Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of Delcath Systems, Inc. (“Delcath” or the “Company”) should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto contained in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 to provide an understanding of its results of operations, financial condition and cash flows.
All references in this Quarterly Report to “we,” “our,” “us” and the “Company” refer to Delcath Systems, Inc., and its subsidiaries unless the context indicates otherwise.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 with respect to our business, financial condition, liquidity, and results of operations. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” “continue,” “potential,” “should,” and the negative of these terms or other comparable terminology often identify forward-looking statements. Statements in this Quarterly Report on Form 10-Q that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements, including the risks discussed in Item 3 “Quantitative and Qualitative Disclosures About Market Risk,” and the risks discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 in Item 1A under “Risk Factors” and in Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” and the risks detailed from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”). These forward-looking statements include, but are not limited to, statements about:
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our estimates regarding sufficiency of our cash resources, anticipated capital requirements and our need for additional financing;
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the commencement of future clinical trials and the results and timing of those clinical trials;
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our ability to successfully commercialize CHEMOSAT and HEPZATO, generate revenue and successfully obtain reimbursement for the procedure and Delcath Hepatic Delivery system;
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the progress and results of our research and development programs;
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our expectations about the COVID-19 pandemic and any potential disruption or impact to our operations;
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submission and timing of applications for regulatory approval and approval thereof;
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our ability to successfully source certain components of CHEMOSTAT and HEPZATO and enter into supplier contracts;
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our ability to successfully manufacture CHEMOSAT and HEPZATO;
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our ability to successfully negotiate and enter into agreements with distribution, strategic and corporate partners; and
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our estimates of potential market opportunities and our ability to successfully realize these opportunities.
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Many of the important factors that will determine these results are beyond our ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as otherwise required by law, we do not assume any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
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Overview
The following section should be read in conjunction with Part I, Item 1: Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q as well as Part I, Item 1: Business; and Part II, Item 8: Financial Statements and Supplementary Data of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Company Overview
We are an interventional oncology company focused on the treatment of primary and metastatic liver cancers. Our lead product candidate, the HEPZATO™ KIT (melphalan hydrochloride for injection/hepatic delivery system), or HEPZATO™, is a drug/device combination product. HEPZATO is designed to administer high-dose chemotherapy to the liver while controlling systemic exposure and associated side effects. HEPZATO has not been approved for sale in the United States. In Europe, our commercial product is a stand-alone medical device having the same device components as the HEPZATO KIT but without the melphalan hydrochloride and is approved for sale under the trade name CHEMOSAT® Hepatic Delivery System for Melphalan, or CHEMOSAT, where it has been used at major medical centers to treat a wide range of cancers of the liver.
In the United States, HEPZATO is regulated as a combination drug and device by the United States Food and Drug Administration (FDA). Primary jurisdiction for regulation of HEPZATO has been assigned to the FDA’s Center for Drug Evaluation and Research. The FDA has granted the active moiety melphalan hydrochloride five orphan drug designations for the treatment of patients with ocular (uveal) melanoma, cutaneous melanoma, hepatocellular carcinoma, intrahepatic cholangiocarcinoma, and neuroendocrine tumors. The FDA has granted the active moiety doxorubicin one orphan drug designation for the treatment of patients with hepatocellular carcinoma. In Europe, CHEMOSAT is regulated as a Class IIb medical device and received its CE Mark in 2012. We are commercializing CHEMOSAT in select markets in the United Kingdom and the European Union, or the EU, where we believe the prospect of securing reimbursement coverage for the use of CHEMOSAT is strongest.
Our most advanced development program is the treatment of ocular melanoma liver metastases, or mOM, a type of metastatic liver cancer, with HEPZATO. HEPZATO is being studied in the FOCUS Clinical Trial for Patients with Hepatic Dominant Ocular Melanoma (FOCUS Trial), a global registration clinical trial that is investigating objective response rate in mOM. The FOCUS Trial is being conducted at approximately 30 sites in the United States and Europe. The FOCUS Trial initiated treatment on the final enrolled patient on October 2, 2020, with the last patient on the study having been treated on May 18, 2021. The primary endpoint of the FOCUS Trial is Objective Response Rate (ORR) as measured by RECISTv1.1, in the Intent to Treat (ITT) population. The single arm trial was powered to demonstrate a superior ORR versus checkpoint inhibitors, one of the few mOM treatment categories with a significant amount of peer reviewed publications. The checkpoint inhibitor ORR was calculated based on a meta-analysis covering 16 different publications which included 476 patients. The pooled overall response rate was 5.5% [95% CI: 3.6, 8.3]. To achieve statistical significance at a 95% Confidence Interval the lower bound of the ORR for HEPZATO is required to exceed the 8.3% upper bound of the meta-analysis. Secondary endpoints include Duration of Response (DOR), Disease Control Rate (DCR), Overall Survival (OS), and Progression-Free Survival (PFS). Additional exploratory outcome measures include time to objective response, hepatic progression-free survival, hepatic objective response, and quality of life, safety, and other pharmacokinetic measures. Initially, the trial was a randomized controlled trial which was amended to a single arm trial given slow enrollment due to the rarity of ocular melanoma, absence of crossover to the experimental trial arm, competing clinical trials and the commercial availability of CHEMOSAT in Europe. Included in the prespecified analyses are comparisons against the Best Alternative Care (BAC) arm which enrolled 32 patients prior to the amendment to a single-arm trial.
On March 31, 2021, Delcath released a preliminary analysis of the FOCUS trial data based on 87% of enrolled patients using prespecified analyses. An Independent Review Committee assessed an ORR of 29.2% [95% CI: 20.1, 39.8] in the ITT population, the lower bound of which exceeded the upper bound of the predefined success criterion (8.3%) for the primary ORR endpoint. Given the large difference between the predefined success criteria and the interim results, the ORR on the full ITT population will exceed the predefined success criterion regardless of the response status of the small number of patients still to be analyzed.
In the per protocol populations, evaluable patients in the HEPZATO arm had a statistically significant improvement over BAC in prespecified endpoints including: ORR of 32.9% [95% CI: 22.8, 44.4] versus 13.8% [CI: 3.9, 31.7] for the BAC arm (Chi-square P<0.05), Median PFS of 9.0 months [95% CI: 6.2, 11.8] versus 3.1 months [95% CI: 2.7, 5.7] for the BAC arm (HR=0.41 p<0.001), and DCR of 70.9% [95% CI: 59.6, 80.6] versus 37.9% [95% CI: 20.7, 57.7] for the BAC arm (p<0.002). In this preliminary analysis, DOR and OS were not yet evaluable. Since not all patients were evaluable for all time points, these preliminary analyses may change as data matures.
In the HEPZATO safety population of 94 patients, 38 patients (40.4%) experienced a treatment-emergent serious adverse event. The most commonly reported treatment-emergent serious adverse events were thrombocytopenia (14.9% of patients), neutropenia (10.6% of patients), and leukopenia (4.2% of patients), which were well-manageable. 5% of patients experienced treatment-emergent serious cardiac adverse events. In all cases the events resolved with no ongoing complications. There were no treatment-related deaths in the trial.
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We have paused a global Phase 3 clinical trial of HEPZATO investigating the treatment of patients with intrahepatic cholangiocarcinoma, (the ALIGN Trial) due to difficulties in enrollment. In addition to the FOCUS Trial and the ALIGN Trial, our commercial development plan also includes a registry for CHEMOSAT cases performed in Europe and support of select investigator-initiated trials, or IITs.
We are currently reviewing the incidence, unmet need, available efficacy data and development requirements for a broad set of liver cancers in order to select a portfolio of indications which will maximize the value of the HEPZATO platform. This may result in a restart of the ALIGN Trial. We believe that the disease states we are investigating and intend to investigate are unmet medical needs that represent significant market opportunities.
COVID-19
Due to the global outbreak of SARS-CoV-2, a novel strain of coronavirus that causes Coronavirus disease (COVID-19), the Company experienced an impact on certain areas of its business. These effects included a slowing of patient recruitment in the FOCUS Trial and a reduction in the pace at which we can monitor data at our clinical trial sites. The resulting delay in completing enrollment and additional time required to monitor data caused our announcement for the top-line data from our FOCUS Trial to shift to early 2021 and to be modified to a preliminary analysis. We intend to submit a New Drug Application (NDA) to the FDA in the first quarter of 2022 for the treatment of mOM once the FOCUS Trial has been completed. The ability to achieve this goal is contingent on our ability to monitor data at our clinical sites and therefore the timeline may shift as access to the clinical sites changes in response to the rapidly evolving situation. COVID-19 has caused us to experience an increase in volatility in EU commercial product revenue. The results of the FOCUS Trial should also support securing reimbursement coverage for the use of CHEMOSAT in Europe. Additional impacts of COVID-19 on our business may arise that we are not aware of currently. The ultimate impact of the pandemic on the Company’s results of operations, financial position, liquidity, or capital resources cannot be reasonably estimated at this time.
Medical Device Directive Transition to Medical Device Regulation
The European Commission recently reviewed the Medical Device Directive legislative framework and promulgated REGULATION (EU) 2017/745 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 5 April 2017 on medical devices, amending Directive 2001/83/EC, Regulation EC) No 178/2002 and Regulation (EC) No 1223/2009 and repealing Council Directives 90/385/EEC and 93/42/EEC. This new Medical Device Regulation became effective on May 25, 2017, marking the start of a 3-year transition period for manufacturers selling medical devices in Europe to comply with the new medical device regulation, or MDR, which governs all facets of medical devices. The transition task is highly complex and touches every aspect of product development, manufacturing production, distribution, and post marketing evaluation. As a result of the worldwide COVID-19 pandemic, on April 17, 2020, the European Parliament adopted the European Commission’s proposal to postpone the implementation of the MDR (EU) 2017/745 by 12 months. This urgently drafted proposal to delay the MDR is in response to the exceptional circumstances associated with the COVID-19 pandemic and the potential impact it may have had on the MDR implementation. The new Date of Application (DoA) for the MDR was May 26, 2021.
Effectively addressing these changes will require a complete review of our device operations to determine what is necessary to comply. We do not believe the MDR regulatory changes will impact our business at this time, though implementation of the medical device legislation may adversely affect our business, financial condition and results of operations or restrict our operations.
Due to COVID-related delays experienced by the medical device industry and Notified Bodies (NB) alike, as of September 30, 2021, Delcath has not yet achieved MDR certification. However, our current CE Mark under the Medical Device Directive remains effective until April 2024 and allows us to fully operate, in Europe, accordingly, as Delcath and our Notified Body work closely together through the certification process.
Results of Operations for the three and nine months ended September 30, 2021 (in thousands)
Three months ended September 30, 2021 compared with three months ended September 30, 2020
Revenue
We recorded approximately $522 in revenue for the three months ended September 30, 2021 compared to $466 for the three months ended September 30, 2020. The increase of $56 in revenue is mainly due to an increase in CHEMOSAT unit sales to medac and associated royalty income.
Cost of Goods Sold
For the three months ended September 30, 2021, we recorded cost of goods sold of approximately $227 compared to $188 for the three months ended September 30, 2020. This increase is primarily related to the increase in sales volume.
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Research and Development Expenses
Research and development expenses are incurred for the development of HEPZATO and consist primarily of payroll and payments to contract research and development companies. To date, these costs are related to generating pre-clinical data and the cost of manufacturing HEPZATO for clinical trials and conducting clinical trials. For the three months ended September 30, 2021, research and development expenses decreased to $2,955 from $3,260 in the prior year period. The decrease of approximately $1,550 in clinical trial expenses is mainly due to the completion of the dosing phase of the FOCUS trial in May 2021. This was offset by recording of stock option expense of $734 and an increase due to additional compensation expense related to the hiring of six additional employees and an increase in costs related to preparation for the NDA submission.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of payroll, rent and professional services such as accounting and legal services. For the three months ended September 30, 2021 and 2020, selling, general and administrative expenses were $4,036 and $1,998, respectively. The increase is primarily related to the recording of stock option expense of $1,655 during the three months ended September 30, 2021.
Other Income/Expense
Other income/expense is primarily related to income or expense associated with financial instruments. For the three months ended September 30, 2021 and 2020, other (income)/expense were $429 and $11 of expense, respectively. The change is mostly related to $255 of interest expense and $127 of amortization expense for the original issue discount on the debt financing transaction between the Company and Avenue Venture Opportunities Fund, L.P., as discussed below under the heading Liquidity and Capital Resources.
Net Loss
Our net loss for the three months ended September 30, 2021 was $7,125, an increase of $2,134 compared to net loss of $4,991 for the three months ended September 30, 2020. The increase is mainly due to the third quarter stock option expense of $2,449.
Nine months ended September 30, 2021 compared with nine months ended September 30, 2020
Revenue
We recorded approximately $1,447 in revenue for the nine months ended September 30, 2021 compared to $1,139 for the nine months ended September 30, 2020. The increase of $308 in revenue is mostly due to an increase in CHEMOSAT unit sales to medac and associated royalty income.
Cost of Goods Sold
For the nine months ended September 30, 2021, we recorded cost of goods sold of approximately $541 compared to $434 for the nine months ended September 30, 2020 This increase is primarily related to the increase in sales volume.
Research and Development Expenses
Research and development expenses are incurred for the development of HEPZATO and consist primarily of payroll and payments to contract research and development companies. To date, these costs are related to generating pre-clinical data and the cost of manufacturing HEPZATO for clinical trials and conducting clinical trials. For the nine months ended September 30, 2021, research and development expenses increased to $10,159 from $8,457 in the prior year period. The increase is partially due to recording stock option expenses of $1,827 in 2021. The balance of the increase was due to additional compensation expense related to the hiring of five additional employees and an increase in costs related to the ongoing FOCUS trial and preparation for the NDA submission.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of payroll, rent and professional services such as accounting and legal services. For the nine months ended September 30, 2021 and 2020, selling, general and administrative expenses were $10,621 and $6,571, respectively. The increase is primarily related to the recording of stock option expense of $4,396 during the nine months ended September 30, 2021
Other Income/Expense
Other income/expense is primarily related to income or expense associated with financial instruments. For the nine months ended September 30, 2021 and 2020, other (income)/expense were $428 and $2,804 of expense, respectively. The change is mostly related to the fair value adjustment recorded in the first quarter of 2020 related to the warrant liability and offset by $255 of interest expense and $127 of amortization expense for the original issue discount on the debt financing transaction between the Company and Avenue Venture Opportunities Fund, L.P., as discussed below under the heading Liquidity and Capital Resources.
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Net Loss
Our net loss for the nine months ended September 30, 2021 was $20,302, an increase of $3,175 compared to net loss of $17,127 for the nine months ended September 30, 2020. The increase is mainly due to the year-to-date stock option expense of $6,224 offset by $2,832 related to the fair value adjustment recorded in the first quarter of 2020 related to the warrant liability.
Liquidity and Capital Resources
At September 30, 2021, we had cash, cash equivalents and restricted cash totaling $29,016, as compared to cash, cash equivalents and restricted cash totaling $28,756 at December 31, 2020 and $11,080 at September 30, 2020. During the nine months ended September 30, 2021 and 2020, we used $16,193.0 and $17,828.5, respectively, of cash in our operating activities. In the nine months ended September 30, 2021, we raised $2,458 of cash related to the exercises of warrants and received net proceeds of $14,437 related to the debt financing transaction between the Company and Avenue Venture Opportunities Fund, L.P., as discussed below.
Term Loan from Avenue Venture Opportunities Fund, L.P.
As previously reported, on August 6, 2021, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with
Avenue Venture Opportunities Fund, L.P. (the “Lender,” or “Avenue”) for a term loan in an aggregate principal amount of up to
$20,000 (the “Loan”). The Loan bears interest at an annual rate equal to the greater of (a) the sum of 7.70% plus the prime rate as
reported in The Wall Street Journal and (b) 10.95%. The Loan is secured by all of the Company’s assets globally, including
intellectual property. The Loan maturity date is August 1, 2024.
The initial tranche of the Loan is $15,000, including $4,000 which has been funded into a restricted account and will be released upon
achievement of (a)(x) positive FOCUS trial efficacy per the trial’s predefined Statistical Analysis Plan (SAP) (specifically the Overall
Response Rate exceeds the prespecified threshold for success defined in the SAP by a statistically significant amount); and (y) based
on data contained within the FOCUS trial database and appropriate for use with the U.S. Food and Drug Administration, safety and
tolerability among FOCUS trial participants is within the range of currently approved and commonly used cytotoxic chemotherapeutic
agents; and (b) raising subsequent net equity proceeds of at least $20,000. The Company may request an additional $5,000 of gross
proceeds between October 1, 2022 and December 31, 2022, with funding subject to the approval of Avenue’s Investment Committee.
In connection with the Loan, the Company issued to Avenue a warrant (the “Avenue Warrant”) to purchase 127,755 shares of common stock at an exercise price per share equal to $0.01. The Avenue Warrant is exercisable until August 31, 2026.
Up to $3,000 of the principal amount of the Loan outstanding may be converted, at the option of the Lender, into shares of the Company’s common stock at a conversion price of $11.98 per share.
The Company will make monthly interest-only payments during the first fifteen months of the term of the Loan, which could be
increased to up to twenty-four months upon the achievement of specified performance milestones. Following the interest-only period,
the Company will make equal monthly payments of principal plus interest until the maturity date when all remaining principal
outstanding and accrued interest must be paid. If the Company prepays the Loan, it will be required to pay (a) a prepayment fee of 3%
if the Loan is prepaid during the interest-only period; and (b) a prepayment fee of 1% if the Loan is prepaid after the interest-only
period. The Company must make an incremental final payment equal to 4.25% of the aggregate funding.
The Company paid an aggregate commitment fee of $150 at closing. Upon funding a second tranche of the Loan, the Lender will earn
a 1.0% fee on the $5,000 of incremental committed capital, for a total commitment fee of $200.
The Loan Agreement requires the Company to make and maintain representations and warranties and other agreements that are customary in loan agreements of this type. The Loan Agreement also contains customary events of default, including non-payment of principal or interest, violations of covenants, bankruptcy and material judgments.
The Company’s financial condition raises substantial doubt about our ability to continue as a going concern for a period of at least one year from the date that the financial statements included elsewhere in this Quarterly Report on Form 10-Q are issued. Our financial statements do not include adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern depends on our ability to raise additional capital through the sale of equity or debt securities to support our future operations.
Our future results are subject to substantial risks and uncertainties. We have operated at a loss for our entire history, and we anticipate that our losses will continue for the foreseeable future. There can be no assurance that we will ever generate significant revenues or achieve profitability. We expect to use cash, cash equivalents and investment proceeds to fund our future clinical and operating
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activities. Our future liquidity and capital requirements will depend on numerous factors, including the initiation and progress of clinical trials and research and product development programs; obtaining approvals and complying with regulations; the timing and effectiveness of product commercialization activities, including marketing arrangements; the timing and costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and the effect of competing technological and market developments.
The Company has no off-balance sheet arrangements.
Application of Critical Accounting Policies
Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. During the nine months ended September 30, 2021, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. A description of certain accounting policies that may have a significant impact on amounts reported in the financial statements is disclosed in Note 3 to the Company’s audited consolidated financial statements contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020.