Buyout or No, Delcath Offers a Valuable Investment Opportunity

Nov. 3.10 | About: Delcath Systems, (DCTH)

Delcath Systems (NASDAQ:DCTH) is a medical device company developing treatment platforms that isolate and treat organs separately from the rest of the circulatory system. Using this technology, treatments are delivered directly to the organ or interest and systemic side effects are avoided. The company lead platform technology, in which NDA submission is expected in the fourth quarter of 2010, involves isolating and treating the liver with chemotherapeutic agents for the treatment of metastatic melanoma.

Delcath briefly made its ways into the headlines recently as rumors of a buyout by Bristol-Myers Squibb (NYSE:BMY) briefly made their way across Wall Street. The share price jumped over 20% on the rumors, briefly topping $9/share, before settling back down to the low $8 dollar range. While the buy-out appears unlikely, there still exist many reasons that make this stock an especially good buy.

The Technology

Delcath’s percutaneous hepatic perfusion (PHP) offers the upside of a new drug approval with the low-risk of a supplementary new drug application. That’s because the technology uses a drug that’s already known and approved for the treatment of cancer – melphalan. Using the technology, the liver is isolated from the circulatory system, the liver is then saturated with melphalan, and then the blood is filtered of the chemotherapy before being returned to the body. Because the treatment is isolated to the liver – rather than being dosed to the body as a whole – the chemo can be delivered locally in concentrations up to 100 times greater than would otherwise be possible. The treatment is therefore moreeffective with fewer side effects.

In its phase III trial, the PHP technology was pitted against best alternative care (BAC) for the treatment of melanoma that had metastasized to the liver. The primary endpoint for the trial was a statistically significant prolongation of the hepatic progression–free survival (hPFS). It was found that the PHP system actually extended hPFS by 214 days compared to 70 days in BAC (p = 0.001), handily meeting study endpoints. In addition, the trial was conducted under a special protocol assessment (SPA).

So why, then, is Delcath off of its 52-week high of approximately $16?

The Overall Survival Issue

After reporting the results of the above study at ASCO annual meeting in June, Dr. Dirk Schadendorf pointed out concerns he had with the patient’s overall survival. The stock plummeted – losing over half of its value in the following month. The media, as well as the Delcath's management, blamed Dr. Schadendorf for the tremendous drop.

Dr. Schadenfdorf’s concern was that, statistically speaking, there was no significant increase in overall survival. This, technically speaking, is true. However, the trial was never properly designed to test for overall survival. This is because patients were allowed to ‘crossover’ if unresponsive to BAC. The patients that did crossover, then, were generally sicker than starting patient populations - having failed initial treatments. Clearly, overall survival rates should suffer in the PHP treatment arm if unresponsive patients were crossing over.

Delcath’s management has addressed the issue pointedly in each of their conference presentations since the ASCO debacle. The management has stated that the crossing over provision was included by suggestion from the FDA. The logic goes that if the PHP system was effective, it would be unethical to withhold that treatment from patients who could benefit. Management has also stated that overall survival was a secondary endpoint – most certainly due the fact that overall survival would be compromised by the crossover provision. And finally, that the trial was done under an SPA agreement and that all required endpoints were satisfied by the trial.

If you agree that the overall survival issue is not really an issue at all, as management has suggested, then there is no reason why Delcath should not be trading near its pre-ASCO highs.

Analysts Agree That Delcath is a Buying Opportunity

Even though the markets have remained cold towards Delcath Sytems, the equity research analysts have been hot on this company for quite some time. The analysts have almost unanimously rated the stock a ‘buy’. Most recently, Canaccord Genuity rated Delcath a ‘speculative buy’ putting their price target at $13.

Here’s a run-down of the analyst coverage for Delcath:

  • 10/25 – Canaccord Genuity, speculative buy, price target of $13.00
  • 10/15 – Roth Capital Partners, buy, price target of $16.50
  • 8/3 – Wedbush, outperform, price target of $21.00
  • 7/30 – Cowen, outperform
  • 7/30 – Craig-Hallum Capital, buy, price target of $23.00


At present levels, Delcath offers a tremendous investment opportunity – whether or not a buy-out is in the immediate future. Eventual approval of the PHP system appears likely as phase III trials were completed under an SPA agreement meeting all primary endpoints. Near-term catalysts include completion of NDA submission and acceptance by the FDA. Average analysts’ projections – based largely on market size calculations – put upside at over 100% over the next year. An investment in Delcath, in my estimation, offers the upside of a traditional biotech play with a reasonably low risk exposure.

Disclosure: Long DCTH