Shares of Delcath Systems Inc. (Nasdaq: DCTH) fell more than 40% yesterday after U.S. Food and Drug Administration (FDA) staffers said the company's experimental liver-cancer-treatment system would probably require another round of clinical trials.
The surprise recommendation was contained in a briefing document that was posted yesterday on the FDA's Web site. The document outlines the key issues that the FDA's Oncologic Drugs Advisory Committee (ODAC) will work through with Delcath at a meeting that is scheduled for tomorrow (Thursday).
The key issue is this: Delcath's "Melblez" system is designed to allow a certain group of liver-cancer patients to receive higher doses of chemotherapy drugs - without all the toxic side effects normally associated with high-dose chemo. That's because the Melblez system contains a special filter that's designed to get the chemo drug out of the body once the tumor has been dosed.
And the sell-off was definitely exacerbated by a report issued by a high-profile market maven who said this is "game over" for Delcath - an assessment disputed by Chief Investment Strategist Keith Fitz-Gerald, who made the original recommendation to Private Briefing subscribers.
"This is a setback - but it isn't the end of the company," Keith said. "These guys are looking to truly revolutionize the game. It's a game-changer if it works. But this also demonstrates the risks that are part-and-parcel of cutting-edge medical research - and that we, as investors, face when we seek to benefit from the huge potential upside of opportunities like this."
Let's take a look at what happened, and make sure we understand what it means. Then we'll get into five factors you'll want to assess before deciding whether to hold or sell Delcath.
And let's start with tomorrow's ODAC meeting, which was the catalyst for yesterday's plunge.
ODAC is part of the process a company has to go through in its bid for a new drug approval. It reviews the company's research and makes a non-binding recommendation to the overall FDA. In Delcath's case, the ODAC meeting is scheduled for tomorrow, and the FDA had been scheduled to make its approval decision by Sept. 13.
For the ODAC panel to have all the information it needs to fully review Delcath's case, FDA staffers provide a briefing document - which in this case is a 34-page affair that was released to the public yesterday morning.
The real issue here is that, during its clinical trials, availability issues forced Delcath to switch from one type of filter (Asahi) to another (referred to as the "Clark" filter - we use the names here to help clarify the issue at hand).
Once the chemo drug hits the tumor, the filter is supposed to direct it outside the patient's body - because once it gets into the bloodstream and starts to circulate, it can induce toxic side effects or hasten the patient's death.
This second type of filter was linked to an increase in adverse reactions, and possibly several deaths, among the test patients. (The patients are terminal cancer sufferers - which we mention only because Delcath and the FDA are apparently disagreeing over the fatality rates of the trials.)
To blunt any issues, however, Delcath is proposing to equip the Melblez kit with an even newer filter - which it describes as its "Gen2" filter. The company contends that the safety of this new filter can be predicted by testing that doesn't require a new round of trials.
But in a strongly worded rebuke, the FDA contends that those same tests didn't predict the increase in adverse reactions experienced in shifting from the Asahi to the Clark filter, meaning there's no assurance that these tests will be any more effective in predicting the safety of the new Gen2 fiilter.
"The substantial increase in the incidence and severity of the adverse reactions seen in patients treated with the Melblez kit using the Clark filter as compared to the Asahi filter was not predicted by the battery of in vitro tests or by the limited PK data collected in the clinical trials," the FDA report stated. "The FDA concludes that other, unidentified factors caused the increase in toxicity observed in the change from Asahi to Clark filters. Therefore, any new filter introduced as a new component of the device (Delcath Hepatic Delivery System) for this combination product must be evaluated in a clinical trial in order to have confidence in the safety profile of that iteration of the Melblez Kit."
You need to know a few things about this briefing document. It may not contain everything the FDA knows, is thinking about or is worried about with regards to Delcath's new drug application. The views expressed in the briefing aren't necessarily reflective of what the agency's decision makers think. And new information could come to light.
Even so, we should assume from here that the FDA is going to stand firm on a requirement for a new round of trials with Delcath.
Yesterday's sell-off is worth one last look, too. The stock came back at the end of the day. And the sell-off was definitely exacerbated by the afore-mentioned Delcath death sentence rendered by the commentator.
When we recommended Delcath, Keith strongly urged investors to follow strict "trailing-stop" and position-sizing guidelines - precisely because of the stock's speculative nature and the potential for scenarios just like this one.
Most of you have likely been "stopped out" of Delcath. Given the uncertainty the company now faces, we wouldn't be looking to make new investments right now. That means those of you still holding the stock are deciding whether to hold onto the shares, or to sell.
Here are the five factors you need to consider in making that decision:
- A Hefty Possible Upside: One of the things that drew us to Delcath in the first place was the fact that this was a truly pioneering technology - which targets a type of cancer for which there currently is no effective therapy. As the FDA itself said in the briefing document, "there are no FDA-approved drugs for the treatment of" the form of liver cancer that the company's Melblez system is designed to counter. In fact, "these treatments produce modest response rates and no documented effect on survival." So there's a hefty potential upside for the company that delivers a paradigm-shifting treatment - especially one that oncologists can adapt to "off-label" uses. But that upside is now much further down the road than it was previously.
- The Technology is Already Approved in Europe: Although we said from the outset that this was a highly speculative stock, we believed some of that risk was mitigated by the fact that Delcath's system has been approved in Europe since April 2011, and is actually a commercial, revenue-generating product there. In fact, insurance companies even recognize it as a reimbursable procedure. Delcath is also pursuing approval in other markets around the world. But it really needs the U.S. market approval to become the big profit opportunity we initially envisioned.
- The Opportunity Costs of New Trials: If the FDA ends up requiring a new round of trials, the potential product approval gets pushed even further into the future. And while there will no doubt be profitable trading opportunities in Delcath's shares, this means the big payoff we were looking for is more distant and probably less certain. There may be better places to put that money to use in the meantime.
- A Delay Can Force Another Trip to the Financing Trough: One truism about delays like this with clinical/development-stage biotech and medical-device firms is that the companies aren't usually in a position to finance this additional time period. So they have to go back to the markets and raise additional money. Depending on the path they choose, they either add to the company's debt burden or dilute existing shareholders by issuing more stock. The time frame we're talking about, obviously, is a major determining factor. We'll know more in the next few days.
- Has Delcath Become a "Serial Disappointer?" Delcath disappointed once before - but that was back in 2011, before we recommended it. That was when the FDA told Delcath it needed to re-file its new drug application (NDA). After that, the company seemed to be making all the right moves. It hired one of the top liver-cancer specialists - a doctor from the Mayo Clinic - to help guide the process. And, in December, it took the FDA's advice and adopted a tighter indication for its treatment system. Along the way it got the European approval and seemed ready to make its mark here in the U.S. market. Companies as speculative as this one are prone to disappointments: The expectations are high, and so are the hurdles the company has to clear. But when a company has surprised investors (in a bad way) on more than two occasions over essentially the same issue, you have to take a hard look at the technology, the business model and the management team. If two or more of these are problematic, you'll find there's more money to be made elsewhere.
As you know, Keith's "Money Map Method" investment strategy is a three-part allocation approach that consists of Base Builders (50% of the portfolio), Growth and Income (40%) and "Rocket Riders" (10%) - with Delcath definitely fitting into that latter category.
He's also a huge advocate of such risk-management and profit-harvesting strategies as "trailing stops," limit orders and careful position-sizing. That last point is one that Keith has strongly urged investors to use with Rocket Rider stocks like Delcath.
Here's why: If you limit the purchase on a stock like this to 1% to 3% of your holdings, even a 50% decline amounts to only a 0.5% to 1.5% decline in the value of your overall holdings.
The reason that's important - and the reason we're repeating it again here - is that stocks as speculative as this one can experience massive swings that can far exceed trailing-stop limits you might set for less-volatile stocks.
We're disappointed, and we know you are, too. We may see a rebound in Delcath's shares, but right now we believe there are better risk/reward opportunities elsewhere.
For those of you who continue to hold the stock, however, we will continue to follow the company. And we'll let you know if the outlook improves.