Delcath Should Double In The Next 12-15 Months
All you need to know about the drug-device combination manufacturer with a time-sensitive component as new data will be released this Saturday at the ESMO conference.
Word Count: 2,995 words, Reading Time: 14 minutes. Not financial advice, do your own due diligence, for entertainment purposes only.
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Today I want to talk about Delcath DCTH 0.00%↑ and why I think it’s a lower risk biotech stock now which should double in the next 12 to 15 months if they execute as I expect them to do.
A (Very Brief) History Of Delcath
I first learned about Delcath through someone pointing me to the research of Encode Ideas. If you absolutely want the full and complete history of Delcath refer to all their research notes as well as these podcasts here (embedded below) and here (this one also has some fun discussion of Verona Pharma in retrospect.)
At that time I found it, Delcath was on the precipice of pivotal data following a recapitalization of the company in the aftermath of a failed attempt to get their drug-device combination approved for the first time. They were using a new filter for their product and were attempting to re-do their pivotal trial program. Delcath’s reputation at the time was pretty bad and investors and journalists were engaged in what I felt was a bit of a dogpile to badmouth the company based on old information. (Some have later apologized and admitted they were wrong and I respect that because it’s impossible to get it all right in biotech.)
The pivotal data and safety were acceptable and, through many twists and turns, we can fast forward to now. The drug-device combo is approved as a “liver-directed treatment for adult patients with uveal melanoma with unresectable hepatic metastases affecting less than 50% of the liver and no extrahepatic disease, or extrahepatic disease limited to the bone, lymph nodes, subcutaneous tissues, or lung that is amenable to resection or radiation”. You can view the full label here for efficacy and safety information.
What is Hepzato? Why Metastatic Uveal Melanoma
The most simple explanation of Hepzato Kit is it a system that allows blood flow to the liver to be isolated to deliver melphalan, an old chemotherapy drug, directly to the liver at concentrations 6 times higher than would be tolerated systemically and then the filter removes 85% of the chemotherapy from the blood returning to the body resulting in concentrations (6 * <.15) at less than 90% of the “normal” systemic dose. As I understand it, the original version of the filter “Gen 1” was NOT safe enough and there were patient deaths leading to the product being rejected by the FDA. The “Gen 2” version of the filter is much safer and while there are still safety precautions that need to be taken (see the label for full safety information and also I am not a lawyer or regulator…) the procedure is reliable and safe with only short hospital stays needed.
Why metastatic uveal melanoma? Simply because it is a cancer that commonly spreads to the liver which is the life limiting organ of metastasis, there is an unmet need because the existing liver-directed therapies don’t address all of the micro and macro lesions, and because it is an indication which supports high pricing due to the relatively limited number of patients making it feasible for a smaller biotech to launch in that indication and be financially viable.
Hepzato has the potential to help in most cancers that have metastasized to the liver as being able to safely give high dose chemotherapy directly to that organ is really indication agnostic. I will address some pipeline opportunities at the end but everything there is years away, would require guideline inclusion based on a Phase 2 trial or an even longer Phase 3 trial, and would also require the mUM indication to fund the company so most of the focus should be on the lead indication. Although two Phase 2 trials in metastatic breast cancer and metastatic colorectal cancer are either enrolling or planned if a potential acquirer needs a sweetener to try to justify a future acquisition multiple. 🤔
Drug Launch
The Hepzato launch started slower than I would have liked but it’s a highly specialized product with little precedent so no one is really to blame for that. Things have picked up well in the last 6-9 months but the stock has been flattish despite that.
The above slide is from the current deck but the below slide, that I have saved from a late 2023 deck, actually does a better job outlining the potential market and size because it gives more information for how the company calculates the $500 million per year market size. It also does some diffusing around potential risks of follow-on generic entrants, new systemic therapies, and the short survival on standard of care.
Bring this slide back!
800 potential patients * $182,500 price per treatment * 4 treatments/patient = $584 million total addressable market. We’ll get back to this figure later.
At a current valuation of $500 million the stock probably has 5x upside just based on mUM long-term if they can fully capture that market but I’m focused on a double in the next 12 months. Why do I think that will happen and why has the market shrugged off approval, a vastly improved balance sheet, early commercial success, and pipeline progress?
What Scared The Market
The stock and investors seem hyper-focused lately on this specific issue from the recent earnings call:
We have proceeded with plans to enter into the National Drug Rebate Agreement, or NDRA, with the U.S. Department of Health and Human Services. The NDRA enables Medicaid and Medicare coverage for outpatient drugs while requiring manufacturers to provide rebates to state Medicaid programs according to statutory formulas. Entering into the NDRA requires participation in the 340B drug pricing program, which enables eligible hospitals to purchase HEPZATO KIT at reduced prices. Participating in these programs should increase market access and align with Medicaid and Medicare coverage requirements. Since July 1, 2025, HEPZATO KIT has been sold at 340B prices to eligible facilities, with approximately 50% of kits distributed being sold at the discounted price.
For the HEPZATO kit, both rebate and discounts are 23.1% of the published WAC price. Earlier projections suggested a larger proportion of centers qualifying as disproportionate share hospitals or DISH hospitals, but the actual list varies quarterly, and some customers with multiple facilities are purchasing via non-DISH facilities. Volume distribution under the 340B program is expected to remain at roughly 50% for the next few quarters. In the third quarter, the estimated net effect will be a 10% to 15% reduction from the second quarter average revenue per HEPZATO kit. Of course, this will be largely or partially offset by ongoing growth in volume.
A lot to process there but roughly 50% of treating centers will get a 23.1% discount on the price of the drug. Thus, the company’s pricing power as a whole will decrease roughly 12% but the amount of centers that qualify will vary so they are giving a 10%-15% window for the future.
But essentially a price decrease, which biotech investors hate.
And I’m here to tell you…it’s not a big deal. It’s an opportunity. And I will explain.
To level set here are the actual sales figures for the last 6 quarters and future analyst projections:
Here is the company provided guidance for the fiscal year 2025:
The Company’s financial outlook for fiscal year 2025 is as follows:
Total CHEMOSAT and HEPZATO KIT revenue of $94 to $98 million, an increase of more than 150% over 2024
Gross margins between 83% to 85%
Positive adjusted EBITDA and cashflow in each quarter of 2025
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