Earnings Call Transcript - DCTH Q1 2024

Operator, Operator

Good day, and welcome to the Delcath Systems First Quarter Fiscal Year 2024 Financial Results Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to David Hoffman, Delcath's General Counsel. Please go ahead.

David Hoffman, General Counsel

Thank you. And once again, welcome to Delcath Systems 2024 First Quarter Earnings and Business Highlights Call. With me on the call are Gerard Michel, Chief Executive Officer; Sandra Pennell, Senior Vice President of Finance; Kevin Muir, General Manager, Interventional Oncology; Vojislav Vukovic, Chief Medical Officer; and Martha Rook, Chief Operating 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 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 expected 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 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.

Gerard Michel, CEO

Thank you, everyone, for joining today. This is the first quarter Delcath is reporting U.S. revenue, a significant milestone for the company. In the first quarter, revenue from our sales of HEPZATO was $2 million and for CHEMOSAT $1.1 million. Given the March start for three of the four U.S. centers active in the first quarter and the temporary use of product sampling for some of the initial product cases, the $2 million in U.S. revenue was predominantly generated by treatments at Moffitt, with the balance from the other three centers activated in the first quarter, which are starting to generate consistent revenue in the second quarter. As we have discussed in prior calls, the pace of revenue growth in the short to medium term will be determined by the rate at which we can train and activate new treating centers. Since our launch in January and in the seven weeks since our recent fourth quarter call, we have made steady progress in expanding the number of centers we are engaged with and actively training. We ended the first quarter with four active sites: Moffitt Cancer Center, Stanford University Cancer Center, Thomas Jefferson University, and the University of Wisconsin. As of today, there are six active treating centers, with the University of Tennessee and the UCLA Cancer Center having recently conducted their first commercial treatments. A further five centers have completed the necessary steps to conduct their first commercial treatment under the guidance of a proctor, once hospital formulary committee approval is obtained, and are in the process of identifying and scheduling the first patients for treatment with HEPZATO. In total, there are 11 centers, an increase of two from our last call, currently accepting patient referrals and listed on our healthcare study locator. Beyond those 11 centers, another seven centers currently have preceptorships scheduled and are partway through the preceptorship training. To date, we have had over 100 perfusionists, anesthesiologists, and interventional radiologists attend preceptorships, representing over 20 institutions in the U.S., with some institutions sending multiple healthcare providers for the same specialty. As a reminder, the entire process from initially scheduling a preceptorship to activation can take approximately three months. Given the significant level of commitment required from healthcare providers to become fully trained and certified under the REMS program, we believe all the healthcare providers and the cancer centers involved to date intend to incorporate HEPZATO as a core part of their treatment regime for metastatic uveal melanoma patients. We continue to expand the number of centers we are engaging with, over 30 centers now somewhere in the process from preliminary discussions regarding the steps required to become a treating center to actively treating patients. There has been a definite increase in interest, partially due to physicians at treating centers sharing their experience with physicians at other centers that are not yet involved. There is certainly a component of what I might characterize as informal and independent peer-to-peer engagement occurring. In addition, increased interest can also be attributed to our permanent and product-specific J-code becoming effective on April 1. While we are aware that hospitals have successfully been reimbursed for the treatment using miscellaneous J-code prior to April 1, the establishment of the permanent J-code has definitely simplified the reimbursement process and the willingness of formulary committees to approve the use of HEPZATO. We believe we are on track to have 20 active centers by the end of 2024. The approximate anticipated pacing of center activation remains at 10 active centers by the end of the second quarter, 15 by the end of the third quarter, and 20 treating centers by year-end. Our projected average treatments per center remain at approximately one per month, ramping to a run rate of approximately 1.5 treatments per month by mid-year and then reaching a run rate of two treatments per month late in the fourth quarter. It is important to note that given our expected ramp for both treatment per center volume and center activation, we should achieve $10 million in U.S. quarterly revenue in 2024, which will likely result in $25 million of cash proceeds from the exercise of the final tranche of warrants issued as part of our March 2023 financing. Sandra will share additional details on our financials in a moment, but I want to highlight that our effective gross margin in the first quarter was approximately 60%, despite the modest initial volume. In addition to the significant commercial activity, we continue to support both internal and external efforts to add to the growing body of evidence that the PHP procedure is an important treatment option for patients with liver dominant uveal melanoma as well as potentially other liver-dominant cancers. Recently, we announced the publication of results from the pivotal Phase III FOCUS study of HEPZATO in patients with unresectable metastatic uveal melanoma in the journals Annals of Surgical Oncology. As previously disclosed at ASCO, the publication reported a statistically significantly higher overall response rate of 36.3% for HEPZATO versus 5.5% from a meta-analysis of historical controls. Other efficacy endpoints include a 7% complete response rate with a 73.6% disease control rate. In addition, results from the early randomized stage of the FOCUS trial, which was initiated as a randomized two-arm trial but completed as a single-arm study, will be presented at a poster session at the upcoming ASCO Annual Meeting in Chicago. Later in the year, we expect also to publish an expanded analysis of various patient subpopulations in a peer-reviewed journal. Liver-dominant metastatic disease is a significant therapeutic challenge in an area of high unmet medical need for many solid tumor types. To support additional clinical development in some of these areas, it is important for the company to build a strong commercial foundation in metastatic uveal melanoma in the U.S., both for purposes of funding trials as well as creating a network of treating centers. We are well on our way to accomplishing this. While the interest level from interventional radiologists in investigating the use of HEPZATO and CHEMOSAT to treat other liver-dominant cancers has been high for many years, this has not necessarily been the case for oncologists outside of metastatic uveal melanoma. The launch of HEPZATO in major cancer centers is increasing the level of interest from a broader set of oncologists to study HEPZATO used in treating other cancers, such as colorectal, intrahepatic cholangiocarcinoma, and breast cancer. As mentioned in the previous quarterly update call, we plan to initiate one or more clinical trials of HEPZATO in other tumor types within approximately a year, and we'll provide further updates on those activities later this year. The CHOPIN trial, which is evaluating the effect of sequencing immunotherapy with CHEMOSAT liver-directed therapy, is expected to be fully enrolled by the end of 2024. As CHOPIN is an investigator-initiated trial, we do not control the timing of data release. However, our understanding is that the study results, including the primary endpoint are still planned to be presented at a major oncology conference in the second quarter of 2025. In summary, the company continues to activate centers consistent with our center activation guidance. In addition, while the treatment of metastatic uveal melanoma patients will support significant growth for the foreseeable future, we are planning to pursue additional indications given the tremendous unmet need for patients suffering from cancers of the liver. I will now hand the call over to Sandra to share some details on our financial position. Sandra?

Sandra Pennell, CFO

Thank you, Gerard. We ended Q1 with $27.2 million in cash investments. Cash used in operations was approximately $9.6 million in the first quarter. The change in cash from year-end is due to the use of cash required primarily for launch and center activation, offset by the 2024 private placement financing of $7 million. It is important to note that this financing was supported entirely by Delcath's senior executives, board members, and existing institutional investors. We believe that our current financial resources are adequate to fund operations until the company achieves $10 million in U.S. quarterly revenue, which would likely trigger a warrant exercise resulting in $25 million in proceeds. This $25 million should be sufficient to fund the company until we become cash flow positive. As Gerard previously mentioned, we remain confident we will achieve $10 million in quarterly revenue in the U.S. no later than the fourth quarter of this year. Revenue from our sales of HEPZATO was $2 million and CHEMOSAT was $1.1 million for the three months ended March 31, 2024, compared to $0.6 million for CHEMOSAT during the same period in 2023. Gross margins were 71% in the first quarter of launch. Cost of goods sold did include a positive adjustment for standard cost revaluation, a nonrecurring item. Without the adjustment, gross margins would have been approximately 60%. For the three months ended March 31, 2024, research and development expenses were $3.7 million compared to $4.7 million for the three months ended March 31, 2023. The change in R&D expenses is primarily due to a decrease in clinical trial activities, offset by an increase in personnel-related expenses. For the three months ended March 31, 2024, compared to the same period in 2023, selling, general and administrative expenses increased to $8.8 million from $4.2 million. The increase is due to activities to prepare for a commercial launch including marketing-related expenses and additional personnel in the commercial team. Thank you.

Gerard Michel, CEO

Moderator, can we now look for questions?

Operator, Operator

The first question is from Bill Maughan from Canaccord Genuity.

William Maughan, Analyst

Congratulations on the strong early launch. I have three quick questions for you. First, regarding the realized revenue per kit, I know you've mentioned that you are selling directly, so you don't expect a gross margin. Looking at the math, does your revenue for the first quarter reflect 11 kits sold? Is it really that straightforward? My second question is about your EU revenue. In absolute terms, it saw a modest increase, but in percentage terms, it was a significant rise in the first quarter. Is this sustainable growth, or is it just variability from quarter to quarter? Lastly, when you reach scale, what do you anticipate gross margins to approach?

Gerard Michel, CEO

Let's address each question one at a time. We are currently shipping directly, so it’s a straightforward calculation with our pricing at $182,500. Regarding Europe, we have successfully established a representative in Germany who has been active for over a year and is starting to gain momentum. Germany is the only European market with a reliable reimbursement structure, as hospitals must plan their budgets and forecast usage based on the previous year. It has taken this representative a full year to build relationships and encourage hospitals to budget accordingly. There is still significant growth potential in Germany, as we have about 15% penetration at most. Lastly, concerning gross margins, I anticipate that at our peak revenue, we could approach nearly 90% gross margins. It will likely take a little over a year to reach that point, but I believe this will be the maximum for gross margins.

William Maughan, Analyst

Okay. And a quick follow-up as I was thinking through that answer. The $10 million in a quarter that triggers the next tranche. Is that just U.S. HEPZATO or is that worldwide revenue?

Gerard Michel, CEO

Just U.S.

Operator, Operator

The next question is from the line of Marie Thibault with BTIG.

Marie Thibault, Analyst

Gerard and Sandra, congrats on a really strong start to your commercialization here. I wanted to ask a little bit about the patient profile of treated patients you're seeing so far. How are they doing? Are they coming back for additional cycles? Are you seeing any first-line treatment? Just any characterization of these first 11 treatments, if you can.

Gerard Michel, CEO

Yes, I think since the end is fairly low, it will be hard to give specific trends. But Kevin, why don't you comment on the variety that we've been seeing?

Kevin Muir, General Manager, Interventional Oncology

Sure, Gerard. Thank you. Marie, we've seen a mix so far with 11 treatments. We do have first-line patients as well as patients who have received other treatments. When you launch a cancer drug, patients don't just stop their current treatments; they go through their current line of treatment, and then when they progress off that, they go to the next line. So we're seeing a combination right now of first-line, second, and third-line patients.

Gerard Michel, CEO

Yes. And I would add, Marie, that we're seeing patients who are coming off of tebe, coming off ipi/nivo. And yes, we are getting recurring patients. We have seen no trends of patients dropping off early in terms of not coming back for retreatment. However, it's early days, so I can't quite take that to the bank, but it is encouraging that patients are coming back for retreatment.

Marie Thibault, Analyst

Yes. Encouraging indeed. Okay. And then I want to ask about reimbursement. Are you seeing any pushback or any hurdles to getting those payments? It doesn't look like it so far. I just want to hear how that is trending? And then with the J-code and TPT status going into effect in April, what you've noticed so far here in your second quarter if customers are having success with that J-code if everything is going smoothly.

Gerard Michel, CEO

Yes. Obviously, we're not sitting there submitting for reimbursement; the hospitals are. So we know stuff anecdotally, and I'll ask Kevin to comment on that for a moment. I will say though that the hospitals are paying us. We are getting checks from them, which is encouraging from our end. But Kevin, why don't you talk a little bit about the changes you've seen in front of the various formulary and finance committees since the J-code has been in place?

Kevin Muir, General Manager, Interventional Oncology

Sure. I'll echo Gerard's view. We are aware that the claims from the first quarter, which were using temporary or miscellaneous codes, were accepted and were paid. That's great news. The J-code has simplified matters for hospitals regarding their claims; for the hospitals that are open and have patients, the claims have been much easier. The formulary process has been much smoother; the J-code, HCPCS approval, and pass-through approval have streamlined things, making it more predictable for hospitals. They have a fee schedule and can understand all those things, which has made their financial decisions and revenue predictability for the future much easier. It's really helping us as we go through our hospital activation.

Operator, Operator

The next question is from the line of Sudan Loganathan with Stephens.

Sudan Loganathan, Analyst

Gerard and Sandra, I have a quick first question. Are physicians seeing patients who have been treated with KIMMTRAK or are they starting on first-line therapy? How are they perceiving the treatment landscape now that HEPZATO KIT is available and launching? Also, how do you see the treatment landscape evolving in the coming years?

Gerard Michel, CEO

Sure. First off, Sudan, welcome aboard. I appreciate your coverage. In response to whether we are seeing patients after KIMMTRAK, I would say yes. While I can't specify how many, we did observe patients post-KIMMTRAK in the clinical trial and have also seen them in the commercial environment. With HEPZATO, we can't identify what specific treatment a patient is receiving, but we do have company representatives involved in every treatment, and they sometimes share patient history with the representatives or clinical support specialists. So, the answer is yes to that. In terms of how the treatment regime and how people view the landscape, I think that varies by doctor. Some are trying to figure out if they should use liver-directed therapy first with us approved now with a specific product, or do they go with systemic first? I think there's a variety of opinions out there, so it varies dramatically. Unfortunately for the patients, all seem to progress. It's very rare to get someone who has a complete response lasting for a decade or so. Companies such as us and Immunocore will, for their subset of patients, probably have a shot at most patients in terms of line of treatment.

Sudan Loganathan, Analyst

That's great. And then secondly, just in terms of your R&D future? Do you plan to fund that through the outcomes of the revenues of HEPZATO KIT, or do you have other plans for future R&D development and how you support that?

Gerard Michel, CEO

The question is how we are going to fund that. The plan is to fund it from the profit and loss statement. I don't want to be someone who constantly raises funds. I'm aware of dilution risks like any investor. If the stock performs exceptionally well and there are great opportunities in other areas, then we might reconsider. However, our preference is to avoid raising significant equity capital for funding; we want to rely on the profit and loss statement. We believe that's achievable. The outcome really depends on how much market share or penetration we gain in this area. If we achieve meaningful penetration, I believe there will be sufficient capital to support a strong development program.

Sudan Loganathan, Analyst

Got you. And again, congrats on the great launch here.

Operator, Operator

Next question is from the line of I-Eh Jeh with Laidlaw and Company.

Yale Jen, Analyst

My congrats on the strong launch as well. Just quick three questions here. First one is given the first quarter revenue of treatment, mostly predominantly from Moffitt's and let's say, with the 11 cases, should we consider Moffitt still to be a dominant contributor going forward for the remaining of the year?

Gerard Michel, CEO

Yes. I think Moffitt is likely to reach a run rate of over 40 cases a year, assuming they maintain their current pace. While we hope for more from other centers, some may only achieve one case every four or five weeks, which is the basis for my guidance. However, Moffitt is expected to be one of a few centers consistently performing one case each week as we move through the year.

Yale Jen, Analyst

Great. That's very helpful. The second question is just a follow-up to the first. I wanted to know if this quarter's European revenue should be viewed as a baseline moving forward, or if it's just a fluctuation for the period?

Gerard Michel, CEO

Yes. I think we will continue to see some growth, although I don't want to characterize it as growth at that level because, despite being a small number, it could compound quickly. Primarily, this growth will be driven by Germany. However, the current level we are experiencing is more realistic than in the past due to various factors, though they are not essential to discuss; the territories are relatively underserved. Currently, we have only one representative covering all of Europe, and she is based in Germany. We are in the process of hiring someone to start in the U.K. soon, anticipating that reimbursement might be available there within the next year or so. Overall, I believe this provides a solid baseline to operate from.

Yale Jen, Analyst

Great. Maybe the last question here is that one of the important pieces of your growth is to get more general oncologists as referrals and approaching them. Any updates in terms of the current status? And what do you anticipate over the next 12 months in terms of this endeavor?

Gerard Michel, CEO

Yes. If I tier my commercial efforts, it would be, first, let's get these sites open. Then let's talk to the oncologists at those sites and make sure they're referring their own patients for treatment. That's probably a larger part of the activity of our oncology reps, who are meant to call on oncologists and try to get referrals going. They've probably been focused on the sites that were opened or pending opening and they've been trained. We have been successful in getting referrals; we've gotten patients referred to Moffitt, for example. We've also received patient referrals to other sites. I think 6 to 12 months from now, getting referrals going will become increasingly critical and probably the primary driver of growth. But it's early days right now because our focus is more on opening the centers and then secondarily, getting the patients at those centers treated.

Operator, Operator

The next question is from the line of Sean Lee with HC Wainwright.

Xun Lee, Analyst

Congrats on a solid quarter. I just have two quick ones. Firstly, you mentioned 50 sites as your initial goal. I was wondering how easy it is to increase the rate that you are getting these sites active. What percentage of the U.S. patient base do you expect these 50 sites will be able to cover?

Gerard Michel, CEO

Okay. How many sites did you say? I'm sorry, did you say 50 sites? Yes, the number is probably going to be 25 to 35 is our current kind of window that we're thinking about. And of course, we claim full license to change that significantly if we believe it's worthwhile to go beyond that number. The 25 to 35 treating centers, if you look at just the patients being treated there, it's probably half or maybe a bit under half. But most patients get a single consult or two consults at one of those sites and then go have their local oncologist manage their treatment based on what they learned in the consult. We will need to get a bite at the full market; we will need to generate referral patterns. But again, I think that's quite doable, given that with payer data nowadays, you know who has these patients. We'll be very focused on that. And as I mentioned before, the importance of that growth driver will really come to the fore probably sometime next year. Right now, I would focus on getting the sites open and getting the patients treated that are already being seen by the oncologists at that site.

Xun Lee, Analyst

I see. That's very helpful. My second question is on reimbursement. I was wondering, would you be needing to seek additional reimbursement from private payers? Or is that not a big portion of the overall patient population?

Gerard Michel, CEO

No, it's a significant portion of the patient population; I think probably a little bit over half based on our research. But what happens is you generally don't get medical policy developed for an ultra-ultra-orphan product such as this. The payers, depending on the size of the payer, and as you know, it's highly fragmented. Some of them might not see a claim for every two years; another one might see one, two a year. But it's not going to be the volume or the level that it's going to take to need to develop medical policy. Generally, we have not seen any pushback from commercial payers, and based on my experience, I don't expect to see that for this ultra-orphan indication. It's on label; there are very few options for these patients. The only other option for a subset of these patients, and they're not necessarily competitive, is to provide treatment down in terms of pricing. Okay. I guess that's it for the questions. I'll just close up here. So thank you, everybody, for your time today. I look forward to giving you another update in August. Until then, enjoy your summer. Take care.

Operator, Operator

Thank you. The conference call has now concluded. Thank you for attending today's presentation.