Delcath Systems: Too Many Red Flags To Hold Through May 2nd ODAC

Apr.29.13 | About: Delcath Systems, (DCTH)

The preservation of capital should be the number one priority of all investors and traders. Do not invest when the risk seem to outweigh the reward. While I still think Delcath Systems (NASDAQ:DCTH) gets its FDA approval come September, what happens between now and then is anyone's guess.

That being said, I am now a former DCTH investor. Last week, I came to the conclusion there were now simply too many red flags waving for me to hold through the May 2nd ODAC meeting. A few months ago, I had anticipated DCTH to be trading north of $2 by now and, while we did get a brief spike above that figure some six weeks ago, those levels were unable to hold and the price action seen since has not given me a reason to be hopeful.

Additionally, even if the company were to receive a positive nod from the ODAC panel, there are no assurances that Delcath wouldn't use the ensuing spike (if it came at all) to tap into its recently announced ATM financing and squash any potential rally.

I tried to love this company (and may have an affair again with it yet), but after holding the stock for over six months, I finally reached my breaking point last week and sold my entire position at a loss. After riding the low to $1.01 and the eventual rebound back to $2.19, I was used to the rollercoaster ride... but it was only very recently that I finally became unnerved enough to actually sell.

Buying into Delcath, I was already familiar with the concerns: the slow reimbursement, the lack of partners, the ongoing fund raising, the switch from Gen1 to Gen2, the talk of needing to conduct more trials in the future to expand the use of the Melblez Kit/Chemosat System. I was willing to live with all those known risks in anticipation of the ultimate reward... FDA approval.

But then the FDA date got pushed back another three months, then Delcath announced another $50 million ATM, and then it seemed as if the entire dynamic had suddenly changed for DCTH. Instead of rallying into the ODAC decision, any attempt at a breakout was now being heavily sold into. While that in itself seemed like a bad omen, it was the three red flags below that finally pushed me over the edge.

Red Flag #1:

The persistence of a promotional gimmick from "Sierra" or "SierraWorld" that Delcath is in talks with Pfizer (NYSE:PFE) and/or Roche (OTCQX:RHHBY). "Sierra" loves to claim deals are coming for a multitude of stocks, and usually claims these deals are to occur either on catalyst dates (such as earnings) or some short period of time after a catalyst date (such as ODAC, in this case). I simply refer to them as: Carrot on a stick promotions.

I've been tracking Sierra for about a year and now use their website recommendations as a possible red-herring, red-light flashing, run for the exits contrarian indicator. The deals they claim are coming rarely (never?) materialize and the catalyst events people were duped into holding through often end up being huge disasters. Take Sierra's promotion of OCZ Technology Group (NASDAQ:OCZ), for example. Last year, with the stock trading around $6/share, Sierra was claiming a deal with Seagate (NASDAQ:STX) was to be announced with STX earnings. Instead, no deal was announced and OCZ then dropped a few bombshells of its own regarding earnings. OCZ soon fell to below $2/share.

My Sierra alarms were triggered again a few days ago when they posted that DCTH was set to have a great next 10 days. To see Sierra continue with their DCTH promotion this close to the ODAC decision has me thinking DCTH may be having a brush with a new 52-wk low within the next 10 days instead.

Thoughts to ponder... Was it only coincidence that Sierra has been promoting DCTH while the company itself was gearing up to announce additional capital raises? Who is paying for this DCTH promotion? Why do they continue to promote DCTH this close to ODAC when the event itself should have been enough to cause the stock to rally on its own? Never underestimate Wall Street.

Red Flag #2:

There have been some high volume days for DCTH occurring since March... all at higher prices than where we are at today. The two I'm paying particular attention to now are the April 8 and April 9 dates, when over 11 million shares traded. The news driving all that volume were the announcements of more job cuts and news of the FDA pushing back the PDUFA date for the Melblez Kit from June to September. As a result, it wouldn't shock me to see a possible new 52-week low being established on or about May 9.

Why May 9th? 1) Because ODAC is May 2nd and, if they don't recommend the Melblez Kit, the stock likely tanks, 2) Because Sierra's claims of a great next 10 days and deals with Pfizer and Roche will have proven not true, and 3) because this date is exactly 30 days after April 9 and represents the day that the big-money boys who sold on April 9 can buy back in and avoid any white-wash* issues with the IRS.

*This EXACT same event played out on October 15 when Delcath's NDA was accepted by the FDA, but was granted only a standard review vs. the priority review sought. DCTH fell from $2.09 to $1.70 on 6.5 million volume. Exactly one month later, on Nov 15, DCTH hit a new 52-week low intraday at $1.01. The stock then climbed 65% over next two weeks. My previous article on DCTH went over this in some detail.

Red Flag #3:

Cowen, a company that re-affirmed its "outperform" rating on DCTH in late September with a target price of $4.00, sold 87% of its DCTH holdings during the last quarter of 2012. I'm only mentioning this now because I was waiting to see if it was only doing this for tax purposes and possibly preparing to buy back in during the first quarter of 2013. No such luck. Cowen is now down to just 20,600 shares from 158,627 shares reported previously. Few should be more familiar with Delcath than Cowen. Delcath continues to present at the Cowen Healthcare Conferences, has arranged financing through Cowen in the past, and hired Cowen again last month to sell another $50 million worth of shares via a new ATM agreement.

So there you have it! Based on my conspiracy theories, I say Delcath may be testing new 52-week lows this coming week. I also think May 9th could represent the best day to re-enter the trade. Ultimately, I still think Delcath gets its FDA approval in September.

If my suspicions are wrong and the ODAC meeting goes well, I'd expect DCTH to spike towards the $2.00 to $2.50 area. If so, I would be inclined to take at least half those profits off the table and look for better entry points ahead of the September FDA decision. Earnings (thus far) have been abysmal, reimbursement in Europe is taking longer than expected, and the company will soon need to access its new ATM agreement to fund ongoing operations and future trials. All these facts are likely to continue to put pressure on the stock, regardless of ODAC.

Risk: Holding any stock through an ODAC and/or FDA decision should be considered high risk. That risk is multiplied when the company only has one product under development. As a result, speculative investments such as Delcath should only make up a very small percentage of investors' overall portfolios. If the ODAC meeting does not end with a positive recommendation for Delcath's Melblez Kit, DCTH is likely to go below $1/share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.