Delcath Systems Inc (DCTH) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Delcath Systems third quarter 2020 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, James Carbonara of Hayden Investor Relations. Thank you, sir. You may begin.

Thank you. And once again, welcome to the Delcath Systems third quarter 2020 earnings call. With me on the call are Gerard Michel, Chief Executive Officer, John Purpura, Chief Operating Officer, Dr. Johnny John, VP, Medical Affairs, and Christine Padula, Principal Accounting 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 27 A of the Securities Act of 1933, and Section 21 E of the Securities Exchange Act of 1934.

Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances 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 circumstance.

Now I'd like to turn the call over to Gerard Michel. Gerard, please proceed.

Thank you, everyone, for joining today. As many of you know, this is my first earnings call since joining Delcath in October. In addition to the expected updates on clinical progress and financial results, I will first explain why I found the Delcath opportunity so compelling that I chose to join the company. I think this will be useful for investors to know the story well, and especially valuable for the many investors who are either looking at the story for the first time, or taking a second look after ceasing to follow the company years ago.

An obvious first question when looking at any opportunity, whether a career move or an investment opportunity, is whether the company is offering or developing a product or service that addresses a real unmet need. I believe that Delcath clearly has such a product. The drug device combination, Melphalan/HDS and the standalone CE mark device, CHEMOSAT available in the EU are designed to administer high-dose chemotherapy to deliver while controlling systemic exposure and associated effects.

The lead indication is metastatic ocular melanoma. And while an orphan indication with an estimated 1,200 to 1,500 patients here in the US, there's no standard of care and the existing treatments have not been shown to offer a significant benefit to patients. Upon diagnosis of liver metastases, patients have a very poor prognosis from this devastating disease. While it is clear that there is an unmet need, the next key question is whether the ongoing FOCUS trial would demonstrate adequate efficacy. The trial's primary endpoint is overall response rate.

In our submission to the FDA, we based the outcome of the trial on the hypothesis that Melphalan/HDS is more efficacious than immune oncology agents. One category of treatments frequently used in patients with metastatic ocular melanoma given their approved label for metastatic melanoma. For analytical purposes, the FOCUS trial should demonstrate an overall response rate of at least 21% show superiority over the response rate calculated from a meta analysis that was conducted on immuno-oncology trials in metastatic ocular melanoma. It is important to note that in all previously published studies, even the first pivotal trial with the first generation filter, exceeded this targeted overall response rate.

In these studies, the overall response rates have varied from 27% to 72%, with the last three studies using the second-generation device range from 47% to 72%. While these last three published studies were all single or dual center studies which often have higher response rates, and the last study focused on earlier stage patients who generally seem to have a better response rate, we do fully expect the trial results to be somewhere within the range of all four studies studies and be well in excess of the 21% target overall response rate.

All of this information was critical to my conclusion that Delcath is nearing the end of a development program which lead to an efficacious product addressing an unmet need. While the lead indication is an ultra orphan indication, we believe Melphalan/HDS will eventually have a role in treating other solid tumors of the liver in the US as it already does in the EU.

In addition to ocular melanoma, the liver is the predominant site of metastasis for colorectal cancer and gastrointestinal neuroendocrine tumors. Complete surgical resection might represent a curative option in patients with isolated hepatic metastasis, the resection is not possible in most patients because of the number, location, or size of the hepatic capacities. Hepatic metastasis can also co-occur with many other malignancies such as breast cancer, renal cell carcinoma, cutaneous melanoma, and soft tissue sarcoma. Liver is often the life-limiting organ for cancer patients and overall survival is usually under 12 months.

There have been a variety of studies and case reports in many of these tumor types that support further investment to investigate the possible efficacy of Melphalan/HDS in a broader set of tumor types, thereby dramatically expanding the market potential for Melphalan/HDS. Of course, turning this potential into reality will take time. And the first step is approval in a single indication, which is currently our primary focus.

A second critical factor which I examined carefully before deciding to join Delcath is whether there is adequate evidence to conclude that the safety of the second-generation Melphalan/HDS device is meaningfully improved over the device studied in the pivotal trial conducted 10 years ago. In that trial, four deaths occurred due to the treatment. And despite the clear signals of efficacy, the risks associated with device led the FDA to conclude that the benefits of the product did not outweigh the risks with the first-generation product. The safety issues were multifactorial, but there were two that are most noteworthy.

The first was patient selection. In the first pivotal trial, many patients had extensive liver disease and were not restricted by volume of tumor burden in the liver. These patients accounted for a disproportionate percentage of the adverse events. We now know that like most chemotherapeutic regimes, some patients are just too sick to tolerate treatment. Patients were treated in the first pivotal trial that would have been excluded from many other liver-directed therapies and systemic chemotherapeutic agents.

A second and perhaps the most important change was improving the filtration efficiency and consistency. The previous generation filter, whose manufacturer was outsourced, was inconsistent in its filtration efficiency and had an unacceptable rate of hematological toxicities due to both the design of the filter and inadequate manufacturing controls. To this end, the company changed the design of the filter, in-source manufacturing that filter, and developed validated physical and functional release specifications for the filter and its critical subcomponents. The evidence for the improved safety is again in the public domain. I will not go through the safety findings of each of the three published studies mentioned previously, but I will mention results from the most recent study from Leiden University Medical Center.

In a publication reporting the results of the study, the authors noted that all the adverse events were well manageable or self-limiting, and there were no treatment related deaths. The investigators also noted that the hematologic and hepatic toxicity percentages were significantly lower compared to studies using the earlier generation of CHEMOSAT, which utilized a different filter system. Finally, based on a validated quality of life tool used in the trial, the investigators concluded that CHEMOSAT is well tolerated with maintenance of quality of life with only a mild and temporary impairment in physical functioning noted at six weeks after the second CHEMOSAT treatment.

It is important to note that there's not been a single treatment related deaths in over 1,000 treatments in Europe. And then in the FOCUS trial, which still has nine patients undergoing treatments, 356 treatments have been given to 91 patients. And we can confidently state that the adverse event profile is within the range as seen in the published studies.

This study is utilizing an independent Data Safety Monitoring Board, which has met seven times as planned during the course of the trial. And there has never been a need to pause the trial for reasons of unacceptable safety risk or a safety concern.

In summary, given the totality of the safety and efficacy data available, I reached the conclusion that the FOCUS trial is likely to produce the data necessary to support compelling case that Delcath Melphalan/HDS has a high probability of approval to treat metastatic ocular melanoma. And given the multiple smaller studies and case reports in other tumor types, Melphalan/HDS has significant potential to expand into larger markets over time.

While compelling, that in itself was not adequate to convince me to join Delcath. Beyond just the data, an important question is what the team is in place to execute. While the team is lean and key positions need to be filled, John Purpora, our COO, and Johnny John -- Dr. Johnny John, our Vice President of Clinical and Medical Affairs, have done an excellent job planning and executing on all aspects of the development program, including manufacturing, process validation, regulatory strategy, and clinical development. I would not have joined if I was not confident in their capabilities. In addition, we have a strong, experienced, and reinvigorated Board with a wealth of experience supporting the management team.

Since my arrival, John Purpura, Johnny John and I have set the company's near-term priorities as follows. One, complete the FOCUS trial and submit an approvable NDA. Two, prepare for the commercialization of Melphalan/HDS in the United States. Three, raise the awareness of Delcath in the investor community. Four, prioritize additional indications for Melphalan/HDS and then design and execute a development plan for the higher value indications.

I will touch briefly upon each of these priorities. Starting with the FOCUS trial and NDA submission, Delcath enrolled and started treating the final patient, October 2, 2020. The next milestone is the release of top line data, which we will project will occur early in 2021. In that release, we intend to share the primary endpoint, overall response rate, as well as duration of response, and an evaluation of safety. We are currently projecting submission of the NDA to the FDA in the first quarter of 2022, which would still allow for a 2022 launch.

The primary gating item to our submission is data monitoring, which requires site access. Due to the increased rates of COVID-19 cases, many sites have recent increased access restrictions. While we are utilizing remote monitoring where feasible, not all sites are equipped to support remote monitoring and not all data can be remotely monitored. In addition, when lockdowns end, the number of days of access is being reduced due to the high demand from multiple sponsors.

Our projections assumes that current and future access restrictions are limited in duration to a few months. Given the rapidly changing landscape, it is difficult to project a submission date with a high degree of confidence, and our assumptions could be could prove to be overly optimistic or pessimistic. In an effort to minimize further delays, we are attempting to negotiate increased site access when restrictions are lifted and also intend, subject to FDA feedback, to adjust our monitoring plans to focus on the CRF pages most important to the efficacy and safety endpoints, a strategy which we believe is consistent with current FDA guidance on monitoring.

I must stress that the team's focus is not primarily speed but quality. Our goal is not to submit an NDA as quickly as possible, but to submit an approvable NDA in a timely manner.

Regarding the second priority, commercialization planning is underway with a well-known consulting firm helping lay the groundwork to ensure appropriate patient access and reimbursement. In addition, we expect to announce some significant hires over the coming few months in commercial roles. One small, but exciting step towards commercialization is the choice of a trade name. In September, the FDA conditionally accept the name HEPZATO kit for use in the US. Going forward, we will use HEPZATO or HEPZATO kit when referring to Melphalan/HDS, the combination drug device product. I look forward in the coming quarters to providing additional updates and details on our prelaunch activities.

Our third priority is to raise awareness with the investor community. Delcath has not received much intention for many years for a variety of reasons. It is not the first company that has had some missteps, been forgotten, and then continue to be overlooked despite mounting evidence of significant progress and value creation. To raise awareness, Delcath will need to deliver on its milestones, and the management team will need to be transparent with and accessible to the investor community. To that end, I plan on getting out on the virtual road on a regular basis and maintaining an open and of course Reg FD compliant line of communication with our current and potential shareholders.

Consistent with our efforts to raise awareness last week, we hosted a key opinion leader call with Dr. Mark Burgmans, Head of Interventional Radiology at the Leiden University Medical Center in the Netherlands, an investigator in the study had previously mentioned, which cited the use of CHEMOSAT in earlier stage ocular melanoma patients.

Our fourth strategic priority is the prioritization of additional indications for HEPZATO and the subsequent design and execution of development plans for the higher value indications. Over the next six months we'll be reviewing the incidence, unmet need, available efficacy data, and development requirements for a broad set of liver cancers in order to select a portfolio, follow indications, which will maximize the value of HEPZATO and CHEMOSAT platform. A key part of that process will be to convene disease-specific advisory boards to ensure that we choose the highest potential indications and as importantly, the optimal development plan.

In 2017, we initiated the ALIGN trial, a global Phase 2 clinical trial for intrahepatic cholangiocarcinoma, based on promising data generated from commercial treatments in Europe. Presently, we have paused our work on the ALIGN trial while we revisit the protocol to determine changes which may boost recruitment rates. In the interim, the clinical team is focusing its efforts on the FOCUS trial conclusion and subsequent NDA filing.

In summary, I believe HEPZATO was a clinically differentiated, high value platform with the potential to address multiple cancer indications of high unmet medical need. I am committed to leading the organization towards its goal of making HEPZATO the first product specifically labeled for metastatic ocular melanoma patients, a population which currently has limited therapeutic options.

I look forward to building shareholder value both through the successful commercialization of HEPZATO in metastatic ocular melanoma, and longer term initiating an additional targeted clinical programs to expand the market opportunity of this platform technology.

I look forward to taking your questions, but first, we'll turn the call over to Christine to review the financials.

Thank you, Gerard, and good morning to everyone.

Our product revenue for the three months ended September 30, 2020, was approximately $340,000 compared to the $216,000 for the prior year period from our sales of CHEMOSAT procedures in Europe. Selling, general, and administrative expenses were approximately $2 million compared to $4 million in the prior year quarter. Research and development expenses for the third quarter were $3.3 million compared to $1.8 million in the prior year quarter. Total operating expenses for the third quarter were $5.3 million compared to the $5.8 million in the prior year quarter.

We recorded a net loss for the three months ended September 30, 2020 of $5 million compared to the net loss of $7.5 million for the same period in 2019. At September 30, we had cash, cash equivalents and restricted cash totaling $11.1 million compared to cash, cash equivalents, and restricted cash of $10.2 million at December 31, 2019, and $15.5 million at the end of September 30, 2019.

During the three months ended September 30, 2019, and September 30, 2019, we used $5.2 million and $12.4 million respectively of cash in our operating activities.

That concludes my financial remarks, and I now ask the operator to open the phone lines for Q&A. Operator, can you please poll for questions?

Thank you. We will now be conducting a question and answer session. (Operator Instructions)

Scott Henry, Roth Capital.

Thank you and good morning. A lot of new information on the call. I did just have a couple of questions.

First, 91 patients for 356 treatments, that's about 3.9, call it 4 cycles per patient, which would seem to be an encouraging sign. How would you kind of interpret is that in your opinion?

Well, I think it means just using the simple math that on average, patients are getting about four treatments. And as you know, some six to eight weeks per protocol for treatment. So that's an encouraging sign. I don't want to go beyond that and say, hey, look, it's impute an overall response rate from that. But certainly if you assume that most of those patients are getting a response and it's not just stable disease, it's very, very encouraging.

Okay. I would certainly agree. And then, with the data coming in early '21 and a filing coming in early '22, what's kind of the gating factor?

Yes. The gating factor is really monitoring. We have probably a disproportionate number of patients in a handful of sites. The monitoring is certainly backed up through COVID. And it's really working through that and the slowest site with the most data is the gating item. So we might have, you know, 17 out of, I think it's 20 sites, give or take one. There might be two or three they're dragging us that far along. We're certainly doing everything we can to accelerate that.

But when you do the math of the pace and the access you have, you remember it's us and umpteen other sponsors trying to get in the door and negotiate for additional access. And some of these sites are saying what we're going to do is scan for your redact -- redact and scan excuse me, paper copies and send them off to you. And we only get a one person every two days a month to do that because every other sponsors' asking for it. That's one example.

Another is when they open up, it could be normally you could perhaps three or four people show up, they only let two because they're trying to do distancing. There's a myriad of things like that. But all under the same basic theme of when things open up, they're not totally opened up. And then things start shutting down like they are now, we have to make some set of assumptions about how long will they be shut down. So it's a handful of sites that we're trying to pull the data through thin straws, that's the best way to think about it.

And I very much appreciate the guidance of at least 21%. Now, how comfortable you are you that that bar hasn't shifted since you last met with the FDA? I mean, has the kind of standard of care improved at all? Or would you say it's similar to when you came across that? When you picked that number, 21%?

I don't think anything dramatic has changed since then, but I'll ask Johnny John to comment.

Sure. Thank you, Scott, for the question. We're not that concerned that this bar has shifted. This was a meta analysis done on 16 publications at the time to get the overall response rate in those publications and establish a baseline or a minimum that we would have to hit to show superiority over immuno-oncology treatments. Even if it did shift a small amount, it still is not of a concern currently to us. But if we would, of course, consider any new publications, and we can do an analysis internally to see if those would impact to the current 21%. But again, we're not deeply concerned by a small shift in that number.

Okay, great. Well, thank you for taking the questions and thank you for the increased visibility.

Yale Jen, Laidlaw & Company.

Good morning and thanks for taking the questions and, Gerard, congrats on the great opportunities.

My first question is that you still have 9 patients under treatment. Can you give us some sense when those treatments will be completed? Any comments on those patients? And when you say reported top-line data for early 2021, would that be first quarter? Can I have some follow-up?

Sure. Let me let me start with the second question. Yes, it will be in the first quarter and then hopefully early in the first quarter. Need to give yourself a little wiggle room. So we'll say the first quarter.

In terms of the nine patients, we don't know when they'll be completed. Depends on how many cycles of treatment they get. We did mention the last patient was dosed up in September started dosing. Now if it happens that we have all the data in except for, let's say, two or three patients, we will give the top line data. And then we'll just say that, you know, except for X number of patients who were not evaluable at this time, which is not unusual, as you know, in oncology trials. So that will not be a gating item to getting top line data.

Okay. And you mentioned about the 21% for the immuno-oncology agents. Are those none of those agents actually formally approved for the metastatic ocular melanoma? Is that correct? Or that's actually somewhat has been approved?

Well, somewhat has been approved. I'll let Johnny John explain that kind of a unique situation of those agents.

Sure. So those agents have been approved, Yale Jen. The analysis, meta analysis was done on both a single therapy agents, but also combination therapy regimens that were used for metastatic melanoma.

So in terms of the approval, the approval for these agents are overall for metastatic melanoma. They didn't specify whether this is related to cutaneous or ocular. But if you look at the data provided to the FDA for the approvals, there are no patients with ocular melanoma included in that data. So the majority of patients that were analyzed for supporting this approval came from cutaneous treatment by immunotherapy agents. But to answer your question, it was a combination of approved single agent and multiple combination therapy studies that we looked at for the meta analysis.

Okay, great. And maybe my last question here is that based on the last US Phase 3 study in terms of the response rate, do you feel that if the FOCUS study has something similar to that this commercially verifiablee product? Or any sort of thoughts or comments on this issue?

Yes, that's a good question. I mean, if it sails over the bar, but only by inches, which I don't think will be the case. But if that was the case, then I still think it will be commercially viable. The immunooncology agents have single digit if even response rates. So we will be far better than that.

And then the other liver-directed therapies don't have a lot of published data at all in this area. So there's really nothing to point to. Now it's always best to have a bigger number. And that would be helpful. But I do think that's any approval in this area with data that shows an overall response rate, something in the 20s, 30s, or 40s is going to be a great product with a fair amount of uptake, because there's very little available for patients with this type of disease.

Okay, great. Thanks a lot. And again, congrats on the progress.

Thank you.

(Operator Instructions)

RK, H.C. Wainwright.

Thank you. Good morning, Gerard and Johnny John. And congratulations. Your you're taking the reins of Delcath and are driving a successful run as CFO at Vericel, which also went through a makeover. What are the learnings there that you would like to bring over to Delcath?

Well, I wasn't expecting that question, RK. Thanks for asking that. The learnings from Vericel. I think a couple of things. One is I'll say the truth will set you free. It's good to always have an open conversation about barriers, obstacles and address them head on both within the management team and then in a thoughtful manner and the right time with investors.

So there's never you know in this area, there's never a straight line between here and there. There are going to be curbs and detours. And I think everyone needs to take those into account and have constructive dialogue. And so transparency, both internally. And then again, it's a little more stringent and regulated, but also with the investor community. That's important.

I think the second is, trust your team. Give them solid directions and a direction to go and let them run with the appropriate cue seeing and [Saturday] checking. And the third is having the right balance between having very specific goals in mind, but recognizing that at times you'll have to be flexible and deviate from them. And that's probably the toughest part, because unanticipated things will occur at times. So that's kind of a balancing act. So I think I would leave it at those three lessons.

Certainly and I wish you all success here. Couple of additional questions. It's interesting. This technology is interesting that the company utilizes in order to deliver Melphalan, which is a well-known and well understood drug. So what is novel about this technology in the sense, is it something easy for some of the surgeons to conduct? And also is there a learning curve for this for the surgeons to use this technology? Would that be any hindrance at all? Or is this something that it's easy for these folks to use in their OR?

I think there are really two parts to your question. What's novel about the technology and then the learning curve and the services. I'm going to ask our COO, John Purpura, to discuss about what's novel about the technology, and then Johnny John can talk through the learning curve and radiology.

Thank you, Gerard. I think what's novel about this technology, it can be summed up in three words. And you might have seen this in various incarnations in our prior communications, but the concept of isolation, saturation, and filtration. That's what's novel. Taken together, we can isolate an organ. And because of that isolation technique, really ramp up the dose of chemotherapy because you can have the dose of chemotherapy be much more effective in higher doses and yet spare the patient from the systemic side effects. And then of course, there's the filtration technique, which comes after the dosing and return of the blood to the patient with the significant amount of chemotherapy removed.

So those are the three tenants of the technology, which sound very simple in practice. There's an orchestration of the various participants conducting the surgical procedure. And yes, there's a learning curve, but each individual practitioner runs the procedure as an orchestrated event. And we have several centers now around the world that have conducted well over 100 treatments. And these things get shorter and shorter in time and the procedure becomes more and more routine. So we're confident that we'll be able to build the commercial organization around that concept of having specialized centers conduct the procedure as a matter of routine.

Let me ask Johnny John to talk to you about the experience in Europe on the commercial setting in terms of getting centers up and running them and familiar with the technique.

Sure. Thank you, Gerard. So I would just go on top of what John said. There is a learning curve. We are very familiar with what it takes to get up, a new site to get them up and running. And we do have a comprehensive training program in place which constitutes of first part of diabetic training and then additional proctoring that takes place for each member of the procedural team that will conduct the procedure. We don't find that individually the tests required to do the procedure are inherently difficult. It's the combination of the whole team working together, as John said, as an orchestra, while performing the procedure that requires some skill set and some training.

So we usually do have a set of proctors that will be available and present when a new site comes up and running. And this would be an individual proctor for each member of the procedural team that is taking place in the new center. We do encourage and have these centers go and visit and see a procedure prior to that at a trained site so that they have additional familiarity on how the procedure is conducted. So so far, we haven't had any issues. And again, as John has said, we have had centers that have conducted over 100 and we've had centers that have conducted over 200 procedures. Obviously, like anything else, the more procedures you conduct, your familiarity and skillsets, of course, improve.

Fantastic. Thank you, gentlemen. And then the last question from me is, obviously there are multiple indications where they can think you would need -- it's helpful to target a large bolus of drugs. What other indications would Delcath be looking at once you get through the current indication of metastatic ocular melanoma? I know you listed a few of them on your slide deck, but I'm just trying to see as you regroup, what are the indications that seem to most viable and quick to the market?

Well, quick to the market, you touched on an important point there. There are multiple inputs to trying to decide which to go after first store or in parallel. Obviously the unmet need, both are there alternative therapies and how many patients are there? What type of evidence do we have that it's likely to work? And we have lots of individual case studies and small reports out of Europe for most of those cancers that we mentioned.

And then third, is the cost to get a label expansion and get and or get reimbursement. I think it'll be some mix and it may frankly be all but just staggered in terms of the start of ICC, which the trial is open. But frankly, recruitment has been very slow due to inclusion exclusion criteria that perhaps we will change.

On neuro endocrine, where we have some fairly solid data from an earlier trial or it was a mix of different tumor types treated, breast, where we've heard of some very good reports out of Europe, single cases and then colorectal, where just simply given the size of that indication it makes sense to explore. I think that's the set that we'll choose from, and it could very well be that something in a year and half from now, we have something going on in three or four of those. Or maybe even four on a really upside scenario in terms of funding and resources.

But I think over time, both whether you look at Compendia and various guidelines and label expansion, this product will be used across multiple tumor types. Again, it's a step-wise fashion. We got to have the first one approved and start development efforts in others. But we will do that. And I think the four I mentioned, it is some subset of those will be the next ones we start.

Thank you, Gerard.

Thank you, gentlemen, for taking all my questions and talk to you soon.

Thanks, RK.

Our next question is a follow-up from Yale Jenwith Laidlaw.

Thanks for taking the follow-up. Just a very quick one that now that there's still no debt occurred in the FOCUS study, is that correct?

Yes, for really treatment related. Yes.

Okay. Great. Thank you. I appreciate.

Thank you. We have reached the end of the question and answer session. Mr. Michel, I would now like to turn the floor back over to you for closing comments.

And thank you all for taking the time today to join the call. In closing, I will reiterate that I am thrilled to have joined the team here at Delcath and stayed together with our team, we intend to build a world-class interventional oncology company. Thank you for your support. Goodbye.

Ladies and gentlemen, that concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.