DCTH - NASDAQ

Greetings and welcome to the Delcath Systems’ Fourth Quarter 2024 Earnings Conference Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce David Hoffman, Delcath General Counsel. Mr. Hoffman, you may begin.

Thank you. And once again welcome to Delcath Systems fourth quarter and full year 2024 earnings and business highlights call. With me on the call are Gerard Michel, Chief Executive Officer; Sandra Pennell, Chief Financial Officer; Kevin Muir, General Manager, Interventional Oncology; Oya Lukovic, Chief Medical Officer and Martha Rook, Chief Operating Officer. I'd like to begin the call by reading the Safe Harbor Statement. This statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made on this call, with the exception of historical facts, may be considered forward-looking statements within the meaning of Section 27A of the securities act of 1933 and Section 21E of the Security Exchange Act 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurance that such expectations will prove to have been correct. Actual results may differ in a material manner from those expressed or implied in forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the company's annual report on Form 10-K. Those contained in subsequently filed quarterly reports on Form 10-Q as well as in other reports that the company files from time to time with the Securities and Exchange Commission. Any forward-looking statements included in this call are made only as of the date of this call. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent knowledge, events or circumstances. Our press Release with our fourth quarter and full year 2024 results is available on our website under the Investors Section and includes additional details about our financial results. Our website also has our latest SEC filings which we encourage you to review. A recording of today's call will be available on our website. Now I would like to turn the call over to Gerard Michel. Gerard, please proceed.

Thanks, David, and thank you all for joining us today. 2024 was truly a transformative year for Delcath given the U.S. launch of HEP

Thank you, Gerard. Revenue from our sales of HEP

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. The first question today comes from the line of John Newman with Canaccord Genuity. Please proceed with your questions.

Hi there. Good morning. Thanks for taking my question and congratulations on all the excellent execution in 2024. The question I have is as you are bringing new sites online in the United States for HEP

Sure. As you know, the label allows up to six treatments, and in the FOCUS trial in that setting it averaged out to 4.1 treatments. It takes about a year to know whether a patient's going to go the full six. But if we look at the kind of what's called the decay curve of patients when they start, or for the patients who have gone a full year where it looks like we're going to be at least the four or 4.1 that we saw in the trial. So it's premature for me to say it's going to be much over that, but I'd be very surprised if a year from now it's under the 4.1, but it's been remarkably steady, to be honest. We haven't seen much of a change now the like from center to center as they do more treatments. Now, with that said, you wouldn't expect it really is driven by patients either not tolerating the product or alternatively having disease progression. I think the tolerability is at least as good as we saw in the trial and I would say the results the docs are seeing anecdotally are at least or better than was seen in the trial. So those are the reasons if it would end up greater than 4.1, I'm hopeful it might, but premature to say that with any degree of certainty.

Great, thank you.

Our next questions are from the line of Marie Thibault with BTIG. Please proceed with your questions.

Good morning, Gerard and Sandra and congrats as well on a great 2024. Wanted to ask here about the plans on the sales ad, expanding from four to six regions. Help us think through how we should be thinking about your SG&A ramp? You've certainly done a very nice job of controlling OpEx, but we want to sort of understand the cadence of that coming through this year.

Sure. Sandra, can you help with that?

Yes. For SG&A expenses in 2024, we're probably going to see about anywhere from a 30% to 40% increase over the year of 2024 into 2025. I think a lot of those expenses will come probably starting in second quarter and mid-year as begin to expand. But I know the sales and commercial team has already started that in Q1 a bit, but fully staffed I think by midyear of this year.

Okay, very good. And I guess a quick one on the pipeline. Thanks for sizing up the opportunities there and updating us on the timeline. What's left to do on the device itself on making some modifications for those possible indications and then what's left to do on kind of preparing for the trial in terms of finding interested sites, et cetera?

Sure. In terms of device modifications, none are necessary. We're treating the mets in the liver, so whether or not the mets are from breast cancer, colorectal, uveal, it doesn't really matter. In terms of getting up and running for the trial, I'm going to ask Vojo to add some color in terms of the basics of IND approval for breast et cetera.

Thank you, Gerard. So, in order to get the clinical trial started for the colorectal trial and for the breast cancer trial, our strategy is to focus on existing treatment sites and engage new sets of doctors who treat the respecting diseases. We expect this strategy will facilitate the activation of new sites because we'll be going to sites that are already trained and experienced in delivering the treatment and the engagement is primarily to generate interest and support of the breast cancer and colorectal cancer medical oncology communities.

Okay, thanks. Thanks for taking the questions.

Our next questions are from the line of Sudan Loganathan with Stephens. Please proceed with your question.

Hi, Gerard and Sandra, thank you for the update here and congrats on the progress. My first question is regarding R&D OpEx and your aggressiveness to be enough aggressive to have meaningful progress on that front, yet maintain kind of a potential cash flow break even or profitability profile. Which goal is the most important for you in 2025 to be EPS profitable or be break even and maybe more robust on the R&D front?

As I frequently tell investors and new investors and existing investors, don't count on us always being cash flow positive. If we have adequate R&D opportunities for this platform and the cost of capital is reasonable and that second part is critical, we will invest. Now I would say that the bad news in my mind is that we can't get moving fast enough where there are the opportunities to spend all our money. So, we'll be cash flow positive this year without a doubt and perhaps following year and for a while. But I'm purposely not making any promises of maintaining positive cash flow because I think that is an unnecessary set of handcuffs to put in a business when they have quite a few high potential R&D possibilities.

Got it. And my second question is I noticed I think a price increase to about 187,500 in early February. I think that's about 2.74% price increase. Is that expected, that cadence going to be expected every six months now or once every year for HEP

It depends on inflation because with, the legislation is that for CMS you can't price higher than increase- the price increases in faster than the rate of inflation. So that's essentially it depends on what happens with inflation.

Got it. Thank you and once again, congrats.

Our next questions are from the line of Bill Maughan with Clear Street. Please proceed with your questions.

Hey, good morning and thank you. So, I just want to ask about your referral network. What have you seen so far from that network? Do you believe that most patients who should be referred are being referred or how much growth is there from strengthening that outreach effort to the more local centers?

Let me ask Kevin to answer this.

Sure. Thanks, Gerard. Our referral network is working well to this point. We are getting referrals from the community into the larger academic centers. Even some of our new sites that are waiting for product approval are referring their patients to existing treating sites, and those patients will return back to the site once it is opened. We have built each of our regions out with a structure that Gerard mentioned in the brief, where we have a dedicated oncology manager that is out talking to the community, understanding their needs, and helping facilitate referrals to active treating sites.

And I will add that, you know, any good management team adapts strategy as they learn more things. And if you dig through the archives and find, you know, what I said we would need in terms of centers years ago, we're definitely looking at more centers, almost twice as many as I thought we would need. I maybe said maybe 20 max, two or three years ago or move them to 40. And that isn't because the academic centers aren't willing to accept referrals, and it's not that we aren't getting referrals there, but it's become pretty clear that to have patients, you know, fly four hours or drive seven hours, we're going to lose patients. So, we need more centers. So, we're working hard on referrals, but the referrals are probably, we need more centers. That referral pipeline probably isn't going to be as big a mix of the business as I personally anticipated a couple years back. But again, you know, nobody has a perfect crystal ball.

Okay. And on the expansion of the recommendation from just liver confined to liver dominant, how many patients in your target patient population are hepatic confined versus dominant?

Almost all patients eventually get extrahepatic mets. So, it really is a matter. It's a moving target. It's a matter of, you know, when they're primary, when they're diagnosed initially, when they're first diagnosed. Under half have extra hepatic mets, whether it's 20% or 40%. It's hard to have the exact data. Our label, you know, includes patients with extra hepatic mets. The guidelines recently changed. It was strange when the guidelines got updated. Just around the time we were approved, they actually changed and said isolated liver mets, which made no sense. We got on the phone with the KOLs around the country, talked to them. They thought it made no sense. They reached out to the guideline committee, and it got changed pretty quickly. So, there's no incremental patients in terms of our TAM, because we've always included them. But that was a unexpected potential headwind, especially for docs out in the community who don't see a lot of these. If they just refer to the guidelines, that would have been a headline, headwind for us, so we're thankful we got that changed.

Okay, and last one, I know there's no guidance, but looking at consensus numbers for 2025, I'm seeing $77 million as consensus. So, would you at least describe that as conservative or aggressive?

I'm going to say no comment.

I figured I'd try. Thanks though.

Our next questions are from the line of Yale Jen with Laidlaw. Please proceed with your questions.

Good morning and thanks for taking the question and congrats on all the progress. Just want to get a sense of your CRC trial to start later this year in terms of, how many cycles you think the patient may have? Or was there any adjustment in terms of a dose or duration, anything of that compared to your approved label or approved the things on the label orders? Any other adjustments?

Sure. Let me ask Vojo to take that question.

Sure. Thank you for the question. After discussing with leading experts in colorectal cancer, we decided to put forward a design that we believe will facilitate the adoption of liver directed therapy into this line of treatment of metastatic colorectal cancer patients. So, we basically took as a basis the standard of care and we added the treatments with HEP

Okay, great. That's very helpful. Maybe just want to get a little bit more deeper, the orders or sequence of treatment, why you have the HEP

Yes, absolutely. The reason why we sequence PHP first followed by standard of care is that the definition of the patient population are those patients where the liver metastases dominate the clinical presentation. And for that reason the liver tumor is the real problem and that needs to be addressed first. And then the actual hepatic disease could be addressed later.

Okay, great. That is very helpful. And maybe the last question here is that I know you guys start to expand in Europe and in the prepared remark you mentioned some of those. What is the sort of expectation of this year, 2025 for that, that effort, particularly from a revenue perspective? And thanks.

Yes, the expectation, and I may be setting the bar rather low, but the expectation is I said modest growth. And I don't know whether or not it's 20% or 30%. In Europe, it's step changes will occur when we get reimbursement. We really only have reimbursement in Germany, in the Netherlands, the hospitals that use it, and they consider it standard of care, have been taking it out of their own budget. In the UK it's been private pay. If we do get reimbursement in a major market, it would probably be the UK is the one that's up, maybe The Netherlands. We could see a step change in those particular markets. But because it's not, that's really the big driver of future growth. New markets, which can take a while to get started, as well as reimbursement. And they're kind of binary outcomes. I'm setting the bar a little on the low side perhaps, and just saying modest growth for now. But again, the real value there for us is not the economic value, it's the strategic value. The more centers that do it in Europe with its device label, which means. And it can be used to treat any cancer, I think the more we see docs trying to use it and us getting efficacy signals in publications.

Okay, great. Maybe the last sort of tag on that is that do you guys need to do some, some sort of a pharmacoeconomic, some sort of those studies or whether you already have that as a piece for request for the reimbursement?

Yes, we're not going to do a specific pharmacoeconomic study, but we have to. We end up having to pay consultants to do models and the models according, models according to the particular countries, and we will do it for the every, yes I know, Vojo sitting here mostly. Yes. Every country needs its own model. And yes, so, the UK we put a model together. The Netherlands will put a model together. You know, eventually we're starting out in Sweden. I suspect we'll have to put a model together for them. Italy, France, et cetera, et cetera. But they're all basically, we're gathering data we already have and putting into the country's particular model that I'd like to see.

Okay, great. Thanks a lot and congrats on the progress.

Thank you. [Operator Instructions] The next question comes from the line of Chase Knickerbocker with Craig-Hallum. Please proceed with your questions.

Good morning. Thanks for taking the questions. Gerard I feel like I ask this question kind of every quarter, but I'll ask it again. Sorry. But just kind of in those eight centers now that I guess we have 16 active and those eight centers that are in queue approaching being ready to treat patients, do you have a sense for kind of when our expectation should be that those are online? Is that something where in the first half of the year we should have all eight of those centers at some point kind of activating and treating patients and then basically to get to 30 at the end of the year, we kind of need six incremental from there in the back half.

Yes. So, we need 16 overall for the year. We've got two now to reach the 30. Okay. I expect of the balance of them. More will come on board in the second half of the year because we're expanding the sales force. They'll be hit the ground running and really be active in the second half of the year. So, if you assume it was, if you just divide by four, we need four quarter. I think it's going to be closer to three a quarter for the first two quarters and closer to five a quarter for the back half of the year. Now my ability to predict this has been really poor. So, we're doing well. But you know, if I had to put some money on it, that's, that's the pace I would, I would put, I would conclude.

Got it. And just if you could give us a sense for kind of, kind of what percentage of volume is being driven by kind of top three accounts. Are you starting to see some of that kind of broaden out to a lot of your other recently activated centers or just kind of idea?

Yes. The percentage of business coming from the top three accounts has definitely been decreasing as we add more accounts. But the pareto rule probably still holds. I don't think it's quite 80/20, but maybe it's 60/30 in terms of a distribution.

Got it. And then just last from me, there's going to be a readout that will be registrational and HLA negative disease. Sounds like by the end of the year. Can you just remind us how you think about that program competitively with HEP

Look, oncologists like systemic therapies. Our job is to remind them. I don't want to say educate, but remind them that, hey, look, these patients die of liver failure and if you let the liver disease get out of control at some point, even we can't help them or even our product can't help them. We think these patients should survive long enough to get both a systemic and a liver directed. And I think they need a systemic on top of our product. It wouldn't be appropriate just to use our product in these patients. I think the systemics will battle it out amongst themselves. We will be the only liver directed that's appropriate for this patient population. Now a second thing I would mention is we already face a headwind from these products even before they're approved because this is a very small patient population and most of these patients end up getting treated at academic centers that are involved in these trials. So, we're already facing, you want to call it a headwind or understanding how to work with these treatments and that many of our patients already first going into the trials and getting ours because most of these trials dictate that you have to be treatment naive. So, we're already living it and I think it's appropriate that they get systemics on top of us.

Do you ultimately think we could move to something where there's some sequencing of therapy? Is that something you're.

Yes, as a matter of fact, just yesterday I was we had a small panel of docs we were having a conversation with and that's what they do. It takes up six to eight weeks to from a patient presenting and to them being ready to treat with our product for a variety of reasons ranging from prior auth to just having to map the patient and do a variety of evaluations with the patient. And these docs put them on Tebe or IPI/NIVO immediately, treat them for two months or so, then take them off and start sequencing with our product. When I ask them do you put them back on or do you do the full six? They do the full six or as far as they can go before progression or tolerability issues arise and then they put them back on the systemic thereafter. Now that's one doctor's or one center's protocol, but I think that's going to become increasingly common.

Got it. And then just last from me Gerard, any meaningful off label use that you've seen so far in other tumor types in your experience in the U.S.?

No. And as I said before, we've had centers approach us who want to get open to do off label use and we've said no, we have to start uveal melanoma. I suspect we will start seeing some centers doing cases here and there. I would not bake into your model anytime in the near future, like the next year or so. Any meaningful revenue from that, though.

Great. Thanks, guys.

Our next question is from the line of Swayampakula Ramakanth with H.C. Wainwright. Please proceed with your questions.

Thank you. Gerard, congratulations. I was looking into my email archive and just about four years ago, you and I were talking about how to get all the data from the FOCUS trial in house and file the application. And here we are with $37 million in annual revenue after four years. So huge congratulations to you and your team. Having said that, so, with 16 centers now that have incorporated HEP

All right, do I see the changing in terms of the process to get new centers on board?

That or then, in terms of competition, saying that, hey, the other centers in the neighborhood have it, so we need to have it so that we can draw some paper.

Yes, yes. Okay, I got it. Yes. So definitely, you know, if we use the term fear of missing out or fomo, there's definitely a little bit of that going on among the centers. So, you know, you had your typical early adopters who jump on board and then maybe it flattens out a little bit. And then definitely doing a bit of a, I think, uptick in interest as more. And it's not necessarily local centers, but, you know, other name brand centers. Oh, XY

Fantastic. Then coming down to gross margin, you know, you exited 2024 with an 83%. What's the push and pull on that number? You know, especially thinking about '25 and beyond, at least in the short term?

Sandra?

Yes, thank you. So, R&D expenses, Q4 was a bit flat versus previous quarters, but we definitely are going to see a ramp up of R&D 2025, anywhere from $35 million to $40 million as Vojo and his team continues to start the trial and get sites open. Of course, there's some wiggle room in there and how fast. Sure mentioned we can spend that money. But yes, there's definitely going to be a significant increase in R&D over 2024.

And did you ask the puts and takes on gross margin as well?

Yes, that's what I was wondering. What's the push pull on that number? Gross margin.

Oh, gross margin. I'm sorry. So we ended Q4 with 86% gross margin and we do expect that to continue into 2025 and you probably could reach 90% by the end of 2025.

Okay, perfect.

And the push pull, most of the expenses are just our personnel. The bill of materials is what it is, it's fixed. But we have a fair amount of leverage still with the existing team in terms of capacity putting more through. We have a tremendous amount of excess capacity in terms of just the physical infrastructure. So, I don't see any large increases in expense CapEx which would get loaded on over time on cost of goods. So, I think we'll see incremental improvement. But with any high high price drug like this, obviously you kind of reach diminishing returns on a percentage basis even with higher throughput.

Yes. Okay. And then on the expansion of the R&D arm. So, what's the mandate that this group has now? What I mean is, is it more on the device improvement or is it trying to add additional either chemotherapy or biologicals in terms of administering them either to the liver tissue itself or other tissues?

Yes. So, the short term and the relatively low hanging fruit, although it's not that low hanging in anything in this industry, is to get up, treat other liver dominant cancers. I'd love to be able to do a basket trial and have the FDA wave that through, but that's just not likely to happen. So yes, CRC, breast, others that might make some sense of the future. I'm not saying this will happen, but ICC pancreatic to pick up two others that might make sense. Thereafter sequencing therapy with Immuno-oncology agents of CHOPIN looks good. There are lots of other. That's one place maybe we would do a basket trial. You were doing well on an IO agent, got a liver met, started progressing that we might do as a basket trial. In terms of other agents, other chemo agents, even biologics. Yes, we have a long list of ideas I think we're walking now and getting ready to jog. You know, picking up other compounds is something we're definitely going to start looking at, but it's too premature for us to give any specifics. But I think it does speak to the fact that this is a platform that can treat many different diseases in the liver. And we anticipate, as I said earlier in my remarks, if it looks like a compelling R&D opportunity, we're going to make sure we have the right team to do it, but we're going to fund it.

Perfect. So, talking about starting to jog, you know, the ex-U.S. growth has been pretty decent in '25 according to, you know, what you were saying to us earlier. So, in terms of geographic expansion, what, what geographies could be low hanging for '25? Or your scientists ensure first deeper penetration of CHEMOSAT in the current geographies and then worry about expansion to new geographies? I'm trying to figure out how you're going to do this.

Yes, so we sold about as many units in Europe this year as we did in the U.S. last year excuse me. That gives you a sense of the differential in pricing and the value we could get. So again, I want to manage Europe, where I'm not losing millions and millions of dollars every year, and expand it so that we can get the clinical data out of there. Now, are there other sites where now if we ended up getting a broad first line colorectal indication, about half of those patients end up with liver mats. And that's not our trial, it's third line. It's a much smaller market. But if we end up getting, for example, first line colorectal, first line pancreatic, which are huge numbers in terms of liver involvement, then it might make sense to really push hard in other markets where we have lower pricing because the volume would help make up for it. And we probably might have to consider lowering the price in the U.S. to get on policy and such. But right now, with the pricing structure in Europe, with this particular set of data we have, which drives usage, I think Europe is going to be modest growth but strategically important. Might we go to Japan at some point? Perhaps. It's again one of the long list of things the team is considering. But for now, I think again, for the near-term model of the company, I think we think about the U.S. But if we're thinking about a terminal value in your spreadsheet, I would factor in ex-U.S. sales.

Yes, perfect. Thank you very much, Gerard and Sandra for taking all my questions.