Is Delcath The Post-Celsion Play On Liver Cancer?

| About: Delcath Systems, (DCTH)

Everyone saw the collapse of Celsion Corporation (CLSN) last week, which is something I already covered. As you may know, their drug Thermodox failed Phase III trials for the treatment of hepatocellular carcinoma (HCC) - a form a liver cancer.

Liver cancer is one of the most common cancers in the world, and seems to be have rapidly increasing incidence in the United States especially (as we "catch up" to the rest of the world). About 30,000 new patients last year get diagnosed with liver cancer, with the vast majority of these cases being HCC.

The reason that there was so much hope for Thermodox leading up to the HEAT trial data release was because it offered a giant upgrade to our current chemotherapy regimen for liver cancer (and even others as well). Liver cancer is notoriously tricky, which is why there is a lot of emphasis on improvements on basic chemotherapy delivery. After all, finding new liver cancer drugs with new mechanisms of action is easier said than done.

But, had Thermodox succeeded, it would not have had trouble with healthcare reimbursement or general acceptance amongst oncologists. It used heat-activated doxorubicin, which is one of the most common chemotherapeutic agents out there.

Now that Thermodox seems to be out of the question, a lot of the attention turns to Delcath Systems (DCTH). Delcath is developing a system known as CHEMOSAT, which is a potential improvement to chemotherapy delivery to the liver - much like Thermodox. The difference is that CHEMOSAT isolates the liver's blood flow through a system of catheters, which allows a chemotherapeutic compound to be pumped directly into the liver while limiting damage to the rest of the patient's body through circulatory isolation.

The company had some trouble in recent years with the approval process, although these were largely manufacturing related and represented no real threat to the survival of CHEMOSAT's program.

Drawing more comparisons between Thermodox and CHEMOSAT, you can see that Thermodox failed the Phase III HEAT trial because it wasn't able to demonstrated statistically significant improvement in progression free survival of its treatment arm versus placebo arm. CHEMOSAT, in its pivotal Phase III trials, did exactly that. Also worth noting, both Phase III trials were conducted under special protocol assessment.

Anyway, I also believe that Delcath's market capitalization, which is approximately $113 million right now, is not representative of CHEMOSAT's real market potential after a potential FDA approval (which is estimated to be well over $2 billion). This makes me think that either DCTH would immediately have a jump following FDA approval, or have a gradual run-up as we head towards the PDUFA date of June 15th 2013.

Another point the bulls make is that CHEMOSAT is already approved and ready to go in Europe, and seems to be quite popular. Just today (February 4th) we got news that their healthcare reimbursement situation in Germany is looking terrific as well. Germany is key, of course, because it is the biggest liver cancer market in Europe.

While DCTH is inexpensive in terms of valuation, I think that the company is not all that cash rich ($28 million, as mentioned in the Q3 2012 earnings press release). The company does have $35 million in equity financing that won't be dilutive to shareholders, although they may want to raise cash for the marketing budget of CHEMOSAT going into 2014. I think there's a fair chance that we'll see an equity financing in the second half of 2013, following a hypothetical FDA approval of CHEMOSAT.

Celsion has a market capitalization of about $46 million at this point, which is clearly much lower than that of Delcath but justified. This low valuation does reduce Celsion's risk to the downside, but the results of the HEAT trial bring question as to whether or not Thermodox is worth anything.

Even if the company wanted to pursue strategic alternatives for the drug, I think they'd have a very hard time finding a buyer. If the company wanted to finance another Phase III trial for Thermodox, they'd probably have to raise the capital through share dilution. I really can't imagine anything that would put CLSN investors in a more sour mood than an equity financing following a Phase III trial failure.

I'm not sure if remaining CLSN shareholders are willing to accept their losses, but I do think that anyone willing to buy and hold DCTH as we get close to the PDUFA for CHEMOSAT could make very substantial gains just on the anticipation of the event. Given that DCTH has a catalyst ahead while CLSN doesn't, I think Delcath is the no-brainer option when it comes to current liver cancer investments.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DCTH over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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