3 Reasons Delcath Systems Appears Undervalued

| About: Delcath Systems, (DCTH)
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There are many companies operating in the cancer treatment space with near-term catalysts, including Celsion Corporation's (NASDAQ:CLSN) ThermoDox, Threshold Pharmaceuticals' (THLD) TH-302 and even Dendreon Corporation (NASDAQ:DNDN), whose Provenge has already been approved. But, Delcath Systems Inc. (NASDAQ:DCTH) is one of the more interesting opportunities for many reasons.

#1: Targeting a Dire End Market

Delcath Systems is focused on technologies that control liver cancer - one of the three most deadly forms of cancer. Liver cancer does not respond well to existing therapies, unlike brain and lung cancers that have seen better success. In these markets, surgical intervention in conjunction with systemic chemotherapy is often times the preferred standard of care treatment with a success rate of just around 10%, according to a recent conference call.

Liver cancer is characterized by millions of micro metastasis or micro-tumors that make surgical approaches impractical in most of these cases. Meanwhile, melanoma liver metastases are notoriously insensitive to systemic chemotherapy that's simply not capable of killing cancer cells and preserving the liver itself at commercially available dosages. As a result, most of these patients end up dying from liver failure in relatively short order.

Currently, the American Cancer Society estimates that about 30,640 new cases of liver cancer will be diagnosed in 2013, while approximately 21,670 people will die of the cancer. The instances of liver cancer as a percentage of the U.S. population have also been on the rise over the past several decades, suggesting a growing need for effective treatment. Similar trends are being seen in the European Union and other major markets around the world.

#2: Efficacious & Low-Risk Approach

Delcath Systems aims to address these problems with its proprietary CHEMOSAT system, which isolates the liver circulation, delivers an ultrahigh dosage of chemotherapy (melphalan), and filters the chemotherapy agents out of the blood before returning it to the patient. The result is a very focused chemotherapy that has shown robust efficacy in both Phase III clinical trials and existing commercial implementations around the world.

In a Phase III SPA study using its Generation 1 CHEMOSAT in patients with melanoma to the liver, the company demonstrated hepatic progression free survival of 7 months compared to 1.7 months and overall progression free survival of 5.4 months compared to 1.6 months, with 100-fold increases in local chemotherapy dosages behind the strong efficacy. Overall, this produced a robust 40%+ objective response rate, compared to around 10% for approved targeted therapy.

Also of note, the two-hour procedure has demonstrated very low risk, with minimal systemic toxicities and impact on blood components even with the extreme dose escalation. The only observed side effects in the clinical trial were known side effects consistent with the existing approved labeling for melphalan - the chemotherapy agent being used. Moreover, this safety profile was consistent between multiple types of tumor types.

#3: Large Market with Existing Approvals

Delcath Systems' approach is initially targeting the use of melphalan as a chemotherapy agent, which is effective on a broad range of cancers. The chemotherapy agent is primarily used to treat bigger cancers like liver cancer, colorectal, neuroendocrine or melanomas around the world. In its estimates, the company initially sees a $2.3 bilion market opportunity, driven by multi-histology opportunities in the European Union, that could eventually expand to $7 billion in the EU, U.S. and APAC.

Notably, CHEMOSAT has already been approved in the E.U. and Australia, where it has obtained a CE mark. Initially targeting Italy, Germany, France, the UK, Ireland, the Netherlands and Spain, the company has already completed training in eight E.U. clinical sites. Reimbursement is also progressing with existing programs established in Italy and anticipated programs in Germany and the UK during the first quarter of this year.

An approval on its June 15, 2013 PDUFA date in the U.S. could set the stage for a U.S. launch of CHEMOSAT during the fourth quarter of this year. While the market would be initially limited to ocular melanoma, the company could eventually see the country expand into a multi-billion dollar market of its own. And combined, these markets could unlock significant value in a stock that continues to trade with a market capitalization of just $108 million.

Parting Thoughts

Delcath Systems represents a unique opportunity with an existing liver cancer treatment approved in the European Union and upcoming catalysts for U.S. approval. In addition to the three points above, the company is well capitalized with $28.3 million in cash, up to $35 million in committed equity financing, and no debt. Combined, these elements make this stock an interesting story in the cancer treatment space worth following.

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.