Last month, we wrote about Xenon Pharmaceuticals (Nasdaq: XENE) and Delcath Systems (Nasdaq: DCTH) as two of our favorite names in this volatile biotech landscape. In that note, we concluded our thoughts on Xenon by saying, “For those who can stomach the risk/reward of a big binary data readout, an entry point in the low $30s may be attractive.” Even as we penned our Xenon commentary a month ago, it seemed clear that the stock, which had dipped below $30, was moving back towards its usual $40 range, closing the attractive entry window we had just suggested. However, Xenon’s Q1 corporate update, which included a data delay and some mixed depression results, has sent the stock tumbling below $30 again. Despite the market’s reaction to the update, we reiterate that for patient investors, owning Xenon in the low $30s could be an attractive entry point.
Delay & Depression
In their Q1 press release last week, Xenon pushed the timing of top-line data from the Phase 3 X-TOLE2 study in focal epilepsy from late 2025 to early 2026. While there is nothing significant about a delay of a few months, it is disappointing to see the data slip off the 2025 calendar. Xenon now lacks a meaningful data catalyst for 2025, which may have prompted some to sell the stock with the notion of revisiting it in early 2026. Although the delay is unfortunate, Xenon is poised for a data-rich 2026, with X-TOLE2 scheduled early in the year, along with the likelihood of one or both of the Phase 3 X-NOVA2 (major depressive disorder) and/or the Phase 3 X-ACKT (primary generalized tonic-clonic seizures) later in 2026.
In its quarterly update, Xenon also reported the results of a 60-patient investigator-sponsored study with azetukalner in major depressive disorder (MDD). The study missed its primary neuroimaging endpoint but showed an encouraging, albeit not statistically significant, numerical separation for azetukalner versus placebo in the SHAPS and MADRS scales, two key clinical endpoints of anhedonia and depression, respectively. On the call, management stated that azetukalner outperformed placebo across all time points, and at week six, there was a four-point improvement in MADRS and a three-point improvement in SHAPS in favor of azetukalner compared to placebo. We highlight the six-week data because that is the time period for the primary endpoint measurement in Xenon’s ongoing Phase 3 MDD study X-NOVA2.
Overall, we would describe these MDD data as mixed. Investors never want to see a study miss its primary endpoint; however, missing a surrogate endpoint while demonstrating activity on clinical endpoints is, in our opinion, a palatable outcome. If anything, these MDD data serve as a reminder that the evidence supporting azetukalner’s benefit for neuropsychiatric indications (MDD and bipolar mania) is considerably thinner than that for epilepsy. Fortunately, the first Phase 3 data investors will see for azetukalner will be in focal epilepsy, where, as we have stated previously, “…Xenon’s upcoming Phase 3 data are weighted toward success, making this recent decline a potentially attractive entry point for those who embrace high-stakes clinical readouts.”
Nothing Depressing About Delcath
Delcath reported another strong quarter, with revenue of $19.8 million for Q1, which included $18 million in U.S. Hepzato sales and $1.8 million in European Chemosat sales. The company had earnings of $1.1 million, $7.6 million in adjusted EBITDA, and $2.2 million in cash from operations. Delcath ended the quarter with $58.9 million in cash, which did not include another $16.1 million from the exercise of warrants that expired earlier this month, resulting in a pro forma treasury balance of approximately $75 million.
Delcath had 17 active sites by the end of Q1, 19 at the time of their earnings call (May 8th), and 10 new pending activation but accepting referrals. This pace of new site activation arguably puts them ahead of schedule for achieving their target of 30 active sites by year-end.
Threaded The Needle
In an October 2023 note, shortly after Hepzato’s FDA approval and the stock languishing in the $3s we wrote, “All indications are that Delcath is well prepared to launch HEPZATO. In fact, we feel that the company is purposefully underselling itself to investors heading into its first commercial year. Gerard’s tone may come across as cautious to some, but all indications point to the company investing heavily in the initial commercial push for HEPZATO. Over the next 12-18 months we believe Delcath can thread the needle between investing (spending) in its commercial business, generating meaningful revenues, bringing in the additional capital from the $6 warrants, and achieving cashflow breakeven. The upside to investors, if Delcath threads the needle as described, is multiples of its current $100mm market cap.” Five quarters into Hepzato’s commercialization, there is no doubt that CEO Gerard Michel and his team have executed an impeccable launch plan and threaded the needle we referred to 18 months ago. Having proven Hepzato is an attractive commercial product, the questions now turn to how big Hepzato can grow in metastatic uveal melanoma (mUM) and beyond, and whether Hepzato/Delcath might be a strategic fit for a larger interventional oncology company.
Hepzato Math
As we stated in our last Delcath note, and based on the company’s current pace of site activation, Hepzato should exit this year at an annualized run rate of at least $120 million. The company is expanding its commercial team with the medium-term goal of having 40 active sites in 2026. At 40 sites, the “Hepzato math” gets Delcath to approximately $170 million in revenue.
However, Immunicore Holdings (Nasdaq: IMCR) generates $225 million in annual revenue with its systemic Kimmtrak treatment, which is only suitable for 45% of mUM patients. Kimmtrak and Hepzato are priced similarly per patient, so based on the Kimmtrak sales figures, the annual addressable mUM market for Hepzato should be between $400-$500 million.
How can Delcath grow Hepzato to Kimmtrak-like levels and beyond? The answer is utilization. Delcath is still only five quarters into its launch; awareness is still increasing, and new sites often start slowly as they build familiarity with the Hepzato procedure. We highly recommend that investors watch a recent webinar titled “Puzzling-Out Liver-Directed Therapies” by A Cure in Sight, where a panel of interventional radiologists and medical oncologists discuss liver-directed therapies, to get a sense of how impressed physicians are with the safety and efficacy of Hepzato after they have become more familiar with the procedure.
We expect monthly utilization rates to rise, especially once Delcath reaches its target number of active sites. If Delcath could grow monthly utilization rates 25%, from just under two procedures currently (we estimate 1.9 in our Hepzato Math above), to two and a half, 40 active sites should yield $225 million in revenue. However, the big driver for increased utilization could be data on the combination (sequencing) of Hepzato with systemic therapy.
In our previous notes, we have spilled a fair amount of ink describing the ongoing clinical trials studying the combination of Hepzato with systemic therapy. Positive data from these studies, the first of which is CHOPIN, is due to be reported later this year and, if positive, should lead to a dramatic increase in the utilization of Hepzato by pushing the treatment earlier in the mUM treatment paradigm. Combination data could also catalyze greater experimentation with Hepzato in areas outside of mUM. Could the impending CHOPIN data, with its potential impact on Hepzato’s growth in mUM and beyond, also be a galvanizing event for M&A interest in Delcath?
For Sale or Go Shopping….
In 2026, Delcath’s expanded commercial team will have been operational for a year; the company should have 40 active sites established and visibility towards $200 million in annual Hepzato revenue. The next significant push for Delcath will be label expansion for Hepzato, but the colorectal and breast cancer studies will not produce results until 2028 or 2029, with potential sNDA decisions occurring approximately a year later. Perhaps the company can access new indications creatively by having Hepzato included in guideline recommendations based on European data, but currently, there is no visibility on this happening. Regardless, Delcath could find itself in an interesting position by the end of 2026, with a maturing Hepzato business in mUM, a growing treasury, and label expansion two to three years away. That’s why we believe by 2026, Delcath will either be sold or will pursue an acquisition. On the Q1 earnings call, the Stephens analyst inquired about the potential for in-licensing, indicating that we are not the only ones wondering if Delcath might be considering complementary assets. However, if we had to wager on whether Delcath will be acquired or add an asset, we firmly lean toward the former. In fact, we will boldly assert that we believe Delcath will be acquired in 2026. Even if we are mistaken, investors should still reap the rewards of a growing commercial business for many quarters to come.
Likeness…..It’s A Start
In a March note entitled Likeness: Bright Minds, Delcath, NovoCure, Triasalus….RenovoRx, we described RenovoRx (Nasdaq: RNXT) as an interesting speculative microcap company with a nascent commercial business and an impending data catalyst. Last week, Renovo reported its first full quarter of RenovoCath sales, a modest yet encouraging $200,000. The company has over ten centers currently using RenovoCath, and believes up to twenty more will come online once the Phase 3 locally advanced pancreatic cancer (LAPC) study has concluded later this year. The company reiterated that it believes the annual addressable market for RenovoCath is approximately $400 million.
While Renovo’s commercial business may just be beginning, its clinical study is nearing completion. As mentioned above, the company expects enrollment of 114 LAPC patients to be finished later this year. Importantly, the company also announced that 56 events (deaths) have occurred, triggering the second planned interim analysis. Data from the second interim are anticipated to be available in Q3, and we expect them to be announced earlier in the quarter. As our initial note on Renovo highlighted, the second interim’s p<0.008 statistical hurdle for the primary survival endpoint is daunting. Nonetheless, there are scenarios where, in our opinion, Renovo and its investors can still win even without achieving the primary endpoint in the second interim. As our earlier Renovo piece said, “Heading into the second interim readout, Renovo offers investors a unique set-up. It has the speculative upside that biotech investors covet. A statistically significant survival benefit from the second interim could send the stock soaring. The stock should also react favorably if the second interim demonstrates an improving statistical trend in survival, providing optimism that statistical significance can be reached in the final analysis next year. Finally, there’s a possible “soft landing” scenario if the statistics trend the wrong way for survival in the second interim, but safety remains substantially better than SoC.”
Back On Our Radar
It has been a while since we last commented on Fennec Pharmaceuticals (Nasdaq: FENC), but their recent Q1 results were encouraging and warrant highlighting. Our last note on Fennec was December 2023, where we discussed the company’s push into the adolescent and young adult (AYA) market with PEDMARK and its impending European commercial launch. A lot has changed since that note; the company has a new CEO, the company licensed the European rights to PEDMARK (branded PEDMARSQSI in Europe) to Norgine, and the company’s push into the AYA market has been slower than expected. However, the company may be close to reaping the financial rewards from these changes. The European launch by Norgine in Germany and the United Kingdom has begun, with Q2 being the first full commercial quarter in both jurisdictions. In the U.S., Fennec added several new high-volume accounts and gained traction in the outpatient setting, a critical market for AYA adoption. With $8.8 million in Q1 revenue, the company is close to cash-flow breakeven. Fennec’s a name that is back on our radar.