$DCTH Banking On Dilutive MetastasisAlthough FDA approval is a promising sign to invest in biotech stocks, that may not be the case with Delcath Systems, Inc. (NASDAQ: DCTH) whose treatment for a form of metastatic melanoma – Heozato Kit – was recently approved by the FDA. The promising biotech company is suffering from high cash burn and its current cash balance is insufficient to last it more than 2 quarters at its current burn rate. With this in mind, the company’s expenses are set to drastically increase since it intends to make its treatment available for commercial use in Q4. Considering that the stock is up 82% since receiving FDA approval, shorting DCTH stock may prove profitable since capital raise may be announced soon.
DCTH Fundamentals
At times, dilution is the only means for a company’s survival such is the case for DCTH. The company had a cash balance of only $14.5 million and an operating loss of $8 million in Q2 2023 and due to its operating costs, the company burned through $13.9 million in the first half of the year. Having said that, this is merely the tip of the company’s cash burn iceberg due to the fact that it recently received FDA approval for Hepzato Kit, which means that it is expected to start mass production in order to increase its product revenue.
Since the company expects to introduce its treatment to the market in Q4, it is fair to assume that mass production will start this quarter which means that the company’s operating costs will drastically increase. For reference, operating costs are high compared to its cash balance as they currently account for $8.3 million, and with production expected to start soon, this figure may reach another order of magnitude. Taking that into consideration, the company may not be able to start production without a capital raise given its current cash balance.
Thankfully, the FDA approval triggers the second tranche of the company’s financing regulations which will initiate a private investment in public equity (PIPE), during which, PIPE investors have 21 days to exercise their tranche A warrants in exchange for $34.9 million in funding. Although this funding is critical for the company, it comes at the cost of diluting shareholders. Moreover, since the company is already burning around $8 million per quarter pre-production, these funds would only last for a year without considering the added costs of mass-producing its treatment.
Once the company starts production, its expenses will substantially increase as well as its cost of revenue which is why it may seek out a public offering to capitalize on the stock’s high PPS following its run on FDA approval news which would further dilute shareholders. Moreover, if the company generates $10 million in US sales from its new treatment, PIPE investors would have 21 days to exercise their B warrants – providing the company with an additional $24.9 million. Given that dilution appears to be a certain fact for the company, DCTH stock may fall soon which makes shorting it at current levels a potentially profitable decision.
Technical Analysis
DCTH stock was trading in a bearish trend as it was in a downward channel. However, the stock broke this channel after receiving FDA approval – creating a gap near $3.14 in the process. Looking at the indicators, the stock is above the 200, 50, and 21 MAs which is a bullish sign. Meanwhile, the RSI is approaching overbought at 65 and the MACD is approaching a bearish crossover.
As for the fundamentals, DCTH stock may be poised to fall if the company announces a capital raise given its dwindling cash balance and its high cash burn rate. In addition, PIPE investors could now exercise their warrants which may add selling pressure on the stock price. Based on this, investors could go short on the stock with an entry on the break of support and take profits on retests of the 200 MA and the upper trendline, with a stop loss at $5.8 if it holds support.
DCTH Forecast
Despite receiving FDA approval, DCTH stock may be poised to fall drastically from current levels as the company may resort to dilution to raise the funds required to start producing its Hepzato Kit. Aside from this factor, the company has to dilute since PIPE investors are now able to exercise their warrants – providing the company with $34.9 million in dilutive funding. With PIPE investors also set to exercise their B warrants once the company achieves $10 million in US sales from its treatment and the possibility of announcing a public offering soon, going short on DCTH stock may prove to be a profitable decision.
