Earnings Call Transcript - DCTH Q4 2022

David Hoffman, General Counsel

Thank you. And once again, welcome to Delcath Systems' Fourth Quarter and Full Year 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 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 27A 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 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.

Gerard Michel, CEO

Thank you, everyone, for joining today. We have had a very productive four months since our last earnings call. I'd like to include the resubmission of the HEPZATO NDA on February 14 and the subsequent receipt of the PDUFA date of August 14 from the FDA, the announcement of significant financing with high-quality investors, and the continuation of a steady small publication for both commercial usage and clinical investigation of CHEMOSAT in Europe. On February 14, we filed the NDA resubmission for HEPZATO. And on March 20, the FDA determined the resubmission constituted a complete Class 2 response and set a PDUFA date of August 14. We look forward to working with the FDA through the review process of our resubmission. Since I know I will be asked, at this time, we do not know whether the application will be the subject of an Advisory Committee, but we will continue to prepare for one unless we receive notification otherwise. Obviously, receiving the FDA acceptance was a major milestone for the company, and it represents a culmination of many years of hard work by Delcath employees, our various partners, investigators, and patients. Today, we announced a private investment in public equity or PIPE deal with healthcare-focused institutional investors, as well as existing investors that will provide up to $85 million in gross proceeds, including $25 million in upfront funding upon closing. The financing was led by Vivo Capital with participation from Logo Capital, BVF Partners, Stonepine, and Serrado Capital, as well as existing investors, including Rosalind Advisors. We are grateful for the participation of our existing investors and are delighted to have the financial backing of an additional set of investors. The new investors are well-known, long-term healthcare-focused funds who conducted extensive due diligence on clinical, regulatory, commercial and other topics before deciding to invest in Delcath. Their support validates the clinical relevance of and the commercial opportunity for HEPZATO in metastatic ocular melanoma. We believe the aggregate funding will fully support the commercial launch of HEPZATO if approved and take us to profitability without having to raise additional capital. The structure was designed to remove the financing overhang, something that is often an issue in normal economic environments and is greatly exacerbated in the current environment. There is always a trade-off between fully financing a business and dilution. I think it is important to note that we will manage our business prudently with an eye towards building shareholder value through generating and growing cash flows. Given our likely operating margins and the expected uptake of HEPZATO, we likely to generate positive cash flows in a relatively short period after launch. In addition to the press release on this financing, the details of the financing, including the impact on common shares and warrants outstanding upon the conversion of preferred stock, are outlined in our current investor presentation, which can be found on our website. Tony will also cover this in greater detail in his section of the call. On February 16, we announced the Board of Directors voted to appoint John Sylvester as a new Chairman of the Board. Mr. Sylvester has served as director since July 2019 and has extensive experience building interventional oncology businesses, including senior commercial roles at BTG and most recently serving as Chief Executive Officer of both Curium SPECT and international business units. Mr. Sylvester will replace Dr. Roger Stoll, who has served as Chairman since October 2015 and will continue to serve as an active member of the Board of Directors and on various committees. We thank Roger for his many years of leadership in the company and are grateful for his continued service to the company. We look forward to Mr. Sylvester's guidance as the company prepares for a possible HEPZATO launch in the U.S. In the U.S., we currently have enrolled three expanded access program treatment sites or EAPs. In addition, we have four more sites reviewing their agreements and Mayo Jacksonville and Mayo Rochester are undergoing startup activities. We currently have eight patients at one participating site, which have completed 20 cumulative treatments across the patients. While we have not aggressively pursued EAP sites or established patient referral networks, we are now in the process of hiring a contract MSL team to support our EAP efforts and start building those referral networks. In February, a publication was presented, which updated safety and efficacy results from the Phase I portion of the CHOPIN trial. The updated published results for seven patients with advanced uveal melanoma treated with CHEMOSAT and ipilimumab plus nivolumab showed a median progression-free survival of 29.1 months and a median follow-up time of 29.1 months. At the time of publishing, all patients were still alive, and three of four patients who subsequently experienced progressive disease continued with treatment in the form of repeated melphalan PHP treatments delivered by CHEMOSAT. The ongoing randomized Phase II portion of the CHOPIN trial comparing melphalan PHP alone with melphalan PHP plus ipi/nivo will include another 76 patients, 38 per arm, and is approximately 50% or more enrolled. We equally await the publication of interim results potentially late this year from the Phase II portion of this study. This should provide critical information about the potential utility of CHEMOSAT or HEPZATO used in sequence with immune checkpoint inhibitors. Finally, in December, the results of a single center study in the treatment of cholangiocarcinoma were published in the journal Clinical and Experimental Metastasis. The study was a retrospective analysis of 17 patients, who underwent a total of 42 procedures using CHEMOSAT and melphalan between October 2014 and September 2020 at the Hannover Medical School in Germany. The aim of the retrospective monocentric study was to analyze PHP with CHEMOSAT as a palliative treatment for unresectable liver cholangiocarcinoma. Based on the results of the study, the authors concluded that percutaneous PHP CHEMOSAT is an effective and safe treatment option for patients with advanced cholangiocarcinoma and has the potential to prolong life in patients with inoperable treatment-refractory liver metastases. The authors highlighted the increasing importance of locoregional forms of therapy in the treatment of cholangiocarcinoma and that the new addition of the German S3 cancer guidelines for diagnostics and therapy of hepatocellular carcinoma and biliary carcinomas now includes PHP with melphalan for the treatment of both inoperable intrahepatic cholangiocarcinoma and extrahepatic cholangiocarcinoma liver metastases. That completes my prepared remarks, and I look forward to taking questions after Tony reviews the financials. Tony?

Anthony Dias, Vice President of Finance

Thank you, Gerard. Product revenues for the three months ended December 31, 2022, were approximately $639,000 compared to $246,000 for the prior year quarter from the sale of CHEMOSAT in Europe. In the fourth quarter of 2022, the company was selling direct and this is not comparable to the fourth quarter of 2021, during which we generated product revenues with our European distributor on a revenue share arrangement. Other income of $1.9 million for the fourth quarter of 2021 was related to the acceleration of amortization of the license agreement with medac, which ended in December 2021. Research and development expenses for the quarter increased to $4.4 million, compared to $3.6 million in the prior year quarter, primarily due to higher professional service costs related to the preparation of our NDA resubmission, which occurred on February 14, 2023. Selling, general, and administrative expenses for the quarter were approximately $3.8 million, compared to $3 million in the prior year quarter. The increase was primarily due to higher headcount-related costs such as share-based compensation expense. On December 31, 2022, the company had cash, cash equivalents, and restricted cash totaling $11.8 million, as compared to cash, cash equivalents, and restricted cash totaling $27 million on December 31, 2021. During the year ended December 31, 2022, and December 31, 2021, we used $25 million and $22.6 million, respectively, of cash in our operating activities. The use of cash in operating activities was partially offset by two private placements during 2022, resulting in net proceeds of $10.9 million. Also, on March 15, 2023, we returned to Avenue the $4 million held in restricted cash to pay down a portion of our outstanding loan balance. On December 13, 2022, the company closed a private placement for the issuance and sale of approximately 1.5 million shares of common stock and approximately 692,000 shares of prefunded warrants to purchase common stock at market price. The company received gross proceeds from this private placement of approximately $6.2 million before deducting offering expenses. Today, we announced that the company has signed a securities purchase agreement with healthcare-focused institutional investors that will provide up to $85 million in gross proceeds to Delcath to a private placement that includes initial upfront funding of $25 million. The company will issue approximately $25 million in shares of Series F convertible preferred stock and two tranches of warrants that are exercisable for shares of Series F convertible preferred stock. The Series F convertible shares will equate to approximately 7.6 million common shares and have an effective price per share of $3.30. As far as the first tranche of warrants, they have an aggregate exercise price of approximately $35 million at $4.50 per share and are exercisable until the earlier of March 31, 2026, or 21 days following the company's announcement of receiving FDA approval for HEPZATO. The second tranche of warrants has an aggregate exercise price of approximately $25 million at $6 per share and is exercisable until the earlier of March 31, 2026, or 21 days following disclosure of the company's public announcement of recording at least $10 million in quarterly U.S. revenues from the commercialization of HEPZATO. As Gerard mentioned, the details are contained in our corporate presentation, which is on our website and has been filed as an 8-K.

Scott Henry, Analyst

And congratulations for just a lot going on in the past day or so or the past few days. A couple of questions I had. First, with regards to the PDUFA date, if you did get approval on that date about how long would it take between approval and product availability?

Gerard Michel, CEO

I think the fastest would be about three weeks, and it might take as long as six weeks. And the gating item, I think you know this pretty well, Scott, is not having the product per se, but having a labeled product on hand. We can do that pretty quickly. We are at our site in Queensbury, but our partner Neopharma, who manufactures the melphalan, they'll need to label that with the FDA approved label which came through their QC processing and give it to us. John Purpura, our COO, has already negotiated with them to hold some inventory, broken sublot, which they normally wouldn't do, so we can do that quickly. But I think three to six weeks is probably the range that we'll shoot for.

Scott Henry, Analyst

Okay. Great. And when the product is available on the market, would you expect to book revenue simultaneous with product usage? Sometimes there's a lag, and I'm just trying to figure out how we should think about potentially late 2023 revenues?

Gerard Michel, CEO

We will sell directly and not use wholesalers. Given the nature of the product and the volumes, that approach wouldn't be practical. The revenue will be based on two models: either on consignment, where we record revenue as the product is used, or we record revenue upon shipment when it's purchased without consignment. I don't anticipate hospitals will maintain significant inventory of this product, which means revenue will closely align with actual usage or procedures rather than the typical scenario with infused therapies or pills, where wholesalers generally hold a larger inventory.

Scott Henry, Analyst

Okay. Great. And then with regards to the build-out of reps, could you give us a sense of when you would start to hire people and approximately how many reps or marketing liaisons or how many employees would you expect to have in that unit?

Gerard Michel, CEO

Yes. So in terms of the overall field force, Kevin and I have been talking about probably something in the range of eight reps. The current thinking is four of those, roughly, again, this could evolve, will be focused on medical oncologists and kind of pulling patients into or pushing patients into the referral networks. Then for medical device types, we're very familiar with interventional oncology, and they'll be kind of centered around the actual treating centers. And then those two reps will partner together to help develop referral networks as well as open new sites. So I think all told about eight of those. We've just recently signed a contract with the company to help us build a modest-sized medical science-related sales force. I'm hoping to have the first of them out there maybe as soon as two months, hopefully sooner. And they'll start calling on medical oncologists preapproval to try to establish those referral networks. So maybe two or three of those. But all told, even taking into account training, etc., I don't see having more than, let's say, 12 to 15 people in the field upon launch.

Scott Henry, Analyst

Okay. Great. And I'll just finish it up with a couple of modeling questions. First, a lot of moving levers, shares outstanding, it looks like it will be about $10.1 million in Q1, jump up to $18-ish million in Q2, and then we'll deal with the warrants when that stuff happens. Is that assumption correct?

Gerard Michel, CEO

Yes. If you take a look at, I think, Slide 36 of the investor presentation, we updated today and on the website. On an as-converted basis, the series preferred and E1s and the prefunded warrants, all of which are just plain vanilla, they're simply blockers for Rosalind. We don't want to go over 9.9%. That totals about 12.7 million equivalent common. The deal we announced today entails converting the preferred, and that will lead to about another 7.6 million shares. So in total, a bit over 20 million shares.

Scott Henry, Analyst

Okay. Great. And then just a final question. Could you just give me an estimate of pro forma cash and debt after everything kind of has gone through the system here?

Gerard Michel, CEO

Okay. I need someone to ask me a hard question. So I think about $23.5 million payment will come from the deal we did today. We are getting kind of low, but we paid back $4 million of Avenue debt. It's probably about, I'd say, let's call it about $24 million on the balance sheet. Now in terms of overall debt, there is probably about $9 million of true debt, but we still owe. And there's another maybe $2 million or so of that which is owed to some, but that is essentially equity, and that was converted at about $11 per share. So that's probably the best way to think of that as another 200,000 shares there. So in terms of debt that we really have to pay back, it's roughly $9 million right now.

William Maughan, Analyst

Congrats on the acceptance. So now with some more clarity on your financial outlook for the next few quarters, does that update your plans for your EAP? And if you could just run through those numbers in terms of how many patients you expect to have on around the time of launch and how many sites you expect to have up and running at that point?

Gerard Michel, CEO

Yes, I can share what I hope for in the EAP. We're planning to start testing it once we have personnel in the field engaging with the treatment centers where we want to refer patients. Currently, we have three sites open, with just one actively enrolling patients. We're working to get the other two trained, and if a patient arrives, they will be trained as well. Additionally, we have three sites: Thomas Jefferson, Stanford, and Ohio. We're also discussing with the Mayo Clinic, which has two sites and is quite proactive in getting operational. Conservatively, I anticipate having five EAPs ready at launch, but we could potentially reach eight or nine. Ideally, we aim to see one patient every other week in the network, which is modest, but we expect to need approvals before we can bring in larger numbers. If everything goes well, having one patient every other week across six centers could generate about $10 million per quarter as soon as we start bringing in paying customers. We'll see how it develops, but I believe a reasonable goal is to start with one new center each week initially, aiming to eventually increase to 20 centers with one to two added weekly as we scale up.

William Maughan, Analyst

And now looking just at the overall mOM market, there is a convenient comp in a competitive launch that's going on now. When you look at HEPZATO versus Kimmtrak, is there a drawback that says that the kind of numbers that Kimmtrak is putting up or out of reach for you guys? Or do you think that what they're putting up is the kind of blue sky for HEPZATO?

Gerard Michel, CEO

Yes, I believe there are a few factors to consider here. First, looking at their fourth quarter performance, they achieved $38 million in the U.S. and $50 million globally. In the U.S., they generated approximately $152 million to $174 million in revenue annually, which is quite impressive and likely accounts for about half of their available market. It's somewhat challenging to assess precisely, but we estimate there are about 350 patients available to them, while we have around 800 patients related to the specific HLA phenotype. If we were to price our product similarly, we might capture just under half of the market share and achieve comparable revenue. However, we don't plan to set our price exactly the same; I've previously mentioned $150 million as a placeholder—this reflects roughly three-quarters of the price point, give or take. It's essential for them to distribute their product across a sufficient number of treatment centers, which I estimate to be around 100, so patients can receive treatment without having to travel extensively. In contrast, our patients will likely need to fly or travel far, and getting oncologists to refer patients can be challenging. We must proactively engage with those doctors to raise awareness about HEPZATO and connect them with a referral network at one of several treatment centers. Therefore, I expect patient enrollment to be slower, although I don’t believe this will significantly impact our potential peak sales. Our data is robust, and while the necessity to travel should be comparable to the need for frequent infusions, the critical issue will be developing our referral networks. Thus, although patient volume might build at a slower pace, I am confident that based on Total Addressable Market (TAM), our potential is nearly double that of their product. Finally, I don’t see their business negatively impacting our opportunities. These products complement each other; most patients facing this disease will ultimately experience liver failure or liver metastases, and systemic metastases can arise. Therefore, I believe patients will utilize both therapies, which is beneficial for them. I'm not sure if that fully addresses your question, Bill.

Swayampakula Ramakanth, Analyst

Congratulations. One quick question from me. With HEPZATO, the surgeon or the physician needs to learn the procedure as well. So how easy is it to learn the procedure? And would you be having any training centers so that you can increase that option beyond the initial centers involved in the study?

Gerard Michel, CEO

Yes. Thanks for that question. No particular step in this procedure is technically difficult for the interventional radiologist or the anesthesiologist who's there, or the perfusionist technician. What's important is that these things are done in a coordinated fashion, and that really will be the focus of training. It doesn't make sense for us to put together a training center because I don't think we'll have volume of doctors who need to be trained. I know when I was at Vericel, we would do, for lack of a better phrase, pop-up training centers where we bring in a bunch of doctors to use the cell therapy product, and we would have 40 docs in it. I don't think that type of thing will work here. I think what we will do is have didactic training online that they can go through, and it will be broken up by a team member. Then they will either attend the case, either directly or virtually watch a case. We will likely set up both of those mechanisms for them. We will have a proctor come in. The first case that is done will have someone proctoring. We will likely have our own person capable of proctoring as well to augment that process. It will start with didactic training, then we will have them virtually view a case or travel to see a case, and then we will have a proctor sit through the initial case for the team. We will have someone pretty much in every procedure until we're confident that the team has it down. We don't need to do any technical type of very difficult technical portion of this; it's really a matter of making sure that the filters come out at the right time, the balloons go out at the right time, and that blood pressure is managed in the right way at the right time. So again, it's a matter of coordination, not technical difficulty.

Swayampakula Ramakanth, Analyst

Okay. And then the second question is in terms of the CHOPIN study. You said there will be an update later this year. That's an IIT at this point. So would you take it under your wing once you get the approval for HEPZATO?

Gerard Michel, CEO

Yes, we hadn't really thought about transitioning before. I haven't personally been involved in transitioning an Investigator Initiated Trial. Regarding a sponsored trial for a combination of immuno-oncology agents and CHEMOSAT, we are certainly interested in pursuing that, whether it relates to metastatic ocular melanoma or another indication where immuno-oncology is applicable. Exploring immuno-oncology agents alongside HEPZATO is definitely among our top priorities. I've mentioned this previously; there is a strong rationale for doing so given the side effect of our product that, while could be seen negatively, actually proves beneficial. The local hepatic myeloablative effect resets the tumor microenvironment in the liver, leading to systemic effects. Therefore, we will definitely consider conducting trials that combine our treatment with immunotherapy.

Yale Jen, Analyst

And congrats on all the development. Just a couple of quick ones. The first one is that, in terms of the financing, the remaining committed again, $65 million or $60 million. What sort of milestone is that anticipated and expected, so they will move those funds forward?

Gerard Michel, CEO

We have just received a $25 million financing, which is currently being processed. The first tranche of warrants will consist of approximately 7.8 million warrants that can be exercised at $4.50, totaling around $35 million. These warrants are valid for three years, but their expiration is accelerated to 21 days post-approval. Therefore, warrant holders will need to exercise their warrants following our approval. This marks our first milestone, potentially providing $35 million in gross financing. After reaching $10 million in gross revenue in a quarter, there will be a second accelerated expiration within 21 days of that announcement, yielding about 4.2 million warrants priced at $6 per share, which would contribute another $25 million to the business. This is why we believe everything is progressing as planned. While we know that situations can change, if everything stays on track, we should be able to achieve cash flow positivity without requiring additional financing.

Yale Jen, Analyst

Okay, that's very helpful. The next question is about the pipeline development we discussed earlier. Considering the cash you may have moving forward, many of those projects can definitely be executed. Have you established any priorities or specific regions to focus on for the pipeline development and other indications?

Gerard Michel, CEO

Yes. We are focusing on three areas in ICC due to significant interest from researchers, particularly in Europe, where there is a considerable unmet need. One area is an orphan indication, while colorectal cancer leads to the highest incidence of liver metastases. There are various scenarios we can explore in this space. The third area involves liver metastases where the primary cancer is treated with immunotherapy agents. Currently, our resources are quite occupied as we prepare for an Advisory Committee meeting, respond to FDA information requests, and get ready for an overall launch. We will need to expand our team to manage these tasks before we can actively pursue additional indications. Nevertheless, we will conduct advisory committee meetings to explore these ideas and draft some protocols. Even with a reasonable pace, it will likely take about a year before we can invest significantly in these areas. In summary, we will be planning for one or all of those three areas, but the impact on our profit and loss statement and any increase in our R&D spending will be at least a year away.

Yale Jen, Analyst

Okay, great. That's very helpful. The last question is, considering you are taking back European sales, do you anticipate any potential approval in the United States going forward? Could this also lead to a price increase for the product and possibly boost revenue as well?

Gerard Michel, CEO

Yes. I think as you probably know, it's tough to move prices up in Europe once they're set. We're not approved yet. The reimbursement in the U.K. we used there would probably be the first test to see how far we can move things up from where it is now. Germany, the price is set, which would be hard to move up too much. It is a very difficult situation that the price will be surprisingly quite a bit lower for the device stand alone in Europe versus the combination drug device in the U.S. There are advantages for how we're approved in Europe. Given that it's a CE Mark, and the CE Mark is for the use of CHEMOSAT to the liver, it's tumor agnostic, and that gives us a bit more flexibility in terms of developing the product and doing smaller trials and such and letting investigators use it on their own where they think it's applicable and having open conversations about it. You noted the amount of data coming out of Europe without us really doing much besides supplying product that is likely to continue to happen in a variety of cancer types, which might yield benefits in the U.S., given that small publications. Although they're not going to get you labeled for use and we are not going to promote based on small publications, doctors do note it, and it can lead to reimbursement if the doctor believes it's worth a shot. So we have ICC publications that come out because of the investigator work. Again, that's partly driven by the CE Mark's ability for any cancer. We've had uses in breast cancer and a number of other things that look promising. So it may be that it's just a source of publication for us; despite the low price, we may end up being very happy with just the data it's been generating.

David Hoffman, General Counsel

This concludes our question-and-answer session. I would like to turn the conference back over to Gerard Michel for any closing remarks.

Gerard Michel, CEO

Thank you. I appreciate everyone's questions and attention today, and I'd like to thank our existing and new investors who've gotten involved with the business. Without those folks, we'd be nowhere. I look forward to speaking to everyone in about two and a half months with another update. Have a good evening.

David Hoffman, General Counsel

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.