Seeking Alpha
Long/short equity, deep value, special situations, growth
Profile| Send Message|
( followers)  

If you're not yet familiar with Delcath Systems (NASDAQ:DCTH), it's time to do your homework. After more than two decades of work, fine-tuning, trials, and fulfilling FDA request for more information, Delcath finally appears to be on the cusp of receiving FDA approval this June.

Delcath is in the cancer fighting business. However, it's their approach to fighting cancer that first attracted me to the company. Instead of trying to discover a new novel drug, Delcath simply chose to improve the effectiveness of chemotherapy... one of the most widely used cancer fighting methods used in the world today.

What Delcath has done is establish a method of isolating an organ and treating it with chemotherapy agents in doses up to 100x more potent than existing chemotherapy methods. After treatment, the blood from the organ is then drained through a catheter into Delcaths proprietary filtering system (CHEMOSAT). After being filtered, the blood is then returned back to the body but with significant amounts of the harmful chemotherapy agents now removed.

Learn more about CHEMOSAT here: Delcath Investor Presentation

What Delcath has done is essentially improved the bicycle. Giving doctors the ability to fight cancer with a more lethal punch. Improving the odds of killing the cancer without killing the patent, if you will.

Here are recent events that have convinced me that Delcath is about to receive FDA approval for CHEMOSAT:

1) CHEMOSAT has already been approved by the European Union, Australia, and a few weeks ago... Germany.

2) On Oct 15, 2012 the FDA accepted Delcath's new drug application (NDA) for CHEMOSAT. However, despite this great news, the stock dropped from $2.09 to $1.70 due to the FDA granting them only a standard review versus the priority review the company was seeking.

Within 24 hours I was viewing the standard review as a positive (versus a non-negative) after reading an article regarding a conversation that took place between Delcath CEO Eamonn Hobbs and the FDA upon receiving the standard review. The FDA essentially told Hobbs that it was in their best interest.

3) On Dec 5, 2012 Delcath announced after hours that they were going to modify (by narrowing) the label indication it was seeking in its NDA at the recommendation of the FDA. Because 90% of the patients enrolled in the company's Phase III trials had a particular type of liver cancer (ocular melanoma metastases) the FDA suggested the company only seek approval for this particular cancer.

With this news, Delcath stock fell from its closing price of $1.46 to $1.30 after hours. However, it was very telling that AH volume went barely north of 30,000 when the average daily volume was north of 1 million. The lack of AH volume indicated to me that this didn't change the CHEMOSAT story in the eyes of its largest investors. This was further affirmed the following morning when only 600 shares traded pre-market and also during the regular trading session when DCTH closed at $1.43... for a net decline of only .03 on the narrowing of the label news.

It then dawned on me... It seemed as if the FDA wanted to approve CHEMOSAT and that they were going to lead Delcath by the hand at every turn to help them achieve it.

4) Also on Dec 5, 2012, Delcath secured a $35 million equity financing agreement with Terrapin Opportunity LP. While investors almost universally hate it when companies return to the financing table, it is a necessary evil for many companies in the small-cap space until their businesses are able to thrive on their own.

I am viewing this as a positive sign because it would allow Delcath to sell up to $35 million worth of common stock to Terrapin at a meager 3.6% to 5.8% discount to the weighted average price of DCTH over a preceding period of trading days. To help put this into perspective, Delcaths previous fund raising was done at a 37% discount (May 25, 2012) and it cratered the stock price, sending it down to $1.50 from $2.38.

As we all know, the riskier the investment, the higher rate of return investors will demand. The fact that Delcath just effectively secured financing for themselves at 3.6% to 5.8% told me that Terrapin didn't see too much risk here.

5) On Jan 9, 2013 it was announced that the FDA would begin allowing patients to be treated, under certain circumstances, with Delcath's CHEMOSAT system here in the United States... despite not yet being approved.

6) DCTH price action from Oct 15, 2012 to Nov 30, 2012.

Before I get further into this, I'd simply like to say that I trust no one on Wall Street. It's my firm believe that many trading desk have one main objective: To remove money from your hands and get in into theirs. For example, if they wanted your shares they might: Issue bogus downgrades, publish negative articles (either themselves or through subordinates), watch L3 for opportunities to spike down share prices in order to take out stops, or simply have a stock lose long standing support. (The opposite can also occur... To create demand for shares that an institution wants to unload). Now let's take a look at some dates:

Oct 15 - DCTH falls from $2.09 to $1.70 despite finally having its NDA for CHEMOSAT accepted by the FDA. The drop in price was supposedly due to the heartache of receiving only a standard review vs a priority review. However, regardless of the reason, the $1.60-$1.80 range had been an area of recent support and so seemed like a natural area for the stock to settle back into if it were going to fall. Volume: 6.5 million shares.

Oct 16 to Nov 7 - DCTH continues to hold its long standing support area and never trades outside the tight range of $1.60 to $1.76.

Nov 8 to Nov 14 - DCTH suddenly loses support and closes at these prices over the next five days: 1.50's, 1.40's, 1.30's, 1.20's, 1.10's.

Nov 15 - DCTH sets a new 52-wk low of $1.01 and closes at $1.13. How ironic. At a time when Delcath had never been closer to gaining FDA approval for CHEMOSAT, it set a new 52-wk low. It also just-so-happened to occur on the exact same day that the Wall Street Dumpers from Oct 15 could buy back in and avoid any Wash-Sale issues with Uncle Sam. Manipulation anyone?

Nov 15 to Nov 30 - With the big money boys now back in the saddle, DCTH jumps 65% over a two week period and touches $1.67 on November 30th.

7) And the biggest reason I think CHEMOSAT is about to be approved by the FDA... It works! Not only is CHEMOSAT extending the lives of people with cancer, but some patients are still living happy productive lives five years after having been treated with the Delcath CHEMOSAT system. Here are two recent news articles featuring stories about people that have been treated with the CHEMOSAT system both here in the U.S (Procedure Attacks Cancer Point Blank) and in the U.K. (Mega Chemo to Kill Cancer Without Side Effects).

Closing Thoughts:

I'm fully expecting FDA approval of Delcaths CHEMOSAT. At a minimal, I think investors should expect a price of $2.30 leading up to the expected June decision by the FDA. This was a price point seen several times already throughout 2012 and an area of first resistance. It would also not surprise me to see a price just north of $4.00, the next area of resistance. However, after witnessing the recent parabolic movement of Celsion Corporation (NASDAQ:CLSN) on expectations that it's chemotherapy based liver cancer treatment would work (the stock rose from $1.80's to over $8 in nine months) I suppose anything is possible. Of course, the CLSN story did not end well, but the DCTH story seems ready to blossom and bear fruit.

Being a seasoned investor, I'm assuming that some short time after the FDA approves CHEMOSAT, Delcath investors will look for new things to worry about. It seems to happen with every small bio... Euphoria with FDA approval and then eventual disappointment that things just aren't ramping up fast enough. It seem to me that investors ramp up expectations usually trail reality by 18-24 months.

To DCTH investors I say: Let your hearts not be troubled. I'm in full agreement with Delcath CEO Hobbs in that CHEMOSAT "off-label" use will eventually gain serious traction. I'm also convinced that sales and reimbursement from Europe (and eventually Asia) will gain serious traction. The wheels are turning now, but the pace of things won't start gaining speed until the company finally receives FDA approval.

Though an FDA approval will allow Delcath to use its CHEMOSAT system to treat just one organ (liver), using one-type of drug (melphalan), against one type of cancer (ocular melanoma metastasis), I believe it will represent just the first wave of an eventual tsunami of success for the company. In the not-to-distant future, I expect CHEMOSAT to be used across multiple organs, using multiple drugs, to treat multiple types of cancer. To believe it won't is to also believe chemotherapy only works on one type of cancer in one specific organ.

Delcath has no plans to sit idle. See their pipeline plan here.

Lastly, while CHEMOSAT is currently owned by Delcath, I believe a day may be coming where the entire company will be gobbled up by a larger firm. As CEO Hobbs recently put it himself, the future of the company's technology was likely to be realized under another name and belonged in bigger hands.

Risk: As with all investments, there is risk. There is a chance I am wrong. A chance CHEMOSAT will not gain FDA approval. A chance they might eventually issue more shares or raise more funds. A chance the company might eventually go to zero. A chance I will go broke. These are all chances I'm willing to take with Delcath.

Source: Delcath Systems: 'Improving The Bicycle' In Chemotherapy