NEW YORK ( TheStreet) --Shares of Delcath Systems ( DCTH are trading near their highest levels in four years as the company prepares to release results from a pivotal study of a drug-device system aimed at destroying tumors in the liver. Top-line data from a phase III study of Delcath's Percutaneous Hepatic Perfusion (PHP) system will be announced in April, according to CEO Eamonn Hobbs in an interview Friday. Positive results will lead quickly to an approval filing with the U.S. Food and Drug Administration, he added. Delcath started enrolling patients in this study four years ago, so investors have waited a long time for the results. Here's a primer on what to expect: How does Delcath's Percutaneous Hepatic Perfusion (PHP) system work? PHP is a system that lets doctors isolate the liver from the rest of the blood supply, allowing tumors in the liver to be treated with very high doses of chemotherapy without causing significant toxicity in the rest of the body. The PHP "system" isolates the liver using a series of catheters, balloon-like clamps and filters that are inserted via small incisions in the neck and legs. Doctors then infuse the liver with the chemotherapy drug melphalan at 10 times the dose they could use if the drug were injected normally. The PHP system filters out the melphalan as it exits the liver, which keeps the toxic drug out of the patient's blood supply and reduces side effects. Since PHP isolates the liver, the system can only be used to treat liver cancer? Not exactly. Delcath's current phase III study enrolled patients with melanoma (skin cancer) that spread or metastatized to the liver. Cancer patients often die because their primary cancer invades other vital organs, like the liver, lungs or brain. The liver, in particular, is very susceptible to cancer metastases, and once tumors spread there, doctors have few good treatment options.
Delcath chose metastatic melanoma patients for its first phase III study since this type of cancer often spreads first and foremost to the liver. The company is also conducting other studies, including in patients with primary liver cancer. What's the design of Delcath's phase III study? Ninety-two patients were enrolled, randomized to treatment with either the PHP system or "best alternative care." The primary endpoint is hepatic progression-free survival, defined as the length of time before a patient's liver tumor grows or death. Delcath designed the study assuming that PHP could reduce the risk of tumor progression or death by about 50% compared to best alternative care. Delcath and the FDA also came to an agreement on the study design through a Special Protocol Assessment. Since treatment with the PHP system requires minor surgery, can I assume the phase III study is open label? And if so, what are doctors saying about their patients? Yes, good point. This study is open label which means doctors know which of their patients are being treated with the PHP system and which are only getting best alternative care. Delcath's Hobbs says four doctors in the study enrolled about 75% of the overall patients, and yes, these doctors have been poked and prodded by professional investors (and by Delcath, too) for their assessment of how well the PHP system is working. To date, the response from doctors has been positive. Now, these doctors can only speak for their own patients, they don't know the overall results of the study, but the positive feedback filtering back through Wall Street has raised investor expectations that the phase III PHP study will be a success.
Is this why Delcath's stock price is so strong? Most likely. Delcath's stock price moved steadily higher throughout 2009, quadrupling in price to just over $5. Since then, the stock has traded between $5 and $6 a share. Delcath shares closed Monday at $5.27. As a mea culpa of sorts, I last wrote about Delcath in December 2008 when the stock was around $1. At that time, I said it was too early to get involved in the stock because the results of the phase III study were too far off. I never followed up on Delcath in 2009, which was my mistake because I clearly missed the stock's big run. Will the stock move even higher if the PHP study is a success? I think so, if solely on pure momentum and the giddy joy that comes from a headline about a positive phase III study. Press me for a prediction and I'd say the stock has another buck or two in it for positive PHP study news, although I won't be surprised at all to see significant profit-taking kick in at some point. What's Delcath worth if PHP is ultimately approved? That's a tough call because the PHP system is somewhat unique, which makes it tough to find a comparable. Delcath says about 14,000 patients will be covered under its proposed label indication and it expects to charge about $15,000 per procedure. That's an addressable commercial market of $210 million in the U.S. If patients are treated more than once, which is happening in the phase III study, the overall market opportunity could double or triple. What percentage of those 14,000 patients can Delcath expect to treat? Again, it's hard to forecast since the PHP system is unique, but let's assume three years post launch the company can capture 20% of patients with liver metastases and treat each patient twice. That's $84 million in annual sales.
Slap a sales multiple of six on that and discount back three years at 20% and Delcath is valued between $6 to $7 a share. The stock could be worth significantly more than that -- $10 a share or so -- if Delcath can expand the PHP label to include other types of cancer and/or receive approvals in Europe and other parts of the world. Of course, that's going to take some time. What are the bears (i.e shorts) growling about over Delcath? The relatively small size of the phase III study; the fact that the PHP procedure, while minimally invasive, is still complicated; worries about the types of melanoma patients enrolled and whether or not the liver is the primary or only metastatic site; and commercial risk i.e. can a small company like Delcath market the PHP system effectively? -- Reported by Adam Feuerstein in Boston. Follow Adam Feuerstein on Twitter.