. I look forward to building shareholder value through the successful commercialization of HEPZATO in metastatic ocular melanoma and, longer term, initiating additional targeted clinical programs to expand the market opportunity of this platform technology. I look forward to taking your questions, but first, we'll turn the call over to Christine to review the financials.

Thank you, Gerard, and good morning to everyone. Our product revenue for the three months ended September 30, 2020, was approximately $340,000, compared to $216,000 for the prior year period from our sales of CHEMOSAT procedures in Europe. Selling, general and administrative expenses were approximately $2 million compared to $4 million in the prior year quarter. Research and development expenses for the third quarter were $3.3 million compared to $1.8 million in the prior year quarter. Total operating expenses for the third quarter were $5.3 million compared to $5.8 million in the prior year quarter. We recorded a net loss for the three months ended September 30, 2020, of $5 million, compared to the net loss of $7.5 million for the same period in 2019. At September 30, we had cash, cash equivalents, and restricted cash totaling $11.1 million compared to cash, cash equivalents, and restricted cash of $10.2 million at December 31, 2019, and $15.5 million at the end of September 30, 2019. During the months ended September 30, 2019 and September 30, 2019, we used $5.2 million and $12.4 million respectively of cash in our operating activities. That concludes my financial remarks. And I now ask the operator to open the phone lines for Q&A. Operator, can you please pull for questions?

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Scott Henry with Roth Capital. Please proceed with your question.

Thank you and good morning. A lot of new information on the call. I did just have a couple of questions. First, 91 patients for 356 treatments to about 3.9, for call it, four cycles per patient, which seemed to be an encouraging sign. How would you kind of interpret that in your opinion?

I think it means that on average, patients are undergoing about four treatments. As you know, the treatment protocol lasts six to eight weeks. This is a positive indication. I don't want to draw any definitive conclusions about the overall response rate from that. However, if you consider that most of those patients are responding and not just experiencing stable disease, it is very encouraging.

Okay. I would certainly agree. And then with the data coming in early 2021 and a filing coming in early 2022, what's kind of the gating factor?

The main challenge is monitoring. We have a significant number of patients at a few sites, and the monitoring process has been impacted by COVID. The slowest site with the most data is causing delays. We might have around 17 out of approximately 20 sites completed, but a couple of them are holding us back. We're trying our best to speed things up. However, given the competition from other sponsors for site access, it complicates things. Some sites are only able to process limited requests, resulting in delays. Furthermore, when they do open up, they often have stricter limits on the number of people who can be there due to distancing requirements. There are numerous factors at play, all following a general theme: when sites begin to reopen, they're only partially operational, and when closures occur, we have to estimate how long those disruptions will last. Ultimately, it's a few sites that we are focusing on to get the data.

Okay. I really appreciate the guidance of at least 21%. How confident are you that this benchmark hasn't changed since your last meeting with the FDA? Has the standard of care improved at all, or is it still similar to when you set that 21% target?

I don't think anything dramatic has changed system, but I'll ask Johnny John to comment.

Sure. Thank you, Scott, for the question. We're not that concerned that this bar has shifted. This was a meta-analysis conducted on 16 publications at the time to get the overall response rate in those publications and establish a baseline or a minimum that we would have to hit to show superiority over immuno-oncology treatments. Even if it did shift a small amount, it still is not of concern currently to us. But if we would, of course, consider any new publications, and we can do an analysis internally to see if those would impact the current 21%. But again, we're not deeply concerned by a small shift in that number.

Okay. Great. Well, thank you for taking the questions and thank you for the increased visibility.

Our next question comes from the line of Yale Jen with Laidlaw and Company. Please proceed with your question.

Good morning, and thank you for your questions. Gerard, congratulations on this great opportunity. My first question is about the nine patients currently under treatment. Do you have an estimate for when those treatments will be completed, and do you have any comments on those patients? Additionally, when you say you will report the top-line data for early 2021, are you referring to the first quarter? I also have some follow-up questions.

Sure. Let me address the second question. It will be in the first quarter, ideally early in the first quarter to allow some flexibility, so we'll say the first quarter. Regarding the nine patients, we are unsure when their treatments will be finished as it depends on the number of treatment cycles they receive. We mentioned that the last patient began dosing in September. If we have all the data available except for two or three patients, we will provide the top-line data and specify that data from a limited number of patients is not available at this time, which is common in oncology trials. Therefore, this will not delay the release of our top-line data.

Okay. And you mentioned the 21% for the immuno-oncology agents. And are none of those agents actually formally approved for the metastatic ocular melanoma, is that correct? Or that's actually somewhat has been approved.

Well, somewhat has been approved. I will let Johnny John explain the kind of unique situation of those agents.

Sure. The agents have received approval. The analysis included both single therapy agents and combination therapy regimens for metastatic melanoma. The approval covers overall metastatic melanoma without a specific mention of cutaneous or ocular types. However, reviewing the data submitted to the FDA for these approvals indicates that no patients with ocular melanoma were included. The majority of the patients analyzed for this approval were treated with immunotherapy agents for cutaneous melanoma. In response to your question, the meta-analysis examined both approved single agents and various combination therapy studies.

Okay. Great. Maybe my last question here is that, based on the last Phase III study in terms of the response rate, do you feel that if the FOCUS study has something similar to that, this commercially viable product or any sort of thoughts or comments on this issue? And thanks.

That's a good question. If it barely meets the criteria, which I don’t expect will happen, I still believe it would be commercially viable. The response rates for immuno-oncology agents are typically in the single digits. We would perform significantly better than that. Additionally, there isn't much published data regarding other liver-directed therapies in this area, so there’s not much to reference. While a larger number is always preferable and would be beneficial, I believe that any approval in this field, supported by data showing an overall response rate in the 20s, 30s, or 40s, would result in a successful product with considerable market uptake. There is very little available for patients suffering from this type of disease.

Okay. Great. Thanks a lot. And again, congrats on the progress.

Thank you.

Our next question comes from RK with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, Gerard and Johnny John. Gerard, congratulations. You're taking reins of Delcath after having a successful run as CFO at Vericel, which also went through a makeover. What are the learnings there that you would like to bring over to Delcath?

I wasn't expecting that question, RK, but thank you for asking. From my experience at Vericel, there are a couple of key takeaways. First, it's essential to have open conversations about barriers and obstacles, addressing them directly within the management team and at the appropriate time with investors. The path is never straightforward; there will be curves and detours, and everyone needs to acknowledge that and engage in constructive dialogue. Transparency is crucial, both internally and with the investor community, which is more regulated but still important. Second, it's vital to trust your team, provide them with clear direction, and allow them to operate, especially if there are signs of underperformance. Finally, it's about finding the right balance between setting specific goals and being flexible enough to adapt when necessary. This balancing act can be challenging, but unexpected situations will arise, and those are my three key lessons.

Great. Certainly. I wish you all success here. I have a couple of additional questions. This technology your company uses to deliver Melphalan, a well-known drug, is quite interesting. What is novel about this technology? Is it easy for some surgeons to use? Will there be a learning curve for them? Could this present any challenges, or is it user-friendly for these professionals in the EU?

There are really two parts to your question: what's novel about the technology and then the learning curve and the surgeons. I'm going to ask our COO, John Purpura, to discuss what's novel about the technology. And then Johnny John can talk through the learning curve in radiology.

So, thank you, Gerard. I think what's novel about this technology can be summed up in three words. And you might have seen this in various incarnations in our prior communications, but the concept of isolation, saturation, and filtration, that's what's novel. Taken together, we can isolate an organ, and because of that isolation technique really ramp up the dose of chemotherapy because you can have the dose of chemotherapy much more effective in higher doses, yet spare the patient from the systemic side effects. And then, of course, there's the filtration technique, which comes after the dosing and returns the blood to the patient with the significant amount of chemotherapy removed. So, those are the three tenets of the technology, which sound very simple in practice. There's an orchestration of the various participants conducting the surgical procedure. And yes, there's a learning curve, but each individual practitioner runs the procedure as an orchestrated event. We have several centers now around the world that have conducted well over 100 treatments, and these things get shorter and shorter in time as the procedure becomes more and more routine. So, we're confident that we'll be able to build the commercial organization around that concept of having specialized centers conduct the procedure as a matter of routine.

Let me ask Johnny John to talk about the experience in Europe in the commercial setting, in terms of getting centers up and running and familiar with the technique.

Sure. Thank you, Gerard. So, I would just go on top of what John said: there is a learning curve. We are very familiar with what it takes to get a new site up and running. We do have a comprehensive training program in place, which constitutes of a first part of didactic training and then additional proctoring that takes place for each member of the procedural team that will conduct the procedure. We don't find that individually the tasks required to do the procedure are inherently difficult. It's the combination of the whole team working together, as John said, as an orchestra, while performing the procedure that requires some skill set and some training. So, we usually do have a set of proctors that will be available and present when a new site comes up and running, and this would be an individual proctor for each member of the procedural team that is taking place at the new center. We do encourage and have these centers go and visit and see a procedure prior to that at a trained site so that they have additional familiarity on how the procedure is conducted. So, far we haven't had any issues; and again, as John has said, there are centers that have conducted over 100, and we've had centers that have conducted over 200 procedures. Obviously, like anything else, the more procedures you conduct, you're familiar with familiarity and skill sets, of course, improve.

Thank you, gentlemen. My final question is regarding the various indications you may consider after addressing the current indication of metastatic ocular melanoma. I know you mentioned several in your slide deck, but I'm curious to know which indications appear to be the most promising and could reach the market quickly as you refocus your efforts.

You raised a crucial point regarding the pace at which we can enter the market. There are various factors to consider when determining which areas to pursue first or in tandem. Clearly, we need to assess the unmet needs, the availability of alternative therapies, the patient population, and the evidence we have to support the likelihood of success. We have numerous individual case studies and small reports from Europe related to most of the cancers we've discussed. Additionally, there's the consideration of the costs associated with obtaining label expansions and securing reimbursement. I believe we will have a combination of these factors, likely in a staggered approach. One of our trials, ICC, is currently open, although patient recruitment has been slow due to certain inclusion/exclusion criteria that we may adjust. We have commendable data from an earlier trial on neuroendocrine tumors, which involved various tumor types. Reports from Europe regarding breast cancer have also been promising, and given the size of the colorectal indication, it certainly makes sense to investigate that as well. This sets the stage for our decision-making, and it's possible that in a year and a half, we could be making progress in three or four of those areas, particularly if funding and resources align favorably. Over time, whether through compendia or different guidelines and label expansions, this product is expected to be utilized across a range of tumor types. We're taking a step-by-step approach, starting with approval for our first indication and then moving to develop efforts for others. The four indications I've mentioned will be among the first we target.

Thank you. Thank you, Gerard, and thank you gentlemen for taking all my questions, and we'll talk to you soon.

Take care. Thanks, RK.

Our next question is a follow-up from Yale Jen with Laidlaw. Please proceed with your question.

Thanks for taking a follow-up. Just a very quick one. There are still no deaths occurred in the FOCUS study, is that correct?

Yes. That is true. Treatment related, yes.

Okay. Great. Thanks a lot. I appreciate it.

Thank you. We have reached the end of the question-and-answer session. Mr. Michel, I would now like to turn the floor back over to you for closing comments.

Well, thank you all for taking the time today to join the call. In closing, I will reiterate that I am thrilled to have joined the team here at Delcath and stayed together with that team. We intend to build a world-class interventional oncology company. Thank you for your support. Goodbye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.