Cabot Small-Cap Confidential Issue: February 6, 2025

The Big Idea

The liver gets its dual blood supply from the portal vein and hepatic artery. This vascular structure means many cancers find the liver an easy target.

Recent data suggests liver-dominant cancers affect roughly 1.2 million people around the world every year.

Unfortunately, whether they are primary or metastatic (i.e., have spread from tumors in other organs), liver-dominant cancers are often fatal.

This is partially because they often show no symptoms until they are relatively advanced. And partially because there isn’t a lot of routine screening that catches liver cancers early on.

Late detection means the window for the more successful treatment options, like surgery (possible in 10% to 20% of cases), has often closed. Liver-directed therapies may help, but they’re not suitable for all patients and don’t allow for repeat treatments.

The situation might sound pretty dire if not for the emergence of new, less invasive methods for whole organ therapy that target the liver.

The latest whole-organ therapy isolates the liver from the rest of the body, allowing for much higher chemo-agent dosage, and much lower side effects.

Moreover, this is an outpatient treatment that can be repeated. That’s a heck of a lot better than early attempts at whole organ therapy that required surgery. And also better than many other current liver-directed therapies.

Today’s new addition is a small MedTech company that just received FDA approval last summer to treat one type of liver-dominant cancer with its whole organ therapy.

It’s certainly not a cure, but it’s a step in the right direction.

Revenue is growing quickly as the technology becomes better known and treatment centers ramp up procedures.

The Company

Delcath Systems (DCTH) is an emerging interventional oncology company that has developed an innovative system for whole organ therapy. It is currently focused on liver-dominant cancers. It has a market cap of $530 million.

The company’s targeted, whole-organ treatment system delivers a high dose of a chemotherapy agent directly to the liver, which is isolated from the rest of the patient’s vascular system.

Systemic side effects are controlled by filtering the chemo agent out of the patient’s blood before it is returned to the body.

In the U.S. the company’s combination drug and device product is called HEPZATO KIT for Injection/Hepatic Delivery System (HDS).

It gained FDA approval for the treatment of metastatic hepatic dominant uveal melanoma (mUM) in August 2023. This is the first and only FDA-approved whole-liver directed therapy.

The company also sells a device-only configuration in Europe, where the product is called CHEMOSAT Hepatic Delivery System for Melphalan percutaneous hepatic perfusion (PHP).

The first commercial use of the HEPZATO Kit took place in January 2024. Sales are ramping rapidly (relatively speaking) as the company activates more treatment centers.

Delcath’s growth strategy is to expand sales dramatically in the U.S. while focusing on clinical and R&D activities in Europe (rather than sales expansion). This dual strategy in different regions has evolved because Europe has a relatively low price point (this could change over time).

Delcath management thinks HEPZATO can become the U.S. market leader for treating mUM. But this one indication could be just the beginning. Leadership believes HEPZATO has the potential to treat several other cancers in the liver as well, and two Phase 2 trials should begin this year.

The Platform & Solutions

Delcath’s products are sold in the U.S. and Europe under the names, HEPZATO KIT (U.S.) and CHEMOSAT (Europe).

They are essentially the same thing, except that the HEPZATO KIT for the U.S. is a combination medical device and drug, whereas the European version is a device-only configuration.

Both are designed to administer high-dose chemotherapy to the liver while controlling systematic exposure and associated side effects during a percutaneous hepatic perfusion (PHP) procedure.

A Crash Course in Percutaneous Hepatic Perfusion (PHP)

Throughout the early 2000s, liver-directed high-dose chemotherapy evolved from a very invasive open surgical procedure, known as Isolated Hepatic Perfusion (IHP), to a minimally invasive procedure known as Percutaneous Hepatic Perfusion (PHP).

IHP had the rather significant drawback that open surgery limited the procedure’s use to a single treatment. PHP was developed to allow for repeat treatments using catheter-based techniques instead of open surgery.

What About Melphalan?

The chemotherapy agent melphalan has a long history of use, having been approved in the U.S. and used since 1964. It is currently sold in both branded and generic versions and is manufactured by a variety of pharma companies.

Data shows that melphalan causes rapid and irreversible DNA damage that kills both resting and rapidly dividing tumor cells. It acts by introducing interstrand cross-links into DNA.

Delcath has melphalan hydrochloride supply agreements with Synerx Pharma and Mylan Teoranta that run through 2028, with options to extend for five-year periods.

The HEPZATO KIT Delivery System

Approved in the U.S. on August 13, 2023, HEPZATO is considered a combo drug and device product and is regulated by the FDA. The drug is melphalan and the device is Delcath’s proprietary Hepatic Delivery System (HDS). Treatment calls for up to six cycles, one every six to eight weeks.

The HDS works by temporarily separating the liver’s blood flow from the rest of the body while filtering the blood during and after the delivery of melphalan.

This allows a high dose of melphalan to be concentrated in the liver, which may help shrink tumors while keeping liver damage low and reducing the drug’s impact on the rest of the body.

HEPZATO’s road to FDA approval flowed through the FOCUS trial, which had 91 patients, an Objective Response Rate (ORR) of 36.3%, Progression Free Survival (PFS) of 9.0 months and Overall Survival (OS) of 20.5 months.

While these numbers might not sound all that great, they are significantly better than many alternatives. And anecdotal evidence suggests real-world treatment rates might be better than in the FOCUS trial. Fingers crossed.

CHEMOSAT Hepatic Delivery System for Melphalan

In Europe, the hepatic delivery system is sold as a stand-alone Class III medical device. It has the same device components as HEPZATO, it’s just sold without the melphalan. It is used at major medical centers to treat a wide range of cancers in the liver.

Growth Initiatives

Grow Commercial Centers: More centers mean more treatments. As of the end of 2024, Delcath had 14 active sites and a total of 22 sites accepting referrals. The sales team is in conversations with over 20 more sites and management believes it can have 30 active centers by the end of 2025 (i.e., roughly double what it had at the end of 2024).

Expand Indications: HEPZATO’s approval to treat metastatic hepatic dominant uveal melanoma (mUM) implies potential to treat up to roughly 800 to 1,000 patients a year. But the real market opportunity is much larger, approaching roughly 40,000 patients with various liver-dominant cancers.

Delcath is planning Phase 2 trials in 2025 for metastatic breast cancer (mBC) and metastatic colorectal cancer (mCRC). There is also potential to treat intrahepatic cholangiocarcinoma (ICC), metastatic neuroendocrine tumors (mNETs), metastatic pancreatic cancer (mPC) and hepatocellular carcinoma (HCC).

Improving Fundamentals Support Higher Valuation: Delcath is debt-free, revenue is starting to flow, it should be cash flow positive in 2025, there’s potential for adjusted EPS profits in fiscal 2025 and the balance sheet should be bolstered by an additional $17 million in Q2 if/when warrants are exercised ($10 strike price, stock trading near 16). Improving fundamentals should validate a higher valuation and share price while also attracting more institutional and retail investors.

Business Model

Delcath is a medical device company, selling directly to hospitals and treating centers. In certain cases, the equipment may be on consignment until first use, after which Delcath recognizes the associated revenue.

The Bottom Line

Delcath is in the early stages of commercializing its technology, so it is in the supernormal stage of revenue growth.

Revenue in 2022 and 2023 was just $2.7 million and $2.1 million, respectively. The vast majority of sales came from the CHEMOSAT system in Europe. Following FDA approval of the HEPZATO KIT in 2023, the company began commercial activities in the U.S., with revenue starting to ramp in January 2024.

Through the first three quarters of 2024 revenue has been $3.1 million (+426% vs Q1 2023), $7.8 million (+1,469%) and $11.2 million (+2,481%), respectively.

On January 13, 2025, management pre-released Q4 2024 results that surpassed expectations. Management said Q4 revenue should be about $15.1 million, roughly 21% above expectations. Implied full-year 2024 revenue is $37.2 million, (+1,671% over 2023). HEPZATO KIT should account for around 87% of full-year sales, while CHEMOSAT should account for the remaining 13%.

Gross margin is expected to be in the 80% to 85% range, and Delcath should have finished 2024 with around $53.2 million in cash and cash equivalents, up from $14 million at the end of September. The company has no debt.

Management didn’t give any guidance for 2025. I expect they will when official results and the conference call are held on March 6. If I had to guess, I’d say we should expect guidance for around $80 million in revenue in 2025. But that’s just a guess.

Risk

• Site Activation Delays: If the pace of site activations and procedures falls short of expectations, revenue will likely be lighter than anticipated and shares of DCTH stock may suffer.
• Competition: Delcath currently has the first and only FDA-approved whole-liver directed therapy. That could change in time.
• Reimbursement Rate Risk: MedTech companies are always at risk of beneficial/detrimental changes to reimbursement rates. Management’s latest commentary on this front suggests existing CPT codes should capture all steps of the procedure and provide payment to physicians that’s competitive with other interventional procedures. Still, things can change.
• Microcap Stock: This is a small company with a market cap under $600 million. These types of stocks can swing wildly at times, often for no clear reason.
• Dilutive Equity Raise Potential: Management has said Delcath does not expect to raise cash, but that’s always a risk/reality with these types of companies. In June 2024 the company filed a shelf registration for up to $150 million, just in case.
• R&D Costs: Pursuing new indications will cost money. Management has said that R&D spending in 2025 should be $35 - $40 million. We will have to see how this is to be funded.
• Patient Results Could Be Better or Worse Than FOCUS Trial: On the Q2 2024 conference call management said that anecdotal evidence suggests response rates are better than that found in the FOCUS trial. This could be great, but also as time goes on response rates could turn out to be worse. It’ll just take a lot of treatments before we can zero in on what the real-world response rates are.

Competition

HEPZATO and CHEMOSAT compete with surgery, systemic chemotherapy, focal therapies and palliative care. Specific to mUM, the company competes with KIMMTRAK (approved in 2022 and owned by Immunocore Holdings, Plc.), which can treat roughly 45% of mUM patients (HEPZATO is the only drug approved to treat the remaining 55%). More broadly, there are a number of large companies developing and marketing devices for the liver-cancer treatment market, including Boston Scientific (BSX), Medtronic (MDT), Merit Medical (MMSI), Varian Medical, Sirtex Medical and AngioDynamics (ANGO).

The Stock

Trading Volume: DCTH trades an average of 438,000 shares daily and has a market cap under $600 million. We can likely move this stock a little so take that into consideration when buying. Best to average in.

Historical Price: DCTH began trading on the Nasdaq on May 1, 2020, when it closed at 7.8. The stock hit an all-time high of 25.2 in February 2021 then an all-time low of 2.25 in November 2023. The stock’s trend has been mostly up and to the right since then, albeit with some extended consolidation phases. The most recent of these was last July and August when the stock bounced around in the 7.2 to 9.2 range. Since then it’s been somewhat “peaky,” with rapid advances extending well above both the 25- and 50-day moving average lines followed by material pullbacks to about the 50-day line. The most recent advance began after preliminary Q4 results were released on January 13. The stock closed at 11.5 (right on its 50-day line) the day prior, then jumped 11.4% the day of the announcement. It then rallied above 15 over the subsequent six sessions and has traded in the 15 – 16.5 range for the last two weeks.

Valuation: DCTH trades with an EV/Revenue multiple of 8x based on my very rough estimate of 2025 revenue ($80 million).

Short-Term Buy Range: Expect to buy in the 13 (current level of 50-day line) to 18 range ahead of the March 6 official report. I know that’s a wide range. Due to the stock’s tendency to pull back to its 50-day line, we’ll start with a half-sized position. BUY HALF

The Next Event: Official Q4 2024 report on March 6. Participation at BTIG Annual MedTech Conference February 11-12.

Current Recommendations

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

Please note that, unless otherwise credited, all images in this Issue are sourced from Delcath’s January Investor Presentation, which can be found here.

The next Cabot Small-Cap Confidential issue is scheduled for March 6, 2025.

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