Delcath Systems (DCTH) is a small-cap medical device company developing a drug/device combination to treat primary and metastatic liver cancers. Their lead candidate delivers high-dose chemotherapy to the liver with the goal of minimizing broader exposure to a patient and reducing harmful side effects. Delcath’s lead product delivers a high-dose of melphalan hydrochloride, a chemotherapy, to the liver through a hepatic delivery system (HDS). The drug/device combo has been approved in Europe under the Chemosat brand with over 1K treatments done to date and is in late-stage trials in the US under the Hepzato brand. Delcath is running two US trials: FOCUS (n=80) for treatment of patients with hepatic dominant ocular melanoma (mOM), which has no FDA-approved treatment, and ALIGN for intrahepatic cholangiocarcinoma. The FOCUS trial is completely enrolled and top-line data is due to come out any day now with objective response rate (ORR) as the primary endpoint.
Delcath has had a rough path to get here though. After a complete response letter (CRL) in 2013, the company’s stock crashed and was ultimately de-listed. The company meandered for a few years and got back on track in 2018 by redesigning its trial to be a single-arm study with 80 patients to solve its enrollment issues in the past since mOM is a rare cancer and to have different filtering to address past safety issues. The trial was completed in 2020 and a data announcement is expected this year. Moreover, the company appointed a new CEO, Gerard Michel, in October 2020 who has experience as a CFO in biopharma at companies like Vericel and Biodel.
There is an opportunity to invest in a company whose perception is still colored by its past that has potential to generate hundreds of million in revenue on its lead product based on an upcoming data release and expand to other liver cancer indications over time. The clinical event is de-risked by an approval in Europe with a track record of treatments and redesigned trials to avoid past mistakes. Also, excitedly, no treatment-related deaths were reported in the FOCUS trial and has shown better safety versus Chemosat.
Delcath has a shot at getting the first treatment for mOM approved. Over the long run, the company can bring HDS to other liver cancers. A comparable for Delcath is NovoCure (NVCR). NovoCure is a device company that uses electric fields to disrupt cell division to inhibit tumor growth. The company focuses on rare cancers similar to Delcath - NovoCure got its first approval in recurrent glioblastoma (RGBM) and then moved into first-line GBM treatment and malignant pleural mesothelioma (MPM). This business model has helped drive over $400M in annual revenue for NovoCure and a market cap above $17B.
Figure 1: DCTH daily chart (Source: Capital IQ)
The investment opportunity for Delcath Systems is centered around the FOCUS trial readout. If it works, the platform is de-risked and the company is on a similar path as Novocure. If the trial fails, Delcath probably gets de-listed again.
Delcath’s drug/device combo focuses on isolating a patient’s liver and delivering high-dose chemotherapy, melphalan, to it and filtering the drug from the blood afterwards; this procedure takes 2-3 hours. Delcath’s HDS isolates the liver with a series of balloons and catheters, a very high dose of chemotherapy (i.e. melphalan) is given, and then a filter works to capture the chemotherapy from blood before it goes back into the patient.
The FDA did not approve this treatment in 2013 after ~90% of patients in the trial had severe adverse events and 4 treatment-related deaths. The CRL from the FDA recommended that Delcath redesign the clinical trial to address these safety issues. This clinical failure decimated Delcath’s ability to raise more capital and the company was left for dead.
The company was able to cobble together some capital to start a new trial. The trial was set up to enroll 80 mOM patients in a single-arm trial. This change helped the company raise more capital, get relisted, and set up the company to release data from this redesigned trial. So what did Delcath do to address past failures?:
Changed the clinical trial protocol - Delcath updated their current clinical trial to use granulocyte colony stimulating factor (G-CSF) for all patients, not just sick patients, as a preventative measure to reduce toxic side effects. Moreover, beta blockers in combination with norepinephrine were given to patients to manage their blood pressure.
Selective patient recruitment - Delcath recruited patients with up to 50% tumor burden to lower the odds of clinical failure due to liver failure. Also, patients must have a blood test close to baseline, and the trial excluded patients with acute cardiac problems.
Next-generation filter - to address past toxicity issues, Delcath used a different filter for the new trial to more efficiently (over 80% versus 70% in the past) remove the chemotherapy drug from the patient’s blood.
With this updated trial and recapitalization, Delcath has successfully enrolled the trial without any treatment-related mortality so far and reduced incidence rates of severe adverse events. Various publications over the last ~5 years have also established the safety and tolerability of Delcath’s drug/device combo:
Moreover, Chemosat’s approval and use in Europe also de-risks the FOCUS trial. The drug/device’s safety profile has been well characterized in the EU with a predictable set of adverse events (30%-50%) with a response rate that outweighs the toxicity that comes with a chemotherapy. Chemosat’s success is probably driven by its use of the next-generation filter with multiple studies done and over 1K procedures conducted. Anecdotal evidence is this interview of a patient’s journey undergoing a Chemosat treatment - Delcath Chemosat Patient - Brian Carney Jan 28th. This updated trial and track record in Europe bodes well for Delcath’s FOCUS trial.
Figure 2: Overview of Delcath’s main product - Chemosat (Source: Delcath Systems’ corporate presentation)
Figure 3: Clinical trial design for Delcath’s lead asset in ocular melanoma (Source: Delcath Systems’ corporate presentation)
Figure 4: Historical efficacy of Hepzato, the drug used in Delcath’s drug/device combination (Source: Delcath Systems’ corporate presentation)
Delcath’s first indication, mOM, is an ultra-rare cancer without any FDA-approved treatments. The standard-of-care for mOM patients are systemic chemotherapy and immunotherapy that help with stabilization but have not shown efficacy; moreover, surgery is often too difficult due to mOM’s structural complexity. Patients with mOM have 6-9 months to survive after diagnosis with around 1.5K patients per year being diagnosed with the disease in the US. Beyond mOM, Delcath’s drug/device combination can address liver metastases in general, which represents over 50K patients in the US. Globally, over 1M patients are diagnosed with primary and metastatic liver cancer.
In Europe, Chemosat is sold for $25K per kit where 4 cycles are used per patient. Based on drug pricing of melphalan and guidance from management, the US price for Hepzato likely will be $50K per kit, which over 4 cycles equates to $200K per patient. With around 1.5K mOM patients and 80% of them treated in around 20 medical centers in the US, distribution and market uptake should be predictable and cost-efficient.
The valuation model assumes an FCF margin of 28%, discounting the company's ability to generate this cash flow from Hepzato over the lifetime of the product. The model also assumed a drug price of $200K. From this work, Delcath in my opinion is trading at a ~40% discount implied by the model. Moreover, the valuation model does not include the potential for Delcath to expand to other liver cancers; as a result, mOM is a beachhead market to validate Delcath’s clinical trial reset and platform.
Figure 5: Valuation of Delcath Systems (Source: Author's valuation work, using base data from DCTH’s 10-K)
Figure 6: Market opportunities for Delcath (Source: Delcath Systems’ corporate presentation)
Delcath has several catalysts but the most important one is reporting of top line data from the pivotal FOCUS trial. This data readout is expected any time now given guidance was for the fourth quarter of 2020. This event will either enable the company to validate its platform and expand or retreat back to relying solely on Chemosat in Europe. If the former occurs, Delcath should be able to raise the capital on equity markets to fund commercialization.
Right now the company has $10M in cash, and another $40M they can raise through warrants. In the first half of 2021, the company has conveyed their plans to submit an NDA in mOM pending the pivotal trial. Over time, Delcath is expecting to fund clinical development of their drug/device combination in other liver cancers through sales from the mOM commercial launch.
Figure 7: Delcath Systems’ catalysts (Source: Delcath Systems’ corporate presentation)
Risks And Challenges
Delcath’s main risk is the clinical event that is coming to a head over the next few days or weeks. This is mainly a binary event that is de-risked by a few factors: (1) success in Europe, (2) updated clinical trial, and (3) modified device filter. Delcath is not a diversified company, so the success or failure of the FOCUS trial represents most-if-not-all of the company’s value. As a side note, COVID-19 could delay this trial readout, which if punted a few months down the line, Delcath will need to issue their warrants (i.e. very dilutive) to have cash for operations.
Also, Delcath will need to raise more capital to commercialize their product pending the pivotal trial readout. Equity dilution is inevitable but whether it is around current prices or much higher is difficult to guarantee. Given the market size and comparables, I believe Delcath’s stock price will move up substantially if positive trial data is reported. In that situation, dilution is a less important consideration for the investment.
The last risk is the fact that the FOCUS trial is a single-arm trial. The primary endpoint is ORR. Issues with these trial designs are statistical powering; however, the FDA has approved medicines based on single-arm trials especially for rare diseases where patient recruitment is a barrier for clinical development.
Delcath is a relatively ignored investment with the potential to become the standard-of-care in mOM and expand into liver cancer in general. With a long and riddled history, the company’s stock is likely undercovered; however, its updated clinical trial and success in Europe substantially de-risk the upcoming clinical event. If positive data comes out, Delcath will be one of the best turnaround stories in drug development given that the company was de-listed but stuck it out and executed a new trial.
The company’s business model also creates a moat around its drug/device combination. In general, there are no such things as a generic medical device; as a result, Delcath’s HDS builds up high regulatory barriers to entry for other companies to enter chemotherapy treatments for liver cancer. Some of Delcath’s key patents on the device are the new filters. With this moat, the company can start with treating mOM patients and open up HDS applications for other, larger indications.
The thesis to invest in Delcath is premised on the following:
The company’s stock is underappreciated due to past clinical failures and de-listing despite new and exciting clinical data.
Delcath’s updated trial design for its drug/device combo addresses past issues around toxicity and patient recruitment.
The company’s product is already approved in Europe and has been used over 1K times. This substantially de-risks the US clinical trial.
Delcath has successfully enrolled for a pivotal clinical trial and has a data readout expected that creates a binary investment event that is de-risked by points (2) and (3).