Delcath Systems, Inc. Q3 FY2022 Earnings Call

Good day, and welcome to the Delcath Systems Third Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. I would now like to turn the conference over to David Hoffman, Delcath’s General Counsel. Please go ahead.

Thank you. And once again welcome to Delcath Systems third 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; 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 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 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 productive third quarter of 2022 for both HEPZATO KIT, the company's product development candidate in the United States; and CHEMOSAT, the company's marketed product in Europe. In the U.S., we have two centers enrolled and currently treating patients under the Expanded Access Program, or EAP, with a third center enrolled and pending training. In addition, four other sites are in various stages of the startup process and these include sites that were not involved in the FOCUS trial. We are on track to file the HEPZATO KIT through resubmission of the NDA to FDA by the end of December. We expect that within 30 days after the submission, the FDA will confirm receipt of the submission and, if they agree the resubmission is sufficiently complete to warrant review, establish a PDUFA date six months from the submission date. As we previously reported, in the third quarter, a retrospective analysis of patients treated with CHEMOSAT at three European centers, one in the Netherlands and two in Germany between February 2014 to December 2019, was published. The analysis involved 212 PHP procedures on 101 patients. The publication reported an overall response rate of 59.4% and a disease control rate of 89.1%. The safety analysis showed mostly grade 1/2 and self-limiting toxicity consistent with previous reports on PHP. This continues to add to the growing body of published research, documenting the efficacy and safety of our CHEMOSAT system in the European commercial center. Researchers from Leiden University Medical Center in the Netherlands are making rapid progress on the randomized Phase 2 portion of the CHOPIN trial with approximately 50% of the planned 76 patients enrolled. Recall the goal of this combined Phase 1b/randomized Phase 2 trial is to study the safety and potential synergistic effects of systemic immunotherapy ipilimumab and nivolumab, or IPI+NIVO, when combined with Delcath’s proprietary liver-targeted treatment in metastatic uveal melanoma patients. We look forward to the completion of enrollment into this trial possibly as early as late next year given the pace of recruitment, and to provide updates on the progress of the seven patients who completed the Phase 1b portion of the trial. At ASCO earlier this year, investigators reported an OR of 85.7% and a DCR of 100%. We expect updates on the previous and reported median progression-free survival of 22.4 months as the data matures. If similar results are seen in the current larger randomized Phase 2 portion of the trial and the combination continues to be well tolerated, it could represent a significant improvement over the current standard of care, including PHP alone. While the results will be important in terms of the treatment of metastatic uveal melanoma patients, they could have relevance across multiple tumor types where hepatic metastases are present and immunotherapy is an accepted treatment. Turning to the commercial progress of CHEMOSAT in Europe, the third quarter was the second full quarter after we resumed direct responsibility for sales, marketing and distribution activities, which occurred on March 1, 2022. Excluding the Netherlands where most patients are now being treated in the CHOPIN trial, our units increased 41% over the same quarter last year and increased 26% versus the second quarter. We will continue to operate the business on a cash flow breakeven basis for the time being. But we'll make several key hires in Germany and engage with consultants to support submissions for national coverage. These submissions are reliant on the publication of the FOCUS trial results, which will now occur early next year. The first submission for national coverage will be in the UK. In late October, we agreed with medac, the previous distributor of CHEMOSAT in the UK and EU, on terms to settle the party's ongoing dispute over the termination of a distribution agreement. The parties will reach a definitive settlement agreement before the end of 2022. And with this dispute behind us and the planned upcoming publication of FOCUS trial results, we are confident that Europe will become a meaningful revenue contributor to the business with EU revenues likely growing along with the U.S. commercial launch of HEPZATO if approved next year. Also in October, we successfully completed a Notified Body audit to recertify our Queensbury, New York manufacturing facility for CHEMOSAT under the European Medical Device Regulation, or MDR. While recertification, even under the new MDR regulation, has become routine for the company, it is important to keep in mind that our team in Queensbury has been undergoing audits for years, and I'm confident that we are well prepared for a preapproval inspection from the FDA. Finally, we continue to lay the foundation for the planned commercialization of HEPZATO. During the third quarter, we held an advisory board in the United States with interventional radiologists and specialists to gain further insight into the way treating facilities would utilize HEPZATO, if approved, within their continuum of care. We have solidified our market access plans and are confident that for Medicare patients, HEPZATO will primarily be reimbursed using pass-through status, initially with a miscellaneous ZE code before being assigned our unique ZE code. We are carefully watching Immunocore’s progress and noted that in their first full quarter, they obtained a unique ZE code and booked $20 million in revenue from U.S. KIMMTRAK sales, despite being restricted to less than 50% of the patient population given their mechanism of action. Based on publicly available information, in the U.S., KIMMTRAK is priced at a level which equates to approximately $925,000 per patient based on the average duration of therapy reported for their pivotal trial. An equivalent price for the HEPZATO KIT would be somewhere between $150,000 to $225,000 per kit, depending upon whether the price is based on a nine-month duration of therapy or six kits, or four HEPZATO treatments over six months, the mean number of treatments from the FOCUS trial. While it is premature to finalize the price, this dynamic is important for investors to understand as we approach commercialization next year. We believe that the ultra-orphan pricing dynamic combined with a very focused set of treating centers we will support and the growing number of EAP sites will translate into rapid revenue growth, a short runway to becoming cash flow positive and very strong operating margins. Obviously, there is much to get done between now and launch. The commercial potential for this first indication, and the value it represents, is clear. I look forward to taking questions. But first, we'll turn the call over to Tony to review the financials. Tony?

Thank you, Gerard. Product revenues for the three months ended September 30, 2022, were approximately $906,000 compared to $395,000 for the prior quarter from the sales of CHEMOSAT in Europe. Revenues increased 129% over the same period last year, primarily because we're now booking all European revenue after the termination of the medac distribution agreement versus a royalty and a revenue share. Research and development expenses for the quarter increased to $4 million compared to $3 million in the prior quarter, primarily due to higher professional service costs relating to the preparation for our NDA submission by the end of this year. Selling, general and administrative expenses for the quarter were approximately $4.5 million compared to $4 million in the prior year quarter. The increase was primarily due to recording an estimated $1.2 million for the settlement of the medac litigation, offset by lower share-based compensation expense of $800,000. Other expenses increased $730,000 from $420,000 due to a full quarter of interest expense and amortization related to our debt financing during the third quarter of 2022. The company recorded a net loss for the three months ended September 30, 2022, of $8.5 million, $0.92 per share basic and diluted compared to a net loss of $7.1 million, $0.94 per share basic and diluted for the same period in 2021. On September 30, 2022, the company had cash, cash equivalents, and restricted cash totaling $14 million as compared to cash, cash equivalents, and restricted cash totaling $27 million on December 31, 2021. During the three months ended September 30, 2022, and September 30, 2021, we used $5.2 million and $4.9 million, respectively, of cash in our operating activities. On July 20, 2022, we closed a private placement for $5 million issuance and sale of 690,954 shares of common stock and 566,751 pre-funded warrants to purchase common stock to certain investors. Each share of common stock was sold at a price per share of $3.98 and the pre-funded warrants were sold at a price of $3.97 per pre-funded warrant. The pre-funded warrants have an exercise price of $0.01 per share of common stock and are immediately exercisable. Delcath received gross proceeds from the Private Placement of approximately $5 million before deducting offering expenses. That concludes my financial remarks. I'll ask the operator to open the phone lines for Q&A. Can you please check for questions?

Yes, sir. Absolutely. We will now begin the question-and-answer session. Today's first question comes from Marie Thibault with BTIG. Please go ahead.

Hi. Good morning, everyone. This is Sam Eiber on behalf of Marie. Thanks for taking the questions here. Maybe if I can ask with my first question here any updates or color on maybe what's happening behind the scenes here at the CROs? Maybe what's left that's needed before getting this resubmission before the end of the year? Thanks.

Sure. The primary thing at this point is medical writing. We have about 98% of the data from our key CRO, a little bit more to get out of them. But really right now, the gating item is medical writing. And I would say we're well down the path. It will be towards the very end of December. If it slips, it will slip slightly, a week or so. But I'm confident we're very close to getting it filed, and I don't see any major issues in getting it done at this point.

Okay, very good. Thanks for answering that. And then maybe on the EAP sites here, I might have missed this in the prepared remarks, but maybe how many treatments have been done or scheduled at this point so far? And maybe how are some of those early learnings informing maybe the referral pathway for when you potentially do get FDA approval here?

Sure, Gerard. So to date, we have seven treatments. There is actually a treatment occurring today at the Moffitt Cancer Center, so that would be the eighth. In terms of your question on learnings, we're using the learnings from our European experience and the FOCUS trial in the training and the conduct of PHP. So it's still a little bit early. We're carefully monitoring the safety of these patients and we don't see any concerns with the adverse events so far that have been reported.

Kevin, it might be worth you noting what you've noticed some really interesting referral patterns going into market I think.

Yes. We've seen some patients being referred to Moffitt Cancer Center and using HEPZATO as a first-line treatment in the theory being that it stabilized the disease and preserved liver function before treatment with KIMMTRAK. So it's an interesting dynamic that we've seen here of kind of sequencing these treatments in combination to extend, better preserve the liver function in anticipation of treating with KIMMTRAK or tebentafusp.

Sam, what's interesting about this concept is that, although it's obvious, we haven't pursued it yet because we’re not approved. There is one specific doctor who was very active in the trial, and he is now directing his patients with the appropriate HLA phenotype to Moffitt for initial treatment before moving on to KIMMTRAK. As I’ve mentioned before, I don’t see KIMMTRAK as a competitor; rather, it’s beneficial for patients, and I believe doctors will find the best way to use both treatments together.

It makes sense. Thanks for taking the questions.

Thank you. And our next question today comes from Scott Henry of ROTH Capital. Please go ahead.

Thank you and good morning. I guess just starting on the FDA process. First, do you think there's any risk to it being a six-month review? It would seem likely given the indication. And any thoughts on whether there'd be a panel as well as do you have any planned meetings prior to the filing? Thank you.

In regard to the potential for a six-month review, we are working to ensure that our submission is as complete as possible. We have also focused on making the process straightforward. When you receive all the materials from various contributors, particularly the non-clinical writers, it can become challenging to navigate. Our goal is to simplify this as much as we can. Additionally, this filing is not particularly extensive. While the drug has a long history, it is based on a single trial, making the filing smaller. However, we understand that the FDA is quite busy and may delay certain things, so we are doing our best to prevent that. Currently, we do not have any meetings scheduled with the FDA. Regarding an advisory panel, I believe it’s about a fifty-fifty chance, but we will prepare as if it is certain to occur, recognizing that there is never enough time to get ready if we wait for final notes.

Okay, great. And then with regards to the European revenue trends, it’s certainly good sequential growth from 2Q to 3Q. Should we expect continued sequential growth or will it be kind of lumpy?

Yes. These are still fairly small numbers, so by definition when you have small numbers, it can be very lumpy at times. Most of this revenue is coming from Germany and the UK. In the UK, we have a rep. We hired one a little bit before getting the product back, actually converted an MSL to a rep. And in Germany actually, it's all referrals on their own. Basically, the product's been on autopilot for years. I think some of that growth is definitely due to our efforts. I think lumpiness is probably in order. I think what will really drive revenue in the short term is us hiring a rep in Germany to help improve referral patterns. As I mentioned a second ago, it's all kind of on autopilot. And then longer term, what will really drive revenue will be UK reimbursements. We’ll probably focus on France at some point as the next market, given that the burden of disease when the CHOPIN trial winds down, we'll get that back online. But I think the focus for us is that dynamic. When that gets published, I think that will help a tremendous amount. But as is always the case, it's a matter of getting reimbursement in each individual market. That will take a number of years, so steady growth but we need to get those reimbursement submissions in.

Okay, great. I have a final question regarding the EAP sites. Eight procedures seem like a solid number. How should we approach the volume? Is this something that happens weekly? I assume it will increase significantly once the product is approved. In general, how do you view the volume per site in terms of the number of patients after approval based on your current understanding? Any insights would be appreciated. Thank you.

Yes, that's a great question and we've been obviously focused on that ourselves. And I think it will vary, not surprisingly, dramatically by sites. I think an average of one a week per site is probably a reasonable effort after some period after launch. In terms of getting the sites to that level prior to launch, the EAP, we have to make an effort with our MSL. We have one right now to drive patients, inform clinicians about the sites and referral patterns in a compliant manner, of course. Could we get it up to one a week prior to that? That probably would be a reach, given our current resources. But I think the demand is certainly there. We're able to communicate it. But again, we're being very careful as to how hard we hit the accelerator. I think I've said this before, just trying to harbinger our resources at the moment. But I think post-launch, I think one a week is feasible. And I think we probably could get up to maybe as high as 20 sites over time within perhaps two years post-launch. But we're hopeful that we'll have seven sites up and running at launch and probably well under one a week at that point, but moving towards that.

Okay, great. That's helpful. Thank you for taking the questions.

Thank you. And our next question today comes from Yale Jen with Laidlaw & Company. Please go ahead.

Good morning and thank you for your questions. I recall that there is a timeline for the FOCUS study regarding the final survival data, which I believe could be available by May of next year. If that turns out to be the case, would you need to submit that data to the agency for approval, or is that not necessary for the process?

The primary endpoint of the trial is objective response rate, so there is no need to update the data. However, the data we are submitting to the FDA is a slight update from what we previously provided publicly. In regular filings, if there is an abstract or additional information published, that will also be sent to the FDA to keep them informed. But this update is not significant. In short, no, it's not necessary as part of the process. They will be kept informed.

Okay, great. That's very helpful. Just two more quick ones. First, housekeeping questions that based on the operating expenses, should we anticipate that going down further sequentially compared to the third quarter or the fourth quarter, how should we think about that?

I think you just assume they're about on a steady state for the next two quarters.

Okay, great. And maybe the last question here is that once the FDA accepts the application I assume a month after it was submitted, could you tell us the procedure or the process in terms of the FDA facility inspection and possible timeline of that, so that's probably the last piece for the agency in the process to complete their work?

There's no formal cut and dry. It's always X. But I would expect four to six weeks prior to the PDUFA date, then scheduling a preapproval inspection.

Okay, great. That's very helpful and congrats on all the progress, and look forward to you guys filing the things before the end of the year.

Thank you.

Thank you. Our next question today comes from Bill Maughan with Canaccord Genuity. Please go ahead.

Hi. Good morning. Thanks for taking the question. So after a recent FDA advisory committee for another oncology product in a small orphan population, there's a little bit more of a renewed focus on what the FDA is expecting to prove efficacy in a single arm trial in a small population. So I was just hoping you could kind of hit the highlights again. I know you've gone through it before, but in terms of what the FDA expected or required of your pivotal data, specifically as you can, what they needed to see to prove efficacy? And to the extent that you were able to compare that to results outside of your trial, the suitability of that comparison and how satisfied the FDA will be that HEPZATO is achieving the level of response needed for approval?

Sure. The first point is that it is a single-arm trial, and during our discussions with the FDA about this, they indicated they wanted to see a clinically meaningful objective response with a significant duration of that response. Specifically on duration, they requested a follow-up of at least six months to establish its significance, and we achieved a 14-month duration, which is exceptionally strong. Regarding objective response rate, it's more complex, but we informed the FDA that we were designing the trial to show a meaningful improvement based on a meta-analysis of immuno-oncology agents. Our lower bound needed to surpass 8.3%, and we reached 26.4%, clearly exceeding that threshold. However, the FDA might still evaluate whether that is sufficient. We have additional evidence for comparisons, and one of the most compelling aspects is our overall survival (OS) data, which closely aligns with published results, even though our patients were sicker, being in first, second, or third-line treatments. Our one-year OS rate was 77%, compared to the published data's 73%. We also have historical survival data showing we're significantly better than past results. Previously, we reported an OS of 19.25 months compared to the BAC's 14.5 months, and this OS continues to mature. It competes favorably with KIMMTRAK. The meta-analysis for objective response rate indicates our rates are much higher than what’s generally available, which tend to be in single digits, combined with our impressive 14-month duration. Overall, I believe we are in an excellent position. Additionally, although we haven’t published this information, I’ve qualitatively noted that our response rates—whether complete, partial, or progressive—correlate cleanly with survival outcomes, showing that our objective response rate is significant in terms of relapse potential, which isn't always applicable across all therapies. In summary, we have a wealth of information at our disposal.

Absolutely. I appreciate the thorough answer. Thank you.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.