Inside Wall Street: The Allure of Delcath's Highly Targeted Chemotherapy

It's unfortunate but true that traditional chemotherapy for cancer patients is as dreaded as the disease itself. Most people undergoing chemo complain that the cure feels worse than the pain from cancer. That's partly because current chemo treatments, while aiming to destroy cancerous cells, also tend to damage the noncancer cells, resulting in pain and suffering. Delcath Systems (DCTH), a medical device company focused on oncology, aims to remedy that problem.

Delcath has developed a technology for a minimally invasive procedure called "Chemosaturation System," designed to deliver high doses of chemo or other therapeutic agents directly to the diseased organ while also protecting the patient from systemic side effects, including toxicity. Delivered by direct infusion, the Chemosaturation System is now undergoing tests in various cancers of the liver. So far, Delcath's most advanced clinical program was a National Cancer Institute-led randomized Phase III pivotal study treating "ocular and cutaneous melanoma metastatic to the liver."

"The Phase III data looks good and offers catalysts for approval and commercialization," says Mathew Pommer, analyst at Roth Capital Partners, who rates Delcath's stock a buy. Now trading at more than $7 a share, the stock gets a 12-month price target of $16.50 a share from Pommer. "We continue to believe that the Delcath system has commercial potential, and the clinical data presented at the ASCO (American Society of Clinical Oncology) meeting in June are robust," he says.

"Compelling" Study Results

Specifically, Delcath's "Chemosaturation System for Percutaneous Hepatic Perfusion" isolates specific organs or parts of the body from the general circulatory system. That allows the delivery of high-dose chemo only where it's needed. The Phase III data "exceeded our expectations," says Pommer, and demonstrated "hepatic progression-free survival." Based on feedback received from the field, Pommer believes the "outcomes in the pivotal study were compelling."

Brooks West, analyst at Craig-Hallum Capital Group, says his conversations with surgeons and physicians revealed an "excitement around introducing Chemosaturation as an adjunctive to systemic therapies to stabilize the liver." Such positive reactions could accelerate the use of Chemosaturation in the estimated $18 billion worldwide market, he says.

The next step for Delcath is to seek the Food and Drug Administration's approval to market the product next year. Expectations are it will get the green light. Gregory R. Wade, analyst at investment firm Wedbush, says he's confident the Delcath system will receive an FDA OK, based on its success in meeting the prespecified goals laid out in the FDA's Special Protocol Agreement. He rates the stock as outperform.

Delcath President and CEO Eamonn P. Hobbs figures the market for Chemosaturation system is about $775 million in the U.S. alone. The company, he says, is also planning to offer its product outside the U.S., where some 90% of the world's liver cancer cases are.

Way Undervalued?

Delcath has raised $35 million, boosting total cash to more than $60 million, which could be used to fund the commercial launch of its product in 2011 and the company's entree to the European market. In Asia, Delcath plans to conduct Phase I and Phase II clinical trials in Taiwan in the first half of 2011 to test its impact on colorectal cancer and primary liver cancer. In addition, Delcath is pursuing partnerships with several large companies in Asia.

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In the fourth quarter of this year, Delcath expects to achieve several required milestones that, analysts say, could drive up the stock's valuation. At its current price, several analysts say the stock is way undervalued. Jason R. Mills, analyst at Cannacord Financial, rates Delcath as a speculative buy with a 12-month target of $17.50 a share. He believes the Chemosaturation System "would address a very large market opportunity because patients currently have few adequate treatment options.

Individual investors have yet to discover Delcath. But not surprisingly, several large U.S. institutional investors that conduct their own thorough research have already latched on to the shares of this little-known medical device maker and have accumulated sizable holdings. Among them are BlackRock Institutional Trust, which owns a 3.9% stake; TCW Asset Management, which holds 2.19%; and Laddcap Value Advisors, with 1.77%.

With chemotherapy such a necessary remedy for many cancer patients, Delcath's sharply focused delivery of treatment through its proprietary Chemosaturation System could someday become the preferred choice in battling the dreaded disease.