Operator
Good day and welcome to the Delcat Systems first quarter fiscal year 2024 financial results conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchstone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to David Hoffman, Delcat General Counsel. Please go ahead.
David Hoffman
Thank you. And once again, welcome to Delcat Systems' 2024 First Quarter Earnings and Business Highlights Call. With me on the call are Gerard Michel, Chief Executive Officer, Sandra Pinnell, Senior Vice President of Finance, Kevin Muir, General Manager, Interventional Oncology, Boyo Vukovic, Chief Medical Officer, and Martha Rook, Chief Operating 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 assurance 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 expected 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 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.
Gerard
Thank you, everyone, for joining today. This is the first quarter DeltCath is reporting U.S. revenue, a significant milestone for the company. In the first quarter, revenue from our sales of Hepsado increased was $2 million and for Chemosat, $1.1 million. Given the March start for three of the four U.S. centers active in the first quarter and the temporary use of product sampling for some of the initial proctored cases, the $2 million in U.S. revenue was predominantly generated by treatments at Moffitt, with the balance of the other three centers activated in the first quarter starting to generate consistent revenue in the second quarter. As we have discussed in prior calls, the pace of revenue growth in the short to medium term will be determined by the rate at which we can train and activate new treating centers. Since our launch in January and in the seven weeks since our recent fourth quarter call, we have made steady progress in expanding the number of centers we are engaged with and actively training. We ended the first quarter with four active sites, Moffitt Cancer Center, Stanford University Cancer Center, Thomas Jefferson University, and the University of Wisconsin. As of today, there are six active treating centers, with the University of Tennessee and the UCLA Cancer Center having recently conducted their first commercial treatments. A further five centers have completed the necessary steps to conduct their first commercial treatment under the guidance of a proctor once hospital formulary committee approval is obtained and are in the process of identifying and scheduling their first patients for treatment with Hepsado. In total, there are 11 centers, an increase of two from our last call, currently accepting patient referrals and listed on our healthcare setting locator. Beyond those 11 centers, another seven centers currently have preceptorship scheduled or are partway through the preceptorship training. To date, we have had over 100 perfusionists, Anesthesiologists and interventional radiologists attend preceptorships representing over 20 institutions in the US, with some institutions sending multiple healthcare providers for the same specialty. As a reminder, the entire process from initially scheduling a preceptor shift to activation can take approximately three months. Given the significant level of commitment required from healthcare providers to become fully trained and certified under the REMS program, we believe all the healthcare providers and the cancer centers involved to date intend to incorporate Hepsado as a core part of their treatment regime for metastatic uveal melanoma patients. We continue to expand the number of centers with which we are engaging, with over 30 centers now somewhere in the process from preliminary discussions regarding the steps required to become a treating center to actively treating patients. There has been a definite increase in interest, partially due to physicians and treating centers sharing their experience with physicians at other centers which are not yet involved. There's certainly a component of what I might characterize as informal and independent peer-to-peer engagement occurring. In addition, increased interest can also be attributed to our permanent and product-specific J-code becoming effective on April 1st. While we are aware that hospitals have successfully been reimbursed for the treatment using miscellaneous C-code prior to April 1st, the establishment of the permanent J-code has definitely simplified the reimbursement process and the willingness of formulary committees to approve the use of Hepstato. We believe we are on track to have 20 active centers by the end of 2024. The approximate anticipated pacing of center activation remains at 10 active centers by the end of the second quarter, 15 by the end of the third quarter, and 20 treating centers by year end. Our projected average treatments per center remains at approximately one per month, ramping to a run rate of approximately one and a half treatments per month by mid-year, and then reaching a run rate of two treatments per month late in the fourth quarter. It is important to note that given our expected ramp for both treatment for center volume and center activation, we should achieve $10 million in U.S. quarterly revenue in 2024, which will likely result in $25 million of cash proceeds from the exercise of the final tranche of warrants issued as part of our March 2023 financing. Sandra will share additional details on our finances in a moment. but I want to highlight that our effective gross margin in the first quarter was approximately 60%, despite the modest initial volume. In addition to the significant commercial activity, we continue to support both internal and external efforts to add to a growing body of evidence that the PHP procedure is an important treatment option for patients with liver-dominant uveal melanoma. as well as potentially other liver-dominant cancers. Recently, we announced the publication of results from the pivotal Phase III focused study of Hepsado in patients with unresectable metastatic uveal melanoma in the journal's Annals of Surgical Oncology. As previously disclosed at ASCO, the publication reported a statistically significantly higher overall response rate of 36.3% for Hepsado versus 5.5 percent from a meta-analysis of historical controls. Other efficacy endpoints include a 70 percent complete response rate with a 73.6 percent disease control rate. In addition, results from the early randomized stage of the FOCUS trial, which was initiated as a randomized two-arm trial but completed as a single-arm study, will be presented at a poster session at the upcoming ASCO Annual Meeting in Chicago. Later in the year, we expect also to publish an expanded analysis of various patient subpopulations in a peer-reviewed journal. Liver-dominant metastatic disease is a significant therapeutic challenge in an area of high unmet medical need for many solid tumor types. To support additional clinical development in some of these areas, it is important for the company to build a strong commercial foundation in metastatic uveal melanoma in the U.S. both for purposes of funding trials as well as creating a network of treating centers. We are well on our way to accomplishing this. While the interest level from interventional rating... I'm unable to hear you. You're unable to hear me?
Sandra
Yeah, you're... You can't hear me? Please go ahead. Yes, we can hear you now.
Gerard
Can you hear me now?
Gerard
Hello?
Sandra
Yes, Gerard, we can hear you. You can go ahead.
Gerard
And when did I drop off? Can you tell me when I dropped off?
Sandra
We couldn't hear you for about 20 seconds.
Gerard
Sandra, do you know where I dropped off?
Sandra
I heard you the whole time, but if you want to start back around the ASCO in Chicago, perhaps.
Gerard
Okay, so you heard me the whole time. All right.
Sandra
I did.
Gerard
Always some testicle difficulties somewhere. So let me rewind here. And apologies to the listening audience here. All right. I'm going to just pick up with later in the year, we expect expanded analyses of various patient subpopulations, a little focus study to be published in a peer-reviewed journal. Liver-dominant metastatic disease is a significant therapeutic challenge and an area of high unmet medical need for many solid tumor types. To support additional clinical development in some of these areas, it is important for the company to build a strong commercial foundation and metastatic uveal melanoma in the U.S., both for purposes of funding trials as well as creating a network of treating centers. We are well on our way to accomplishing this. While the interest level from interventional radiologists in investigating the use of Hepsado and chemosat to treat other liver-dominant cancers has been high for many years, this has not necessarily been the case for oncologists outside of metastatic uveal melanoma. The launch of Hepsado in major cancer centers is increasing the level of interest from a broader set of oncologists to study Hepsado use in treating other cancers, such as colorectal, intrahepatic cholangiocarcinoma, and breast cancer. As mentioned in the previous quarterly update call, we plan to initiate one or more clinical trials of Hepsado and other tumor types within approximately a year, and we'll provide further updates on those activities later this year. The Chopin trial, which is evaluating the effect of sequencing immunotherapy with chemostat liver directed therapy, is expected to be fully enrolled by the end of 2024. As Chopin is an investigator-initiated trial, we do not control the timing of data release. However, our understanding is that the study results, including the primary endpoint, are still planned to be presented at a major oncology conference in the second quarter of 2025. In summary, the company continues to activate centers consistent with our center activation guidance. In addition, while the treatment of metastatic UV melanoma patients will support significant growth for the foreseeable future, we are planning to pursue additional indications given the tremendous unmet need for patients suffering from cancer of the liver. I will now hand the call over to Sandra to share some details on our financial position. Sandra?
Sandra
Thank you, Gerard. We ended Q1 with $27.2 million in cash investments. Cash used in operations were approximately $9.6 million in the first quarter. The change in cash from year end is due to the use of cash required primarily for launch and center activation, offset by the 2024 private placement financing of $7 million. It is important to note that this financing was supported entirely by DELCAS senior executives, board members, and existing institutional investors. We believe that our current financial resources are adequate to fund operations until the company achieves $10 million in U.S. quarterly revenue, which would likely trigger a warrant exercise resulting in $25 million in proceeds. This $25 million should be sufficient to fund the company until we become cash flow positive. As Gerard previously mentioned, we remain confident we will achieve $10 million in quarterly revenue in the U.S. no later than the fourth quarter of this year. Revenue from our sales of Hipsado were $2 million, and ChemoSat was $1.1 million for the three months ended March 31, 2024, compared to $0.6 million for ChemoSat during the same period in 2023. Gross margins were 71% in the first quarter of launch. Cost of goods sold did include a positive adjustment for standard cost revaluation, a non-recurring item. Without the adjustment, gross margins would have been approximately 60%. For the three months ended March 31, 2024, research and development expenses were $3.7 million compared to $4.7 million for the three months ended March 31, 2023. The change in R&D expense is primarily due to a decrease in clinical trial activities offset by an increase in personnel-related expenses. For the three months ended March 31, 2024, compared to the same period in 2023, Selling, general, and administrative expenses increased to $8.8 million from $4.2 million. The increase is due to activities to prepare for commercial launch, including marketing-related expenses and additional personnel on the commercial team.
Gerard
Thank you. Back to you. Moderator, can we now look at questions?
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2.
Sandra
At this time, we will pause momentarily to assemble our roster. The first question is from the line of Bill Bond from Canaccord Genuity.
Operator
Please go ahead.
spk01
Good morning, and congrats on the strong early launch. I have three quick questions for you. So first one, just thinking through realized revenue per kit, I know you've said before that you're selling direct, so you expect there to not be a gross margin. So just quickly looking at the math here, is it Does your revenue for first quarter reflect 11 kits sold? Is it that simple math? Second question is on your EU revenue. Obviously, in absolute terms, it was a modest tick up, but in percentage terms, it was a very noticeable tick up in first quarter. Is that a sustainable growth we're seeing, or just some quarter-to-quarter variability? And then finally, at scale, what do you expect gross margins to approach? Thank you.
Gerard
All right. Let's tick those off one at a time. Eleven kits that you're pretty good at math. There is, you know, we're shipping direct, so it's a fairly simple analysis. given our pricing is $182,500. Second question, in terms of Europe, we actually finally got a rep in Germany established. She's been out there for about a year and change, but she's really finally getting some traction. Germany is the only market in Europe where there is really a consistent form of reimbursement. It's a ZE scheme where the hospital has to actually budget for the use of the product and estimate how much they'll use in the prior year. So it's taken this rep a good year to get things built, get in front of the hospital, say, hey, you need to budget for this. So I think we'll continue to see a fair amount of growth out of Germany, given I think probably at best we have maybe 15% penetration. So I think there's ways to go there as well. And lastly, in terms of gross margins, I think that, you know, at peak revenue, I would expect we should be closing in on perhaps close to 90% gross margins. It'll take us, you know, a good year and change probably to get to that point. But I think that'll probably be peak in terms of gross margins.
spk01
Okay. And a quick follow-up as I was thinking through that answer. The $10 million in a quarter that triggers the next tranche, is that just U.S. Hepsado or is that worldwide revenue?
Gerard
Just U.S.
spk01
Okay.
Gerard
Thank you. Thank you.
Operator
The next question is from the line of Marie Thibault with BTIG. Please go ahead.
Marie Thibault
Hi. Good morning, Gerard and Sandra, and congrats on a really strong start to your commercialization here. I wanted to ask a little bit about the patient profile of treated patients you're seeing so far. How are they doing? Are they coming back for additional cycles? Are you seeing any first-line treatments? Just any characterization of those first 11 treatments, if you can.
Gerard
Yeah, I think since the N is fairly low, it will be hard to give specific trends. But, Kevin, why don't you comment on the variety that we've been seeing? Sure, Gerard. Thank you.
Kevin
Marie, we've kind of seen them all to this point with 11 treatments. We do have first-line treatments. as first-line patients as well as patients that have received other treatments. When you launch a cancer drug, the patients just don't stop the current treatments. They go through their current line of treatment, and then when they progress off that, they go to the next line. So we're seeing a combination right now of first-line and second- and third-line patients.
Gerard
And I would add, Marina, that we're seeing patients who are coming off of Tebby, coming off of Epinevo. And then, yes, we are getting returning patients. We have seen no trend of patients dropping off early in terms of not coming back for retreatment. However, early days, so, you know, can't quite take that to the bank, but encouraging that patients coming back for retreatment.
Marie Thibault
Yeah, encouraging indeed. Okay. And then I wanted to ask about reimbursement. Are you seeing any, you know, pushback or any hurdles to getting those payments? It doesn't look like it so far. I just want to hear how that's trending. And then with the J code and TPT status going into effect in April, what you've noticed so far here in your second quarter, if customers are having success with that J code, if everything's going smoothly. Thanks for taking the questions.
Gerard
Yeah, obviously we're on, you know, we're not – sitting there submitting for reimbursement. The hospitals are, you know, we know stuff anecdotally, and I'll ask Kevin to comment on that for a moment. I will say, though, the hospitals are paying us. We are getting checks from them, so that's encouraging from our end. But, Kevin, why don't you talk a little bit about, you know, the change you've seen in front of the various formulary and finance committees since the JCO has been in place? Sure.
Kevin
I'll echo Gerard's view from his statement. We are aware that the codes or the claims from the first quarter, which were using temporary codes or miscellaneous codes, were accepted and were paid. That's great news. And when you look at the J code, it has just simplified matters for the hospital, for their claims. So for the hospitals that are open and have patients that are treating, the claims have been much easier. And I think the biggest thing for us through this launch has been the formulary process. It's a much easier process and much more predictable for the hospitals that we are attempting to open right now. So the formulary process has been much smoother. JCODE and the HCPCS approval as well as the pass-through process approval has streamlined things and it's just made the process for the hospitals much more predictable. There's a fee schedule. They can look at it and they can understand all of those things and they can make their financial decisions and their revenue predictability in the future much easier and it's really helping us as we go through our hospital activation.
Marie Thibault
Thank you, Kevin.