Delcath Systems, Inc. Q1 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Delcath’s First Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, David Hoffman, Delcath’s General Counsel. Sir, the floor is yours.

Thank you. And once again welcome to Delcath Systems First Quarter 2022 Earnings Call. With me on the call are Gerard Michel, Chief Executive Officer; Dr. Johnny John, Senior Vice President of Medical Affairs and Clinical Development; Kevin Muir, Vice President of Commercial Operations; John Purpura, Chief Operating Officer, and Anthony Dias, Vice President of Finance. 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 statement 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 21(e) 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 assurance 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 the 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. Delcath has had a very productive first quarter of 2022 and year-to-date for both HEPZATO, the company's product development candidate in the United States, and CHEMOSAT, the company's marketed product in Europe. In the US, we are moving forward towards the resubmission of a new drug application for HEPZATO; we have completed the pre-NDA meeting with the FDA, and based on that interaction, we see no barriers to a resubmission of HEPZATO’s NDA, which we now plan to file in the third quarter. In addition, an update on the Phase III FOCUS trial results was accepted for a poster presentation at the American Society of Clinical Oncology or ASCO’s Annual Meeting in June. Regarding CHEMOSAT, single center safety and efficacy data from the University Hospital Southampton in England was published in the Journal of Melanoma Research, and data from patients treated at the Hanover Medical School were presented at the European Conference on Interventional Oncology or ECIO. In addition, we achieved medical device regulation certification under our CE mark, and most notably, we resumed direct responsibility for sales, marketing, and distribution activities of CHEMOSAT in all of Europe. Starting with HEPZATO in the US, after the first quarter ended, we completed a pre-NDA meeting regarding HEPZATO’s NDA resubmission without any meaningful new issues arising, gaining additional clarity of the FDA's expectations regarding certain analyses. While we wait for the final official meeting minutes from the FDA, we do not believe that any additional preclinical or clinical studies will be required in order to file the NDA. Whether the FDA will convene an advisory committee is an open question. As a company, we are planning for one and would look forward to the opportunity to highlight HEPZATO’s efficacy and safety. We expect to file HEPZATO’s Class II resubmission of the NDA to the FDA in the third quarter. Our previous mid-year guidance regarding the timing of the NDA resubmission has shifted slightly due to a single vendor placing unforeseen delays in cleaning work. Notably, all clinical data in hand and only a few queries are currently outstanding. While we commercially manufacture products for the European market, we have undergone a third-party FDA mock audit and a review of the company's manufacturing processes. Based on the results of the review and our continued work, we believe our manufacturing system will be ready for the FDA's pre-approval inspection. Over the course of the year, at various conferences, we will look to share additional data analysis from the FOCUS trial that we believe further supports clinical efficacy and safety. Consistent with that, yesterday we announced the acceptance of the poster presentation at the upcoming ASCO 2022 Annual Meeting. The poster to be presented on June 6 by Dr. Jonathan Zager, global investigator of the FOCUS study will provide updated results from the FOCUS III trial; updated efficacy parameters will include the time-based endpoints of overall survival and duration of response, which continue to mature. Turning to commercialization of HEPZATO, ocular melanoma is a niche high-value market for us with attractive attributes, including a focused set of treating physicians and a significant unmet need. A key goal is to have 10 expanded access sites open by the time of the expected launch and to ensure that the mix of sites is appropriately located to enable reasonable access regardless of a patient's location. By doing so, we will have an established base of treating physicians with an existing patient population. At the moment, two sites will be in a position to start accepting patients by the end of this month, with another three having agreed to participate. Multiple other sites have expressed some level of interest in participating, and we are hopeful we can achieve 10 EAP sites prior to launch. We are actively developing key documentation to support reimbursement, such as a value dossier, as well as advisory boards with treating physicians to better understand the patient journey. We have initiated recruiting key physicians required for commercialization, such as training, and have engaged a hub service to assist sites with reimbursement for standard care expenses associated with the EAP. Turning to CHEMOSAT in Europe, we continue to see a steady stream of single-center publications and presentations reporting on the use of CHEMOSAT in Europe. In February, we were pleased to see results from the University Hospital Southampton's retrospective study published in the Journal of Melanoma Research. As we reported previously, the study evaluated the safety and efficacy of 250 CHEMOSAT treatments in 81 patients with liver dominant metastatic uveal melanoma between 2012 and 2020. The authors concluded that CHEMOSAT provided excellent response rates and progression-free survival compared with other available treatments and noted that combination therapy of CHEMOSAT with systemic agents may be a viable option to further advance overall survival. The study’s results are consistent with numerous other publications out of Europe and add to the growing body of published research documenting the efficacy and safety of our CHEMOSAT system in the European commercial setting. We expect that investigators from the Leiden University Medical Center in the Netherlands will present updated data from the CHOPIN investigator-initiated trial at ASCO. Recall that at the 2021 Cardiovascular and Interventional Radiological Society of Europe, or CIRSE conference, they presented an abstract which included data from seven patients treated during the first phase of the trial, which is investigating the combination of CHEMOSAT with ipilimumab and nivolumab in patients with metastatic ocular melanoma. The trial has completed a dose escalation phase and the observed responses in the seven patients were complete response in one patient and partial response in four patients, for an overall response rate of 71.4%. After a median follow-up of eight months, at that time, the median duration of response was eight months. No deaths and no dose-limiting toxicities occurred. Given the 10 months since the last report, we eagerly await updated efficacy data, both response rates and duration of response from this first trial investigating combination immunotherapy with CHEMOSAT. In February, we received a Medical Device Regulation or MDR certification for CHEMOSAT in Europe. Achieving MDR certification involves a detailed evaluation for a designated EU notified body, including an audit of quality systems and a review of documentation supporting safety and performance claims for the device. MDR greatly expands upon existing MDD requirements, including the level of clinical evidence supporting claims, post-marketing surveillance, database traceability, unique device identification, and increased supply chain oversight. Under MDR, CHEMOSAT's designation has changed from Class IIb to a Class III medical device. We believe that MDR certification demonstrates our manufacturing team's ability to adapt the company's quality systems and processes as required by different regulatory standards. Delcath is taking direct responsibility for sales, marketing, and distribution activities of CHEMOSAT in all of Europe as of March 1. We currently have four customer-facing employees in sales, marketing, and medical affairs, working with healthcare providers in the UK, Germany, and the Netherlands, and anticipate hiring several more this year to further support healthcare providers and patients in those markets, as well as expand use throughout Europe. Importantly, we anticipate our first submission for national coverage will occur by the end of the year in the United Kingdom. Given the multi-year process to obtain national coverage approval and then to be incorporated into the NHS budget, we have also initiated efforts to obtain regional reimbursement in the UK in the interim. While it will likely take several years to obtain national coverage in most major markets, we are confident that Europe will become a meaningful revenue contributor to the business with EU revenues likely growing alongside our US commercial launch next year. Finally, we continue to plan on expanding the PHP platform into other indications. We are in the midst of a series of planned advisory board reviews with those protocols for both ICC and CRC, after which we will start formal discussions with sites and prepare any required regulatory submissions. We will likely initiate ICC trials first and then follow with one or more CRC trials. ICC has more than twice the market size of metastatic ocular melanoma, and there are some similarities in that many of these patients are treated at special centers, and there is a high unmet need, especially for patients who have failed first-line therapy. Importantly, we have seen encouraging efficacy signals in ICC at a number of centers in the EU and there is strong investigator interest. Given our first priority remains submitting the NDA and launching in the US, Delcath is primarily focused on those regulatory and commercial goals. However, these additional indications for development are still a core part of our strategy and our efforts will continue in parallel. We continue to build our management team as we transition to a company with both a full development pipeline and commercial operations in Europe and the US. In January, we announced David Hoffman as General Counsel, Corporate Sector, and Chief Compliance Officer. He brings over 20 years of industry experience and has considerable expertise in pharmaceutical law and regulation, business development, commercial business transactions, and compliance. In February, we announced Anthony Dias as our new Vice President, Finance. He also brings over 20 years of industry experience and will oversee all financial aspects of the company, including financial planning, reporting, accounting, and control. Both hires strengthened our management team at an important time as we approach commercialization in the US. In summary, during and since the first quarter, we've taken significant steps towards commercial revenues in the US and increased our activities in Europe. We brought in key personnel and continue to be supported by a growing body of data. I look forward to taking questions, but first I'll turn the call over to Tony to review the financials. Tony?

Thank you, Gerard. Product revenues for the three months ended March 31, 2022 was approximately $207,000 compared to $261,000 from the prior year quarter from sales of CHEMOSAT in Europe as we resumed direct sales during March 2022. Other income for the quarter was $171,000 compared to $127,000 in the prior year quarter. Research and development expenses for the quarter increased to $4.2 million compared to $3.7 million in the prior year quarter, primarily due to higher professional service costs related to our pre-NDA meeting with the FDA and preparation for our NDA submission in the third quarter of 2022. Selling, general, and administrative expenses for the quarter were approximately $3.6 million compared to $3.3 million in the prior year quarter. The increase was due to pre-launch costs relating to the commercialization of HEPZATO. Other expenses increased from $660,000 from $27,000 due to the increase in interest expense and amortization related to our debt financing. On March 31, 2022, the company had cash, cash equivalents, and restricted cash totaling $20.5 million as compared to cash, cash equivalents, and restricted cash totaling $27 million on December 31, 2021. During the three months ended March 31, 2022 and March 31, 2021, we used $6.4 million and $4.6 million, respectively, of our cash in operating activities. That concludes my financial remarks. I'd like to ask the operator to open the phone lines for Q&A. Can you please check for questions?

Ladies and gentlemen, the floor is now open for questions. Thank you. Your first question is coming from Marie Thibault from BTIG. Marie, over to you.

Good morning. Thank you for taking the questions. I wanted to start here with what you learned from the pre-NDA meeting with the FDA, as well as any more detail you can give us on that one vendor who had those unforeseen delays. Any detail you could give along what those delays are and how they led to the slight change in the timeline.

Sure, Marie. As you know, pre-NDA meetings typically don't yield much upside and can carry some downside risk. However, in this instance, we experienced some modest upside. During our discussions with the FDA, they suggested that we use our treated population for the primary efficacy analysis instead of the IPT, which is in line with what we expected given that the efficacy parameters were somewhat higher in the treated group. On the downside, we received clarification from the FDA regarding how they wanted us to present some of the data. For instance, there was a question about whether we needed to provide our safety data for an integrated summary of safety, but they concluded that our data and devices were sufficiently different from the prior pivotal trial, so that wouldn’t be necessary. This was a positive development; they acknowledged that they share our perspective regarding the step change in product safety, making it unreasonable to compare the two. Overall, it was a very positive meeting. There are always specific requests about data presentation, but nothing major. We were very pleased with the outcome, and we expect the official meeting minutes soon, although we don’t anticipate any surprises in them. Regarding the delays with the vendor, we have a unique product that relies on many off-the-shelf components, and we don’t have quality supply agreements with all our vendors since we’re a relatively small player. This means we need to repeat various quality tests, such as stability and consistency, to revalidate these off-the-shelf components. We had most of these evaluations completed, but one vendor experienced significant delays of several quarters in delivering the necessary data. We recently faced another delay, but we have taken a firm stance with the vendor and have received a strong commitment that the data will be provided very soon. We have seen draft data, which is currently undergoing quality control. Once we receive this data, it will take several months to analyze, document, and prepare it for the NDA, which is our primary timeline concern.

Okay, very good. And then, I guess I'll ask on the EAP expecting to have sites accepting patients by the end of the month, three more coming online pretty soon. What's needed to get those centers across the finish line here and what will they be doing in the early days of that EAP? Thanks again.

Yeah, the thing we're facing with the EAP that I think a lot of other companies are facing is really frankly, the nursing shortage is impacting the ability to supply clinical coordinators in the hospital for clinical trials. EAPs are not always the easiest thing to entice people to hospitals or investigators to join; they are considered not the sexiest thing, put it that way, in terms of trials. I am thrilled that we have two that either have been trained or one of those pieces of training is to be done, so they can start enrolling patients; three others have committed; there are quite a few more than five others that have talked to us and they're kind of circling the basket; we just need to see if we can get five more over the finish line. But it really is having them be able to allocate the resources and find the resources to do it; and I think this is an industry-wide problem. I'm pushing the team very hard to get the 10. I'm not moving that goal right now internally. I think we can get there, but it really has mostly to do with the sites having adequate resources to put on trials right now.

Thank you. Your next question is coming from Scott Henry of Roth Capital. Scott, please ask your question.

Thank you and good morning. Just a couple of questions. I guess, first, with regards to the survival data, has that data fully matured or is that still going to be coming in through this process?

That data will mature over the next year. So maturity in terms of duration of response and overall survival will continue to recur over the next year. There'll be an update at ASCO and probably one or two more updates until the final maturity occurs. In our protocol, we said we would follow those patients for two years post the last treatment and that last treatment was in May of last year, but overall survival is not the primary exploratory endpoint of the trial. There is no need to wait for that data to mature to submit the NDA.

Okay, great. Thank you for that color. And then on the income statement, a couple of questions. R&D, should we expect that to start to decline or should it maybe stay up at this level for another quarter or two? And then I guess, very small numbers, but the COGS going down, is that a function of the new sales model in Europe? Just trying to get my arms around that.

Yeah, in terms of R&D, I think we'll have another quarter probably at a high level as we continue to pay the typical army of consultants that get involved when you're pulling an NDA together. Then that should drop for a period before we ramp up again with the new indications. But there'll be a part of a couple of months in terms of that higher level. In terms of the COGS, I will turn to Tony to see if he can answer that question. They are indeed small numbers.

This quarter's numbers are small since we began direct sales in March. However, the cost of goods sold reflects some of the direct sales we conducted in March.

Yeah, and there was also a modest drop in the units sold. I think our past partner probably sold into some sites, which led to this modest drop in the units sold. So that probably had an impact as well.

Okay, great. And, Gerard, perhaps a bigger picture question. Do you kind of slow things down a little bit on future indications given the current market environment and biotechnology? Or how do you see your compass given the backdrop we currently have? I’m just curious if you do it all and your thoughts on that? And also another balance sheet question, that restricted cash, is that usable or what are the restrictions there? Thank you.

Sure. In terms of how we adjust the dial given the current market situation, there isn't a lot left to do in the interim — there is a lot of spending at the moment on those new indications. It's primarily advisory boards, and we've already slowed that down; we started doing that probably three months ago and are really pushing hard. But what we're trying to do is the low-cost names in the interim, which are advisory boards to get interest with investigators, and make sure we have the protocol fine-tuned. We have definitely slowed down the expansion of hiring that we otherwise would have done to support some of that. So that's a key component in terms of trying to manage the balance sheet. In terms of restricted cash, there is a target amount of money to raise that would release it. That would involve raising another $16 million in equity financing to release the restricted cash. We can always, of course, have conversations to advance that if the need arose to do that sooner; they are a very constructive partner. So those are the two avenues we would have to release that cash.

Okay, great. Thank you for taking the questions.

Thank you.

Okay. Your next question is coming from Swayampakula Ramakanth of HC Wainwright. Over to you.

Thank you. Good morning, Gerard. Quite a few of my questions have been asked, but just thinking of CHEMOSAT and Europe. Now that you're taken over the responsibility of commercializing in Europe, how is that working, and anything we can get color on in terms of the progress so far and what needs to be done so that it goes smoothly from here onwards?

Sure. So for the last several years, we haven't had much visibility into kind of the commercial dynamics in the markets in Europe when we handed it over. So right now, we are reintroducing ourselves to a lot of the clinicians, some of which we kept tabs on because we were doing clinical development in Europe. But right now it really is, for example, in Germany, trying to better understand the lay of the land; but the near-term priorities in those markets — the markets we currently exist in — are as follows: in the UK, we are trying to increase referral patterns to the existing sites. I think we have enough sites in the country, so we're trying to increase referral patterns, whether or not it's from Ireland, which has an agreement with the NHS, or within the UK itself. Finding those patients who are being surveyed and referring them to the treating center is critical. The second thing in the UK is to get a submission together for national coverage. Our goal is to get that in this year; however, it’s a good year-and-a-half process to get incorporated into the NHS budget after EU approval. So there is also regional funding. We've hired a consultant to help try to get regional funding in parallel, and again, we couldn’t do this before we had the rights back. So, we're looking for regional funding which we think might provide additional revenue beyond the patients we are currently treating on a cash-pay basis. In Germany, we will likely want to open another site somewhere in Germany. But also, importantly, it is once again trying to get referrals to hospitals and working more closely with the hospitals from a budgetary perspective, because those hospitals have the ability to get reimbursed via something called a stipend scheme, but they have to do it every year; they must request the funds. Now that we have the rights back, it will be much easier to work directly with those hospitals to assist them in terms of making those requests and providing them the data they need. Once again, as I mentioned before, another important factor will be increasing referrals through the treating centers, which is key to generating revenue. We have had something that really was occurring in the past. In the Netherlands, we're going to work towards making a submission in terms of our reimbursement there as well for national coverage. We're going to try to get started in Austria and Switzerland; primarily, it’s much easier to get started when we have German-speaking hires in Germany as it’s easier to cover Austria and Switzerland with those personnel. Longer term, we're looking to expand into Italy and other markets in Europe. So that's kind of the near-term 18-month plan I just outlined in terms of Germany, the UK, the Netherlands, expanding into the DACH region and trying to get those humming before looking to other regions in Europe.

Okay. There appear to be no more questions. I will now hand back over to Gerard for any closing remarks.

Okay. I want to thank you all again for your interest and support. We look forward to giving future updates as the year progresses. Have a great day everyone.

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