Delcath Systems, Inc.

Good day, ladies and gentlemen, and welcome to the Delcath Second Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara, Investor Relations. Sir, the floor is yours.

Thank you. And once again, welcome to Delcath Systems' Second Quarter 2021 Earnings Call. With me on the call are Gerard Michel, Chief Executive Officer, Dr. Johnny John, Senior VP Medical Affairs and Clinical Development, Kevin Muir, VP Commercial Operations, and Christine Padula, Interim 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no 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 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 Forms 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 circumstances. Now, I would like to turn the call over to Gerard Michel. Gerard, please proceed.

Thank you, everyone, for joining today. One of the major highlights of the quarter was the presentation at the 2021 ASCO Annual Meeting, which reviewed both previously announced and new efficacy data from our Phase III focused trial of Hepsado kit in patients with liver-dominant metastatic ocular melanoma. The oral presentation by the study's lead investigator, Dr. Jonathan Zager, Chief Academic Officer, Chair, USF Department of Oncological Sciences at the Moffitt Cancer Center, included data based on 79 of 91 treated Hepsado patients, which showed an overall response rate of 29.2%, with a 95% competence interval lower bound of just over 20%. Given the magnitude by which the lower bound exceeded the 8.3% pre-specified threshold for success, the primary endpoint of the trial has been met regardless of the outcome of patients who have not yet been evaluated. Patient-level response data were also presented for this same patient set, indicating that 44% of evaluable patients in the hep-sato arm had a 30% or greater reduction in tumor target lesions at one or more time points versus 17% for patients enrolled in the best alternative care arm. Importantly, the safety data presented was well in line with previously reported data from single-center European studies. These data, combined with the previously disclosed statistically significant improvement over best alternative care and progression-free survival and disease control rate, further strengthens the case that Hepzada would offer a compelling clinical benefit to patients were it approved by the FDA. The resurgence in COVID is impacting both our clinical sites and vendors, Due to that, final focus data is going to be released somewhat later than we projected three months ago, and we are now targeting October instead of ESMO in September. Given the importance of these data to investors, we will likely present these data as part of an investor day instead of waiting for the next scientific conference. Despite that slight delay, we are still targeting the end of Q1 2022 for the filing of the NDA with the FDA. Despite the disruptions at the clinical sites due to COVID, we continue to try everything possible to get the sites to enter all the data into the electronic data capture or EDC database and get all the scans over the independent radiology committee reviewing the scans. The gating item for final submission will be monitoring, an activity that for most sites requires multiple physical on-site visits. We are pursuing a 100% data monitoring effort. Our efforts to ensure timely access to data and monitoring include lobbying sites to get extra monitoring days on-site each month adding co-monitors to monitoring visits, working with sites to improve the use of remote monitoring in cases where that has never been done before, and paying for supplemental staff at sites to assist in data entry, monitoring visits, and answering queries. All NDA resubmission and CRL response accountabilities, writing and data compilations, are ongoing to the extent possible without finalized clinical data. We have chosen to reprioritize some activities as the clinical team has been working with the sites on the above-mentioned activities. We are submitting the expanded access protocol this week to the FDA instead of earlier this summer as originally planned. That was a difficult tradeoff because we know patients desperately need treatment options, but we thought it more important to focus resources on compiling the NDA so that Hepzada becomes commercially available as soon as possible. We are also well on our way to prelaunch planning. ranging from accessing data to better understanding treatment pathways for metastatic ocular melanoma patients, building out our marketing group with additional hires, including recently adding a new product manager to the team, and starting to compile a global value dossier, which will be the core document used to communicate Hapsado's kit's value to both payers in the US and Europe, and in the European case, of course, Chemosat. Turning to Europe, another important commercial development in the second quarter has been the change in guidance from the United Kingdom's National Institute for Health and Care Excellence, or NICE, for chemosat and the treatment of patients with metastatic ocular melanoma. Previously, the NICE guidance recommended chemosat only be used in the context of formal research studies. Due to that guidance, both private insurance and regional funding were generally not available for treatment of chemosat, nor was it possible to apply for national coverage. Under the revised NICE guidance, Chemosat has been categorized under a special arrangement designation. Under this designation, private insurance may be more likely to fund treatment with Chemosat, some regional funding may be more accessible, and a process is now available to seek national reimbursement. We are continuing our analysis to prioritize the next set of indications we will study in the clinic. This effort is being led by our new EMEA Medical Director, Dr. Stephan Shakar. Dr. Shakar was most recently Global Medical Affairs Director at Gilead Kite Pharma, and prior to that was EMEA Medical Director Oncology at Astellas. He has 20 years of experience in the pharmaceutical industry at national and regional levels, leading the development, rollout, and execution of several pre- and launch medical campaigns for a dozen launches. We have concluded that metastatic colorectal cancer and interhepatic cholangiocarcinoma or MCRC and ICC, will be the focus of our expanded development activities. We currently have an open IND for ICC, but paused the trial due to lack of enrollment owing to both a small number of sites being open and the requirement that patients be treatment naive. We are now investigating changes to the protocol to increase the pace of enrollment. At this point, I can't go into what those changes might be, but I can state the clinicians have been very consistent in their feedback that existing therapies for ICC have limited efficacy and poor tolerability, and there is strong interest in trying percutaneous hepatic perfusion, or PHP, in ICC patients. Unlike ICC, metastatic colorectal cancer is a crowded field, both in terms of approved products and clinical trials. However, we are viewing Hepsado as an additive agent and not as a replacement for an existing systemic therapeutic. We believe there is a role for Hepsado in stage three and four patients, either as a complement to other therapies or for use in patients at higher risk for recurrence as an adjuvant therapy. We hope to have further detail on this in October when we present the final HPSADO data. In summary, this past quarter we've taken important steps towards commercialization of our PHP system in our initial indication and expansion into new areas. The release of positive preliminary results from the FOCUS trial, which with new patient data presented at ASCO this quarter, Sterling indicates that Hepsado's risk-benefit ratio is a significant improvement versus an earlier generation of Delft-Cast proprietary PHP system. In addition, there is significant physician interest in utilizing PHP in a broader range of tumor types, and we are actively in discussions with KOLs regarding both setting and protocols. We look forward to continued progress with the balance of the year as we prepare both to file an NDA in early 2022 and expand the development of Hepsado into additional areas of high unmet need. I look forward to taking questions, but first we'll turn the call over to Christine to review the financials.

Thank you, Gerard, and good morning to everyone. Product revenue for the three months ended June 30, 2021, was approximately $536,000, compared to $379,000 for the prior year period of our chemosat procedures in Europe. Selling general and administrative expenses were approximately $3.3 million compared to the $2.3 million in the prior year quarter. Research and development expenses for the quarter were $3.5 million compared to $2.2 million in the prior year quarter. Total operating expenses for the quarter were $6.8 million compared with $4.5 million in the prior year quarter. The expenses for the quarter included approximately $1.6 million of stock option expense compared to no stock option expense in the prior year quarter. The company recorded a net loss for the three months ended June 30th, 2021 of $6.4 million compared to a net loss of $4.3 million in the same period in 2020. On June 30, 2021, we had cash, cash equivalents, and restricted cash totaling $19.4 million, compared to cash, cash equivalents, and restricted cash totaling $6.2 million at June 30, 2020. During the three months ended June 30, 2021 and June 30, 2020, we used $11.7 million and $13.8 1 million, respectively, in cash of our operating activities. On August 6th, we closed a $20 million venture debt financing transaction with Avenue Venture Opportunities Fund. The initial tranche of the loan is $15 million, including $4 million which has been funded into a restricted account and will be released upon certain milestones, including a readout of the complete overall response data and raising $20 million in net equity proceeds. The company may request an additional $5 million of gross proceeds between October 1, 2022 and December 31, 2022, which will be funded at Avenue Venture Funds' discretion. The loan bears interest at an annual rate equal to the greater of 7.7 percent plus the prime rate, or 10.95%. The maturity date is August 1, 2024, and the company will make interest-only payments during the first 15 months of the loan, which could be increased up to 24 months upon achievement of certain specified performance milestones. If the company prepays the loan, it will prepay It will pay a prepayment fee of 3% down to 1% depending on the timing of the prepayment. The company must make an incremental final payment equal to 4.25% of the aggregate funding. In connection with the loan, the company has issued the lender warrants to purchase 127,755 shares of common stock at an exercise price per share equal to one penny. The warrants are exercisable until July 31st, 2026. Up to $3 million of the principal amount outstanding may be converted into shares of the company's common stock at a conversion price of $11.98 per share. Also on August 6th, we amended an existing $2 million convertible note through the extension of a term note until 2024. and lowered the conversion factor to effectively $11.98 per common share in consideration for the note becoming subordinate Avenue Venture fund debt. These details will be available for review in our 10Q to be filed later today, as well as subsequent 8K filings. That concludes my financial remarks, and I now ask the operator to open the phone lines for Q&A. Can you please check for questions?

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone at this time. Our first question today is coming from Marie Tybalt at BTIG. Your line is live.

You may proceed. Hi, good morning, and thank you for taking the questions. I wanted to ask one here quickly on the progress you're making toward the full data release and what you're hearing from hospitals in terms of access. Of course, we're talking with all sorts of companies who are starting to see some restrictions, so I'm curious if the variants are having any impact on your team's access to the sites.

Sure. Johnny, do you want to take that one?

Sure, good morning, Mary. Thank you for the question. So we aren't seeing any restrictions due to the increased variance prevalence here in the US, but we have seen that in a certain sites in Europe, particularly in Germany and in the UK. So at a few centers at our European sites that we are trying to get access to continue with monitoring, we have seen the impact, not all of them and not yet in the US.

OK, that's very helpful and great detail. And I wanted to ask one quick follow-up here, maybe a little bit in the weeds, but I noticed that, you know, DELCAS had issued an invoice to MEDAC, your partner in Europe, for a milestone payment related to the FOCUS efficacy trial, efficacy data there. I haven't seen an update in the release, so I wondered if there was any new news on that front. Thanks.

Yeah. You did correctly notice that as a subsequent event in our last queue, we did note that we had achieved the milestone and that 1 million euros would be due. That milestone was based on achieving top line efficacy result as defined in our protocol. MEDEC is actually, their position is that is not due until the full clinical study report is available. Per the agreement, you know, we have a, let's just say, a friendly disagreement because we think the agreement's fairly clear that it's due upon just positive efficacy data. So we're going to work through that with them. These things happened. I think really what the issue is is one of timing, whether we get it sooner or later. They're not disputing the data itself. They're just disputing whether or not a full CSR is necessary prior to payment.

Okay, so we'll stay tuned for the resolution on that, and congrats on the progress. Thanks for the questions.

Thank you, Marie.

Thank you. Our next question today is coming from Scott Henry at Roth Capital. Your line is live. You may proceed.

Thank you, and good morning. Just a couple questions. First, on the income statement, the product revenue in the quarterly 536,000, obviously still pretty small numbers, but the trend seems to be upward. I'm just wondering if that has any reflection of the changes you've seen with the NICE guidance, and should we perhaps expect that to continue in that direction?

Yeah, I think it's more of a generalized increase in the UK and Germany. I think it's too soon for the NICE guidance to have had a material impact yet. You know, sales had not been, you know, growing by leaps and bounds, and I think we're finally just getting back to a reasonable growth clip that we had had when we had the product on our own. But I do expect the NICE guidance to have some impact as private payers, which is maybe about 10% of the UK have that as they kick in. But really the large impact in the UK is going to be the fact that next year we can submit a request for national reimbursement. And that might take another year. So we're probably a good year and a half, two years off before national reimbursement is an option in the UK. But thankfully now we can actually move down that path.

Okay, great. And then staying on the income statement, would you expect the current kind of expense and burn rate to be reflective of the next couple quarters? Or, you know, given that the financing's improved, Would you expect perhaps spending to increase in the next couple quarters, or perhaps we should wait until after we get the data and then see that more of a next year event?

I think there'll be a consistent kind of tick up over the next, let's call it six quarters, based on, I'm not going to give a specific number, but definitely the general trend. And that would be expected based on three things. One, there's always an increase in third-party expenses as you push to get an NDA to get out the door. That ranges from consultants you bring in to do mock GMP and GCP audits. It has to do with increased statistical work, medical writers. So all of that will increase to some extent. Secondly, you know, Kevin Muir, although he is very frugal, he is going to – or had a commercial – he is going to continue to spend increasing amounts as we prepare for commercial launch. And then lastly, back to Johnny, John and his team, you know, right now what we're doing in terms of new indications is really advisory board meetings, that type of thing. But, you know, sometime next year we'll start writing checks to sites as we start signing sites up. and hopefully enrolling patients. So based on all three of those things, we will likely see an increase in expense. Now with that said, if for some reason it's not prudent to spend some of those monies, some of those funds, because of financing environment or something else, we always have the option to slow that spend down or halt some things. So we will be very careful in our expenses and only spend what we think we can afford based on our balance sheet. and based on the opportunities in front of us.

Okay, great. And the final question is more of a qualitative one and probably one I've asked you before. But when it comes to the primary endpoint in the FOCUS trial, the ORR under the RESIST criteria, how much variability is in that endpoint from the interpreter? I'm just wondering, when the FDA goes through that data, how much of that endpoint can be a function of the interpretation versus objectiveness of the data? Just looking for color on that.

That's a great question, and it's fairly specified by the RESIST and how the independent radiology group goes through it. I'll let Johnny give the details on how that works.

Yeah, so we are employing an independent radiology committee for this trial, and that consists of three independent readers that review the scans at the committee. So there's very little variability. They do follow resist guidelines, and we have an adjudicator if there is a different response between two readers. So we don't expect much variability in the results from the IRC.

Okay, great. Thank you for the additional color there. Thank you for taking the questions.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 at this time. Our next question today is coming from Yale Jen at Laidlaw & Company. Your line is live. You may proceed.

Good morning, and thanks for taking the questions. And, Gerald, you mentioned earlier this EMEA additional work in terms of the pipeline development. Could you elaborate a little bit more as to whether some of the early pipeline development will be conducted in Europe, or there's additional color to that?

Yeah, I think, I mean, the pipeline development will occur both in Europe and the U.S. It could be that more of the weight of the development early on is in Europe. And the reason for that is that the indication for chemosat in Europe under the CE mark is broad across all tumor types. So it is a bit easier to get studies going in other tumor types such as CRC, et cetera. But our intent is to have a mix of perhaps investigator-initiated studies and probably more of those in Europe given how familiar those sites are with the product, as well as multi-center studies in both Europe and the U.S.

Okay, great. That's very helpful. In addition, another question here is that you mentioned that you just applied or just submitted an open access or expanded access program. how should we think about the time this to be implemented and Any other colors on that front?

Yeah, I think I think Johnny probably best position to answer that but I think what before he does answer I will say one thing I mean the most important thing from a commercial perspective the EAP is that We have a fair number of sites up and running by let's say midsummer next year, you know with plenty of time prior to launch and so training doesn't become a gating item. In terms of the near term, how many we want to get up and running, let's say, you know, by the time the NDA is filed, let's say over the next six months. Johnny, I want to talk about how many sites within the next six months and about when they'll be up and running.

Sure. So we expect three sites to be, well, two sites for sure to be up and running by the end of this month. And then we are adding another two sites subsequent to that. So about four sites that we expect to be up and running by September. And then as we move forward in months after that, as sites become interested, we'll put, we'll enroll them onto the program on a rolling basis. So approximately five, I would say five, six sites in the next six months.

Okay, great. That's very helpful. That's most of my questions and congrats for the progress. Thank you, Gail.

Thank you. We have no further questions in the queue at this time. Do you have any closing comments you'd like to finish with?

Sure. In closing, we're excited about the prospects for the company as we start to finish analyzing the focus trial data, prepare the NDA, and start outlining the development plans for the next indications for HEP-SATO. As the year moves on, we look forward to updating you on these developments, and thank you all for taking the time this morning to join the call.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.