2023-08-11 07:00:00 ET
Summary
- Delcath Systems recently passed FDA inspection without any manufacturing-related observations.
- The medical review for HEPZATO KIT has likely concluded successfully; FDA seems to have proposed a Black Box Warning, instead of asking for more clinical data.
- Recent sell-off due to API supplier concerns likely misplaced.
- Anemic valuation and lack of broad institutional ownership create attractive risk/reward.
Overview
I believe Delcath Systems' (DCTH) HEPZATO KIT should be approved by the FDA on its PDUFA date , in spite of the recent sell-off resulting from concerns about DCTH’s API supplier .
1) DCTH has passed its own recent facility inspection without a single manufacturing-related observation
2) I believe the medical review portion of the NDA has been successfully completed
3) While the disclosure in the 10Q is concerning, it does NOT mean a CRL is guaranteed
The company's anemic valuation, chronic lack of institutional ownership and the recent sell-off provide excellent risk/reward. Stock has $7+/shr of upside and about $1-2/shr of downside.
DCTH Passed FDA Inspection With Flying Colors
FDA concluded a 9-day-long inspection of DCTH's manufacturing facility on June 9, 2023, and issued a Form 483 with merely three procedural observations. NONE of the three observations were manufacturing-related.
Observation 1 the Company should have addressed immediately, Observation 3 required updating a drawing and Observation 2 cited some lack of documentation during a cleaning step of a piece of equipment. In fact, Observation 2 revealed the Company's willingness to follow Standard Operating Procedures (SOPs), initiate Corrective Action Plans (CAPA) when required and hire independent consultants if needed. All hallmarks of a well-functioning cGMP operation. Although I haven’t obtained it yet, I believe the Establishment Inspection Report (EIR) has become available through FOIA, which means the inspection was classified as VAI and it has been closed out.
Medical Review Likely Has Been Successfully Concluded
DCTH disclosed on August 4 in an 8-K filing , that a vendor accidentally made a staging web-site public, which was meant to appear in case HEPZATO KIT received FDA approval. I managed to take some screen shots of this site and they lead me to believe that the FDA has successfully concluded their medical review.
Just by way of background, DCTH was required to conduct a second Phase 3 trial in order to rule out a mortality signal that appeared in their first Phase 3 trial, due to the Company using off-the-shelf filters in the KIT which resulted in fatal myelosuppression when too much melphalan re-entered the bloodstream. In my opinion, DCTH has clearly accomplished this, which is demonstrated by the following chart showing a clear correlation between the magnitude of response and survival. Pre-specified exploratory analyses also showed that HEPZATO KIT was better than Standard of Care every possible way, including Overall Survival.
The staging site accidentally published by their vendor seemed to reveal the existence of a Black Box Warning for peri-procedural myelosuppression. Normally, the FDA requires Black Box Warnings, they are not usually offered up by the product sponsors. Therefore, I believe the FDA has concluded its medical review and has provided draft labeling to the Company. Labeling negotiations are generally conducted by the FDA after the medical review has been completed. Asking for a Black Box Warning generally means that the FDA has determined that the side effects of a product can be mitigated by the prescribing label and an accompanying REMS. In this case, I believe that means that the FDA has concluded that the data from the FOCUS trial has successfully ruled out the fatality signal of the old filters. Personally, I believe that is pretty obvious.
API Supplier Concerns Maybe Overblown
DCTH has disclosed in their 10-Q Filing on August 9th (pp 42-43) that their Melphalan supplier also received a Form 483 during a recent general facility inspection. They also disclosed that this supplier will be shutting down operations for several months in December “to perform facility maintenance,” and that DCTH has sufficient inventory not to be impacted by this shutdown.
I believe, DCTH stock has sold off because some investors concluded that this shutdown must mean the API supplier has received an OAI classification (or worse) and therefore DCTH will receive a CRL similarly to Fennec Pharmaceuticals Inc. (FENC), Verrica Pharmaceuticals (VRCA), etc. on their prior filings.
First of all, DCTH’s API supplier sells over a dozen marketed products and they were never in trouble with the FDA:
Second, and maybe most importantly, DCTH purchases Melphalan from NerPharMa like any other NerPharMa customer, pursuant to their approved ANDA. (In Europe, doctors/hospitals need to purchase the Melphalan independently, to be used in the DCTH filtration system.) In my experience, OAI classification usually results in the FDA refusing New Drug Approvals (as an initial punishment of the manufacturing site), but they DO NOT impact a manufacturer’s ability to continue selling approved products. Only once a Warning Letter is issued by the FDA (like CRMD’s heparin supplier received), a company’s ability to conduct product release testing maybe curtailed.
Even if NerPharMa received an OAI classification, they would be allowed to keep selling their Melphalan and ALL of their other products in the US to DCTH and everyone else. Therefore, in this case an OAI would not mean automatic CRL to DCTH, like many investors may believe. Third, OAI classification does not require the FDA to withhold approval from new applications, it allows them to do it. Technically, denying new applications is the first “punishment” to a manufacturing site for violating the law. The punishments escalate to product recalls/seizures, etc. if a plant doesn’t fix the violations. In this case, however, denying the DCTH NDA would not have any consequence on NerPharMa, since, as mentioned above, they would be allowed to keep selling Melphalan in the US. It would be purely punitive to DCTH (whose own inspection was spotless.)
Fourth, I believe the only way DCTH would receive a CRL if the inventory they had purchased from NerPharMa is contaminated and needs to be recalled. Since it would not require any validation batches for DCTH to switch to a different supplier, maybe just some accelerated stability data, if that, DCTH could easily switch to Olon or any other manufacturer using a Post Approval Supplement (PAS). Unless there was a safety issue selling the Melphalan already acquired, it would be irrational to make DCTH switch suppliers prior to approval vs a PAS that could take 30-days to process.
Fifth, looking closer at NerPharMa, reveals that they are in fact in need of facility upgrades and maintenance. Their audited financials are published on their website . They reveal that the company has been lagging in upgrading obsolete equipment, software and some capital expenditures to keep up with regulatory requirements. They do not give the impression of being bad faith actors.
Lastly, every manufacturing facility is required to be shut down annually for a couple of weeks for maintenance. Choosing to shut down operations until issues are fixed, appears to be a very smart move according to my manufacturing consultants. It is “the ultimate CAPA.” Since NerPharMa is showing that they are serious in fixing whatever observations the FDA cited in their June inspection, it takes away the need from any further regulatory action against them. They may have waited 4 years to upgrade some of the software after their 2017 inspection (in part due to Covid) they seem to be acting immediately this time around. Which is what the FDA needs to see, in order to avoid escalating regulatory actions.
Anemic Valuation And Sell-Off Provide Excellent Risk/Reward
DCTH stock has suffered for over a decade from lack of investor interest. Vast majority of the market has believed HEPZATO KIT won't be approved for clinical data reasons, since the Company modified their Phase 3 trial to be single-arm trial. And today investors are also concerned about their API supplier and sold off the stock to near all-time-lows.
Post approval, DCTH could easily be worth $10+, a modest multiple even to a mere $100m/rev peak sales number. Since HEPZATO KIT will never do generic, the NPV of any revenue-stream is orders of magnitude higher than the current valuation. Never mind the platform value and use in other indications.
Investors do not appreciate the accomplishments of the current management team where it counts. They built a top-notch cGMP manufacturing process for a proprietary product and re-submitted an NDA which I believe should be approved based on the clinical data. Even if DCTH were to receive a CRL and needed to switch API suppliers, that would be a simple process.
Risks
As with any FDA action, the outcome is ALWAYS uncertain. The FDA could ask any question, medical or CMC or require a new API supplier. In case of a lengthy delay, the stock would trade to $1-2/shr and DCTH would have to conduct another dilutive financing. I believe this risk is mitigated by the fact that HEPZATO KIT is a product for terminally ill patients whose treatment options (TACE with doxorubicin) are much more toxic and provide less benefit.
For further details see:
Delcath Systems: HEPZATO KIT Should Receive Approval On Aug 14 PDUFA