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DCTH > SEC Filings for DCTH > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for DELCATH SYSTEMS INC

Form 10-Q for DELCATH SYSTEMS INC


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company's financial condition and results of operations 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 financial statements and notes thereto as of and for the year ended December 31, 2011 included in the Company's 2011 Annual Report on Form 10-K to provide an understanding of its results of operations, financial condition and cash flows.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, contains "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 with respect to Delcath's 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 (the "Exchange Act"). 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 the Company's Annual Report on Form 10-K in Item 1A under "Risk Factors" as well as in this report under "Risk Factors" in

Part II, Item 1A and Part I, Item 3 "Qualitative and Quantitative Disclosures
About Market Risk". These forward-looking statements include, but are not limited to, statements about:

- the progress and results of the Company's research and development programs;

- the Company's estimates regarding sufficiency of cash resources, anticipated capital requirements and need for additional financing;

- the commencement of future clinical trials and the timing and results of those clinical trials;

- submission and timing of applications for regulatory approval and approval thereof;

- the Company's ability to successfully source certain components of the system and enter into supplier contracts;

- the Company's ability to successfully manufacture and supply the Delcath chemosaturation system;

- the Company's ability to successfully commercialize the Delcath Chemosaturation system; and

- the Company's ability to successfully negotiate and enter into agreements with strategic and corporate partners.

Many of the important factors that will determine these results are beyond the Company's ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements contained in this Quarterly Report on Form 10-Q, which speak only as of the date of this report. Except as otherwise required by law, Delcath does 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.

Overview

The following section should be read in conjunction with Part I, Item 1:
Condensed Consolidated Financial Statements of this report and 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.


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Delcath Systems, Inc. is a specialty pharmaceutical and medical device company focused on oncology. Delcath's proprietary system for chemosaturation is designed to administer high dose chemotherapy and other therapeutic agents to diseased organs or regions of the body, while controlling the systemic exposure of those agents. The Company's initial focus is on the treatment of primary and metastatic liver cancers. In 2010, Delcath announced that its randomized Phase III clinical trial for patients with metastatic melanoma in the liver had successfully achieved the study's primary endpoint of extended hepatic progression-free survival. The Company also completed a multi-arm Phase II trial to treat other liver cancers. The Company obtained authorization to affix a CE Mark for the Delcath Hepatic CHEMOSAT® delivery system in April 2011 and for the second generation hemofiltration cartridge for CHEMOSAT in April 2012. In October 2012, the Company satisfied all of the requirements to affix the CE Mark to its CHEMOSAT device system for use with doxorubicin hydrochloride injection, providing a regulatory pathway for CHEMOSAT with doxorubicin hydrochloride injection for countries in Asia that accept CE Marking as part of their national regulatory requirements. The right to affix the CE mark allows the Company to market and sell the CHEMOSAT system in Europe. The Company submitted its New Drug Application (NDA) to the U.S. Food & Drug Administration (FDA) on August 15, 2012, seeking approval for commercial sale of its chemosaturation system with melphalan in the treatment of patients with unresectable metastatic melanoma in the liver. The Company's NDA was accepted for filing by the FDA, and has been designated for standard review with a Prescription Drug User Fee Act (PDUFA) goal date of June 15, 2013. The Company will continue to work with the FDA to complete its review with the goal of obtaining approval for commercial sale of its proprietary chemosaturation system with melphalan. The Company has not yet received FDA approval for commercial sale of its system in the United States.

Challenge of Treating Liver Dominant Disease

There are two types of liver cancer: primary and metastatic. Primary liver cancer (hepatocellular carcinoma or HCC) originates in the liver and is particularly prevalent in populations where the primary risk factors for the disease (hepatitis-B, hepatitis-C, high levels of alcohol consumption, aflatoxin, cigarette smoking and exposure to industrial pollutants) are present. Metastatic, or secondary, liver cancer is characterized by microscopic cancer cell clusters that detach from the primary site of disease and travel via the blood stream and lymphatic system into the liver, where they grow into new tumors. These metastases often continue to grow even after the primary cancer in another part of the body has been removed. Given the vital biological function of the liver, including processing nutrients from food and filtering toxins from the blood, it is common for metastases to settle in the liver. In many cases patients die not as a result of their primary cancer, but from the tumors that metastasize in their liver. In the United States, metastatic liver cancer is more prevalent than primary liver cancer.

The Delcath system for hepatic chemosaturation allows the administration of concentrated regional chemotherapy to the liver. This "whole organ" therapy is administered by first isolating the circulatory system of the liver, saturating the entire organ with chemotherapeutic agent, and filtering the blood prior to returning it to the patient. The Delcath system involves three catheters placed percutaneously through standard interventional radiology techniques. The catheters temporarily isolate the liver from the body's circulatory system, deliver a 30 minute infusion of chemotherapeutic agent (currently melphalan hydrochloride) directly to the liver, and collect drug-laden blood exiting the liver for filtration by proprietary filters. The filters reduce the concentration of chemotherapeutic agent in the blood, thereby minimizing systemic exposure to the drug and related side-effects before the filtered blood is returned to the patient's circulatory system.

The procedure is minimally invasive and repeatable, allowing for multiple courses of treatment with chemotherapeutic drugs and the potential for concomitant use in conjunction with other cancer therapies. The Company believes that the Delcath chemosaturation system may play an important role in the management of cancers in the liver, potentially providing time and additional options for treatment of a patient's primary disease. The Company also believes that the Delcath system is a platform technology that in the future may include the use of other drugs to treat cancers in the liver, as well as for the treatment of cancers in other organs and regions of the body.

European Market Commercialization

In April 2011, the Company obtained the right to affix the CE Mark to its first generation commercial product: the Delcath Hepatic CHEMOSAT® Delivery System (CHEMOSAT System). Delcath believes the CHEMOSAT System may ultimately fulfill an annual unmet clinical need for as many as 59,000 patients with cancers in the liver in this region. In the EEA, the CHEMOSAT System is regulated as a medical device indicated for the intra-arterial administration of chemotherapeutic agent (melphalan hydrochloride) to the liver with additional extracorporeal filtration of the venous blood return.


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In the EEA, the Company is focusing its initial commercialization efforts on seven target markets: Germany, United Kingdom, France, the Netherlands, Italy, Spain and Ireland. The Company believes these countries represent a majority of the total potential liver cancer market in the EEA. The Company's commercialization strategy for these markets involves the establishment of initial training and launch centers at prestigious cancer hospitals. Medical teams at these centers are trained in the performance of the CHEMOSAT procedure and proctored for their initial cases by experienced physicians, and are provided additional logistical support by Delcath. The Company believes that as the CHEMOSAT teams at these centers gain experience, they will form a European base of key opinion leadership that will help educate other physicians about the potential of chemosaturation therapy with CHEMOSAT and foster initial market acceptance. To further drive adoption, the Company is using a combination of direct and indirect sales channels to market and distribute the CHEMOSAT System in Europe. The Company has recently entered into exclusive distribution agreements for Italy and Spain. In addition, the Company has retained Quintiles to provide a third party medical science liaison force to educate medical oncologists in the target markets about the CHEMOSAT system. To support commercialization efforts, the Company established its EU headquarters in Galway, Ireland.

In November 2011, the Company announced that it had entered into its first initial training and launch agreement with the European Institute of Oncology (IEO) in Milan, Italy. As of the end of the third quarter, the Company has signed a total of 13 such agreements with leading European cancer centers, and has established a presence in all seven of its target markets. Patients treated thus far include those with inoperable liver-dominant metastases from ocular melanoma, cutaneous melanoma, breast cancer, gastric cancer and cholangiocarcinoma.

In April 2012, the Company announced it received CE Mark approval for the Generation Two hemofiltration cartridge of the CHEMOSAT System. The Generation Two system has demonstrated filter efficiency greater than 98% during drug infusion of melphalan in an in vivo study; the same study also showed that the Generation Two filter removes fewer blood platelets. Upon approval of the Generation Two filter, the Company began supplying its early launch and training centers exclusively with the Generation Two CHEMOSAT system.

Applications for interim reimbursement have been submitted in Germany, Italy and the UK and the Company expects a response by first quarter of 2013. Delcath is also supporting efforts of treatment centers to pursue patient specific insurance funding in these countries as well as in Spain. In the other target countries, reimbursement pathways have been identified and are being actively pursued.

Regulatory

International Regulations

The Company recently changed its Notified Body in Europe and as part of this change the CHEMOSAT System was reclassified from a Class III medical device to a Class IIb medical device. The primary difference between Class III and Class IIb is that for Class IIb medical devices the Notified Body is not required to carry out an examination of the product's design dossier as part of its conformity assessment. The Company must continue to comply with the essential requirements of the EU Medical Devices Directive (Directive 93/42 EC) and is subject to a conformity assessment procedure requiring the intervention of a Notified Body. The conformity assessment procedure for Class IIb medical devices requires the manufacturer to lodge an application for the assessment of its quality system for the design, manufacture and inspection of its medical devices by a Notified Body. The Notified Body will audit the system to determine whether it conforms to the provisions of the Medical Devices Directive. If the Notified Body's assessment is favorable it will issue a Full Quality Assurance Certificate, which enables the manufacturer to draw a Declaration of Conformity and affix the CE mark to the medical devices covered by the assessment. Thereafter, the Notified Body will carry out periodic audits to ensure that the approved quality system is applied by the manufacturer.

On October 22, 2012, the Company announced that it had satisfied all of the requirements to affix the CE Mark to its Hepatic CHEMOSAT Delivery System with doxorubicin hydrochloride ("CHEMOSAT System with doxorubicin"). CE Marking confirms that a medical device complies with the Essential Requirements of the Medical Device Directive, and that the device has been subjected to conformity assessment procedures. Application of the CE Mark for the CHEMOSAT System with doxorubicin provides Delcath with a regulatory pathway for certain countries in Asia that accept CE Marking as part of their national regulatory requirements. Doxorubicin is an established chemotherapeutic agent commonly used globally to treat hepatocellular carcinoma (HCC) via trans-arterial chemoembolization (TACE) and is widely used to treat HCC in Asia, which is where the Company sees the market opportunity for our CHEMOSAT system with doxorubicin injection. In China, these requirements include conducting a local clinical trial and approval by the China State Food and Drug Administration (SFDA). Delcath intends to seek approvals for the CHEMOSAT System with doxorubicin in key Asian markets such as China and South Korea. The Company does not intend to market the CHEMOSAT System with doxorubicin in the European Economic Area at this time.


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Having previously obtained the CE Mark for the CHEMOSAT System with melphalan, the Company believes the right to affix the CE Mark can result in an accelerated regulatory approval in a number of countries outside the EEA and the United States. Delcath recently received regulatory approval for the second generation CHEMOSAT System in Australia and has completed the product notification process in New Zealand. The Company has submitted applications for regulatory approval as a device for the CHEMOSAT System in Hong Kong, South Korea, Singapore, Canada and Israel and Delcath intends to submit regulatory applications in Mexico, Argentina, Brazil, Russia, India, Japan, China, and Taiwan. Delcath is in the process of determining the regulatory pathway in some of these countries subject to negotiations with the applicable health authority. It is Delcath's intention to leverage the CE Mark in some or all of these countries to commercialize the Delcath CHEMOSAT System, where appropriate. Delcath Systems Limited's facility in Galway, Ireland has obtained certificates of free sale from the Irish Medicines Board as many markets require country of origin manufacturing, such as Mexico, Argentina, Brazil, Japan, China, and Taiwan, as a prerequisite to obtain regulatory approval.

United States

In the United States, the Delcath chemosaturation system for the administration of melphalan hydrochloride is considered a combination drug and device product and is regulated as a drug by the U.S. Food and Drug Administration (FDA). In August 2012, the Company submitted its Section 505(b)(2) New Drug Application (NDA), to the FDA, seeking an indication for the percutaneous intra-arterial administration of melphalan for use in the treatment of patients with metastatic melanoma in the liver. The Company's NDA was accepted for filing by the FDA, and has been designated for standard review with a PDUFA goal date of June 15, 2013.

In addition to the NDA submission, the Company submitted to the FDA an amendment to its Investigational New Drug application to include the Generation Two system in the FDA's Expanded Access Program (EAP), as well as all future clinical trials and compassionate use cases. The Company announced acceptance of these amendments on June 18, 2012, and expects the first centers to begin treating patients under the EAP by the end of 2012.

Results of Operations

The Company recorded the first sales of its CHEMOSAT System in Europe during the quarter ended June 30, 2012, resulting in net sales of $0.1 million. During the quarter ended September 30, 2012, the Company recorded sales of $0.1 million, $58,000 of which is deferred until the Company fulfills its obligations under the distribution agreement and the distributor is able to ship kits to the centers it anticipates servicing. As discussed in Note 4 to the Company's condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, the Company did not recognize any cost associated with the recognized or deferred revenue.


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As Delcath continues to expand its commercialization in Europe, the Company expects to see a certain amount of volatility in both the average selling price and gross margin for the next several quarters. This volatility will be related to several factors, including: the expected use of third party distributors, whose purchase prices will be lower than direct to end user customer prices; the gradual increase in cost of goods sold as the Company exhausts raw materials that were purchased and expensed in prior periods and begins to recognize the actual costs of materials, labor and overhead; and an improvement in efficiencies as the Company increases its production of the CHEMOSAT system.

Three Months Ended September 30, 2012 and September 30, 2011

The Company had a net loss for the three months ended September 30, 2012, of $11.8 million, which is a $3.5 million increase in the net loss for the same period in 2011. The increase in net loss is primarily due to a $3.4 million change in the fair value of the warrant liability.

The Company's operating loss for the three months ended September 30, 2012 was $12.2 million, of which $1.0 million is non-cash expense related to stock option and restricted stock grants made under the Company's 2004 and 2009 Stock Option Plans as discussed in more detail in Note 6 of this filing. This compares to an operating loss for the three months ended September 30, 2011 of $12.2 million, of which $0.9 million was non-cash expense related to stock option and restricted stock grants made under the Company's 2004 and 2009 Stock Option Plans.

At September 30, 2012 the Company had 95 full-time employees compared to 74 at September 30, 2011. The increase in total costs is commensurate with this growth, which has led to an increase in payroll and overhead expenses. Additionally, the Company's ongoing commercialization efforts in the European Union and continued efforts to prepare its submission to the FDA have contributed to the increase in total costs and expenses. As the Company continues to advance its business strategy, it will continue to incur losses for the foreseeable future.

For the three months ended September 30, 2012, selling, general and administrative expenses increased to $7.0 million from $5.7 million for the three months ended September 30, 2011. A significant portion of the increase is related to the Company's continued expansion, particularly as Delcath has continued executing on its commercialization plans by hiring staff for sales and support positions across Europe. This has led to an increase in personnel-related expenses, as well as all other expenses related to maintaining an office and supporting employees.

For the three months ended September 30, 2012, research and development expenses decreased to $5.3 million from $6.4 million for the three months ended September 30, 2011. The reduction in expenses is primarily related to the Company's transition from a development stage company to a commercial organization. Purchases of inventory are now capitalized rather than being expensed as research and development materials. Additionally, there was a reduction in expenses related to the preparation of the NDA submission.

Interest income is from a money market account and interest earned on operating accounts. During the three months ended September 30, 2012, the Company had interest income of $8,629, as compared to $537 for the same period in 2011.

Nine Months Ended September 30, 2012 and September 30, 2011

The Company had a net loss for the nine months ended September 30, 2012, of $41.2 million, which is a $25.6 million increase in the net loss for the same period in 2011. The increase in net loss is primarily due to an increase of $11.7 million in total costs and a $13.8 million change in the fair value of the warrant liability.

The Company's operating loss for the nine months ended September 30, 2012 was $42.0 million, of which $2.9 million is non-cash expense related to stock option and restricted stock grants made under the Company's 2004 and 2009 Stock Option Plans as discussed in more detail in Note 6 of this filing. This compares to an operating loss for the nine months ended September 30, 2011 of $30.5 million, of which $3.4 million was non-cash expense related to stock option and restricted stock grants made under the Company's 2004 and 2009 Stock Option Plans.

At September 30, 2012 the Company had 95 full-time employees compared to 74 at September 30, 2011. The increase in total costs is commensurate with this growth, which has led to an increase in payroll and overhead expenses. Additionally, the Company's ongoing commercialization efforts in the European Union, continued efforts to prepare its submission to the FDA, as well as research and development activities, such as the recently approved Generation Two filter, have contributed to the increase in total costs and expenses. As the Company continues to invest in product commercialization, R&D and clinical activities it will continue to incur operating losses for the foreseeable future.


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For the nine months ended September 30, 2012, selling, general and administrative expenses increased to $21.6 million from $15.1 million for the nine months ended September 30, 2011. A significant portion of the increase is related to the Company's continued expansion, particularly as Delcath has continued executing on its commercialization plans by hiring staff for sales and support positions across Europe. This has led to an increase in personnel-related expenses, as well as all other expenses related to maintaining an office and supporting employees.

For the nine months ended September 30, 2012, research and development expenses increased to $20.6 million from $15.3 million for the nine months ended September 30, 2011. The increase in expenses is primarily related to global regulatory efforts including continued preparation of the NDA submission to the FDA, securing CE Mark for the Generation Two filter and the expansion of addressable markets through the pursuit of additional regional regulatory approvals, as well as the training and deployment of third party medical science liaisons.

Interest income is from a money market account, interest earned on operating accounts and certificates of deposit. During the nine months ended September 30, 2012, the Company had interest income of $15,818, as compared to $1,202 for the same period in 2011.

Liquidity and Capital Resources

The Company's future results are subject to substantial risks and uncertainties. Delcath has operated at a loss for its entire history and anticipates that losses will continue over the coming year. There can be no assurance that Delcath will ever generate significant revenues or achieve profitability. The Company expects to use cash, cash equivalents and investment proceeds to fund its operating activities. Delcath's future liquidity and capital requirements will depend on numerous factors, including the progress of 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.

At September 30, 2012, the Company had cash and cash equivalents totaling $28.3 million, as compared to $41.0 million at September 30, 2011. During the nine months ended September 30, 2012, the Company used $40.7 million of cash in its operating activities, which compares to $23.8 million used for operating activities during the comparable nine month period in 2011. The increase of $16.9 million is primarily driven by NDA submission related costs, expenses related to the Company's ongoing commercialization efforts in Europe, an increase in compensation related expenses as the Company grew from 74 employees at September 30, 2011 to 95 employees at September 30, 2012, and research and development activities, such as the recently approved Generation Two and doxorubicin filters. The Company believes it has access to sufficient capital to fund operating activities for the next twelve months. Assuming Delcath receives FDA approval in 2013, the Company anticipates additional resources will be required to support full U.S. commercialization.

Because Delcath's business does not generate positive cash flow from operating activities, the Company will need to raise additional capital in order to fully commercialize the product or to fund development efforts relating to additional indications. The Company believes it will be able to raise additional capital in the event it is in its best interest to do so. The Company anticipates raising such additional capital by either borrowing money, selling shares of Delcath's capital stock, or entering into strategic alliances with appropriate partners. To the extent additional capital is not available when needed, the Company may be forced to abandon some or all of its development and commercialization efforts, which would have a material adverse effect on the prospects of our business. Further, the Company's assumptions relating to its cash requirements may differ materially from its actual requirements because of a number of factors, including significant unforeseen delays in the regulatory approval process, changes in the focus and direction of clinical trials and costs related to commercializing the product.

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