A Frustrating Stock With Quite A Bit of Value Potential Print E-mail
By Brian Wilson, Lead Contributor   
Wednesday, 17 October 2012 07:16
icon_newsnotesDelcath Systems (NASDAQ: DCTH) is a medical device and biopharmaceutical company that is now waiting on an NDA decision for its product CHEMOSAT. Shares moved down just over 18% on Monday (October 15, 2012) in reaction to news that the NDA was denied priority review by the FDA , meaning that CHEMOSAT is going to get an FDA decision in ten months rather than six (under PDUFA guidelines).  The company is also working on FDA approval to use CHEMOSAT with doxorubicin, another chemotherapeutic agent known to be effective in liver cancers.

CHEMOSAT is a platform developed by Delcath that administers the chemotherapeutic agent melphalan hydrochloride directly to into the liver's bloodstream through a system of catheters. The innovative part of the platform is its ability to isolate the liver's blood flow (a surprisingly complicated task, due to the way the liver is attached to the rest of the body). This is particularly useful because it limits the chemotherapy-induced toxicity in liver cancer patients. Traditional chemotherapy is not isolated, and can pose significant risks to patients despite the intention to attack only cancer cells. The theory is that cancer cells are more sensitive to these poisonous chemo compounds, and will die long before regular cells.

Delcath actually filed an NDA for CHEMOSAT as far back as 2010, although this was met with a refusal to review by the FDA due to a lack of manufacturing information about the drug, and other safety concerns including some problems they found with the statistical data collected from clinical trials. Note that this wasn't an FDA complete response letter, but a refusal to review the NDA without the proper guidelines. The phase III data was fine, and did indeed show statistically significant improvements in progression free survival (PFS) – which was the primary endpoint of the study. In addition, Delcath has introduced a new filter into the CHEMOSAT platform since the phase III trials that should improve its safety profile when under consideration by the FDA. This means that chances of an eventual approval are higher than they were in 2010, when the first NDA was submitted.

Even if it wasn't an outright NDA rejection, it basically felt like one. Shares of DCTH are now off by over 80% since the bad news about CHEMOSAT. The company's statements earlier this year implied that they fixed every safety and manufacturing concern that was brought up by the FDA in response to the NDA submitted in 2010, and that the company was very likely to see a priority review based on the circumstances, which would give a potential FDA approval in February 2013 (the NDA was resubmitted in mid August). Now that we know that priority review is denied, we are looking at mid-June 2013.

Although it has been a frustrating stock to invest in, the huge pessimism surrounding the stock provides quite a bit of value potential given that the company can bring CHEMOSAT to market by 2013 upon an FDA approval. Delcath's market cap of ~$115 million is looking very cheap considering that CHEMOSAT will bring a substantial improvement in a liver cancer treatment market that will grow to roughly $2.5 billion in spending by 2014.

Since CHEMOSAT is finally on track for an FDA decision, we may see the stock recover if the market begins to view Delcath as a future marketer of the CHEMOSAT platform rather than a company that failed to meet the FDA's requirements for the acceptance of an NDA. Even if the wait for the potential approval is four months longer than originally expected, DCTH will see a huge rebound if CHEMOSAT gets approval. There is also an overall decline in short interest in the stock, indicating that the bears have already enjoyed the damage that was done to the stock by delays, but are not as confident on bets that the company is overvalued given its pipeline. Roth Capital has a $6.00 price target on the stock, which reflects a more accurate valuation of CHEMOSAT once it can pass its current hurdles.

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