Earnings Call Transcript - DCTH Q3 2023

Operator, Operator

Good day, and welcome to the Delcath Systems Reports Third Quarter Fiscal Year 2023 Financial Results. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to David Hoffman, General Counsel. Please go ahead, sir.

David Hoffman, General Counsel

Thank you. And once again, welcome to Delcath Systems 2023 third quarter earnings and business update 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; Vojo Vukovic, Chief Medical Officer; and John Purpura, 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 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 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. Since the FDA approval of HEPZATO KIT on August 14 for patients with metastatic uveal melanoma, we have been focused on outreach to potential treating sites and building our commercial team in preparation for commercial launch, which is now anticipated for January. While it's taken slightly longer than expected to work with our CMOs to finalize or produce QC released, labeled and packaged melphalan specific to HEPZATO, we have been productively using the time between approval and launch to expand the number of treatment teams that have undergone training and attended a preceptorship, both of which are required before a new treating team can perform their first proctor case. We have been encouraged by both the medical oncologists and interventional radiology communities' motivation and stated commitment to incorporate HEPZATO KIT into their practices for treating patients with metastatic uveal melanoma. While we are fielding interest from more than 20 sites, we are primarily focused on a subset of these to ensure that we achieve our planned activation targets throughout the year. In conjunction with the local medical oncologists at each of our target sites, we have been working with the interventional radiologists to identify and train HEPZATO KIT treatment teams. In addition to training the treatment teams at each site, we are also working to get HEPZATO KIT approved through the various traditional hospital formulary and value analysis committees, and we have started that process in 13 hospitals. Currently, we have three EAP sites, Moffitt Cancer Center, Duke University, and the University of Tennessee, which are fully trained. They can start treating commercial patients upon the availability of commercial product. Additionally, we now have a further four sites, Mayo Clinic, Thomas Jefferson, Ohio State University, and Stanford University, that have completed the necessary steps to conduct their first commercial treatment under the guidance of a proctor once commercial product is available and formulary and Value Analysis Committee approvals are obtained. Beyond those seven sites, another four sites, UCLA, Providence St. John's, Mass General, and Piedmont Hospital, currently have preceptorships scheduled in November or December. In total, we expect at least 10 sites will have completed the required training to treat a commercial case by the end of January, contingent on scheduling a proctor team for that first case and the successful completion of the various Value Analysis Committee processes. Given the need for the first case to be proctored and the required community approvals, I don't expect all of the 11 previously mentioned sites to be actively treating patients in the first quarter. However, based on interest and progress to date, I am confident that we will achieve at least five active treatment sites sometime in the first quarter, 10 by the end of the second quarter, and 15 treating centers by the end of 2024. We expect treatments per site to start at approximately one per month and end the year at approximately two per month. Since HEPZATO KIT is a liver-directed interventional radiology procedure and not an infused drug, we are focused on medical centers as currently mentioned that they currently offer liver-directed therapies for metastatic uveal melanoma patients and currently treat a meaningful number of patients with liver-directed therapy. Noteworthy centers include Thomas Jefferson University led by uveal melanoma oncologist thought-leader, Marlana Orloff; an interventional radiologist, David Eshman, a leader in liver-directed therapy. Thomas Jefferson treats the largest number of metastatic uveal melanoma patients in the country. Other noteworthy centers include UCLA, led by melanoma thought-leader medical oncologist Bartosz Chmielowski and interventional radiologist Sid Padia. Mayo Clinic with medical oncologist Roxana Dronca and Yiyi Yan, interventional oncologists, Charles Ritchie. Moffitt Cancer Center with the FOCUS trial principal investigator John Zagar and Stanford University with medical oncologist Sunil Reddy and interventional radiologists, Gloria Hwang. Since approval, Kevin Muir, Delcath's General Manager of Interventional Oncology has been busy building the commercial organization. Kevin has made a point of bringing on team members that have deep experience in launching complex therapies requiring multiple stakeholders in the hospital setting. For example, our new Director of Sales, Zac MacLean, comes from Boston Scientific and has over 20 years of experience leading teams in bringing new liver-based interventional procedures to market. Under Zac's guidance, we have divided the U.S. into four regions, each of which will be served by a commercial team comprised of a liver-directed therapy representative and two oncology managers. The liver-directed therapy representative will manage the hospital approval process and ensure that the HEPZATO KIT procedure team is trained and supportive while performing the procedure. The oncology managers will engage community-based medical oncologists outside of our treating centers with the goal of building referral networks to the oncologists within the treating centers. In addition, each team will be supported by a clinical specialist who will support the treatment teams in preparation for and during the treatment with the goal of ensuring patient safety and improving patient outcomes. To ease patient access, Kevin's team has been working with market access consultants to submit the required applications to obtain the C-code, J-Code and NTAP from CMS. Given the nature of HEPZATO KIT, we anticipate all codes and add-on payments will be granted. We are in the final stages of designing a patient access program called HEPZATO KIT Access, designed to assist patients and hospitals in numerous aspects of treatment planning, including prior authorization. We are working with a well-established hub service with significant experience in both ultra-orphan diseases and oncology to manage this program. We continue to support both internal and external efforts to add to a growing body of evidence that the PHP procedure, whether utilizing melphalan delivered by Delcath's CHEMOSAT or the HEPZATO KIT, is an important treatment option for patients with liver-dominant uveal melanoma. We recently announced the publication of results from a retrospective comparative study of CHEMOSAT and selective internal radiation or SIRT published in the Journal of Cancers. The independent investigator study from the University Hospital Tubingen, in Germany, compared two liver-directed therapies, multiple cycles of SIRT versus two treatments of percutaneous hepatic perfusion of CHEMOSAT in patients with liver-dominant metastatic uveal melanoma. Median overall survival was 301 days for the 34 patients treated with SIRT and 516 days for the 28 patients treated with CHEMOSAT. An adjusted regression model showed a significant difference between SIRT and CHEMOSAT with a hazard ratio of 0.32 and associated 95% confidence interval of 0.14 to 0.73 and a p-value of 0.006. The overall survival results clearly demonstrate the positive impact of treating liver metastases on patient outcomes with CHEMOSAT. As a reminder, there is an ongoing investigator initiative in a randomized Phase II trial in Europe evaluating the effect of adding immunotherapy to CHEMOSAT liver-directed therapy. The trial has enrolled 55 of the planned 76 patients, and the investigators expect the trial to be fully enrolled by mid-2024. The primary objective of the trial is to determine the efficacy of combination treatment of immunotherapy with ipilimumab and nivolumab with CHEMOSAT treatment versus CHEMOSAT alone, defined by progression-free survival at one year. Secondary objectives include overall survival and overall response rate. An interim futility analysis conducted in September resulted in the independent data monitoring committee recommending the continuation of the study without modification. As mentioned earlier, we now expect to start commercial sales in January 2024. We have been utilizing the time between approval and launch to increase the number of trained treating centers and initiating the formulary approval process of numerous institutions. The feedback and progress to date gives us confidence that HEPZATO KIT will become the standard of care for liver-directed therapy for metastatic uveal melanoma patients quickly after launch. 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 Q3 with $40.5 million in cash. Cash used in operations was approximately $9.2 million in the third quarter and $23.1 million for the first nine months of the year. The increase in cash is due to the funding received as part of the Tranche A warrants exercise. Specifically, the Tranche A warrants were exercised for $35 million for the equivalent of $7.5 million in common stock. The $35 million should be sufficient to fund the company until another 4.1 million shares of common stock equivalents are issuable at a strike price of $6 as part of the Tranche B warrant without having to issue additional equity capital. The Tranche B warrants would result in $25 million of gross proceeds upon the company achieving $10 million in quarterly revenue. Current shares outstanding are 22.1 million and 40.5 million on a fully diluted basis. Revenue from our sales of CHEMOSAT was $0.4 million for the three months ended September 30, 2023, compared to $0.9 million for the three months ended September 30, 2022. For the three months ended September 30 this year, R&D expenses were $4.7 million compared to $4.1 million for the same period in 2022. The increase is due to activities related to the FDA inspection and other requests in advance of their approval of HEPZATO. For the three months ended September 30, 2023, compared to the same period in 2022, selling, general and administrative expenses have increased from $4.8 million to $6.2 million due to activities to prepare for commercial launch. That concludes our earnings and business update. I would ask the operator to open the line for Q&A. Can you please check for questions?

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Bill Maughan with Canaccord Genuity. Please go ahead.

William Maughan, Analyst

Hi. Good afternoon. Thank you. So I have two questions. You talked about getting sites up and running and the last hurdles to go through being product availability and sites' Value Analysis Committee approvals. Regarding the sites' Value Analysis Committee approvals, how active is Delcath in that process, or is that generally an internal hospital process? And how certain is the outcome of those processes? In other words, is it sort of a check-the-box operation or is there any uncertainty in that approval? Second question is, how do you see HEPZATO being used post-KIMMTRAK, or are those patients simply too far along to be an addressable market? Thanks.

Gerard Michel, CEO

Yes. Let me start with the first question. Bill, good to hear from you. I think, Kevin, you could probably add some color to this. I wouldn't go as far as to say check-the-box, but I would also say we have a lot of sites. There's no place that we're moving forward and aggressively where we aren't confident of support. Kevin, can you add some color?

Kevin Muir, General Manager, Interventional Oncology

Yeah, Gerard. Thank you. It's far from check-the-box. It's a formal process within each facility. They are basically looking for, if we code this procedure, will we get paid, will we get reimbursed? We are asked to provide a limited amount of information, and then a hospital makes its decision. We feel confident with our hub services assisting with the coding and forecasting for the facilities, and it is then up to them to see if that's beneficial for them. The feedback that we've had to this point in time has been very good. So we're confident that out of the 11 sites that Gerard mentioned, we will have five of them perform procedures by the end of January.

Gerard Michel, CEO

And Kevin, I think it's fair to say that there have been a number of these meetings already, and it's usually not just one meeting, but a number of these meetings have started. We've yet to have any negative reactions saying this isn't going to happen. Is that correct?

Kevin Muir, General Manager, Interventional Oncology

It's entirely correct. We've been overwhelmed by the response we've had and the two-way communications with each hospital to this point in time. As Gerard mentioned, we've had several of these calls and presentations with the hospitals, and we anticipate most, if not all, of these coming back with the Value Analysis Committee in our favor.

Gerard Michel, CEO

Now Bill, in terms of your second question, about patients who are post-KIMMTRAK, will they be too far gone, too far progressed? The answer is, some may be, and some may not. If we take a step back, the first question really is, should you use liver-directed therapy first? Some oncologists believe that liver-directed first makes sense. Others prefer systemic first. So it's not going to be everyone automatically going to liver-directed first. One point we will make to oncologists is that you can tell after two treatments from us whether or not you're getting a benefit.

William Maughan, Analyst

Got it. Thank you very much.

Operator, Operator

The next question comes from Scott Henry with ROTH Capital. Please go ahead.

Scott Henry, Analyst

Thank you and good afternoon. Just had a couple of questions. First, as far as the launch metrics you laid out, Gerard. When we think about one per month, moving to two per month, do you think about that as an average, or do you think of that as a high-volume location? Just trying to get a sense, because some people will do more, and some will do less. How are you trying to put that one to two in reference?

Gerard Michel, CEO

I think here's what we have. Before we really get out there and get moving, kind of averaging down, who knows. I do know, I'm confident there will be some sites that are doing one a week. There are others that, as they get started and we're building the referral networks, they might be doing one every two months. Eventually, my hope is that sites do at least one a week over time. But it's definitely an average, and it's really thinking there's one or two sites doing most of those and the new ones that have recently come on board are building their referral networks.

Scott Henry, Analyst

Okay. Great. And when we think about cycles per patient, how would you think about the average number of cycles a patient would have and how much time between cycles should we expect in utilization?

Gerard Michel, CEO

In the FOCUS trial, the average was about 4.1, and for modeling, we are assuming four. In the trial, patients could go up to eight weeks between cycles, with six being the recommended interval. In Europe, some doctors may opt for quicker cycles while others might adhere strictly to the protocol. I believe there will be a group doing two cycles eight weeks apart and then pausing, while others will continue without interruption. I am confident that patients who withdrew from the trial due to low blood counts are unlikely to face the same issue in a commercial setting, as doctors will typically wait a few extra weeks before reevaluating. So, on average, I think it will be manageable.

Scott Henry, Analyst

So when we think about cycles per quarter as we model out expectations for the launch, my understanding is that we should think about it as one to two cycles per quarter, depending on the site?

Gerard Michel, CEO

Yes, one to two. Starting out early in the first quarter, one treatment a month per site, ending with two. When I say treatment, I mean a cycle or a treatment. We're not really counting patients right now since we're just scratching the surface at these levels in terms of the total addressable market. Right now, we're just focused on treatments or cycles.

Scott Henry, Analyst

Okay. And Gerard, maybe for the typical hospital, could you walk through how that hospital gets paid with this product? What is the procedure and how should we think about that?

Gerard Michel, CEO

For the typical hospital, there will be three components of payments, all right? We're going to talk about outpatient because the majority of these patients will be outpatient. They're going to submit a set of CPT codes for a facility fee, a set of CPT codes for the procedure for the doctor's time. Most of these doctors are on salaries, so it's not a direct incentive to them, but they do care. The third reimbursement component will be for the drug itself, HEPZATO KIT. That will initially be with a C-code and we will eventually get a J-code, but that's a pass-through payment, so the hospital would be paid whatever we charge them plus 6%. Let me pause here and see if there's any more detail or a particular part of that process you would like to hear about.

Scott Henry, Analyst

No, I think that's a good overview. Are all of the codes necessary to start the process, or is there a sequence that hospitals will prefer as they utilize this?

Gerard Michel, CEO

Kevin, could you explain how the CPT codes will be available in relation to the portfolio of codes you plan to use? Additionally, could you clarify what their initial use will be and what will happen once the C-code is introduced?

Kevin Muir, General Manager, Interventional Oncology

CPT codes are simply codes that describe what the physicians are doing during the procedure. When they go through the procedure, they will record what they do. The CPT codes will match their actions and are presented to CMS for payment. There will be two payments: one for the hospital and one for the physicians. We've gone through several coding exercises to ensure our hospital partners that these codes will provide adequate reimbursement if they code them correctly and perform the procedure. The final part of that is the product. We should anticipate hearing very soon back from CMS on our C-code, which is the transitional pass-through application. We expect this to be a pass-through payment for the hospital, along with a 6% administration fee on top, so hospitals that we've spoken to so far find that the reimbursement seems more than adequate for them to move forward.

Scott Henry, Analyst

Great. That’s helpful. Gerard, that's my scheduled questions for now. Thank you.

Operator, Operator

Next question comes from Marie Thibault with BTIG. Please go ahead.

Unidentified Participant, Analyst

Hey. Good afternoon. This is Sam Iber on for Marie. Thanks for taking the questions, and congrats on the progress getting through some of those treatment sites. Maybe I can use my first question on the work with the CMOs. I caught your comments earlier on the call that it's taking a bit longer than expected. Just wanted to get any additional color on maybe some of the bottlenecks or work that's going on behind the scenes there? Thanks.

Gerard Michel, CEO

Sure. We've known for quite a while that we'd like to work more directly with a CMO for melphalan. Given the series of acquisitions based on who we initially contracted with, we're now in a situation where Mylan holds the ANDA, and they use a CMO, Neopharma in Italy. Neopharma uses a set of CMOs or contract labelers to create the various labels and such. We have tried to accelerate this by saying, ship us naked vials, we'll label it, make the labels, and ship them up to Italy. Unfortunately, since we're a very small player for this generic product and these nested manufacturers, we are having difficulty getting them to move off of what they say are contracted lead times. There's no way for us to write a large check or guess what the label timing would be to get ahead of this. It's unusual where we're using a generic product, and we're getting a small run for us. We won't have these bottlenecks in the future. We've already placed an order for a second batch, which should be delivered shortly after the first batch. After that, we should have a robust supply chain in place.

Unidentified Participant, Analyst

Okay. That all makes sense. I appreciate the added color there. Maybe I could use my follow-up on some of the VAC approval process questions. How long do these usually take? For other products, we hear it could take six months to 12 months; I assume it's probably quicker here. I recognize it’s not just a check-the-box item but wondering your thoughts on how long those VAC approvals you expect to take?

Gerard Michel, CEO

I think what's unique is that this is not another antibiotic for hospital-acquired infection or another stent. This is a product where there is nothing else for this patient set. Our interventional radiologists and medical oncologists are very happy to champion this and push this forward outside their regular scheduled meetings. Kevin, is there anything I left out in terms of the process or any further color?

Kevin Muir, General Manager, Interventional Oncology

No, to add some perspective. You're right. In my career, I've generally budgeted nine months for these Value Analysis Committees. What's encouraging is that our product addresses an ultra-rare disease, there is a lack of standard of care for these patients, and we're at the right hospitals. They recognize the need for what we are bringing, and we're likely closer to three months, and in some cases even shorter than that.

Unidentified Participant, Analyst

Okay. Really helpful. Maybe just a clarification question. How many of the proctor sites do you have in the U.S. that could essentially conduct the proctor cases?

Gerard Michel, CEO

Kevin?

Kevin Muir, General Manager, Interventional Oncology

Looking at my list right now, we have the three EAP sites that are ready to go. The rest of the focus trial sites have abbreviated training requirements. So that would be another one, two, three, four. So we'll have some available.

Gerard Michel, CEO

Kevin, in terms of proctor teams ready to go, it's Moffitt, right?

Kevin Muir, General Manager, Interventional Oncology

Yes. I'm sorry, I misunderstood the question.

Gerard Michel, CEO

That's one of the reasons it's going to be a bit slow, but we'll have another team, two or three teams up and running within a few months. Additionally, we have a number of teams in Europe who are more than happy to fly over as well.

Unidentified Participant, Analyst

Got it. Okay. Thanks for taking the questions.

Operator, Operator

The next question comes from Yale Jen with Laidlaw & Company. Please go ahead.

Yale Jen, Analyst

Good afternoon and thanks for taking the questions and congrats on the progress. A couple of quick questions. First one is in terms of your inventory preparation for the launch, what do you think your inventory level might be? And how adequate is the anticipated supply for the subsequent quarters?

Gerard Michel, CEO

We are trying to maintain at least a year's worth of inventory. Once we pass the $10 million revenue milestone, this will enhance our balance sheet significantly. We will likely increase safety stock for certain components just to be cautious since it is not easy to switch out component suppliers. So that addresses your first question. What was your second, Yale?

Yale Jen, Analyst

When you start to launch the product, do you see that preparation as adequate at that time?

Gerard Michel, CEO

I believe we will be sufficiently stocked based on orders coming in this year. Once melphalan shows up, we will ensure we have at least a year's worth of inventory of every component.

Yale Jen, Analyst

Great. That's helpful. My second question is that given you indicated roughly 10 sites will be in the queue for the first half of next year, what is your estimate of the total potential patient size or the number of procedures from those 10 combined?

Gerard Michel, CEO

If I'm sticking to what I said earlier, I think by the end of the quarter, we'll definitely have five sites up and running, doing at least one a month. By the middle of the year, I expect at least 10 sites in operation, and by the end of the year, at least 15 sites, all doing at least two per month. You can estimate the total volume, and that will give you a range, plus or minus 30% depending on timing assumptions. To estimate patients, divide that number by four.

Yale Jen, Analyst

Okay. Sounds good. And maybe the last question is, is there any expectation of patients to transition into procedures once we launch the product?

Gerard Michel, CEO

Yes. We are having conversations with sites. We would like to transition EAP patients over to commercial patients when commercial supply is available. However, we can't force that transition, though we plan to do so wherever possible. I don't know whether it will be a third or half of patients, but there will be a significant percentage treated in the first quarter that were previously in the EAP.

Yale Jen, Analyst

That's very helpful. Thanks for all the details and congrats again on the progress.

Gerard Michel, CEO

Thanks so much, Yale.

Operator, Operator

The next question comes from Swayampakula Ramakanth with H.C. Wainwright. Please go ahead.

Unidentified Participant, Analyst

Thank you. This is RK from H.C. Wainwright. In terms of getting centers ready when you start launching the drug in January, are you getting a sense of how long it takes for some of these doctor teams or surgery teams in terms of training so they can start doing their surgeries? How do you foresee this training time evolving as you launch and more physician teams start training?

Gerard Michel, CEO

This really varies. We have one site that immediately jumped on it and completed their training within a month or so. There are other sites that require coordination between interventional radiologists, anesthesiologists, and perfusionists, making scheduling much more complex. Therefore, while we expect to have about 11 sites ready for training within two months, only five will likely proceed to proctor cases at first. We will be looking at more experienced doctors to expedite the process, but this remains difficult to predict. By this time next year, I believe the process will get considerably easier as more teams become available to act as proctors.

Unidentified Participant, Analyst

Understood. How do you see hospitals and doctors approaching treatment with the HEPZATO KIT versus KIMMTRAK? During conversations you've had, what is the main focus, and do you think you'll be able to convert any potential patients from KIMMTRAK to the kit?

Kevin Muir, General Manager, Interventional Oncology

I don't think we will replace KIMMTRAK with HEPZATO KIT. Our conversations have centered around the potential for these two therapies to be used in sequence, exploring which treatment provides the best overall survival without necessarily prioritizing one over the other.

Gerard Michel, CEO

Additionally, it's worth noting that KIMMTRAK is indicated for about 40% to 45% of the overall population. This sets a specific demographic for our discussions, but I do believe there is some overlap.

Unidentified Participant, Analyst

Thank you for taking my questions.

Gerard Michel, CEO

I want to thank everyone for taking the time this afternoon. I look forward to providing future updates regarding the launch and subsequent commercial uptake. Thank you, everyone, and have a good evening.

Operator, Operator

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