Edgar Filing: DELCATH SYSTEMS INC

form10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2011

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ____________

Commission file number: 001-16133

DELCATH SYSTEMS, INC.

Delaware		06-1245881
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

810 Seventh Avenue, 35th Floor, New York, NY		10019
(Address of principal executive offices)		(Zip Code)

212-489-2100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o (Do not check if smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

The aggregate market value of the voting common stock held by non-affiliates of the registrant, based on the closing sale price on The NASDAQ Capital Market of $5.16 per share, was $217,100,199 as of June 30, 2011.

At March 2, 2012, the registrant had outstanding 48,502,902 shares of par value $0.01 Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2012 Annual Meeting of Stockholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K. The definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report on Form 10-K.

TABLE OF CONTENTS

		Page
PART I

Item 1.	Business.	1
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	27
Item 3.	Legal Proceedings	27
Item 4.	Removed and Reserved	27

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	34
Item 8.	Consolidated Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37
Item 9B.	Other Information	39

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	40
Item 11.	Executive Compensation	40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	40
Item 13.	Certain Relationships and Related Transactions, and Director Independence	40
Item 14.	Principal Accountant Fees and Services	40

PART IV

Item 15.	Exhibits and Consolidated Financial Statement Schedules	41

	SIGNATURES	42

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the period ended December 31, 2011 contains certain “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 with respect to our business, financial condition, liquidity and results of operations. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” “continue,” “potential,” “should,” and the negative of these terms or other comparable terminology often identify forward-looking statements. Statements in this Annual Report on Form 10-K for the period ending December 31, 2011 that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act and Section 27A of the Securities Act. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements, including the risks discussed in this Annual Report on Form 10-K for the fiscal year ended December 31, 2011 in Item 1A under “Risk Factors” as well as in Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” our Quarterly Report on Form 10-Q for the period ended September 30, 2011 in Part II, Item 1A under “Risk Factors” as well as in Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” and the risks detailed from time to time in our future SEC reports. These forward-looking statements include, but are not limited to, statements about:

the progress and results of our research and development programs;

our estimates regarding sufficiency of our cash resources, anticipated capital requirements and our need for additional financing;

the commencement of future clinical trials and the results and timing of those clinical trials;

submission and timing of applications for regulatory approval and approval thereof;

our ability to successfully source certain components of the system and enter into supplier contracts;

our ability to successfully manufacture and commercialize the Delcath chemosaturation system; and

our ability to successfully negotiate and enter into agreements with distribution, strategic and corporate partners

our estimates of potential market opportunities and our ability to successfully realize these opportunities.

Many of the important factors that will determine these results are beyond our ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Except as otherwise required by law, we do not assume any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.

Item 1. Business.

Unless the context otherwise requires, all references in this Annual Report on Form 10-K to the “Company”, “Delcath”, “Delcath Systems”, “we”, “our”, and “us” refers to Delcath Systems, Inc., a Delaware corporation, incorporated in August 1988, and all entities included in our consolidated financial statements. Our corporate offices are located at 810 Seventh Avenue, 35th Floor, New York, New York 10019. Our telephone number is (212) 489-2100.

Company Overview

We are a development stage, specialty pharmaceutical and medical device company focused on oncology, initially cancers in the liver. Since our inception, we have directed our research efforts towards the development and clinical study of the Delcath chemosaturation system.

The Delcath chemosaturation system allows the administration of concentrated regional chemotherapy by isolating the circulatory system of the targeted organ. Once the organ is isolated, the Delcath chemosaturation system delivers high doses of chemotherapeutic agents directly to the liver, while limiting systemic exposure and the related side effects by filtering the blood prior to returning it to the patient. The Delcath chemosaturation system involves a series of three catheter insertions, each of which is placed percutaneously through standard interventional radiology techniques. The procedure is minimally invasive and repeatable allowing for multiple courses of treatment with chemotherapeutic drugs and the potential for concomitant cancer therapies. We believe that the Delcath chemosaturation system is a platform technology that may have broader applicability, including the use of other drugs to treat the liver, as well as for the treatment of cancers in other organs and regions of the body.

On April 13, 2011, we obtained the right to affix the CE Mark to the Delcath Hepatic CHEMOSAT® Delivery System (CHEMOSAT System). The right to affix the CE mark allows us to market and sell the CHEMOSAT System in the European Economic Area (EEA). In the EEA, the CHEMOSAT System is regulated as a medical device indicated for the intra-arterial administration of chemotherapeutic agent (melphalan hydrochloride) to the liver with additional extracorporeal filtration of the venous blood return. We have filed an application seeking CE Marking for Generation 2 of our CHEMOSAT System with melphalan as an amendment to the original CE Mark for the CHEMOSAT system and that application is currently under review with the Notified Body.

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We believe the CHEMOSAT system may ultimately fulfill an annual unmet clinical need for as many as 100,000 liver cancer patients in the EEA. We intend to focus our initial efforts on seven target markets including Germany, United Kingdom, France, the Netherlands, Italy, Spain and Ireland. We believe these countries represent a majority of the total potential liver cancer market in EEA countries. We plan to use a combination of direct and indirect sales channels to market and distribute the CHEMOSAT system in the EEA. Our European commercialization strategy involves the establishment of clinical training and centers of excellence to educate and train physicians in these countries in order to develop key opinion thought leadership and foster initial market acceptance. To support our commercialization efforts in the EEA, we have established our European Headquarters in Galway, Ireland.

On November 21, 2011 we announced that we had entered into an initial training and marketing agreement with the European Institute of Oncology (IEO) in Milan, Italy. We have also entered into initial training and marketing agreements with the Frankfurt University Hospital in Frankfurt, Germany, as well as with University Medical Center Schleswig-Holstein in Kiel, Germany. In February 2012, we commenced our first European patient treatments with the CHEMOSAT system at IEO in Italy and Frankfurt University Hospital in Germany. The initial patients involved were treated for inoperable liver-dominant metastases from ocular melanoma, cutaneous melanoma, breast cancer and gastric cancer. We plan to add additional cancer centers in France, the United Kingdom, Netherlands, Spain and Ireland in the near future.

In the United States, the Delcath chemosaturation system for the administration of melphalan hydrochloride is considered a combination drug and device product and is regulated as a drug by the United States Food and Drug Administration (FDA). In December 2010, we submitted our Section 505(b)(2) New Drug Application (NDA), to the FDA, seeking an indication for the percutaneous intra-arterial administration of melphalan for use in the treatment of patients with metastatic melanoma in the liver. In February 2011, we received a Refusal to File (RTF) letter from the FDA for the NDA. The FDA will issue an RTF if it determines, upon an initial review, that the NDA is not sufficiently complete to permit a substantive review. Neither the acceptance nor non-acceptance of an NDA for filing is a determination of the ultimate approvability of the drug product at issue. The RTF requested information on a number of items, including manufacturing plant inspection timing, product and sterilization validations, statistical analysis clarification concerning randomization and additional safety information regarding patient hospitalization data in order to allow the FDA to properly assess the risk-benefit profile of the product candidate. On January 12, 2012, we held a pre-NDA meeting with the FDA to discuss our NDA submission and provide an update on the items identified in the RTF. Based upon the meeting and FDA correspondence received in response to our meeting request and the briefing packet we submitted, we are satisfied with the responses that we received from the FDA to certain questions we had regarding the NDA submission. Accordingly, we will continue with the preparation of our NDA submission as planned and expect to make the submission in the second quarter of 2012.

Advantages of the Delcath Chemosaturation System

Currently there are few effective treatment options for cancers in the liver and they are generally associated with significant side effects. Traditional treatment options include surgery, chemotherapy, radiation therapy, thermal therapy and chemoembolization as well as cryosurgery, percutaneous ethanol injection, implanted infusion pumps, surgically isolated perfusion and liver transplant. We believe the Delcath chemosaturation system may address the critical shortcomings of traditional liver cancer treatments based on the results of our Phase I, Phase II and Phase III trials:

Allows Higher Dosing—Our Phase III clinical trial demonstrated that the Delcath chemosaturation system is capable of delivering over 100 times more of the chemotherapeutic agent to the treated organ than traditional systemic chemotherapy. In our clinical studies on patients with metastatic melanoma it was shown that higher dosing led to significantly improved disease control in the liver.

Controls Toxicities—Our Phase III clinical trial demonstrated that the Delcath chemosaturation system is capable of extracting on average 72% of the chemotherapy agent administered to the liver, which reduces the exposure of healthy tissue and organs to the effects of these chemotherapeutic agents.

Minimally Invasive and Repeatable—The Delcath chemosaturation system allows for multiple courses of treatment with chemotherapeutic drugs and has a recovery period that is shorter than surgical resection or isolated hepatic perfusion.

Treats the Entire Liver—By introducing the chemotherapeutic agent into the arterial blood supply feeding the liver, the Delcath chemosaturation system perfuses the entire liver with chemotherapy, treating both tumors that are visible as well as “micro metastases” that cannot be detected by imaging.

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Strategy

We believe the Delcath chemosaturation system represents a potentially important advancement in regional therapy for cancers in the liver that include both primary liver cancer and metastatic liver cancer with tumor cells originating from other organs. We are seeking to establish the Delcath chemosaturation system as the standard of care for disease control in the liver by concentrating the power of chemotherapy.

We also intend to develop the system for use with other chemotherapeutic agents, as well as for other organs in addition to the liver. We are continuing our research and development efforts with respect to other chemotherapeutic agents and the treatment of other types of cancer and will need to conduct additional clinical trials and seek approval for escalating doses of anti-cancer agents, including melphalan and doxorubicin for use with the Delcath chemosaturation system.

Our strategy includes the following elements:

Commercialize the Delcath Hepatic CHEMOSAT Delivery System in the European Economic Area. We have established our EEA headquarters in Galway, Ireland and have begun hiring initial staff to support our commercialization strategy. As of February 2012, we have entered into initial training and marketing agreements with three leading European cancer centers and two of these centers have utilized the CHEMOSAT System to treat initial European patients. We are pursuing a two-pronged commercialization strategy in the EEA under which we will directly market the CHEMOSAT System in certain markets and enter into agreements with third-party distributors in others.

Leverage the CE Mark to Commercialize the Delcath CHEMOSAT System in Other Countries. We believe the right to affix the CE Mark can result in an accelerated regulatory approval in a number of countries outside the EEA and the United States. We recently received regulatory approval for the CHEMOSAT System in Australia and completed the product notification process in New Zealand. We have submitted applications for regulatory approval in Hong Kong, South Korea, Singapore and intend to submit in Israel, Canada, Mexico, Argentina, Brazil, Russia, India, Japan, China, and Taiwan. It is our intention to leverage the CE Mark in some or all of these countries to commercialize the CHEMOSAT System, where appropriate.

Obtain FDA Approval for Use of the Delcath CHEMOSAT System in Combination with Melphalan to Treat Metastatic Melanoma in the Liver. Based upon the meeting and FDA correspondence received in response to our meeting request and the briefing packet we submitted, we are satisfied with the responses that we received from the FDA to certain questions we had regarding the NDA submission. Accordingly, we will continue with the preparation of our NDA submission as planned and expect to make the submission in the second quarter of 2012.

Commercialize the Delcath CHEMOSAT System in the United States. If we obtain FDA approval of our NDA, we intend to market the Delcath CHEMOSAT system with melphalan in the United States through our own sales force and focus our initial marketing efforts on major cancer centers beginning with those hospitals that participated in our Phase III clinical trial.

Establish Strategic Alliances and Distribution Partners. In addition to our existing partnership with Chi-Fu Trading Co., Ltd in Taiwan, we are pursuing strategic partners to develop certain Asian markets including China, Korea and Japan. We are also pursuing distribution partners to commercialize the product in other foreign markets including Australia, New Zealand, Brazil and Argentina.

Obtain Approval to Market the Delcath CHEMOSAT System in the United States for the Treatment of Other Cancers in addition to Metastatic Melanoma in the Liver. We concluded a multi-arm Phase II trial to evaluate the Delcath CHEMOSAT system for the treatment of other cancers in the liver, such as tumors of neuroendocrine and colorectal adenocarcinoma and cholangiocarcinoma origin that have spread to the liver as well as primary liver cancer. Furthermore, we also intend to pursue pharmaceutical partners to co-develop and fund additional cancer indications for the Delcath CHEMOSAT system. Upon successful conclusion of the related clinical trials, we intend to apply for regulatory approval of additional indications.

Expand the Application of the Delcath Chemosaturation System. We are currently developing a chemosaturation system for use with doxorubicin. We intend to evaluate a variety of chemotherapeutic agents for use with the Delcath chemosaturation system to treat liver cancers, as well as other organs and body regions.

At December 31, 2011, the Company had $30.8 million in cash, cash equivalents and certificates of deposit. Since our inception, the Company has raised approximately $149.1 million in aggregate funds (net of expenses). The Company has used approximately $81.8 million of those funds for research and development costs associated with development and testing of the Delcath chemosaturation system, and has cumulative net losses of approximately $145.4 million. For the years ended December 31, 2011, 2010, and 2009, we invested $25.2 million, $17.6 million, and $9.6 million, respectively on research and development activities.

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The Cancer Treatment Landscape

Background

According to the American Cancer Society, cancer is the second leading cause of death in the United States, with an estimated 571,950 deaths and 1.6 million new cases diagnosed in 2011. Cancer is also the second leading cause of death worldwide, accounting for approximately 7.6 million deaths and 12.7 million new cases in 2008. The financial burden of cancer is enormous for patients, their families and society. The National Institutes of Health estimates the overall costs of cancer in the United States were $264 billion in 2010, including $103 billion for direct medical costs, $21 billion for indirect morbidity costs attributable to lost productivity due to illness and $140 billion for indirect mortality costs attributable to lost productivity due to premature death.

Liver Cancer—Incidence, Mortality and Cost

Liver cancer is one of the most prevalent and lethal forms of cancer. According to the American Cancer Society “Cancer Facts & Figures 2011,” the five-year survival rate for liver cancer patients in the United States is approximately 14%, compared to 68% for all cancer combined. According to GLOBOCAN 2008, liver cancer is the second leading cause of cancer death in men and the sixth leading cause of cancer death among women worldwide. In 2008, there were estimated 748,300 new liver cancer cases worldwide and 695,900 people worldwide were projected to die from liver cancer.

There are two sources of liver cancer: primary and metastatic. Primary liver cancer (hepatocellular carcinoma or HCC) originates in the liver and is particularly prevalent in populations where the primary risk factors for the disease (hepatitis-B, hepatitis-C, high levels of alcohol consumption, aflatoxin, cigarette smoking and exposure to industrial pollutants) are present. Metastatic, or secondary, liver cancer is characterized by microscopic cancer cell clusters that detach from the primary site of disease and travel via the blood stream and lymphatic system into the liver, where they grow into new tumors. These metastases often continue to grow even after the primary cancer in another part of the body has been removed. Given the vital biological function of the liver, including processing nutrients from food and filtering toxins from the blood, it is not uncommon for metastases to settle in the liver. In many cases patients die not as a result of their primary cancer, but from the tumors that metastasize in their liver. In the United States, metastatic liver cancer is more prevalent than primary liver cancer.

One of the cancer histologies with a high likelihood of metastasizing to the liver is melanoma of cutaneous and ocular origins. Once melanoma has spread to the liver, evidence suggests median overall survival for these patients is generally 3-6 months. According to the American Cancer Society, the annual incidence of cutaneous and ocular melanoma is approximately 70,230 and 2,570 cases per year, respectively. Currently there are limited approved treatment options for metastatic melanoma.

On April 13, 2011, we received CE mark approval for the Delcath Hepatic CHEMOSAT Delivery System as a Class III medical device for the percutaneous intra-arterial administration of a chemotherapeutic agent (melphalan hydrochloride) to the liver. We believe the approved label for CHEMOSAT in Europe permits broad use in liver cancers. During February 2012, five patients received CHEMOSAT treatments. Two patients were treated at the Johann Wolfgang Goethe University Hospital in Frankfurt Germany for inoperable, liver-dominant metastases, one from cutaneous melanoma and one from breast cancer. An additional three patients were treated at the European Institute of Oncology in Milan, Italy — two with liver metastasis stemming from ocular melanoma and one from gastric cancer. In the United States, we concluded a Phase III clinical trial for the CHEMOSAT system with melphalan in patients with metastatic ocular and cutaneous melanoma to the liver in 2010. The Company intends to seek FDA approval of chemosaturation system with melphalan as a combination product for an indication for the treatment of metastatic melanoma liver cancer.

Liver Cancer Treatment—Common Current Approaches

Traditional treatment options for liver cancer include surgery, chemotherapy, radiation therapy, ablation and chemoembolization and radioembolization, as well as cryosurgery, percutaneous ethanol injection, implanted infusion pumps, surgical isolated hepatic perfusion and liver transplant. As is the case with treatment of many other cancer histologies, these options have limited efficacy and are associated with significant side effects. Some of the most frequently used treatments are:

Chemotherapy

Systemic chemotherapy uses anti-cancer drugs that are injected into a vein or given by mouth to destroy cancer cells. The effectiveness of this treatment option often depends upon the dose of chemotherapeutic drug administered. Generally, the higher the dosage of chemotherapy administered, the greater its ability to kill cancer cells. Due to the toxic side effects of chemotherapy agents, the higher the dosage administered, the greater the damage caused to healthy tissues. The high doses of chemotherapy often required to kill cancer cells are highly toxic and may even be lethal to patients.

Radiation Therapy

External beam radiation therapy (XRT) uses high dose x-rays or the delivery of localized radiation to kill cancer cells. A number of localized radiation delivery mechanisms are currently being used and tested, and may demonstrate some effectiveness against certain types of liver cancers. Radiation therapy using x-rays is rarely used for treating liver cancer due to toxicities that impact healthy tissue.

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Radioembolization

Selective Internal Radiation Therapy (SIRT) or radioembolization, is a focal therapy that involves the percutaneous, catheter delivery of tiny beads or microspheres that contain a radioactive isotope directly to the liver where they lodge in small vessels in order to deliver radiation to the tumor. The treatment is for specific tumors, not the entire region of the liver.

Resection

Resection— surgical removal of the diseased portion of the liver—offers the greatest chance of curative treatment for localized cancers and is the preferred method to treat liver cancer once detected. Frequently, symptoms of liver cancer do not appear until the tumors have spread broadly within the liver, making surgical resection impractical. As a consequence, only about 10%-20% of primary and metastatic liver tumors can be surgically removed. Additionally, recurrence of tumors is common, and in that event surgical resection typically cannot be repeated.

Chemoembolization

Chemoembolization or transarterial chemoembolization (TACE) is a commonly used focal therapy that involves the injection of a chemotherapeutic drug in combination with an embolic material to block normal blood flow into tumors in the liver. Blocking blood flow deprives the tumor of essential oxygen and nutrients and ultimately can kill the tumor. Although chemoembolization allows for focal delivery of chemotherapeutic drugs, the drugs cannot be delivered at an escalated dosage level comparable to the levels at which they are delivered with the Delcath chemosaturation system. Furthermore, the treatment is for specific tumors, not the entire region of the liver.

Thermal Therapies

Radio frequency ablation uses electric current to destroy cancerous cells. The procedure utilizes an ultrasound or CT scan to guide several needles into the abdomen through small incisions. The needles are heated with an electric current that burns the tumor and destroys the cancerous cells. Microwave ablation is an experimental therapy similar to radio frequency ablation that uses microwaves instead of electrical current to destroy cancerous cells. These procedures are focal treatments and only treat the tumor, not the tumorous region; therefore, they are generally available only to patients with a limited number of smaller unresectable tumors.

Isolated Hepatic Perfusion

Isolated Hepatic Perfusion (IHP) is a surgical procedure developed in the 1960s, whereby the venous and arterial vasculature of the liver are accessed through surgical incision of the abdomen. The liver is isolated from the general circulation, and high doses of chemotherapy, often melphalan or oxaliplatin, are perfused through the liver, saturating the entire organ. The procedure has shown significant tumor control rates. However, the procedure is associated with significant operation time and prolonged (2-3 week) hospital stay. Based on the invasiveness of the procedure and other factors, the therapy cannot be repeated.

Treatment with the Delcath Chemosaturation System

Chemosaturation, or percutaneous hepatic perfusion, evolved from IHP. The Delcath chemosaturation system is designed to be a minimally invasive, repeatable procedure that addresses many of the shortcomings of traditional treatments by permitting the delivery of much higher doses of chemotherapeutic drugs directly to the liver while minimizing the systemic exposure of such drugs. Unlike focal therapies that can only treat a limited number of visible tumors, the Delcath chemosaturation systems saturates the entire liver with concentrated doses of chemotherapeutic agents, thereby treating the whole liver, including both visible and invisible (micro-metastases) tumors. Unlike traditional systemic chemotherapy, our system concentrates the chemotherapy primarily on the liver and limits the exposure to healthy tissue in other areas of the body.

The most advanced application for which the Delcath chemosaturation system was evaluated is treatment of metastatic melanoma in the liver. The Delcath chemosaturation system isolates the liver from the patient’s general circulatory system, allowing for the administration of high and concentrated doses of chemotherapeutic drugs directly to the isolated liver. The Delcath chemosaturation system then captures and diverts the flow of blood exiting the liver, which contains high doses of chemotherapeutic agents. The blood passes through filters located outside of the body that remove the majority of the chemotherapeutic agents from the blood before it is reintroduced to the patient’s general circulatory system. The chemotherapeutic agent remaining in the bloodstream after filtration is a fraction of the infused drug, resulting in manageable toxicities. During our clinical trials, the procedure typically took approximately two to three hours. Patients remained in the intensive care unit overnight for observation after undergoing treatment with the Delcath chemosaturation system. Treatment with Delcath’s chemosaturation system is a repeatable procedure and during our clinical trials patients received an average of three procedures at approximately four to six week intervals. A new disposable Delcath chemosaturation system is used for each treatment.

The Company believes that the Delcath chemosaturation system allows for significantly higher doses of a chemotherapy agent, currently melphalan, to be delivered to the liver than what would otherwise be possible through conventional intravenous chemotherapy or chemoembolization. As a result, the Company believes that our clinical research will show the treatment effectively reduces the number of cancer cells in the liver and may help to control the disease in the liver, leading to better clinical outcomes. In some cases, the use of the Delcath chemosaturation system could potentially allow for therapies previously unavailable for certain patients. We believe that chemotherapy could also be administered through the Delcath chemosaturation system prior to or after resection with the objective of destroying micro metastases in the liver that may remain undetected, thus preventing or delaying any recurrence of tumor growth in that organ.

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The side effects caused by the drug used in our clinical trials, melphalan, are similar to the side effects associated with delivery of melphalan by traditional methods.

The Delcath chemosaturation system includes the following disposable components:

Infusion catheter—an arterial infusion catheter used to deliver chemotherapy to the liver.

Isolation and aspiration catheter—a multi-lumen catheter containing two low-pressure occlusion balloons which are positioned to isolate and capture the blood flow from the liver.

Filtration circuit outside the body—a blood tubing circuit containing disposable components used with a non-disposable blood pump which push the isolated blood through the Delcath chemosaturation system’s filters and deliver the filtered blood back to the patient.

Filters—external hemofiltration filters remove most of the chemotherapy agent from the isolated blood coming out of the liver before the blood is returned to the patient’s general circulatory system.

Return catheter—a thin-walled blood sheath used to deliver the filtered blood from the filtration circuit outside the body back into the patient’s general circulatory system.

Series of introducers and related accessories to properly place the catheters.

In the United States, melphalan hydrochloride for injection will be included with the system.

In Europe, the system will be sold separately and is intended to be used in conjunction with melphalan hydrochloride which is already commercially available from a third party.

Our Clinical Trials

Our Phase III trial and our multi-arm Phase II trial of the Delcath chemosaturation system with melphalan in patients with liver cancers are summarized below. The Phase III and Phase II clinical trials were subject to the terms and conditions of the Cooperative Research and Development Agreement (CRADA), between the Company and the National Cancer Institute (NCI). The Phase III trial was conducted under an FDA Special Protocol Assessment (SPA) and was conducted at centers throughout the United States. The Delcath chemosaturation system with melphalan was granted Fast Track designation by the FDA. The fast track programs of the FDA are designed to facilitate the development and expedite the review of new drugs that are intended to treat serious or life threatening conditions and that demonstrate the potential to address unmet medical needs.

Phase III—Melanoma Metastases Trial

In February 2010, the Company concluded a randomized Phase III multi-center study for patients with unresectable metastatic ocular or cutaneous melanoma exclusively or predominantly in the liver. In the trial, patients were randomly assigned to receive treatments with melphalan using the Delcath chemosaturation system, or to a control group providing best alternative care. Patients assigned to the Delcath chemosaturation system were eligible to receive up to six cycles of treatment at approximately four to six week intervals. Patients randomized to the control arm were permitted to cross-over into the Delcath arm at radiographic documentation of hepatic disease progression. A majority of the control patients did in fact cross over to the treatment arm. Secondary objectives of the study were to determine the response rate, safety, tolerability and overall survival.

On April 21, 2010, the Company announced that our randomized Phase III clinical trial of the Delcath chemosaturation system with melphalan for patients with unresectable metastatic ocular and cutaneous melanoma in the liver had successfully achieved the study’s primary endpoint of extended hepatic progression-free survival, or hPFS. An updated summary of the results was presented at the European Multidisciplinary Cancer Congress organized by the European Cancer Organization (ECCO) and the European Society of Medical Oncology (ESMO) in September, 2011. Comparing treatment with the chemosaturation system with melphalan (the treatment group) to best alternative care (the control group), based on investigator assessment, the statistical analysis revealed that patients in the treatment group had a statistically significant longer median hPFS of 8.0 months compared to 1.6 months in the best alternative care control group. This reflects a 5-fold increase of hPFS over that of the control arm, with less than half the risk of progression and/or death in the Delcath chemosaturation system with melphalan group compared to the best alternative care control group.

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Phase II Trial

In addition to the Phase III metastatic melanoma clinical trial, the Company also concluded a separate multi-arm Phase II clinical trial of the Delcath chemosaturation system with melphalan in patients with primary and metastatic liver cancer, stratified into four arms: neuroendocrine tumors (carcinoid and pancreatic islet cell tumors), hepatocellular carcinoma (primary liver cancer or HCC), ocular or cutaneous melanoma (eye or skin cancer who have been previously treated with regional therapy using melphalan), and metastatic colorectal adenocarcinoma (mCRC). In the metastatic neuroendocrine (mNET) cohort (n=24), the objective tumor response rate was 70% based upon the investigator’s assessment. In the primary liver cancer cohort, there were 9 patients with hepatobiliary origin (five HCC patients and four cholangiocarcimona patients) who received treatment with Delcath’s chemosaturation system and the investigators noted positive efficacy signals. In the mCRC cohort, there was inconclusive efficacy due to very advanced disease status (e.g. 5th or 6th line) of the patients.

Other Clinical Trials

We intend to evaluate our CHEMOSAT system with melphalan for use in the treatment of metastatic colorectal cancer (mCRC) and hepatocellular carcinoma (HCC or primary liver cancer) in future clinical trials. In addition, we are currently developing a CHEMOSAT system with the chemotherapeutic agent doxorubicin and intend to evaluate the CHEMOSAT system with doxorubicin for use in the treatment of HCC in new clinical trials in Asia. We intend to initiate certain new clinical trials in these cancers in 2012. We also intend to evaluate a variety of chemotherapeutic agents for use with the Delcath chemosaturation system to treat other liver cancers, as well as other organs and body regions. The Company will need to conduct additional clinical trials in order to maximize the commercial opportunities of the chemosaturation system and, in certain markets including the United States, will need to seek additional approvals for each new indication for our system.

Strategic Alliances and Distribution Partners

We plan to seek one or more corporate partners in other markets outside the United States, including Asia where we intend to pursue strategic partners to develop markets in China, Korea and Japan. Asia represents a potentially large market for the Delcath chemosaturation system, with its primary liver cancer or HCC incidence accounting for an overwhelmingly large majority of the world’s primary liver cancer patients. We also intend to leverage our CE Mark in order to expedite approval in select countries, as we have already done successfully in Australia, having received regulatory approval to commercialize the Hepatic CHEMOSAT Delivery System in February 2012. We believe distribution or corporate partnering arrangements in select markets internationally will be cost effective, can be implemented more quickly than a direct sales force and will enable us to capitalize on local marketing expertise in the countries we target. We are actively pursuing distribution partners to commercialize the product in other foreign markets including Australia, New Zealand, Hong Kong, Mexico, Brazil, Argentina and Colombia.

In February 2010, the Company entered into a research and distribution agreement with Chi-Fu Trading Co., Ltd., a Taiwanese company. Under the agreement Chi-Fu will conduct clinical studies of the Delcath chemosaturation system and, upon obtaining the approval from the Taiwan Food and Drug Administration (TFDA), will market, sell and distribute the Delcath chemosaturation system in Taiwan and possibly Singapore for TFDA indications of use.

We believe that the Delcath chemosaturation system may have broader applicability, including using other drugs to treat the liver, as well as for the treatment of cancers in other organs and regions of the body. As such, we also intend to pursue U.S. pharmaceutical partners to co-develop and fund possible additional indications for the Delcath chemosaturation system.

Sales and Marketing

European Economic Area

Having obtained the right to affix the CE Mark in Europe, we plan to market and sell the Hepatic CHEMOSAT Delivery System in the EEA. The EEA consists of the 27 member countries of the European Union as well as Lichtenstein, Iceland, and Norway. We intend to focus our initial efforts on seven target markets including Germany, United Kingdom, France, the Netherlands, Italy, Spainand Ireland. We believe these countries represent a majority of the total potential liver cancer market in the EEA countries. We intend to pursue a two-pronged commercialization strategy under which we will directly and indirectly market the Delcath Hepatic CHEMOSAT Delivery System . To pursue a direct marketing strategy in the United Kingdom, Germany and the Netherlands, we intend to utilize a direct sales force to sell our product to interventional radiologists and hospitals.. In France, Italy and Spain, where we intend to pursue an indirect marketing strategy, we will enter into agreements with third-party distributors. We intend to engage a contract organization to provide Medical Science Liaisons (MSLs) to educate the medical oncologists in the seven target markets.

Under the regulatory scheme in the EEA, the Delcath Hepatic CHEMOSAT Delivery System has received authorization to affix the CE Mark as a device only and Physicians must separately obtain melphalan for use with the CHEMOSAT System. Our ability to market and promote the Delcath Hepatic CHEMOSAT Delivery System is limited to this approved indication. Melphalan is currently approved in 14 member states of the EEA, including the seven markets we are initially targeting.

However, no melphalan labels in the EEA reference our product, and the labels vary from country to country with respect to the approved indication of the drug and its mode of administration. In the exercise of their professional judgment in the practice of medicine, physicians are generally allowed, under certain conditions, to use or prescribe a product in ways not approved by regulatory authorities. Physicians intending to use the Delcath Hepatic CHEMOSAT Delivery System must obtain and use melphalan independently at their discretion.

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United States

In the United States, if granted FDA approval, our intention is to market the system ourselves focusing our initial marketing efforts on the over fifty National Cancer Institute (NCI), designated cancer centers in the United States, beginning with the hospitals which participated in the Phase III clinical trial. We plan to focus our efforts on three distinct groups of medical specialists:

surgical oncologists who administer the Delcath chemosaturation system;

medical oncologists who have initial responsibility for cancer patients; and

interventional radiologists who are physicians specialized in working with catheter-based systems and who will also administer the Delcath chemosaturation system.

We intend to utilize MSLs to provide clinical-based education to medical oncologists, and we intend to utilize a direct sales force to sell our product to interventional radiologists and hospitals.

Third-Party Reimbursement

In Europe, there is no centralized pan-European medical device reimbursement body. Reimbursement is administered on a regional and national basis and we have engaged a third party to conduct a pricing cost benefit study which we intend to use to support our future filings for reimbursement. Medical devices are typically reimbursed under diagnosis related groups (DRG) as part of a procedure. Prior to obtaining permanent reimbursement codes, in certain jurisdictions, we intend to seek interim reimbursement from existing mechanism that include new technology payment programs as well as existing codes. In most EEA countries, the government provides healthcare and controls reimbursement levels. Since the EU has no jurisdiction over patient reimbursement or pricing matters in its member states, the methodologies for determining reimbursement rates and the actual rates may vary by country.

After it is approved by the FDA, the Company will seek to have payors establish policy coverage and payment of the cost of the Delcath chemosaturation system and the associated procedures. In the United States, payors consist of government and private organizations, such as Medicare, Medicaid, private health insurance plans, managed care organizations and other similar entities. The elements necessary for reimbursement for any product are:

Coding, the “why” and “what” to report when a procedure is performed;

Coverage, the terms and conditions under which payors will or will not provide payment;

Payment, the amount of monetary compensation allocated to providers who uses the technology.

It is Delcath’s intention to pursue specific codes that both describe and reflect the value provided by the Delcath chemosaturation system. The Company has retained experts in reimbursement to assist us in developing a strategy to maximize reimbursement for the Delcath chemosaturation system. The Company is compiling data comparing the Delcath chemosaturation system with alternative cancer treatments to prepare an analysis of the relative procedure costs and the expected therapeutic advantages of the Delcath chemosaturation system to support our efforts to secure coding, coverage and payment.

In the United States, following FDA approval the Company intends to apply for a Current Procedural Terminology (CPT) -Category I code. The Company also intends to apply for new ICD-10 (International Statistical Classification of Diseases and Related Health Problems) procedure codes to capture reimbursement for the full procedure of hepatic isolation and chemosaturation. Finally, the Company intends to request new Diagnosis Related Group (DRG) codes based on hospital costs above those of existing DRGs and clinical dissimilarity to other hepatic therapy related procedures in current DRGs. Government-sponsored initiatives to reform healthcare and reduce costs are ongoing in the United States, EEA and other countries. Third-party payors are also increasingly adjusting payment rates, often downwards, and challenging the prices charged for medical products and services. There can be no assurance that the Delcath chemosaturation system will be covered by third-party payors, that reimbursement will be available, or, if available, that the coverage will be adequate.

Manufacturing and Quality Assurance

The Company assembles, sterilizes and packages the Delcath chemosaturation system at our facility in Queensbury, New York and has established our European headquarters and distribution facility in Galway, Ireland. Delcath currently utilizes contract manufacturers to manufacture some components of the Delcath chemosaturation system. The Delcath chemosaturation system and its components must be manufactured and sterilized in accordance with approved manufacturing and pre-determined performance specifications. In addition, certain components will require sterilization prior to distribution and Delcath relies on third-party vendors to perform the sterilization process.

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The Company is committed to providing high quality products to our customers. To honor this commitment, Delcath has implemented updated quality systems and concepts throughout our organization. Delcath’s quality system starts with the initial product specification and continues through the design of the product, component specification process and the manufacturing, sale and servicing of the product. These systems are designed to enable us to satisfy the various international quality system regulations including those of the FDA with respect to products sold in the United States and those established by the International Standards Organization (ISO) with respect to products sold in the EEA. The Company is required to maintain ISO 13485 certification for medical devices to be sold in the EEA, which requires, among other items, an implemented quality system that applies to component quality, supplier control, product design and manufacturing operations. On February 17, 2011, the Company announced that it had achieved ISO 13485 certification for our Queensbury manufacturing facility. On December 28, 2011, the Company announced that it had achieved ISO 13485 certification for our Galway, Ireland facility.

Competition

The healthcare industry is characterized by extensive research, rapid technological progress and significant competition from numerous healthcare companies and academic institutions. Competition in the cancer treatment industry is intense. The Company believes that the primary competitive factors for products addressing cancer include safety, efficacy, ease of use, reliability and price. Delcath also believes that physician relationships, especially relationships with leaders in the medical and surgical oncology communities, are important competitive factors. The Company believes the current global economic conditions and potential healthcare reforms could put competitive pressure on us including reduced selling prices and potential reimbursement rates, overall procedure rates, and market sizes.

The Delcath chemosaturation system competes with all forms of liver cancer treatments. Many of our competitors have substantially greater financial, technological, research and development, marketing and personnel resources. In addition, some of our competitors have considerable experience in conducting clinical trials, regulatory, manufacturing and commercialization capabilities. Our competitors may develop more effective or more affordable products or treatment methods, or achieve earlier product development, in which case the likelihood of our achieving meaningful revenues or profitability will be substantially reduced.

Regulatory Environment

The Delcath chemosaturation system is subject to extensive and rigorous government regulation by foreign regulatory agencies and the FDA. Foreign regulatory agencies, the FDA and comparable regulatory agencies in state and local jurisdictions impose extensive requirements upon the clinical development, pre-market clearance and approval, manufacturing, labeling, marketing, advertising and promotion, pricing, storage and distribution of pharmaceutical and medical device products. Failure to comply with applicable foreign regulatory agency or FDA requirements may result in Warning Letters, fines, civil or criminal penalties, suspension or delays in clinical development, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market.

European Regulation

In order for our products to be marketed and sold in Asia, Europe, or other foreign jurisdictions, we must obtain the required regulatory approvals or clearances and comply with the extensive regulations regarding safety, manufacturing processes and quality requirements of the respective countries. These regulations, including the requirements for approvals to market, and the various regulatory frameworks may differ. In addition, there may be foreign regulatory barriers other than approval or clearance.

In the EEA, the Delcath Hepatic CHEMOSAT Delivery System is subject to regulation as a medical device. The EEA is composed of the 27 Member States of the European Union and Norway, Iceland and Liechtenstein. Under the EU Medical Devices Directive (Directive No 93/42/ECC of 14 June 1993, as last amended), drug delivery products such as the Delcath Hepatic CHEMOSAT Delivery System are governed by the EU laws on pharmaceutical products only if they are (i) placed on the market in such a way that the device and the pharmaceutical product form a single integral unit which is intended exclusively for use in the given combination, and (ii) the product is not reusable. In such cases, the drug delivery product is governed by the EU Code on Medicinal Products for Human Use (Directive 2001/83/EC, as last amended), while the essential requirements of the EU Medical Devices Directive apply to the safety and performance-related device features of the product. Because we do not intend to place the Delcath Hepatic CHEMOSAT Delivery System on the EEA market as a single integral unit with melphalan, the product is governed solely by the EU Medical Devices Directive, while the separately marketed drug is governed by the EU Code relating to Medicinal Products for Human Use and other EU legislation applicable to drugs for human use.

Before we may commercialize a medical device in the EEA, we must comply with the essential requirements of the EU Medical Devices Directive. Compliance with these requirements entitles a manufacturer to affix a CE conformity mark, without which the products cannot be commercialized in the EEA. To demonstrate compliance with the essential requirements and obtain the right to affix the CE conformity mark, medical device manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification.

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The Medical Devices Directive establishes a classification system placing devices into Class I, IIa, IIb, or III, depending on the risks and characteristics of the medical device. For certain types of low risk medical devices (i.e., Class I devices which are non-sterile and do not have a measuring function), the manufacturer may issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the EU Medical Devices Directives. Other devices are subject to a conformity assessment procedure requiring the intervention of a Notified Body, which is an organization designated by a Member State of the EEA to conduct conformity assessments. For Class III medical devices, such as the Delcath chemosaturation system, before issuing a certification indicating compliance with the essential requirements, a Notified Body will typically audit a manufacturer’s quality system for the design, manufacture, and final inspection of the medical devices, and examine the specific design dossier of the products covered by the conformity assessment. Based on this certification, manufacturers can complete an EC Declaration of Conformity which allows them to affix the CE mark to their products.

A manufacturer without a registered place of business in a Member State of the European Union which places a medical device on the market under its own name must designate an authorized representative established in the European Union who can act before, and be addressed by, the Competent Authorities on the manufacturer’s behalf with regard to the manufacturer’s obligations under the EU Medical Devices Directive. We appointed such a representative prior to establishing our infrastructure in the EEA and expect that we will not need a third party representative in the future.

On April 13, 2011, we obtained the required certification from Lloyd’s Register Quality Assurance (LRQA), a UK notified body, for the Delcath Hepatic CHEMOSAT Delivery System with the following labeled indication: intra-arterial administration of the chemotherapeutic agent melphalan hydrochloride to the liver with additional extracorporeal flirtation of the venous blood return. Based on this certification, we can complete an EC Declaration of Conformity and affix the CE mark to the Delcath Hepatic CHEMOSAT Delivery System. We have filed an application seeking CE Marking for Generation 2 of the CHEMOSAT system as an amendment to the original approved CE Mark for CHEMOSAT system and the application is currently under review with LRQA. Although the Delcath Hepatic CHEMOSAT Delivery System is CE marked, the provisions of the EU Medical Devices Directive are implemented into the national laws of the Member States of the European Union, which may impose additional conditions on the commercialization of medical devices within their territory, including, for example, language used on the device’s labeling. These Member State national laws are enforced by the respective competent authorities of each Member State, which may differ on the interpretation of the provisions of the EU Medical Device Directive as implemented into their national laws. Therefore, complying with the regulations of one Member State does not automatically ensure compliance in other Member States.

In the EEA, we must also comply with the Medical Device Vigilance System, which is designed to improve the protection of health and safety of patients, users and others by reducing the likelihood of recurrence of incidents related to the use of a medical device. Under this system, incidents are defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient, or user or of other persons or to a serious deterioration in their state of health. When a medical device is suspected to be a contributory cause of an incident, its manufacturer or authorized representative in the European Union must report it to the Competent Authority of the Member State where the incident occurred. Incidents are generally investigated by the manufacturer. The manufacturer’s investigation is monitored by the Competent Authority, which may intervene, or initiate an independent investigation if considered appropriate. An investigation may conclude in the adoption of a Field Safety Corrective Action (FSCA). An FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An FSCA may include device recall, modification exchange and destruction. FSCAs must be notified by the manufacturer or its authorized representative to its customers and/or the end users of the medical device via a Field Safety Notice.

In the EEA, the off-label promotion of a pharmaceutical product is strictly prohibited under the EU Community Code on Medicinal Products, which provides that all information provided within the context of the promotion of a drug must comply with the information contained in its approved summary of product characteristics. Our product instructions and indication reference the chemotherapeutic agent melphalan. However, no melphalan labels in the EEA reference our product, and the labels vary from country to country with respect to the approved indication of the drug and its mode of administration. In the exercise of their professional judgment in the practice of medicine, physicians are generally allowed, under certain conditions, to use or prescribe a product in ways not approved by regulatory authorities. Physicians intending to use our device must obtain melphalan separately for use with the Delcath Hepatic CHEMOSAT Delivery System and must use melphalan independently at their discretion.

In the EEA, the advertising and promotion of our products is also subject to EEA Member States laws implementing the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. These laws may further limit or restrict the advertising and promotion of our products to the general public and may also impose limitations on our promotional activities with health care professionals.

Failure to comply with the EEA Member State laws implementing the Medical Devices Directive, with the EU and EEA Member State laws on the promotion of medicinal products or with other applicable regulatory requirements can result in enforcement action by the EEA Member State authorities, which may include any of the following: fines, imprisonment, orders forfeiting products or prohibiting or suspending their supply to the market, or requiring the manufacturer to issue public warnings, or to conduct a product recall.

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The European Commission is currently reviewing the medical devices legislative framework with the aim of simplifying it and ensuring a more uniform application of the provisions contained in the medical devices directives across the EEA. These adopted or expected regulatory changes may adversely affect our business, financial condition and results of operations or restrict our operations.

Other International Regulations

We believe the right to affix the CE Mark can result in an accelerated regulatory approval in a number of countries outside the EEA and the United States. We recently received regulatory approval for the CHEMOSAT system in Australia and completed the product notification process in New Zealand. We have submitted applications for regulatory approval as a device for the CHEMOSAT system in Hong Kong, South Korea, and Singapore. We intend to submit regulatory applications in Israel, Canada, Mexico, Argentina, Brazil, Russia, India, Japan, China, and Taiwan. We are in the process of determining the regulatory pathway in some of these countries subject to negotiations with the applicable health authority. It is our intention to leverage the CE Mark in some or all of these countries to commercialize the Delcath CHEMOSAT System, where appropriate. Our Delcath Systems Limited facility in Galway, Ireland has obtained certificates of free sale from the Irish Medicines Board as many markets require country of origin manufacturing, such as Mexico, Argentina, Brazil, Japan, China, and Taiwan, as a prerequisite to obtain regulatory approval.

United States Regulation

In the United States, the FDA regulates drug and device products under the Federal Food, Drug, and Cosmetic Act (FFDCA), and its implementing regulations. The Delcath chemosaturation system is subject to regulation as a combination product, which means it is composed of both a drug product and device product. If marketed individually, each component would therefore be subject to different regulatory pathways and reviewed by different centers within the FDA. A combination product, however, is assigned to a center that will have primary jurisdiction over its pre-market review and regulation based on a determination of its primary mode of action, which is the single mode of action that provides the most important therapeutic action. In the case of the Delcath chemosaturation system, the primary mode of action is attributable to the drug component of the product, which means that the Center for Drug Evaluation and Research (CDER), has primary jurisdiction over its pre-market development and review. The process required by the FDA before drug product candidates may be marketed in the United States generally involves the following:

submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may begin and must be updated annually;

completion of extensive preclinical laboratory tests and preclinical animal studies, all performed in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations;

performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each proposed indication;

submission to the FDA of an NDA after completion of all pivotal clinical trials;

a determination by the FDA within 60 days of its receipt of an NDA to file the NDA for review;

satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities at which the product is produced and tested to assess compliance with current good manufacturing practice, or cGMP, regulations; and

FDA review and approval of an NDA prior to any commercial marketing or sale of the drug in the United States.

The development and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product will be granted on a timely basis, if at all.

The results of preclinical tests (which include laboratory evaluation as well as GLP studies to evaluate toxicity in animals) for a particular product candidate, together with related manufacturing information and analytical data, are submitted as part of an IND to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the proposed clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. IND submissions may not result in FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Further, an independent institutional review board, or IRB, for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center and it must monitor the study until completed. The FDA, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive good clinical practice regulations and regulations for informed consent and privacy of individually identifiable information. Similar requirements to the U.S. IND are required in the EEA and other jurisdictions in which we may conduct clinical trials.

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Clinical Trials. For purposes of NDA submission and approval, clinical trials are typically conducted in the following sequential phases, which may overlap:

Phase I Clinical Trials. Studies are initially conducted in a limited population to test the product candidate for safety, dose tolerance, absorption, distribution, metabolism and excretion, typically in healthy humans, but in some cases in patients.

Phase II Clinical Trials. Studies are generally conducted in a limited patient population to identify possible adverse effects and safety risks, explore the initial efficacy of the product for specific targeted indications and to determine dose range or pharmacodynamics. Multiple Phase II clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase III clinical trials.

Phase III Clinical Trials. These are commonly referred to as pivotal studies. When Phase II evaluations demonstrate that a dose range of the product is effective and has an acceptable safety profile, Phase III clinical trials are undertaken in large patient populations to further evaluate dosage, provide substantial evidence of clinical efficacy and further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial centers.

Phase IV Clinical Trials. The FDA may approve an NDA for a product candidate, but require that the sponsor conduct additional clinical trials to further assess the drug after NDA approval under a post-approval commitment. In addition, a sponsor may decide to conduct additional clinical trials after the FDA has approved an NDA. Post-approval trials are typically referred to as Phase IV clinical trials.

Sponsors of clinical trials may submit proposals for the design, execution, and analysis for their pivotal trials under a Special Protocol Assessment (SPA). A SPA is an evaluation by the FDA of a protocol with the goal of reaching an agreement that the Phase III trial protocol design, clinical endpoints, and statistical analyses are acceptable to support regulatory approval of the drug product candidate with respect to effectiveness for the indication studied. Under a SPA, the FDA agrees to not later alter its position with respect to adequacy of the design, execution or analyses of the clinical trial intended to form the primary basis of an effectiveness claim in an NDA, without the sponsor’s agreement, unless the FDA identifies a substantial scientific issue essential to determining the safety or efficacy of the drug after testing begins. Prior to initiating our Phase III clinical trial, we submitted a proposal for the design, execution and analysis under a SPA, and we conducted our Phase III trial under a SPA.

New Drug Applications. The results of drug development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA. NDAs also must contain extensive chemistry, manufacturing and control information. An NDA must be accompanied by a significant user fee, which is may be waived in certain circumstances. Once the submission has been accepted for filing, the FDA’s goal is to review applications within ten months of submission or, if the application relates to an unmet medical need in a serious or life-threatening indication, six months from submission. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. The FDA may deny approval of an NDA by issuing a Complete Response Letter if the applicable regulatory criteria are not satisfied. A Complete Response Letter may require additional clinical data and/or an additional pivotal Phase III clinical trial(s), and/or other significant, expensive and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we or our collaborators interpret data. Approval may be contingent on a Risk Evaluation and Mitigation Strategy (REMS) that limits the labeling, distribution or promotion of a drug product. Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing, including Phase IV clinical trials, and surveillance programs to monitor the safety effects of approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs or other information.

In December 2010, we submitted our NDA for the Delcath chemosaturation system under Section 505(b)(2) of the FFDCA seeking an indication for the percutaneous intra-arterial administration of melphalan for use in the treatment of patients with metastatic melanoma in the liver. Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act. This statutory provision permits the approval of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The Hatch-Waxman Act permits the applicant to rely in part upon the FDA’s findings of safety and effectiveness for previously approved products, such as melphalan. Melphalan, the drug we are initially seeking to have approved for use with the Delcath chemosaturation system, is a widely used chemotherapy agent that has already been approved by the FDA for use at a lower dose than we used in our Phase III clinical trial. The approved labeling for melphalan includes indications for use, method of action, dosing, side effects and contraindications. Because the Delcath chemosaturation system delivers the drug through a different mode of administration and at a dose strength that is substantially higher than that which is currently approved, we will be seeking a revised label of melphalan for use with the Delcath chemosaturation system through its Section 505(b)(2) NDA. The clinical trials were designed to provide the necessary clinical data to support this required labeling change.

In accordance with applicable regulations, the FDA has the ability to formally file or refuse to file an application within 60 days of the completion of the submission. The FDA will issue a Refusal to File letter, or RTF, if it determines upon an initial review that the NDA is not sufficiently complete to permit a substantive review. Neither the acceptance nor non-acceptance of an NDA for filing is a determination of the ultimate approvability of the drug product at issue.

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In February 2011, we received an RTF from the FDA for the NDA. The RTF represented a determination by the FDA that, based on its preliminary review, the NDA is not sufficiently complete to permit a substantive review. The RTF requested information on a number of items, including manufacturing plant inspection timing, product and sterilization validations, statistical analysis clarification concerning randomization and additional safety information regarding patient hospitalization data in order to allow the FDA to properly assess the risk-benefit profile of the product candidate. On January 12, 2012, we held a pre-NDA meeting with the FDA to discuss our NDA submission and provide an update on the items identified in the RTF. Based upon the meeting and FDA correspondence received in response to our meeting request and the briefing packet we submitted, we are satisfied with the responses that we received from the FDA to certain questions we had regarding the NDA submission. Accordingly, we will continue with the preparation of our NDA submission as planned and expect to make the submission in the second quarter of 2012.

Upon resubmission of our application, the FDA will again perform an initial review to assess whether the NDA is sufficiently complete to warrant a substantive review. If the FDA agrees to formally file the application, it will issue a Prescription Drug User Fee Act, or PDUFA, action date. If the drug is intended for the treatment of a serious or life-threatening condition for which there is no effective treatment and which demonstrates the potential to address unmet medical needs for the condition, the sponsor may be subject to a Fast Track designation. The Fast Track program is a process designed to facilitate the development and expedite the review of drugs to treat serious diseases and fill an unmet medical need. Under the program, the sponsor of a new drug may request that the FDA designate the drug for a specific indication as a fast track product concurrent with or after the IND is filed for the product candidate, and the FDA must determine if the product qualifies for Fast Track designation within 60 days of receipt of the sponsor’s request. The Delcath chemosaturation system has received a Fast Track designation. A drug that receives Fast Track designation may be eligible for more frequent meetings with FDA to discuss the drug’s development; more frequent written correspondence from FDA about such things as the design of the proposed clinical trials; eligibility for accelerated approval, i.e., approval of an effect on a surrogate, or substitute endpoint; and rolling review, meaning the sponsor may submit its NDA in sections rather than wait until the entire NDA is complete, among others. Most drugs with Fast Track designation are likely to be considered appropriate to receive a Priority Review. In 1992, under PDUFA, the FDA created a two-tiered system of review times – Standard Review and Priority Review. Standard Review is applied to a drug that offers at most, only minor improvement over existing marketed therapies with a goal of completing the FDA review of the NDA within a ten-month time frame. A Priority Review designation is given to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. A Priority Review means that the time it takes FDA to review a new drug application is reduced. The goal for completing a Priority Review is six months. We intend to request a Priority Review in our resubmitted NDA to the FDA. We cannot guarantee that our application for approval of the Delcath chemosaturation system will receive a Priority Review, or that if Priority Review is received, that the review or approval will be faster than conventional FDA procedures or that FDA will ultimately grant approval.

Orphan Drug Exclusivity. Some jurisdictions, including the United States, may designate drugs for relatively small patient populations as orphan drugs. Pursuant to the Orphan Drug Act, the FDA grants orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. The orphan designation is granted for a combination of a drug entity and an indication and therefore it can be granted for an existing drug with a new (orphan) indication. Applications are made to the Office of Orphan Products Development at the FDA and a decision or request for more information is rendered in 60 days. NDAs for designated orphan drugs are exempt from user fees, obtain additional clinical protocol assistance, are eligible for tax credits up to 50% of research and development costs, and are granted a seven-year period of exclusivity upon approval. The FDA cannot approve the same drug for the same condition during this period of exclusivity, except in certain circumstances where a new product demonstrates superiority to the original treatment. Exclusivity begins on the date that the marketing application is approved by the FDA for the designated orphan drug, and an orphan designation does not limit the use of that drug in other applications outside the approved designation in either a commercial or investigational setting. The FDA has granted Delcath four orphan drug designations. In November 2008, the FDA granted Delcath two orphan drug designations for the drug melphalan for the treatment of patients with cutaneous melanoma as well as patients with ocular melanoma. In May 2009, the FDA granted Delcath an additional orphan drug designation of the drug melphalan for the treatment of patients with neuroendocrine tumors. In August 2009, the FDA granted Delcath an orphan drug designation of the drug doxorubicin for the treatment of patients with primary liver cancer. If the Delcath chemosaturation system is approved for an indication different than the indications for which we have received orphan drug designations, we will not obtain orphan drug exclusivity.

Other Regulatory Requirements. Products manufactured or distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping, annual product quality review and reporting requirements. Adverse event experience with the product must be reported to the FDA in a timely fashion and pharmacovigilance programs to proactively look for these adverse events are mandated by the FDA. The Delcath chemosaturation system, if approved by the FDA, may be subject to REMS requirements that affect labeling, distribution or post market reporting. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Following such inspections, the FDA may issue notices on Form 483 and Untitled Letters or Warning Letters that could cause us or our third-party manufacturers to modify certain activities. A Form 483 Notice, if issued at the conclusion of an FDA inspection, can list conditions the FDA investigators believe may have violated cGMP or other FDA regulations or guidelines. In addition to Form 483 Notices and Untitled Letters or Warning Letters, failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may require us to recall our products from distribution or withdraw approval of the NDA for that product.

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Physicians may prescribe legally available products for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties, in particular in oncology. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use. Thus, we may only market the Delcath chemosaturation system, if approved by the FDA, for its approved indications and we could be subject to enforcement action for any off-label marketing.

Intellectual Property and Other Rights

Our success depends in part on our ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. Because of the length of time and expense associated with bringing new products through the development and regulatory approval process, the health care industry places considerable emphasis on obtaining patent and trade secret protection for new technologies, products and processes. The Company holds seven United States patents, as well as ten foreign patents and four pending patent applications. When appropriate, the Company intends to seek protection of our products and proprietary information by means of U.S. and international patents and trademarks.

Delcath plans to enforce its intellectual property rights vigorously. In addition, the Company conducts searches and other activities relating to the protection of existing patents and the filing of new applications. Delcath seeks to patent improvements that we identify through research and development, manufacturing and clinical use of the Delcath chemosaturation system which allow us to expand the use of the Delcath chemosaturation system beyond the treatment of cancers in the liver. There can be no assurance that pending patent applications will result in the issuance of patents, that patents issued to or licensed by us will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage.

Certain of our United States and foreign patents have already expired and other patents relating to the Delcath chemosaturation system will expire in 2012 and 2016. In certain circumstances, United States patent law allows for the extension of a patent’s duration for a period of up to five years after FDA approval. The Company intends to seek extension for one of our patents after FDA approval. Delcath also relies on trade secrets and proprietary technological experience. The Company relies, in part, on confidentiality agreements with our marketing partners, employees, advisors, vendors and consultants to protect our trade secrets and proprietary technological expertise. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets and proprietary knowledge.

In addition to our proprietary protections, the FDA has granted Delcath four orphan drug designations which provides us a seven-year period of exclusive marketing beginning on the date that our NDA is approved by the FDA for the designated orphan drug. While the exclusivity only applies to the indication for which the drug has been approved, the Company believes that it will provide us with added protection while we commercialize the Delcath chemosaturation system in the United States.

There has been and continues to be substantial litigation regarding patent and other intellectual property rights in the pharmaceutical and medical device areas. If a third party asserts a claim against Delcath, the Company may be forced to expend significant time and money defending such actions and an adverse determination in any patent litigation could subject us to significant liabilities to third parties, require us to redesign our product, require us to seek licenses from third parties, and, if licenses are not available, prevent us from manufacturing, selling or using our system. Additionally, Delcath may find it necessary to initiate litigation to enforce our patent rights or to protect our trade secrets or know-how. Patent litigation can be costly and time consuming and there can be no assurance that the outcome will be favorable to us.

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Employees

As of December 31, 2011, the Company had 80 full-time employees. None of our employees is represented by a union and we believe relationships with our employees are good.

Available Information

Delcath maintains a website at www.delcath.com. The Company makes available, free of charge on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files those reports with, or furnishes them to, the Securities and Exchange Commission, or the SEC. The Company is not including the information contained at www.delcath.com or at any other internet address as part of, or incorporating by reference into, this Annual Report on Form 10-K.

Item 1A. Risk Factors

Risks Related to Our Business and Financial Condition

If we are unable to develop the Delcath chemosaturation system, obtain regulatory approval outside the EEA or market and sell the system, we will not generate operating revenue or become profitable.

The Delcath chemosaturation system, a platform technology for the isolation of various organs or regions of the body to permit the regional delivery of high doses of drugs, is our only product. Our entire focus has been on developing, commercializing, and obtaining regulatory authorizations and approvals of this product and currently we have only developed this system for the treatment of cancers in the liver with melphalan. If the Delcath chemosaturation system with melphalan fails as a commercial product, we have no other products to sell. In addition, since the Delcath Hepatic CHEMOSAT Delivery System is currently only authorized for marketing in the EEA, if we are unsuccessful in commercializing the product in the EEA and the Delcath chemosaturation system is not approved in the United States and elsewhere, we will have no other means of generating revenue.

Continuing losses may exhaust our capital resources.

As of December 31, 2011, we had $30.8 million in cash, cash equivalents and certificates of deposit. We have had no revenue to date, a substantial accumulated deficit, recurring operating losses and negative cash flow. We expect to continue to incur losses while generating minimal revenues over the next year. From our inception on August 5, 1988 through December 31, 2011, we have incurred cumulative net losses of approximately $145.4 million. For the years ended December 31, 2011, 2010, and 2009, we incurred net losses of approximately $30.9 million, $46.7 million, and $22.1 million, respectively, with these amounts being effected by derivative accounting related to warrants as described in our Annual Reports on Form 10-K for the years ended December 31, 2011, 2010, and 2009. To date, we have funded our operations through a combination of private placements and public offerings of our securities. If we continue to incur losses, we may exhaust our capital resources, and as a result may be unable to complete our clinical trials, product development, regulatory approval process and commercialization of the Delcath chemosaturation system with melphalan or any other versions of the system.

If we cannot raise additional capital, our potential to generate future revenues will be significantly limited since we may not be able to commercialize the Delcath chemosaturation system, resubmit our NDA to the FDA or conduct future development and clinical trials.

We may require additional financing to commercialize our product in the EEA and any other markets where we receive approval for our system, to resubmit our NDA seeking U.S. marketing approval or seek other approvals and to conduct future development and clinical trials. We do not know if additional financing will be available when needed at all or on acceptable terms. If we are unable to obtain additional financing as needed, we may not be able to able to commercialize the Delcath chemosaturation system commercially, obtain regulatory approvals or complete our development projects or our clinical trials.

Our liquidity and capital requirements will depend on numerous factors, including:

our research and product development programs, including clinical studies;

the timing and costs of our various U.S. and foreign regulatory filings, obtaining approvals and complying with regulations;

the timing and costs associated with developing our manufacturing operations;

the timing of product commercialization activities, including marketing and distribution arrangements overseas;

the timing and costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and

the impact of competing technological and market developments.

Insufficient funds may require us to curtail or stop our commercialization activities, submissions for regulatory approval, research and development and clinical trials, which will significantly limit our potential to generate future revenues.

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Risks Related to FDA and Foreign Regulatory Approval

Our failure to obtain, or delays in obtaining, regulatory approvals may have a material adverse effect on our business, financial condition and results of operations.

The Delcath chemosaturation system is subject to extensive and rigorous government regulation by the FDA and other foreign regulatory agencies. The FDA regulates the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import and export of pharmaceutical and medical device products. Failure to comply with FDA and other applicable regulatory requirements may, either before or after product approval, subject us to administrative or judicially imposed sanctions.

In the United States, the FDA regulates drug and device products under the FFDCA, and its implementing regulations. The Delcath chemosaturation system is subject to regulation by the FDA as a combination product, which means it is composed of both a drug product and device product. If marketed individually, each component would therefore be subject to different regulatory pathways and reviewed by different centers within the FDA. A combination product, however, is assigned to a center that will have primary jurisdiction over its pre-market review and regulation based on a determination of the product’s primary mode of action, which is the single mode of action that provides the most important therapeutic action. In the case of the Delcath chemosaturation system, the primary mode of action is attributable to the drug component of the product, which means that the CDER has primary jurisdiction over its pre-market development and review.

We are not permitted to market the Delcath chemosaturation system in the United States unless and until we obtain regulatory approval from the FDA. To market the product in the United States, we must submit to the FDA and obtain FDA approval of an NDA. An NDA must be supported by extensive clinical and preclinical data, as well as extensive information regarding chemistry, manufacturing and controls, or CMC, to demonstrate the safety and effectiveness of the applicable product candidate. Regulatory approval of an NDA is not guaranteed. The number and types of preclinical studies and clinical trials that will be required varies depending on the product candidate, the disease or condition that the product candidate is designed to target and the regulations applicable to any particular product candidate. Despite the time and expense associated with preclinical and clinical studies, failure can occur at any stage, and we could encounter problems that cause us to repeat or perform additional preclinical studies, CMC studies or clinical trials. The FDA and similar foreign authorities could delay, limit or deny approval of a product candidate for many reasons, including because they:

may not deem a product candidate to be adequately safe and effective;

may not find the data from preclinical studies, CMC studies and clinical trials to be sufficient to support a claim of safety and efficacy;

may interpret data from preclinical studies, CMC studies and clinical trials significantly differently than we do;

may not approve the manufacturing processes or facilities associated with our product candidates;

may change approval policies (including with respect to our product candidates’ class of drugs) or adopt new regulations; or

may not accept a submission due to, among other reasons, the content or formatting of the submission.

Undesirable side effects caused by any product candidate that we develop could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications or cause us to evaluate the future of our development programs. The regulatory review and approval process is lengthy, expensive and inherently uncertain. As part of the U.S. Prescription Drug User Fee Act, the FDA has a goal to review and act on a percentage of all submissions in a given time frame. The general review goal for a drug application is ten months for a standard application and six months for a priority review application. The FDA’s review goals are subject to change and it is unknown whether the review of an NDA filing for any of our product candidates will be completed within the FDA’s review goals or will be delayed. Moreover, the duration of the FDA’s review may depend on the number and types of other NDAs that are submitted to FDA around the same time period. The development and approval process may take many years, require substantial resources and may never lead to the approval of a product. Failure to obtain or delays in obtaining, regulatory approvals may:

adversely affect the commercialization of the current Delcath chemosaturation system or any products that we develop in the future;

impose additional costs on us;

diminish any competitive advantages that may be attained; and

adversely affect our ability to generate revenues.

We have obtained the right to affix the CE Mark for the Delcath Hepatic CHEMOSAT Delivery System as a medical device for the delivery of melphalan. Since we may only promote the device within this specific indication, if physicians are unwilling to obtain melphalan separately for use with the Delcath Hepatic CHEMOSAT Delivery System , our ability to commercialize the Delcath Hepatic CHEMOSAT Delivery System in the EEA will be significantly limited.

In the EEA, the Delcath chemosaturation system is regulated as a medical device indicated for the intra-arterial administration of a chemotherapeutic agent, melphalan, to the liver with additional extracorporeal filtration of the venous blood return. Our ability to market and promote the Delcath chemosaturation system is limited to this approved indication. To the extent that our promotion of the Delcath chemosaturation system is found to be outside the scope of our approved indication, we may be subject to fines or other regulatory action, limiting our ability to commercialize the Delcath chemosaturation system in the EEA.

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Our product instructions and indication reference the chemotherapeutic agent melphalan. However, no melphalan labels in the EEA reference our product, and the labels vary from country to country with respect to the approved indication of the drug and its mode of administration. As a result, the delivery of melphalan with our device may not be within the applicable melphalan label with respect to some indications in some Member States of the EEA where the drug is authorized for marketing. In the exercise of their professional judgment in the practice of medicine, physicians are generally allowed, under certain conditions, to use or prescribe a product in ways not approved by regulatory authorities. Physicians intending to use our device must obtain melphalan separately for use with the Delcath CHEMOSAT system and must use melphalan independently at their discretion. If physicians are unwilling to obtain melphalan separately from our product and/or to prescribe the use of melphalan independently, our sales opportunities in the EEA will be significantly impaired.

While we have obtained the right to affix the CE Mark, we will be subject to significant ongoing regulatory obligations and oversight in the EEA and in any other country where we receive marketing authorization or approval.

In April 2011, we obtained the required certification from our European Notified Body, enabling us to complete an EC Declaration of Conformity with the essential requirements of the EU Medical Devices Directive and affix the CE Mark to the Delcath Hepatic CHEMOSAT Delivery System. In order to maintain the right to affix the CE Mark in the EEA, we are subject to compliance obligations, and any material changes to the approved product, such as manufacturing changes, product improvements or revised labeling, may require further regulatory review. Additionally, we will be subject to ongoing audits by our European Notified Body, and the right to affix the CE Mark to the Delcath Hepatic CHEMOSAT Delivery System m may be withdrawn for a number of reasons, including the later discovery of previously unknown problems with the product.

To the extent that the Delcath chemosaturation system is approved by the FDA or any other regulatory agency, we will be subject to similar ongoing regulatory obligations and oversight in those countries where we obtain approval. For example, we may be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or requirements for potentially costly post-marketing testing, including Phase IV clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. In addition, if the FDA approves a product candidate, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs, good clinical practices, or GCPs, and good laboratory practices, which are regulations and guidelines enforced by the FDA for all products in clinical development, for any clinical trials that we conduct post-approval. In addition, post-marketing requirements for the Delcath chemosaturation system may include implementation of a REMS to ensure that the benefits of the product outweigh its risks. A REMS may include a Medication Guide, a patient package insert, a communication plan to healthcare professionals and/or other elements to assure safe use of the product.

Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

refusals or delays in the approval of applications or supplements to approved applications;

refusal of a regulatory authority to review pending market approval applications or supplements to approved applications;

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market or voluntary or mandatory product recalls or seizures;

fines, Warning Letters or holds on clinical trials;

import or export restrictions;

injunctions or the imposition of civil or criminal penalties;

restrictions on product administration, requirements for additional clinical trials or changes to product labeling or REMS programs; or

recommendations by regulatory authorities against entering into governmental contracts with us.

If we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would have a material adverse effect on our business, results of operations, financial condition and prospects.

The development and approval process in the United States may take many years, require substantial resources and may never lead to the approval of the Delcath chemosaturation system by the FDA for use in the United States.

We cannot sell or market the Delcath chemosaturation system with melphalan or other chemotherapeutic agents in the United States without prior FDA approval of an NDA for the Delcath chemosaturation system. Although melphalan and other drugs have been approved by the FDA for use as chemotherapeutic agents, regulatory approval is required in the United States for the combined medical device component and drug component and the specific indication, dose and route of administration of melphalan or other chemotherapeutic agent used in our system. We are seeking approval of the Delcath chemosaturation system for a substantially higher dose of melphalan than prior approved doses of melphalan and such other drugs. We must obtain separate regulatory approvals for the Delcath chemosaturation system with melphalan and every other chemotherapeutic agent or other compound used with our system that we intend to market, and all the manufacturing facilities used to manufacture components or assemble our system must be inspected and meet legal requirements. Securing regulatory approval requires the submission of extensive pre-clinical and clinical data and other supporting information for each proposed therapeutic indication in order to establish to the FDA’s satisfaction the product’s safety, efficacy, potency and purity for each intended use. The pre-clinical testing and clinical trials of the Delcath chemosaturation system with melphalan or any other chemotherapeutic agent or compound we use in our system must comply with the regulations of the FDA and other federal, state and local government authorities in the United States. Clinical development is a long, expensive and uncertain process and is subject to delays. We may encounter delays or rejections for various reasons, including our inability to enroll enough patients to complete our clinical trials. Moreover, approval policies or regulations may change. If we do not obtain and maintain regulatory approval for our system and our use of melphalan or other chemotherapeutic agents, the value of our company and our results of operations will be harmed.

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In December 2010, we submitted our Section 505(b)(2) NDA to the FDA, seeking an indication for the percutaneous intra-arterial administration of melphalan for use in the treatment of patients with metastatic melanoma in the liver. An NDA submitted under Section 505(b)(2) of the FFDCA permits the application to incorporate information required for approval from studies not conducted by or for the application and for which the applicant has not obtained a right of reference. Our Section 505(b)(2) application cited the safety information for melphalan submitted by prior NDA applicants for this drug. In February 2011, we received an RTF from the FDA for the NDA. In accordance with applicable regulations, the FDA has the ability to formally file or refuse to file an application within 60 days of the completion of the submission. The FDA will issue an RTF if it determines upon an initial review that the NDA is not sufficiently complete to permit a substantive review. Neither the acceptance nor non-acceptance of an NDA for filing is a determination of the ultimate approvability of the drug product at issue. The RTF represented a determination by the FDA that, based on its preliminary review, the NDA is not sufficiently complete to permit a substantive review. The RTF requested information on a number of items, including manufacturing plant inspection timing, product and sterilization validations, statistical analysis clarification concerning randomization and additional safety information regarding patient hospitalization data in order to allow the FDA to properly assess the risk-benefit profile of the product candidate. On January 12, 2012, we held a pre-NDA meeting with the FDA to discuss our NDA submission and provide an update on the items identified in the RTF. Based upon the meeting and FDA correspondence received in response to our meeting request and the briefing packet we submitted, we are satisfied with the responses that we received from the FDA to certain questions we had regarding the NDA submission. Accordingly, we will continue with the preparation of our NDA submission as planned and expect to make the submission in the second quarter of 2012. If we are unable to properly address the issues raised in the RTF to the FDA’s satisfaction, we may be unable to resubmit our NDA to the FDA. Further, if we resubmit the NDA and subsequently receive a second RTF from the FDA, or, if it is accepted for filing and the FDA fails to approve the application after a substantive review, we will not be able to commercialize the Delcath chemosaturation system in the United States and our value and our results of operations will be harmed.

Even if we obtain regulatory approval for the Delcath chemosaturation system in the United States, our ability to market the Delcath chemosaturation system would be limited to those uses that are approved.

The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, dissemination of off-label information, industry-sponsored scientific and educational activities and promotional activities involving the Internet. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label. In the United States, we intend to seek approval for use of the Delcath chemosaturation system with melphalan in the treatment of ocular and cutaneous melanoma that has metastasized to the liver. If the FDA approves this application, our ability to market and promote the Delcath chemosaturation system would be limited to this indication for use only with melphalan in treating that specific disease, so even with FDA approval, the Delcath chemosaturation system may only be promoted in this limited market. Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties, including oncology. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use, and FDA approval may otherwise limit our sales practices and our ability to promote, sell and distribute the product. Thus, we may only market the Delcath chemosaturation system, if approved by the FDA, for its approved indication and we could be subject to enforcement action for off-label marketing.

Further, if there are any modifications to the product, including changes in indications, labeling or manufacturing processes or facilities, we may be required to submit and obtain FDA approval of a new or supplemental NDA, which may require us to develop additional data or conduct additional preclinical studies and clinical trials. Failure to comply with these requirements can result in adverse publicity, Warning Letters, corrective advertising and potential civil and criminal penalties.

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If we do not obtain required approvals in the United States and in the countries outside of the EEA in which we aim to market the Delcath chemosaturation system, we may not be able to export or sell the Delcath chemosaturation system in those markets, which will limit our sales opportunities.

We intend to leverage our CE Mark to obtain required regulatory approvals for the Delcath Hepatic CHEMOSAT Delivery System in other parts of the world, including Asia. However, our lack of experience conducting clinical trials outside the United States may negatively impact the approval process in foreign countries where we intend to seek approval for the Delcath chemosaturation system. We have not previously conducted multi-national clinical trials, and, particularly in countries where melphalan has not yet been approved, obtaining approval for the Delcath chemosaturation system may be challenging.

If we are unable to obtain and maintain required approval from one or more foreign countries outside of the EEA where we would like to sell the Delcath chemosaturation system, we will be unable to market our product as intended, our international market opportunity will be limited and the value of our company and our results of operations will be harmed.

If future clinical trials are unsuccessful, significantly delayed or not completed, we may not be able to market the Delcath chemosaturation system for other indications.

The clinical trial data on our product is limited to specific types of liver cancer. In 2010, we concluded a Phase III clinical trial of the Delcath chemosaturation system with melphalan in patients with metastatic ocular and cutaneous melanoma to the liver and also completed a multi-arm Phase II clinical trial of the Delcath chemosaturation system with melphalan in patients with primary and metastatic melanoma stratified into four arms. We currently have no clinical trials on any other major forms of liver cancer.

We intend to conduct clinical trials for other indications, and it may take several years to complete the testing of the Delcath chemosaturation system with melphalan, doxorubicin or other chemotherapeutic agents for use in the treatment of the indications we wish to obtain approval of, and failure can occur at any stage of development, for many reasons, including:

any pre-clinical or clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities;

pre-clinical or clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval;

negative or inconclusive results from a pre-clinical study or clinical trial or adverse medical events during a clinical trial could cause a pre-clinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful;

the FDA or foreign regulatory authorities can place a clinical hold on a trial if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury;

we may encounter delays or rejections based on changes in regulatory agency policies during the period in which we are developing a system or the period required for review of any application for regulatory agency approval;

our clinical trials may not demonstrate the safety and efficacy of any system or result in marketable products;

the FDA or foreign regulatory authorities may request additional clinical trials, including an additional Phase III trial, relating to our NDA submissions;

the FDA or foreign regulatory authorities may change its approval policies or adopt new regulations that may negatively affect or delay our ability to bring a system to market or require additional clinical trials; and

a system may not be approved for all the requested indications.

The failure or delay of clinical trials could cause an increase in the cost of product development, delay filing of an application for marketing approval or cause us to cease the development of the Delcath chemosaturation system for other indications. If we are unable to develop the Delcath chemosaturation system for other indications the future growth of our business could be negatively impacted.

While we have received approval of our clinical trial protocol from the FDA under a SPA, our failure to execute the clinical trial according to the agreed upon trial protocol may result in loss of FDA approval and invalidation of our clinical trials.

Prior to initiating our Phase III clinical trial, we submitted a proposal for the design, execution, and analysis under a SPA. A SPA is an evaluation by the FDA of a protocol with the goal of reaching an agreement that the Phase III trial protocol design, clinical endpoints, and statistical analyses are acceptable to support regulatory approval of the drug product candidate with respect to effectiveness for the indication studied. Under a SPA, the FDA agrees to not later alter its position with respect to adequacy of the design, execution, or analyses of the clinical trial intended to form the primary basis of an effectiveness claim in an NDA, without the sponsor’s agreement, unless the FDA identifies a substantial scientific issue essential to determining the safety or efficacy of the drug after testing begins. Pursuant to the FDA’s guidance on SPAs, a SPA is documented in a SPA letter and/or the minutes of a Type A meeting. We conducted our Phase III trial under a SPA. The SPA may be invalidated for a number of reasons including our failure to execute the clinical trial according to the agreed upon trial protocol. While we believe our SPA is currently valid, our failure to execute the clinical trial according to the agreed upon trial procedures, or the FDA’s identification of a substantial scientific issue essential to determining the safety or efficacy of the drug after testing begins, may lead to the invalidation of the SPA, and as a result, the trial itself may not be sufficient to serve as the primary basis of an effectiveness claim.

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We rely on third parties to conduct certain of the clinical trials for the Delcath chemosaturation system, and if they do not perform their obligations to us, we may not be able to obtain regulatory approvals for our system.

We design the clinical trials for the Delcath chemosaturation system, but we rely on academic institutions, corporate partners, contract research organizations and other third parties to assist us in managing, monitoring and otherwise carrying out these trials. We rely heavily on these parties for the execution of our clinical studies and control only certain aspects of their activities. Accordingly, we may have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. In particular, we relied on a third party to conduct monitoring of our Phase II and Phase III clinical trials and collect the data for our planned resubmission of an NDA. We intend to rely upon third parties to conduct monitoring and data collection of our future clinical trials. Although we rely on these third parties to manage the data from these clinical trials, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with GCPs for conducting, recording and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the trial participants are adequately protected. The FDA enforces these GCP regulations through periodic inspections of trial sponsors, principal investigators and trial sites. Our reliance on third parties does not relieve us of these responsibilities and requirements, and if we or the third parties upon whom we rely for our clinical trials fail to comply with the applicable GCPs, the data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional trials before approving our marketing application. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply or complied with GCPs. In addition, our clinical trials must be conducted with product that complies with the FDA’s cGMP requirements. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process, and we may fail to obtain regulatory approval for the Delcath chemosaturation system if these requirements are not met.

Purchasers of the Delcath Hepatic CHEMOSAT Delivery System in the EEA may not receive third-party reimbursement or such reimbursement may be inadequate. Without adequate reimbursement, we may not be able to successfully commercialize the Delcath Hepatic CHEMOSAT Delivery System in the EEA. We have obtained the right to affix the CE Mark for the Delcath Hepatic CHEMOSAT Delivery System , and we intend to seek third-party or government reimbursement within those countries in the EEA where we expect to market and sell the Delcath CHEMOSAT. Until we obtain government reimbursement, we will rely on private payors or local pre-approved funds where available. New technology payment programs may provide interim funding, but there are no assurances that we will qualify for such funding. Even if we do qualify, the amount and the duration of this funding may be limited. There are also no assurances that third-party payors or government health agencies of members states of the EEA will reimburse the product’s use in the long term or at all. Further, each country has its own protocols regarding reimbursement, so successfully obtaining third party or government health agency reimbursement in one country does not necessarily translate to similar reimbursement in other EEA countries. Physicians, hospitals and other health care providers may be reluctant to purchase the Delcath CHEMOSAT System if they do not receive substantial reimbursement for the cost of using our product from third-party payors or government entities. The lack of adequate reimbursement may significantly limit sales opportunities in the EEA.

As the Delcath chemosaturation system is not currently approved by the FDA or other regulatory bodies outside the EEA, Australia or New Zealand, third-party payors in the United States and elsewhere will not reimburse the use of our product. Even if approval is obtained, inadequate reimbursement may harm results of operations.

The Delcath chemosaturation system is currently not approved by the FDA or any other regulatory body outside the EEA, Australia or New Zealand. Medicare, Medicaid, private health insurance plans and their foreign equivalents will not reimburse the Delcath chemosaturation system’s use since the product is currently not approved outside the EEA, Australia or New Zealand. We will seek reimbursement by third-party payors of the cost of the Delcath chemosaturation system after its use is approved, but there are no assurances that third-party payors in the United States or other countries will agree to cover the cost of procedures using the Delcath chemosaturation system at all or at rates that are adequate to cover the actual costs. Further, third-party payors may deny reimbursement if they determine that the Delcath chemosaturation system is not used in accordance with established payor protocols regarding cost effective treatment methods or is used outside its approved indication or for forms of cancer or with drugs not specifically approved by the FDA or other foreign regulatory bodies in the future. Without reimbursement, physicians, hospitals and other health care providers will be less likely to purchase the Delcath chemosaturation system, thereby harming our results of operations.

Risks Related to Manufacturing, Commercialization and Market Acceptance of the Delcath Chemosaturation System

There is only one approved third-party manufacturer of melphalan in the EEA. If this manufacturer fails to provide end-users with adequate supplies of melphalan or fails to comply with the requirements of regulatory authorities, we may be unable to successfully commercialize our product in the EEA.

Under the regulatory scheme in the EEA, the Delcath Hepatic CHEMOSAT Delivery System is approved for marketing as a device only, and doctors will separately obtain melphalan for use with the Delcath CHEMOSAT system. Although melphalan has been approved in the EEA for over a decade, we are aware that there is currently only one approved manufacturer of melphalan in the EEA, with whom we have no supply arrangements or other affiliation, and therefore we will not have any control over the quality, availability, price or labeling of melphalan in that market. As a result, there may not be sufficient supply of melphalan for use with our system, and any adverse change in the sole manufacturer’s commercial operations or regulatory approval status may seriously impair our sales opportunities in the EEA. Additionally, melphalan is not available in certain foreign countries outside the EEA where we intend to market the Delcath CHEMOSAT system. If supply of melphalan remains limited or unavailable, we will be unable to commercialize our product in these markets, thereby limiting future sales opportunities.

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We purchase components for the Delcath chemosaturation system from third parties, some of which are sole-source suppliers.

The components of the Delcath system, including catheters, filters, introducers and chemotherapy agents, must be manufactured and assembled in accordance with approved manufacturing and predetermined performance specifications and must meet cGMP and quality systems requirements. Some states also have similar regulations. Many of the components of the Delcath chemosaturation system are manufactured by sole-source suppliers that may have proprietary manufacturing processes. If Delcath or any of our suppliers fails to meet those regulatory obligations, we may be forced to suspend or terminate our clinical trials, and, once a product is approved for marketing, the manufacture, assembly or distribution thereof. Further, if we need to find a new source of supply, we may face long interruptions in obtaining necessary components for the Delcath chemosaturation system, in obtaining FDA or foreign regulatory agency approval of these components and in establishing the manufacturing process, which could jeopardize our ability to supply the Delcath chemosaturation system to the market.

All of the manufacturers of the components for the Delcath chemosaturation system must comply with a number of FDA and International Organization for Standardization, or ISO, and foreign regulatory agency requirements and regulations. If we or one of our suppliers fails to meet such requirements, we may need to change suppliers. If we are unable to successfully change suppliers, the successful completion of some of our future clinical trials and/or commercialization of the Delcath chemosaturation system could be jeopardized.

If we cannot maintain or enter into acceptable arrangements for the production of melphalan and other chemotherapeutic agents we will be unable to successfully commercialize the Delcath system in the United States.

We have entered into a manufacturing and supply agreement with Synerx Pharma, LLC, or Synerx, and Bioniche Teoranta, or Bioniche, an affiliate of Mylan, Inc., for the supply of our branded melphalan for injection. The agreement with Synerx and Bioniche currently represents our sole source of branded melphalan in the United States. We intend to pursue agreements with additional contract manufacturers to produce melphalan and other chemotherapeutic agents that we will use in the future for the commercialization of the Delcath chemosaturation system, as well as for labeling and finishing services. We may not be able to enter into such arrangements on acceptable terms or at all. To manufacture melphalan or other chemotherapeutic agents on our own, we would first have to develop a manufacturing facility that complies with FDA requirements and regulations for the production of melphalan and each other chemotherapeutic agent we choose to manufacture for our system. Developing these resources would be an expensive and lengthy process and would have a material adverse effect on our revenues and profitability. If we are unable to obtain sufficient melphalan and labeling services on acceptable terms, if we should encounter delays or difficulties in our relationships with our current and future suppliers or if our current and future suppliers of melphalan do not comply with applicable regulations for the manufacturing and production of melphalan, our business, financial condition and results of operations may be materially harmed.

If we cannot successfully manufacture the Delcath chemosaturation system, our ability to develop and commercialize the system would be impaired.

We will manufacture the Delcath chemosaturation system for distribution in the EEA in our Queensbury, NY facility. We have a limited manufacturing history and we may not be able to manufacture the system in commercial quantities, in a cost-effective manner or in compliance with the regulatory requirements applicable to such manufacturing. Additionally, we may have difficulty obtaining components for the system from our third-party suppliers in a timely manner or at all which may adversely affect our ability to deliver the Delcath chemosaturation system to purchasers.

In addition to limiting sales opportunities, delays in manufacturing the Delcath chemosaturation system may adversely affect our ability to obtain regulatory approval in other jurisdictions. Our ability to conduct timely clinical trials in the United States and abroad depends on our ability to manufacture the system, including sourcing the chemotherapeutic agents or other compounds through third parties in accordance with FDA and other regulatory requirements. If we are unable to manufacture the Delcath chemosaturation system in a timely manner, we may not be able to conduct the clinical trials required to obtain regulatory approval and commercialize our product.

If our Queensbury, NY facility fails to maintain compliance with ISO 13485, a comprehensive management system for the design and manufacture of medical devices, and FDA cGMP or fails to pass facility inspection or audits, our ability to manufacture at the facility could be limited or terminated. In the future, we may manufacture and assemble the Delcath chemosaturation system in the EEA, and any facilities in the EEA would have to obtain and maintain similar approvals or certifications of compliance.

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We do not have written contracts with all of our suppliers for the manufacture of components for the Delcath chemosaturation system.

We do not have written contracts with all our suppliers for the manufacture of components for the Delcath chemosaturation system. If we are unable to obtain an adequate supply of the necessary components or negotiate acceptable terms, we may not be able to manufacture the system in commercial quantities or in a cost-effective manner, and commercialization of the Delcath chemosaturation system in the EEA may be delayed. In addition, certain components are available from only a limited number of sources. Components of the Delcath chemosaturation system are currently manufactured for us in small quantities for use in our preclinical and clinical studies. We will require significantly greater quantities to commercialize the product. We may not be able to find alternate sources of comparable components. If we are unable to obtain adequate supplies of components from our existing suppliers or need to switch to an alternate supplier and obtain FDA or other regulatory agency approval of that supplier, commercialization of the Delcath chemosaturation system may be delayed.

We have limited experience in marketing and commercializing our products, and as a result, we may not be successful in commercializing the Delcath CHEMOSAT System in the EEA.

We intend to pursue a two-pronged commercialization strategy in the EEA under which we will directly and indirectly market the Delcath Hepatic CHEMOSAT Delivery System. To pursue a direct marketing strategy in the United Kingdom, Germany and the Netherlands, we intend to utilize a contract sales organization to provide MSLs to educate the medical oncologists, and we intend to utilize a direct sales force to sell our product to interventional radiologists and hospitals. In France, Italy and Spain, where we intend to pursue an indirect marketing strategy, we will enter into agreements with third-party distributors. However, we have not previously sold, marketed or distributed any products and have limited experience in building a sales and marketing organization and in entering into and managing relationships with third-party distributors. Even though we have obtained the right to affix the CE Mark, we currently have limited sales, marketing, commercial or distribution capabilities in any countries in the EEA. In order to pursue our strategy to commercialize the Delcath CHEMOSAT system in the EEA, we must acquire or internally develop a sales, marketing and distribution infrastructure and/or enter into strategic alliances to perform these services. The development of sales, marketing and distribution infrastructure is difficult, time consuming and requires substantial financial and other resources. If we cannot successfully develop the infrastructure to market and commercialize the Delcath CHEMOSAT system, our ability to generate revenues in the EEA may be harmed, and we may be required to enter into strategic alliances to have such activities carried out on our behalf, which may not be on favorable terms.

Competition for sales and marketing personnel is intense, and we may not be successful in attracting or retaining such personnel. Our inability to attract and retain skilled sales and marketing personnel or to reach an agreement with a third party could adversely affect our business, financial condition and results of operations. Further, since our marketing strategy in the EEA includes establishing a network of third-party distributors, we must enter into collaborative arrangements with these third-party distributors. We may not be able to enter into such arrangements on reasonable terms or at all.

Even if we receive FDA or other foreign regulatory approvals, we may be unsuccessful in commercializing the Delcath chemosaturation system in markets outside the EEA, because of inadequate infrastructure or an ineffective commercialization strategy.

Outside the EEA, even if we obtain regulatory approval from the FDA or other foreign regulatory agencies, our ability to commercialize the Delcath chemosaturation system may be limited due to our inexperience in developing a sales, marketing and distribution infrastructure. In the United States, we intend to develop and train our own sales force to market our products, and in foreign countries other than in the EEA, we intend to market our products primarily through strategic partners and distributors. If we are unable to develop this infrastructure in the United States or to collaborate with an alliance partner to market our products in foreign countries, particularly in Asia, our efforts to commercialize the Delcath chemosaturation system or any other product outside of the EEA may be less successful.

Even if we are successful in commercializing the Delcath chemosaturation system in the EEA, we may not be successful in the United States and other foreign countries. Each country requires a different commercialization strategy, so our EEA strategy may not translate to other markets. Without a successful commercialization strategy tailored for each market, our efforts to promote and market the Delcath Hepatic CHEMOSAT Delivery System in each of our target markets may fail in any or all of those markets.

Our plan to use collaborative arrangements with third parties to help finance and to market and sell the Delcath chemosaturation system may not be successful.

We have entered into a collaborative agreement with Chi Fu Trading Company for the country of Taiwan and intend to enter into one or more strategic alliances to further address markets outside the United States, particularly in Asia, and to help fund the development of additional indications or for use with additional chemotherapy agents within the United States. We may be unable to enter into collaborative agreements without additional clinical data or unable to continue a collaborative agreement as a result of unsuccessful future clinical trials. Additionally, we may face competition in our search for alliances. As a result, we may not be able to enter into any additional alliances on acceptable terms, if at all.

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Our collaborative relationships may never result in the successful development or commercialization of the Delcath chemosaturation system or any other product. The success of any collaboration will depend upon our ability to perform our obligations under any agreements as well as factors beyond our control, such as the commitment of our collaborators and the timely performance of their obligations. The terms of any such collaboration may permit our collaborators to abandon the alliance at any time for any reason or prevent us from terminating arrangements with collaborators who do not perform in accordance with our expectations or our collaborators may breach their agreements with us. In addition, any third parties with which we collaborate may have significant control over important aspects of the development and commercialization of our products, including research and development, market identification, marketing methods, pricing, composition of sales force and promotional activities. We are not able to control or influence the amount and timing of resources that any collaborator may devote to our research and development programs or the commercialization, marketing or distribution of our products. We may not be able to prevent any collaborators from pursuing alternative technologies or products that could result in the development of products that compete with the Delcath chemosaturation system or the withdrawal of their support for our products. The failure of any such collaboration could have a material adverse effect on our business.

If we fail to overcome the challenges inherent in international operations, our business and results of operations may be materially adversely affected.

Currently we have only received authorization to market the Delcath Hepatic CHEMOSAT Delivery System in the EEA, Australia and New Zealand, and intend to seek similar authorization or approvals in other foreign countries. As a result, we expect international sales of our products to account for a significant portion of our revenue, which exposes us to risks inherent in international operations. To accommodate our international sales, we will need to further invest financial and management resources to develop an international infrastructure that will meet the needs of our customers. Accordingly, we will face additional risks resulting from our international operations including:

difficulties in enforcing agreements and collecting receivables in a timely manner through the legal systems of many countries outside the United States;

the failure to fulfill foreign regulatory requirements to market our products on a timely basis or at all;

availability of, and changes in, reimbursement within prevailing foreign healthcare payment systems;

difficulties in managing foreign relationships and operations, including any relationships that we establish with foreign sales or marketing employees and agents;

limited protection for intellectual property rights in some countries;

fluctuations in currency exchange rates;

the possibility that foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade;

the possibility of any material shipping delays;

significant changes in the political, regulatory, safety or economic conditions in a country or region;

protectionist laws and business practices that favor local competitors; and

trade restrictions, including the imposition of, or significant changes to, the level of tariffs, customs duties and export quotas.

If we fail to overcome the challenges we encounter in our international operations, our business and results of operations may be materially adversely affected.

The Delcath CHEMOSAT System has been used a limited number of times in a clinical setting in the EEA, so market acceptance of our product will depend on EEA healthcare professionals’ efforts to learn about our product.

Since all of our prior clinical studies were conducted in the United States and the Delcath CHEMOSAT system has had limited use in a clinical setting in the EEA, physicians in the EEA have no clinical experience with our product. As a result, the Delcath Hepatic CHEMOSAT Delivery System may not gain significant market acceptance among physicians, hospitals, patients and healthcare payors in the EEA until healthcare professionals are properly educated about the procedure. Market acceptance of the CHEMOSAT system in the EEA will depend upon a variety of factors including:

whether our future clinical trials demonstrate significantly improved patient outcomes;

our ability to educate and train physicians to perform the procedure and drive acceptance of the use of the CHEMOSAT system;

our ability to convince healthcare payors that use of the CHEMOSAT system results in reduced treatment costs and improved outcomes for patients;

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whether the CHEMOSAT system replaces and/or complements treatment methods in which many hospitals have made a significant investment; and

whether doctors and hospitals are willing to replace their existing technology with a new medical technology until the new technology’s value has been demonstrated.

We intend to establish clinical training and centers of excellence to educate and train physicians and healthcare payors in the EEA, but the key opinion thought leadership required for initial market acceptance within the healthcare arena may take time to develop. Without effort from healthcare professionals to become educated about our product, the market may not accept the CHEMOSAT system and our efforts to commercialize the CHEMOSAT system in the EEA may be unsuccessful.

Similar considerations apply in any other market where we receive approval. Successful commercialization of the CHEMOSAT system in these markets will depend on market acceptance by healthcare professionals.

Rapid technological developments in treatment methods for liver cancer and competition with other forms of liver cancer treatments could affect our ability to achieve meaningful revenues or profit.

Competition in the cancer treatment industry is intense. The Delcath chemosaturation system competes with all forms of liver cancer treatments that are alternatives to the “gold standard” treatment of surgical resection. Many of our competitors have substantially greater resources and considerable experience in conducting clinical trials and obtaining regulatory approvals. If these competitors develop more effective or more affordable products or treatment methods, or achieve earlier product development, our revenues or profitability will be substantially reduced.

The loss of key personnel could adversely affect our business.

The loss of a member of our senior executive staff could delay our obtaining FDA approval, our introducing the Delcath chemosaturation system commercially and our generating revenues and profits. Competition for experienced personnel is intense. If we cannot retain our current personnel or attract additional experienced personnel, our ability to compete could be adversely affected.

Risks Related to Patents, Trade Secrets and Proprietary Rights

Our success depends in part on our ability to obtain patents, maintain trade secret protection, operate without infringing on the proprietary rights of third parties and commercialize the Delcath chemosaturation system prior to the expiration of our patent protection.

Our patent portfolio consists of seven U.S. patents, one pending Patent Cooperation Treaty application, 22 issued foreign counterpart patents and four pending foreign counterpart patent applications. Certain of our U.S., European and other foreign patents have already expired and other U.S. patents relating to the Delcath chemosaturation system will expire beginning in 2012 through 2016.

Due to the uncertainty of the patent prosecution process, there are no guarantees that any of our pending patent applications will result in the issuance of a patent. Even if we are successful in obtaining a patent, there is no assurance that it will be upheld if later challenged or will provide significant protection or commercial advantage. Because of the length of time and expense associated with bringing new medical drugs and devices to the market, the healthcare industry has traditionally placed considerable emphasis on patent and trade secret protection for significant new technologies. Other parties may challenge patents, patent claims or patent applications licensed or issued to us or may design around technologies we have patented, licensed or developed.

Companies in the medical drug/device industry may use intellectual property infringement litigation to gain a competitive advantage. In the United States, patent applications filed in recent years are confidential for 18 months, while older applications are not publicly available until the patent issues. As a result, avoiding patent infringement may be difficult. Litigation may be necessary to enforce any patents issued or assigned to us or to determine the scope and validity of third-party proprietary rights. Litigation could be costly and could divert our attention from our business. There are no guarantees that we will receive a favorable outcome in any such litigation. If a third party claims that we infringed its patents, any of the following may occur:

we may become liable for substantial damages for past infringement if a court decides that our technologies infringe upon a competitor’s patent;

a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms or at all, or which may require us to pay substantial royalties or grant cross-licenses to our patents; and

we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time.

If others file patent applications with respect to inventions for which we already have patents issued to us or have patent applications pending, we may be forced to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could also be costly and could divert our attention from our business. If a third party violates our intellectual property rights, we may be unable to enforce our rights because of our limited resources. Use of our limited funds to enforce or to defend our intellectual property rights or to defend against legal proceedings alleging infringement of third party proprietary rights may also affect our financial condition adversely.

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Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before the Delcath chemosaturation system or any other product can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantages of the patent. Not all of our U.S. patent rights have corresponding patent rights effective in Europe or other foreign jurisdictions.

Similar considerations apply in any other country where we are prosecuting patent applications, have been issued patents, or have decided not to pursue patent protection relating to our technology. The laws of foreign countries may not protect our intellectual property rights to the same extent as do laws of the United States.

Since we rely solely on trade secret protection in the EEA, our inability to maintain this trade secret protection will significantly limit our ability to commercialize the Delcath chemosaturation system in the EEA.

We presently only have valid issued patents for the current version of the Delcath chemosaturation system in the United States. Without patent protection in the EEA, the Delcath Hepatic CHEMOSAT Delivery System will only be covered by trade secret protection. Unlike patents, trade secrets are only recognized under applicable law if they are kept secret by restricting their disclosure to third parties. We protect our trade secrets and proprietary knowledge in part through confidentiality agreements with employees, consultants and other parties. However, certain consultants and third parties with whom we have business relationships, and to whom in some cases we have disclosed trade secrets and other proprietary knowledge, may also provide services to other parties in the medical device industry, including companies, universities and research organizations that are developing competing products. In addition, some of our former employees who were exposed to certain of our trade secrets and other proprietary knowledge in the course of their employment may seek employment with, and become employed by, our competitors. We cannot be assured that consultants, employees and other third parties with whom we have entered into confidentiality agreements will not breach the terms of such agreements by improperly using or disclosing our trade secrets or other proprietary knowledge or that we will have adequate remedies for any such breach.

Trade secret protection does not prevent independent discovery of the technology or proprietary information or use of the same. Competitors may independently duplicate or exceed our technology in whole or in part. If we are not successful in maintaining the confidentiality of our technology, the loss of trade secret protection or know-how relating to the Delcath chemosaturation system will significantly impair our ability to commercialize the Delcath Hepatic CHEMOSAT Delivery System in the EEA, and our value and results of operations will be harmed.

Similar considerations apply in any other foreign country where we receive approval. Since we do not have valid issued patents for the current version of the Delcath chemosaturation system in these countries, our ability to successfully commercialize the Delcath chemosaturation system will depend on our ability to maintain trade secret protection in these markets.

Risks Related to Products Liability

We may be the subject of product liability claims or product recalls, and we may be unable to maintain insurance adequate to cover potential liabilities.

Our business exposes us to potential liability risks that may arise from the testing, manufacture, marketing, sale and use of the Delcath chemosaturation system. In addition, because the Delcath chemosaturation system is intended for use in patients with cancer, there is an increased risk of death among the patients treated with our system which may increase the risk of product liability lawsuits. We may be subject to claims against us even if the injury is due to the actions of others. For example, if the medical personnel that use our system on patients are not properly trained or are negligent in the use of our system, the patient may be injured through the use of our system, which may subject us to claims. Were such a claim asserted we would likely incur substantial legal and related expenses even if we prevail on the merits. Claims for damages, whether or not successful, could cause delays in clinical trials and result in the loss of physician endorsement, adverse publicity and/or limit our ability to market and sell the system, resulting in loss of revenue. In addition, it may be necessary for us to recall products that do not meet approved specifications, which would also result in adverse publicity, as well as resulting in costs connected to the recall and loss of revenue. A successful products liability claim or product recall would have a material adverse effect on our business, financial condition and results of operations. We currently carry product liability and clinical trial insurance coverage, but it may be insufficient to cover one or more large claims.

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Risks Related to Our Common Stock

Our stock price and trading volume may be volatile, which could result in unpredictable pricing of our equity securities.

The equity markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

results of our clinical trials;

regulatory delays, non-acceptance or non-approval of our product;

manufacturing difficulties;

unexpected adverse events caused by the Delcath chemosaturation system;

product recalls;

actual or anticipated quarterly variations in our operating results;

changes in expectations as to our future financial performance or changes in financial estimates, if any, of public market analysts;

announcements relating to our business or the business of our competitors;

a challenge to one of our patents, either in court or via administrative proceedings in the United States Patent and Trademark Office;

conditions generally affecting the healthcare and cancer treatment industries;

the success of our operating strategy;

our ability to repay our debt;

future sales of equity or equity-related securities; and

general financial, economic, domestic, international and other market conditions.

Many of these factors are beyond our control, and we cannot predict their potential impact on the price of our common stock. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.

Our insiders beneficially own a significant portion of our stock.

As of December 31, 2011, our executive officers, directors and affiliated persons beneficially owned approximately 6.5% of our common stock. As a result, our executive officers, directors and affiliated persons will have significant influence to:

elect or defeat the election of our directors;

amend or prevent amendment of our certificate of incorporation or by-laws;

effect or prevent a merger, sale of assets or other corporate transaction; and

affect the outcome of any other matter submitted to the stockholders for vote.

Sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock.

Our warrants contain anti-dilution provisions that, if triggered, could cause dilution to our existing stockholders.

The warrants issued in our September 2007 and June 2009 private placements contain anti-dilution provisions. The September 2007 warrants are subject to “full ratchet” protection upon certain equity issuances below $3.44 per share (as may be further adjusted). The June 2009 warrants are subject to an exercise price adjustment upon certain equity issuances below $3.60 per share (as may be further adjusted). In addition to the potential dilutive effect of these provisions, there is the potential that a large number of the shares may be sold in the public market at any given time, which could place additional downward pressure on the trading price of our common stock.

Anti-takeover provisions in our Certificate of Incorporation and By-laws may reduce the likelihood of a potential change of control, or make it more difficult for our stockholders to replace management.

Certain provisions of our Certificate of Incorporation and By-laws and of our stockholders rights agreement could have the effect of making it more difficult for our stockholders to replace management at a time when a substantial number of our stockholders might favor a change in management. These provisions include:

providing for a staggered board; and

authorizing the board of directors to fill vacant directorships or increase the size of our board of directors.

Furthermore, our board of directors has the authority to issue up to 10,000,000 shares of preferred stock in one or more series and to determine the rights and preferences of the shares of any such series without stockholder approval. Any series of preferred stock is likely to be senior to the common stock with respect to dividends, liquidation rights and, possibly, voting rights. Our board’s ability to issue preferred stock may have the effect of discouraging unsolicited acquisition proposals, thus adversely affecting the market price of our common stock.

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We also have a stockholder rights agreement that could have the effect of substantially increasing the cost of acquiring us unless our board of directors supports the transaction even if the holders of a majority of our common stock are in favor of the transaction.

Our common stock is listed on The NASDAQ Capital Market.

If we fail to meet the requirements of The NASDAQ Capital Market for continued listing, our common stock could be delisted. To keep such listing, we are required to maintain: (i) a minimum bid price of $1.00 per share, (ii) a certain public float, (iii) a certain number of round lot shareholders and (iv) one of the following: a net income from continuing operations (in the latest fiscal year or two of the three last fiscal years) of at least $500,000, a market value of listed securities of at least $35 million or a stockholders’ equity of at least $2.5 million. We are presently in compliance with these requirements.

We are also required to maintain certain corporate governance requirements. In the event that in the future we are notified that we no longer comply with NASDAQ’s corporate governance requirements, and we fail to regain compliance within the applicable cure period, our common stock could be delisted from The NASDAQ Capital Market.

If our common stock is delisted from The NASDAQ Capital Market, we may be subject to the risks relating to penny stocks.

If our common stock were to be delisted from trading on The NASDAQ Capital Market and the trading price of the common stock were below $5.00 per share on the date the common stock were delisted, trading in our common stock would also be subject to the requirements of certain rules promulgated under the Exchange Act. These rules require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a “penny stock” and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, generally institutions. These additional requirements may discourage broker-dealers from effecting transactions in securities that are classified as penny stocks, which could severely limit the market price and liquidity of such securities and the ability of purchasers to sell such securities in the secondary market. A penny stock is defined generally as any non-exchange listed equity security that has a market price of less than $5.00 per share, subject to certain exceptions.

We have never declared or paid any dividends to the holders of our common stock and we do not expect to pay cash dividends in the foreseeable future.

We currently intend to retain all earnings for use in connection with the expansion of our business and for general corporate purposes. Our board of directors will have the sole discretion in determining whether to declare and pay dividends in the future. The declaration of dividends will depend on our profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors. Our ability to pay cash dividends in the future could be limited or prohibited by the terms of financing agreements that we may enter into or by the terms of any preferred stock that we may authorize and issue. We do not expect to pay dividends in the foreseeable future. As a result, holders of our common stock must rely on stock appreciation for any return on their investment.

The issuance of additional stock in connection with acquisitions or otherwise will dilute all other stockholdings.

We are not restricted from issuing additional shares of our common stock, or from issuing securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. As of December 31, 2011, we had an aggregate of 21,762,370 shares of common stock authorized but unissued. Subject to certain volume limitations imposed by The NASDAQ Capital Market, we may issue all of these shares without any action or approval by our shareholders. We have established an "at the market" equity offering program, and we may issue shares under this program without any action or approval by our shareholders. We may expand our business through complementary or strategic acquisitions of other companies and assets, and we may issue shares of common stock in connection with those acquisitions or otherwise. The market price of our common stock could decline as a result of our issuance of a large number of shares of common stock, particularly if the per share consideration we receive for the stock we issue is less than the per share book value of our common stock or if we are not expected to be able to generate earnings with the proceeds of the issuance that are as great as the earnings per share we are generating before we issue the additional shares. In addition, any shares issued in connection with these activities, the exercise of stock options or otherwise would dilute the percentage ownership held by our investors. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price of our common stock.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate offices currently occupy 17,320 square feet of office space at 810 Seventh Avenue, New York, New York under a lease that expires in November 2020. The Company leases three buildings containing approximately 10,320 square feet at 566 Queensbury Avenue, 8,000 square feet at 2 Country Club Road, and 6,000 at 97-95 Park Road in Queensbury, New York. These buildings house manufacturing, research and development, and office space each under lease agreements that expire on August 31, 2012, November 12, 2012, and July 18, 2012, respectively. Delcath has an option to purchase the building at 566 Queensbury Avenue prior to the expiration of the lease term. The Company also owns land at 10,12 and 14 Park Road in Queensbury, New York, In addition, Delcath Systems Limited leases two offices containing approximately 19,200 square feet at 19 Mervue, Industrial Park and approximately 1,640 square feet at Lyrr Building 3 in Galway, Ireland under lease agreements that expire August 2, 2021 and March, 2012, respectively. The Company believes substantially all of our property and equipment is in good condition and that we have sufficient capacity to meet our current operational needs.

Item 3. Legal Proceedings.

None.

Item 4. Removed and Reserved.

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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on The NASDAQ Capital Market under the symbol “DCTH”.

The following table sets forth the high and low last reported sales prices of our common stock for the fiscal quarters indicated as reported on The NASDAQ Capital Market:

Common Stock Price Range

	2011
	High		Low
Quarter ended March 31, 2011	$	11.44	$	6.18
Quarter ended June 30, 2011		8.63		4.98
Quarter ended September 30, 2011		6.37		3.09
Quarter ended December 31, 2011		3.75		1.88

	2010
	High		Low
Quarter ended March 31, 2010	$	8.41	$	4.31
Quarter ended June 30, 2010		16.18		6.34
Quarter ended September 30, 2010		8.69		5.53
Quarter ended December 31, 2010		11.27		7.20

On March 2, 2012 there were 117 stockholders of record of our common stock.

Dividend Policy

The Company has never declared or paid cash dividends on our common stock and has no intention to do so in the foreseeable future.

Recent Sales of Unregistered Securities

The Company did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, in the quarter ended December 31, 2011.

Performance Graph

The following graph compares the cumulative total stockholder return on our common stock over the five-year period ended December 31, 2011, the cumulative total return during such period of the NASDAQ Composite Index and the Hemscott Industry Group 513-Drug Delivery. The comparison assumes $100 was invested on December 31, 2006, in our common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.

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	12/06	12/07	12/08	12/09	12/10	12/11

Delcath Systems Inc.	100.00	50.00	32.16	138.11	264.86	82.43
NASDAQ Composite	100.00	110.38	65.58	95.27	112.22	110.58
Industry Group 513 - Drug Delivery	100.00	115.41	56.91	83.67	100.17	124.69

	12/06	12/07		12/08		12/09		12/10		12/11

Delcath Systems Inc.		-50.00	%	-35.68	%	329.41	%	91.78	%	-68.88	%
NASDAQ Composite		10.38	%	-40.59	%	45.27	%	17.79	%	-1.46	%
Industry Group 513 - Drug Delivery		15.41	%	-50.69	%	47.04	%	19.72	%	24.48	%

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Item 6. Selected Financial Data.

The selected financial data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included in this Annual Report on Form 10-K.

The selected financial data set forth below as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 are derived from our audited financial statements included in this Annual Report on Form 10-K. All other selected financial data set forth below is derived from our audited financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results of operations to be expected in the future.

	Year Ended December 31,
(Dollars in thousands)	2011			2010			2009			2008			2007
Statement of Operations Data
Costs and expenses	$	46,456		$	30,743		$	13,536		$	8,066		$	6,913
Operating loss		46,456			30,743			13,536			8,066			6,913
Net loss		30,885			46,684			22,057			6,865			3,664
Loss per share		(0.68	)		(1.20	)		(0.82	)		(0.27	)		(0.16

	Year Ended December 31,
(Dollars in thousands)	2011		2010		2009		2008		2007
Balance Sheet Data
Current assets	$	31,988	$	48,898	$	36,286	$	11,341	$	18,091
Total assets		35,241		50,578		36,807		11,359		18,106
Current liabilities		8,837		21,197		13,049		1,152		1,677
Stockholder’s equity		26,104		29,081		23,758		10,207		16,429

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

On April 13, 2011, we obtained the right to affix the CE Mark to the Delcath Hepatic CHEMOSAT® Delivery System (CHEMOSAT System). The right to affix the CE mark allows us to market and sell the CHEMOSAT System in the European Economic Area (EEA). In the EEA, the CHEMOSAT System is regulated as a medical device indicated for the intra-arterial administration of chemotherapeutic agent (melphalan hydrochloride) to the liver with additional extracorporeal filtration of the venous blood return. We have filed an application seeking CE Marking for Generation 2 of our chemosaturation system with melphalan as an amendment to the original CE Mark for the CHEMOSAT system and that application is currently under review with the Notified Body.

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Liquidity and Capital Resources

Our future results are subject to substantial risks and uncertainties. The Company has operated at a loss for its entire history and anticipates that losses will continue over the coming year. There can be no assurance that Delcath will ever generate significant revenues or achieve profitability. The Company expects to use cash, cash equivalents and investment proceeds to fund its operating activities. Delcath’s future liquidity and capital requirements will depend on numerous factors, including the progress of research and product development programs, obtaining approvals and complying with regulations; the timing and effectiveness of product commercialization activities, including marketing arrangements; the timing and costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and the effect of competing technological and market developments.

At December 31, 2011, cash and cash equivalents totaled $25.8 million, as compared to $45.6 million at December 31, 2010. Approximately $25.4 million of our funds were invested in money markets at December 31, 2011. In addition, the Company had $5.0 million in certificates of deposit at December 31, 2011 as compared to $1.5 million at December 31, 2010. At December 31, 2011, cash, cash equivalents and certificates of deposit totaled $30.8 million as compared to $47.1 million at December 31, 2010.

During the twelve months ended December 31, 2011, Delcath used $37.4 million of cash in our operating activities. This amount compares to $24.1 million used in our operating activities during the comparable twelve month period ended December 31, 2010. The increase of $13.3 million, or 55.2%, is primarily due to our preparations to commercialize the Delcath chemosaturation system, expenses related to our remonitoring efforts to prepare our submission to the FDA, and an increase in compensation related expenses as the Company grew from 47 to 80 employees during 2011. The Company expects that cash allocated to operating activities will continue to increase as Delcath continues its commercialization efforts in Europe, continues to navigate extensive regulatory processes across the globe, and initiates new clinical trials. The Company believes it has access to sufficient capital to fund our operating activities through 2012.

At December 31, 2011, the Company’s deficit accumulated during the development stage was approximately $146.9 million, as compared to $116.1 million at December 31, 2010. Because our business does not generate positive cash flow from operating activities, the Company will need to raise additional capital in order to fully commercialize our product or to fund development efforts relating to additional indications. The Company anticipates it will be able to raise additional capital in the event that it is in its best interest to do so. The Company anticipates raising such additional capital by either borrowing money, selling shares of our capital stock, or entering into strategic alliances with appropriate partners. To the extent additional capital is not available when needed, the Company may be forced to abandon some or all of its development and commercialization efforts, which would have a material adverse effect on the prospects of the business. Further, our assumptions relating to our cash requirements may differ materially from our actual requirements because of a number of factors, including significant unforeseen delays in the regulatory approval process, changes in the focus and direction of our clinical trials and costs related to commercializing the Delcath chemosaturation system.

In March 2010, the Company filed a registration statement on Form S-3 with the SEC, which allows the Company to offer and sell, from time to time in one or more offerings, up to $100,000,000 of common stock, preferred stock, warrants, debt securities and stock purchase contracts as it deems prudent or necessary to raise capital at a later date. The registration statement became effective on April 13, 2010 (333-165677). The Company used this registration statement for its August 2010 and July 2011 public offerings detailed in Note 3 of the footnotes to the 2011 consolidated financial statements in this Annual Report on Form 10-K and for establishing an "at the market" equity offering program detailed in Note 9 of the footnotes to the 2011 consolidated financial statements in this Annual Report on Form 10-K. The Company has funded our operations through a combination of private placements of our securities and through the proceeds of our public offerings in 2000, 2003, 2009, 2010 and 2011, along with our registered direct offerings in 2007 and 2009. As of December 31, 2011, Delcath had approximately $39,750,000 aggregate amount of common stock, preferred stock, stock purchase contracts, warrants and debt securities (or a combination of these securities) available to be issued under our effective registration statement on Form S-3. The Company intends to use the net proceeds from any future offerings for general corporate purposes, including, but not limited to, obtaining regulatory approvals, commercialization of our products, funding of our clinical trials, capital expenditures and working capital. For a detailed discussion of our various sales of securities and our "at the market" equity offering program see Note 3 and Note 9, respectively, in the footnotes to the 2011 consolidated financial statements in this Annual Report on Form 10-K.

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In December 2011, the Company filed an additional registration statement on Form S-3 with the SEC, which allows the Company to offer and sell, from time to time in one or more offerings, up to $100,000,000 of common stock, preferred stock, warrants, debt securities and stock purchase contracts as it deems prudent or necessary to raise capital at a later date. The registration statement became effective on February 13, 2012 (333-178819).

Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements

The Company is obligated to make future payments under various contracts such as long-term research and development agreement obligations and lease agreements. The following table provides a summary of significant contractual obligations at December 31, 2011 (in millions):

	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating Activities:
Research Activities	$	1.0	$	1.0	$	-	$	-	$	-
Operating Leases		11.9		1.3		3.6		3.9		3.1

The principal goal of Delcath’s Cooperative Research and Development Agreement (CRADA) with the NCI is to continue the development of a novel form of regional cancer therapy by designing clinical protocols utilizing the Delcath chemosaturation system to regionally deliver chemotherapeutics to patients with unresectable malignancies confined to an organ or region of the body. Under the terms of the agreement, Delcath pays $1,000,000 per year to the NCI for clinical support. These funds are payable in quarterly amounts of $250,000, and are used for material support of the CRADA (including equipment, supplies, travel, and other related CRADA support), as well as for support of existing or new scientific or clinical staff to be hired by NCI who are to perform work under the CRADA.

Our operating lease obligations at December 31, 2011 include: the annual rent under the lease for our office space at 810 Seventh Avenue, New York, New York, which will expire in November, 2020; the annual rent under the leases for our facilities in Queensbury, New York, which expire in July, August and November, 2012; and the annual rent for our facilities in Galway, Ireland, which will expire in February 2012 and August 2021. See Part I, Item 2, “Properties” and Note 5 of the footnotes to the 2011 consolidated financial statements in this Annual Report on Form 10-K.

Future Capital Needs; Additional Future Funding

Our future results are subject to substantial risks and uncertainties. The Company has operated at a loss for its entire history and there can be no assurance that it will ever achieve consistent profitability. The Company believes that it has access to adequate resources to fund operations through 2012 and anticipates that additional working capital may be required to continue our operations. There can be no assurance that such working capital will be available on acceptable terms, if at all.

Results of Operations for the Year Ended December 31, 2011; Comparisons of Results of the Years Ended December 31, 2010 and 2009

Delcath has operated at a loss for its entire history. The Company had a net loss for the year ended December 31, 2011, of $30.9 million, a decrease of $15.8 million, or 34%, compared to the net loss from continuing operations for the same period in 2010. This decrease is primarily due to a $31.5 million change in the fair value of the warrant liability, which is a non-cash expense, which was offset by a $15.7 million increase in operating costs. The increase in operating expenses reflects a significant increase in costs related to our preparations to commercialize the Delcath chemosaturation system, expenses related to our additional safety data collection efforts to prepare our submission to the FDA, and an increase in compensation related expenses as the Company grew from 47 to 80 employees during 2011. The warrants issued in 2007 and 2009 as part of our sales of common stock are considered to be derivatives and are subject to valuation and adjustment on a quarterly basis (see item 7A, below for a complete description). This mark-to-market adjustment of the warrant valuation resulted in the recording of $15.6 million in derivative instrument income for the year ended December 31, 2011; a $31.5 million difference from the $16.0 million of derivative instrument expense recorded in the year ended December 31, 2010.

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Delcath had a net loss for the year ended December 31, 2010, of $46.7 million, an increase of $24.6 million, or 111.3%, compared to the net loss from continuing operations for the same period in 2009. This increase was primarily due to a $17.2 million increase in operating costs and a $7.4 million increase in derivative instrument expense. The increase in operating expenses reflected an increase in costs related to our regulatory filings, as well as an increase in compensation related expenses as the Company grew from 17 to 47 employees during 2010.

General and Administrative Expenses

For the year ended December 31, 2011, general and administrative expenses increased to $21.3 million from $13.2 million for the year ended December 31, 2010. The Company is continuing its transition from a development stage company to a commercial enterprise with staff dedicated to commercializing the Delcath chemosaturation system. The increase in the Company’s general and administrative expenses corresponds with the initiation of our European commercialization efforts, as well as an increase in staffing in both the United States and Europe.

For the year ended December 31, 2010, general and administrative expenses increased to $13.2 million from $3.9 million for the year ended December 31, 2009. The Company continued its progress in transitioning from a development stage company focused solely on research and development activities to a commercial enterprise with staff dedicated to the future commercialization of the Delcath chemosaturation system. The increase in the Company’s general and administrative expenses was commensurate with those commercialization efforts. A significant portion of this increase was related to the expansion of our Marketing and Sales, Finance, and Manufacturing departments resulting in increased compensation and related overhead expenses.

Research and Development Expenses

For the year ended December 31, 2011, research and development expenses increased to $25.2 million from $17.6 million for the year ended December 31, 2010. The increase in expenses is primarily related to our expanded research and development activities, including work on our Generation 2 filter and regulatory expenses related to our submission to the FDA.

For the year ended December 31, 2010, research and development expenses increased to $17.6 million from $9.6 million for the year ended December 31, 2009. The Company’s hiring contributed to a marked increase in research and development expenses. Throughout 2010, Delcath expanded both its Research and Development and Regulatory and Quality Assurance departments. Additionally, Delcath focused substantial efforts on submissions for FDA approval and CE marking of the Delcath chemosaturation system.

Interest Income

Interest income shown is from our money market account, treasury bills and investment in various certificates of deposit. For the year ended December 31, 2011, the Company had interest income of $5,249 as compared to interest income of $10,698 for the same period in 2010. For the year ended December 31, 2010, the Company earned interest from certificates of deposit which matured throughout 2010 and the first quarter of 2011, yielding lower interest income for the year ended December 31, 2011.

For the year ended December 31, 2010, the Company had interest income of $10,698 as compared to interest income of $73,833 for the same period in 2009. This decrease was due to the overall market conditions which continued to yield a lower percentage of return on investments.

Application of Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Certain accounting policies have a significant impact on amounts reported in the consolidated financial statements. The notes to the consolidated financial statements included in Item 8 contain a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. Delcath is still in the development stage and has no revenues, trade receivables, inventories, or significant fixed or intangible assets, and therefore have very limited opportunities to choose among accounting policies or methods. In many cases, the Company must use an accounting policy or method because it is the only policy or method permitted under GAAP.

Additionally, the Company devotes substantial resources to obtaining regulatory approvals for the Delcath chemosaturation system as well as our research and development activities, the cost of which is required to be charged to expense as incurred. This further limits our choice of accounting policies and methods. Similarly, management believes there are very limited circumstances in which our consolidated financial statement estimates are significant or critical.

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The Company considers the valuation allowance for the deferred tax assets to be a significant accounting estimate. In applying The Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 740, management estimates future taxable income from operations and tax planning strategies in determining if it is more likely than not that we will realize the benefits of our deferred tax assets. Management believes the Company does not have any uncertain tax positions.

The Company has adopted the provisions of FASB ASC 718, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of FASB ASC 718, share-based compensation is measured at the grant date, based upon the fair value of the award, and is recognized as an expense over the option holders’ requisite service period (generally the vesting period of the equity grant). The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant.

The Company has adopted the provisions of FASB ASC 505-50, which establishes accounting for equity-based payments to non-employees. Measurement of compensation cost related to common shares issued to non-employees for services is based on the value of the services provided or the fair value of the shares issued. Each transaction is reviewed to determine the more reliably measurable basis for the valuation. The measurement of non-employee stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests. Non-employee stock-based compensation charges are amortized over the vesting period or period of performance of the services.

The Company has adopted the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

FASB ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Item 7A.Quantitative and Qualitative Disclosure About Market Risk

Delcath may be exposed to market risk through changes in market interest rates that could affect the value of our investments. However, the Company’s marketable securities consist of short-term and/or variable rate instruments and, therefore, a change in interest rates would not have a material impact on the fair value of our investment portfolio or related income.

The Company measures all derivatives, including certain derivatives embedded in contracts, at fair value and recognizes them on the balance sheet as an asset or a liability, depending on the Company’s rights and obligations under the applicable derivative contract.

In June 2009, the Company completed the sale of 869,565 shares of its common stock and the issuance of warrants to purchase 1,043,478 common shares (the 2009 Warrants) in a subscription agreement with a single investor. The Company received gross proceeds of $3.0 million, with net cash proceeds after related expenses from this transaction of approximately $2.7 million. Of those proceeds, the Company allocated an estimated fair value of $2.2 million to the 2009 Warrants, resulting in net proceeds of $0.5 million. The fair value of the 2009 Warrants on June 15, 2009 was determined by using an option pricing model assuming a risk free interest rate of 2.75%, volatility of 72.93% and an expected life equal to the contractual life of the 2009 Warrants (June 2014). The 2009 Warrants are currently exercisable at $3.60 per share with 1,043,478 shares outstanding at December 31, 2011 and have a five-year term.

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In September 2007, the Company completed the sale of 3,833,108 shares of its common stock and the issuance of warrants to purchase 1,916,554 common shares (the 2007 Warrants) in a private placement to institutional and accredited investors. The Company received net proceeds of $13.3 million in this transaction. The Company allocated $4.3 million of the total proceeds to the 2007 Warrants. The 2007 Warrants were initially exercisable at $4.53 per share beginning six months after the issuance thereof and on or prior to the fifth anniversary of the issuance thereof. As required by the 2007 Warrant agreement, both the exercise price and number of warrants were adjusted following the Company’s June 9, 2009 sale of common stock. The 2007 Warrants are currently exercisable at $3.44 per share with 1,469,456 warrants outstanding at December 31, 2011.

The $2.2 million in proceeds allocated to the 2009 Warrants and the $4.3 million in proceeds allocated to the 2007 Warrants are classified as derivative instrument liabilities. The terms of the 2007 Warrants and the 2009 Warrants provide for potential adjustment in the exercise price and are therefore considered to be derivative instrument liabilities that are subject to mark-to-market adjustment each period. As a result, for the twelve month period ended December 31, 2011, the Company recorded pre-tax derivative instrument income of $15.6 million. The resulting derivative instrument liabilities totaled $2.4 million at December 31, 2011. Management expects that the warrants will either be exercised or expire worthless, at which point the then existing derivative liability will be credited to stockholders’ equity. The fair value of the Warrants at December 31, 2011 was determined by using an option pricing model assuming a risk free interest rate of 0.30% for the 2009 Warrants and 0.09% for the 2007 Warrants, volatility of 79.14% for the 2009 Warrants and 85.05% for the 2007 Warrants and an expected life equal to the contractual life of the Warrants (June 2014 and September 2012, respectively).

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Item 8. Consolidated Financial Statements and Supplementary Data

Consolidated Financial Statements:

Report of Ernst & Young LLP - Independent Registered Public Accounting Firm	F-1

Report of Grant Thornton LLP - Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets at December 31, 2011 and 2010	F-3

Consolidated Statements of Operations for the years ended December 31, 2011, 2010, and 2009 and cumulative from inception (August 5, 1988) to December 31, 2011	F-4

Consolidated Statements of Stockholders’ Equity, cumulative from inception (August 5, 1988) to December 31, 2011	F-5 – F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010, and 2009 and cumulative from inception (August 5, 1988) to December 31, 2011	F-7

Notes to Consolidated Financial Statements	F-8 – F-20

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Delcath Systems, Inc.

We have audited the accompanying consolidated balance sheets of Delcath Systems, Inc. (a development stage company), as of December 31, 2011 and 2010, and their related statements of operations, stockholders' equity, and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2009, and for the cumulative period from August 5, 1988 (inception) through December 31, 2009 were audited by other auditors whose report dated February 24, 2010, expressed an unqualified opinion on those statements. The financial statements for the period August 5, 1988 (inception) through December 31, 2009 include a net loss of $22,056,592. Our opinion on the statements of operations, stockholders’ equity, and cash flows for the period August 5, 1988 (inception) through December 31, 2011, insofar as it relates to amounts for prior periods through December 31, 2009, is based solely on the report of other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Delcath Systems, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for the years then ended and the period from August 5, 1988 (inception) through December 31, 2011, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Delcath Systems, Inc. internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 05, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Metro Park, NJ

March 05, 2012

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Delcath Systems, Inc.

We have audited the accompanying statements of operations, stockholders’ equity, and cash flows of Delcath Systems, Inc. (“Company”) for the year ended December 31, 2009 and for the cumulative period from inception (August 5, 1988) to December 31, 2009. Delcath Systems Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Delcath Systems, Inc. for the year ended December 31, 2009 and for the cumulative period from inception (August 5, 1988) to December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

Successor to the practice of CCR LLP

/s/ Grant Thornton LLP

Glastonbury, Connecticut

February 24, 2010

F-2

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DELCATH SYSTEMS, INC.

(A Development Stage Company)

Consolidated Balance Sheets as of December 31, 2011 and 2010

(in thousands, except share data)

	December 31, 2011			December 31, 2010
Assets:
Current assets
Cash and cash equivalents	$	25,777		$	45,621
Investments – Certificates of deposit		4,980			1,492
Prepaid expenses and other current assets		1,231			1,784
Total current assets		31,988			48,897
Property, plant and equipment
Land		154			–
Furniture, fixtures and equipment		2,251			669
Computers and equipment		1,212			549
Leasehold improvements		1,148			940
		4,765			2,158
Less: accumulated depreciation		(1,512	)		(477	)
Property, plant and equipment, net		3,253			1,681
Total assets	$	35,241		$	50,578

Liabilities and Stockholders’ Equity:
Current liabilities
Accounts payable	$	925		$	610
Accrued expenses		5,473			2,582
Warrant liability		2,439			18,005
Total current liabilities		8,837			21,197

Deferred revenue		300			300

Commitments and contingencies (Note 5)		–			–

Stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2011 and 2010		–			–
Common stock, $.01 par value; 70,000,000 shares authorized; 48,237,630 and 43,028,146 shares issued and 48,016,002 and 42,932,460 outstanding at December 31, 2011 and December 31, 2010, respectively		482			430
Additional paid-in capital		172,613			144,783
Deficit accumulated during the development stage		(146,940	)		(116,055	)
Treasury stock, at cost; 28,100 shares at December 31, 2011 and December 31, 2010		(51	)		(51	)
Accumulated other comprehensive loss		–			(26	)
Total stockholders’ equity		26,104			29,081
Total liabilities and stockholders’ equity	$	35,241		$	50,578

See Accompanying Notes to these Consolidated Financial Statements.

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DELCATH SYSTEMS, INC.

(A Development Stage Company)

Consolidated Statements of Operations

for the Years Ended December 31, 2011, 2010 and 2009, and

Cumulative from Inception (August 5, 1988) to December 31, 2011

(in thousands, except share and per share data)

	Year ended December 31,									Cumulative from inception (August 5, 1988) To December 31,
	2011			2010			2009			2011
Costs and expenses

General and administrative expenses	$	21,283		$	13,187		$	3,899		$	61,148
Research and development costs		25,173			17,556			9,637			81,764

Total costs and expenses		46,456			30,743			13,536			142,912

Operating loss		(46,456	)		(30,743	)		(13,536	)		(142,912	)

Change in fair value of warrant liability, net		15,566			(15,951	)		(8,568	)		(5,133	)
Interest income		5			10			74			2,877
Other expense and interest expense		—			—			(27	)		(274	)
Net loss		(30,885	)		(46,684	)		(22,057	)		(145,442	)
Common share data:
Basic and diluted loss per share	$	(0.68	)	$	(1.20	)	$	(0.82	)

Weighted average number of basic and diluted common shares outstanding		45,236,921			38,991,481			27,072,556

See Accompanying Notes to these Consolidated Financial Statements.

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Table of Contents

DELCATH SYSTEMS, INC.

(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity

Cumulative from Inception (August 5, 1988) to December 31, 2011

(in thousands, except share data)

	Common Stock $0.01 Par Value Issued					In Treasury						Preferred Stock $0.01 Par Value
	# of Shares			Amount		# of Shares			Amount			# of Shares			Amount			Additional Paid-in Capital			Deficit Accumulated During Development Stage			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
From inception to Dec. 31, 2008:
Sales of Common Stock		13,708,783		$	137		311,393		$	3			-			-		$	29,911			-			-		$	30,051
Sales of Preferred Stock		-			-		-			-			2,416,675			24			1,741			-			-			1,765
Dividends paid on preferred stock		690,910			7		-			-			-			-			992			(1,499	)		-			(500	)
Conversion of preferred stock		833,873			8		-			-			(2,416,675	)		(24	)		16			-			-			-
Exercise of stock options		1,501,993			15		3,450			-			-						2,758			-			-			2,773
Vesting of stock options		-			-		-			-			-			-			446			-			-			446
Compensation expense for issuance of stock options		-			-		-			-			-			-			5,092			-			-			5,092
Forfeiture since inception of stock options		-			-		-			-			-			-			(1,241	)		-			-			(1,241	)
Exercise of warrants		8,223,484			82		-			-			-			-			14,267			-			-			14,349
Shares and warrants issued as compensation, in connection with conversion of short-term borrowings and as settlement of Consent Solicitation lawsuit		427,761			4		99,216			1			-			-			3,363			-			-			3,368
Repurchases of stock		-			-		(28,100	)		(51	)		-			-			-			-			-			(51	)
Shares returned due to relevant technology milestones not being fully achieved and as settlement of a dispute with a former director		(3,450	)		-		(414,059	)		(4	)		-			-			(1	)		-			-			(5	)
Deficit accumulated from inception		-			-		-			-			-			-			-			(45,815	)		-			(45,815	)
Change in unrealized loss on investments		-			-		-			-			-			-			-			-			(24	)		(24	)
Balance at December 31, 2008		25,383,354			253		(28,100	)	$	(51	)		-			-		$	57,344		$	(47,314	)	$	(24	)	$	10,208
Compensation expense for restricted stock		91,666			1		-			-			-			-			735			-			-			736
Compensation expense for issuance of stock options		-			-		-			-			-			-			1,579			-			-			1,579
Sale of stock (including 1,043,478 warrants to purchase one share of common stock at $3.99)		869,565			9		-			-			-			-			467			-			-			476
Exercise of warrants		103,512			1		-			-			-			-			355			-			-			356
Sale of stock, net of expenses		9,775,000			98		-			-			-			-			32,355			-			-			32,453
Comprehensive loss:
Net loss		-			-		-			-			-			-			-			(22,057	)		-			(22,057	)
Change in unrealized loss on investments		-			-		-			-			-			-			-			-			8			8
Total comprehensive loss:		-			-		-			-			-			-			-			-			-			(22,049	)
Balance at December 31, 2009		36,223,097		$	362		(28,100	)	$	(51	)		-			-		$	92,835		$	(69,371	)	$	(16	)	$	23,759

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	Common Stock $0.01 Par Value Issued				In Treasury						Preferred Stock $0.01 Par Value
	# of Shares		Amount		# of Shares			Amount			# of Shares		Amount		Additional Paid-in Capital		Deficit Accumulated During Development Stage			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Compensation expense for restricted stock		414,042		4		-			-			-		-		1,671		-			-			1,675
Compensation expense for issuance of stock options		-		-		-			-			-		-		3,839		-			-			3,839
Exercise of warrants and options, common stock surrendered upon restricted stock vesting		1,206,007		12		-			-			-		-		3,830		-			-			3,842
Fair value of warrants reclassified from liability to additional paid-in capital upon exercise		-		-		-			-			-		-		9,154		-			-			9,154
Sale of stock, net of expenses		5,185,000		52		-			-			-		-		33,454		-			-			33,506
Comprehensive loss:
Net loss		-		-		-			-			-		-		-		(46,684	)		-			(46,684	)
Change in unrealized loss on investments		-		-		-			-			-		-		-		-			(10	)		(10	)
Total comprehensive loss:		-		-		-			-			-		-		-		-			-			(46,694	)
Balance at December 31, 2010		43,028,146	$	430		(28,100	)	$	(51	)		-		-	$	144,783	$	(116,055	)	$	(26	)	$	29,081
Compensation expense for restricted stock		173,212		2		-			-			-		-		652		-			-			654
Compensation expense for issuance of stock options		-		-		-			-			-		-		3,605		-			-			3,605
Exercise of options, common stock surrendered upon restricted stock vesting		36,272		-		-			-			-		-		82		-			-			82
Sale of stock, net of expenses		5,000,000		50		-			-			-		-		23,491		-			-			23,541
Comprehensive loss:
Net loss		-		-		-			-			-		-		-		(30,885	)		-			(30,885	)
Change in unrealized loss on investments		-		-		-			-			-		-		-		-			26			26
Total comprehensive loss:		-		-		-			-			-		-		-		-			-			(30,859	)
Balance at December 31, 2011		48,237,630	$	482		(28,100	)	$	(51	)		-		-	$	172,613	$	(146,940	)	$	-		$	26,104

See Accompanying Notes to these Consolidated Financial Statements.

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DELCATH SYSTEMS, INC.

(A Development Stage Company)

Consolidated Statements of Cash Flows

for the Years Ended December 31, 2011, 2010, and 2009 and

Cumulative from Inception (August 5, 1988) to December 31, 2011

(in thousands)

	Year ended December 31,									Cumulativefrom inception (August 5, 1988) to December 31,
	2011			2010			2009			2011
Cash flows from operating activities:
Net loss	$	(30,885	)	$	(46,684	)	$	(22,057	)	$	(145,442	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock option compensation expense		3,605			3,839			1,579			14,383
Restricted stock and warrant compensation expense		654			1,675			736			4,210
Depreciation expense		1,035			472			8			1,567
Amortization of organization costs and loss on disposal of equipment		—			7			3			52
Warrant liability fair value adjustment		(15,566	)		15,951			8,568			5,133
Non-cash interest income		—			(3	)		—			(12	)
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets		553			(1,001	)		(446	)		(1,227	)
Decrease in investment in common stock		26			10			8			46
Increase in accounts payable and accrued expenses		3,206			1,351			1,138			6,398
Deferred revenue		—			300			—			300
Net cash used in operating activities		(37,372	)		(24,083	)		(10,463	)		(114,592	)
Cash flows from investing activities:
Purchase of equipment, furniture and fixtures		(2,607	)		(1,638	)		(515	)		(4,830	)
Purchase of short-term investments and marketable equity securities		(4,980	)		(3,235	)		—			(49,672	)
Proceeds from maturities of short-term investments		1,492			1,743			4,049			44,654	)
Organization costs		—			—			—			(42	)
Net cash (used in) provided by investing activities		(6,095	)		(3,130	)		3,534			(9,890	)
Cash flows from financing activities:
Net proceeds from sale of stock and exercise of stock options and warrants		23,623			37,348			35,476			149,105
Repurchases of common stock		—			—			—			(51	)
Dividends paid on preferred stock		—			—			—			(500	)
Proceeds from short-term borrowings		—			—			—			1,705
Net cash provided by financing activities		23,623			37,348			35,476			150,259
(Decrease) increase in cash and cash equivalents		(19,844	)		10,135			28,547			25,777
Cash and cash equivalents at beginning of period		45,621			35,486			6,939			—
Cash and cash equivalents at end of period	$	25,777		$	45,621		$	35,486		$	25,777
Supplemental cash flow information:
Cash paid for interest	$	—		$	—		$	—		$	171
Supplemental non-cash activities:
Cashless exercise of stock options and shares surrendered upon restricted stock vesting	$	(61	)	$	700		$	—		$	1,184
Conversion of debt to common stock	$	—		$	—		$	—		$	1,705
Common stock issued for preferred stock dividends	$	—		$	—		$	—		$	999
Common stock issued as compensation for stock sale	$	—		$	—		$	—		$	510
Fair value of warrants issued	$	—		$	—		$	2,191		$	6,460
Fair value of warrants reclassified from liability to additional paid-in capital upon exercise	$	—		$	9,154		$	—		$	9,154

See Accompanying Notes to these Consolidated Financial Statements.

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Table of Contents

DELCATH SYSTEMS, INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

for the Years Ending December 31, 2011, 2010 and 2009

(1)	Description of Business and Summary of Significant Accounting Policies

The Company has incurred losses since inception and has a deficit accumulated during the development stage of $146.9 million as of December 31, 2011. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales. Management believes that its capital resources are adequate to fund operations through 2011, but anticipates that additional working capital may be required to continue operations. To the extent additional capital is not available when needed, the Company may be forced to abandon some or all of its development and commercialization efforts, which would have a material adverse effect on the prospects of the business. Operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of product development; uncertainty regarding regulatory approval; technological uncertainty; uncertainty regarding patents and proprietary rights; comprehensive government regulations; limited commercial manufacturing, marketing or sales experience; and dependence on key personnel.

Basis of Consolidated Financial Statement Presentation and Use of Estimates

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP). The preparation of consolidated financial statements in conformity with GAAP requires management to make assumptions and estimates that impact the amounts reported in the Company’s consolidated financial statements. The consolidated financial statements include the accounts of all entities controlled by Delcath. All significant inter-company accounts and transactions are eliminated. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amount of expenses reported for each of its periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for derivative instrument liabilities, stock-based compensation, income taxes and research and development costs. Such assumptions and estimates are subject to change in the future as additional information becomes available or as circumstances are modified. Actual results could differ from these estimates.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, less accumulated depreciation. The Company provides for depreciation on a straight line basis over the estimated useful lives of the assets which range from three to seven years. Leasehold improvements of $1.1 million at December 31, 2011 will be amortized over the shorter of the lease term or the estimated useful life of the related assets when they are placed into service. Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was $1.0 million, $0.5 million, and $7,981, respectively. Since inception, the Company has incurred depreciation expense of $1.6 million. Maintenance and repairs are charged to operations as incurred. Expenditures which substantially increase the useful lives of the related assets are capitalized.

Income Taxes

The Company accounts for income taxes following the asset and liability method in accordance with the FASB ASC 740 “Income Taxes.” Under such method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years that the asset is expected to be recovered or the liability settled. See Note 4 for additional information.

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Stock Based Compensation

The Company accounts for its share-based compensation in accordance with the provisions of FASB ASC 718, which establishes accounting for equity instruments exchanged for employee services and FASB ASC 505-50, which establishes accounting for equity-based payments to non-employees. Under the provisions of FASB ASC 718, share-based compensation is measured at the grant date, based upon the fair value of the award, and is recognized as an expense over the option holders’ requisite service period (generally the vesting period of the equity grant). The Company is required to record compensation cost for all share-based payments granted to employees based upon the grant date fair value, estimated in accordance with the provisions of FASB ASC 718. Under the provisions of FASB ASC 505-50, measurement of compensation cost related to common shares issued to non-employees for services is based on the value of the services provided or the fair value of the shares issued. The measurement of non-employee stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests. The Company expensed its share-based compensation for share-based payments granted under the accelerated method, which treats each vesting tranche as if it were an individual grant.

The Company periodically grants stock options for a fixed number of shares of common stock to its employees, directors and non-employee contractors, with an exercise price greater than or equal to the fair market value of Delcath’s common stock at the date of the grant. The Company estimates the fair value of stock options using an option pricing model. Key inputs used to estimate the fair value of stock options include the exercise price of the award, the expected post-vesting option life, the expected volatility of Delcath’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and Delcath’s expected annual dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Derivative Instrument Liability

The Company accounts for derivative instruments in accordance with FASB ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At December 31, 2011 and 2010, the Company did not have any derivative instruments that were designated as hedges.

Fair Value Measurements

The Company adopted FASB ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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Net Loss per Common Share

For the years ended December 31, 2011, 2010 and 2009 potential common shares from the exercise of options and warrants and the unvested shares of restricted stock were excluded from the computation of diluted earnings per share (EPS) because their effects would be antidilutive.

Shares excluded from the computation of diluted EPS:

	2011		2010		2009
Stock options		2,971,381		2,398,334		1,828,084
Unvested restricted shares		193,532		67,590		307,910
Warrants		2,512,934		2,512,934		3,746,184
Total		5,677,847		4,978,858		5,882,178

Research and Development Costs

Research and development costs include the costs of materials, personnel, outside services and applicable indirect costs incurred in development of the Company’s proprietary drug delivery system. All such costs are charged to expense when incurred.

General and Administrative Costs

General and administrative costs include salaries and related expenses for the Company’s executive and administrative staff, recruitment and employee retention expenses, professional license and organizational fees, business development and certain general legal activities.

Cash Equivalents and Concentrations of Credit Risk

The Company considers investments with original maturities of three months or less at date of acquisition to be cash equivalents. The Company has deposits that exceed amounts insured by the Federal Deposit Insurance Corporation (FDIC), however, the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution.

Investments

Management determines the appropriate classification of securities at the time of purchase and reevaluates such classification as of each balance sheet date. The Company’s securities are classified as either available-for-sale or held-to-maturity. Investments classified as held-to-maturity are stated at amortized cost. Investments classified as available-for-sale are stated at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity.

Deferred Revenue Recognition

Deferred revenue on the accompanying balance sheets includes payment received upon execution of a research and distribution agreement with Chi-Fu Trading Co, Ltd. The Company will amortize deferred revenue over the expected obligation period of the agreement once this amount is reasonably determinable.

Segment Information

The Company currently operates in one business segment, which is the development and commercialization of the Delcath chemosaturation system. A single management team that reports to the Chief Executive Officer comprehensively manages the business. Accordingly, the Company does not have separately reportable segments.

Recently Adopted Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"). ASU 2011-04 amended the FASB Accounting Standards Codification 820, Fair Value Measurements and Disclosures ("ASC 820") to converge the fair value measurement guidance in U.S. generally accepted accounting principles ("GAAP") and International Financial Reporting Standards ("IFRSs"). Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change particular principles in ASC 820. In addition, ASU 2011-04 requires additional fair value disclosures. ASU 2011-04 is effective for fiscal years beginning after December 15, 2011 and should be applied prospectively. Delcath does not expect ASU 2011-04 to have a significant impact on its consolidated results of operations or financial position.

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In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income ("ASU 2011-05"). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity and requires an entity to present items of net income, other comprehensive income and total comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12"). ASU 2011-12 defers the effective date of changes in 2011-05 that relate to the presentation of reclassification adjustments for each component of other comprehensive income in both net income and other comprehensive income. The amendments in the ASU's do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 and ASU 2011-12 are both effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and must be applied retrospectively. Delcath will be required to adopt ASU 2011-05 and ASU 2011-12 no later than the quarter beginning January 1, 2012. As the ASU's require additional presentation only, there will be no impact to Delcath's consolidated results of operations or financial position.

(2)	Investments

The Company invests the majority of its cash in money market funds and certificates of deposit. The money market funds are accounted for based on the guidance for fair value measurements and are discussed further in Note 6. The Company’s certificates of deposit are accounted for based on the guidance for investments, which requires securities to be categorized as either trading, available-for-sale or held-to-maturity. The certificates of deposit are classified as held-to-maturity and, as such, are carried at amortized cost. As of December 31, 2011, the Company held certificates of deposit with original maturities of three to twelve months.

(3)	Stockholders’ Equity

Stock Issuances

In September 2007, the Company completed the sale of 3,833,108 shares of its common stock and the issuance of warrants to purchase 1,916,554 common shares (the “2007 Warrants” and together with the 2009 Warrants, the “Warrants”) in a private placement to institutional and accredited investors. The Company received net proceeds of $13.3 million in this transaction. The Company allocated $4.3 million of the total proceeds to 2007 Warrants (see below). The fair value of the 2007 Warrants on September 24, 2007 was determined using an option pricing model assuming a risk free interest rate of 4.20%, volatility of 81.30% and an expected life equal to the contractual life of the warrants (September 2012). The 2007 Warrants were initially exercisable at $4.53 per share beginning six months after the issuance thereof and will expire on September 21, 2012. As required by the 2007 Warrant agreement, both the exercise price and number of warrants were adjusted following the Company’s June 9, 2009 sale of common stock. The 2007 Warrants are currently exercisable at $3.44 per share with 1,469,456 warrants outstanding at December 31, 2011. The shares were issued pursuant to an effective registration statement on Form S-3.

In June 2009, the Company completed the sale of 869,565 shares of its common stock and the issuance of warrants to purchase 1,043,478 common shares (the “2009 Warrants”) pursuant to a subscription agreement with a single investor. The Company received gross proceeds of $3.0 million, with net cash proceeds after related expenses from this transaction of approximately $2.7 million. Of those proceeds, the Company allocated an estimated fair value of $2.2 million to the 2009 Warrants (see below), resulting in net proceeds of $0.5 million. The fair value of the 2009 Warrants on June 15, 2009 was determined using an option pricing model assuming a risk free interest rate of 2.75%, volatility of 72.93% and an expected life equal to the contractual life of the warrants (June 2014). The 2009 Warrants are currently exercisable at $3.60 per share with 1,043,478 warrants outstanding at December 31, 2011 and will expire on June 15, 2014. The shares and warrants were issued pursuant to an effective registration statement on Form S-3.

The $2.2 million in proceeds allocated to the 2009 Warrants and the $4.3 million in proceeds allocated to the 2007 Warrants are classified as derivative instrument liabilities. The 2007 Warrants are subject to “full ratchet” protection upon certain equity issuances below $3.44 per share (as may be further adjusted). The 2009 Warrants are subject to a potential adjustment in the exercise price adjustment upon certain equity issuances below $3.60 per share (as may be further adjusted). The Warrants are therefore considered to be derivative instrument liabilities that are subject to mark-to-market adjustment each period. As a result, for the twelve month period ended December 31, 2011, the Company recorded pre-tax derivative instrument income of $15.6 million. The resulting derivative instrument liabilities totaled $2.5 million at December 31, 2011. Management expects that the Warrants will either be exercised or expire worthless, at which point the then existing derivative instrument liabilities will be credited to stockholders’ equity. The fair value of the Warrants at December 31, 2011 was determined by using an option pricing model assuming a risk free interest rate of 0.30% for the 2009 Warrants and 0.09% for the 2007 Warrants, volatility of 79.14% for the 2009 Warrants and 85.05% for the 2007 Warrants and an expected life equal to the contractual life of the Warrants (June 2014 and September 2012, respectively).

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Table of Contents

In August 2010, the Company completed the sale of 5,185,000 shares of its common stock pursuant to an underwriting agreement, raising approximately $33.5 million after expenses. The shares were issued pursuant to an effective registration statement on Form S-3 (333-165677).

In July 2011, the Company completed the sale of 5,000,000 shares of its common stock pursuant to an underwriting agreement, raising approximately $23.5 million after expenses. The shares were issued pursuant to an effective registration statement on Form S-3 (333-165677).

Common Stock Repurchases

Pursuant to a stock repurchase plan approved in 2002 by the Company’s board of directors, the Company repurchased 28,100 shares of common stock for $51,103 during 2002. The Company had been authorized by the board of directors to purchase up to seven percent of its then outstanding common stock (290,289).

Stock Option Plans

The Company established the 2004 Stock Incentive Plan and the 2009 Stock Incentive Plan (collectively, the “Plans”) under which 3,000,000, and 4,200,000 shares, respectively, were reserved for the issuance of stock options, stock appreciation rights, restricted stock, stock grants and other equity awards. A stock option grant allows the holder of the option to purchase a share of the Company’s common stock in the future at a stated price. The Plans are administered by the Compensation and Stock Option Committee of the board of directors which determines the individuals to whom awards shall be granted as well as the type, terms and conditions of each award, the option price and the duration of each award.

During 2004 and 2009, respectively, the 2004 and 2009 Stock Incentive Plans became effective. Options granted under the Plans vest as determined by the Company’s Compensation and Stock Option Committee and expire over varying terms, but not more than ten years from the date of grant. Stock option activity for 2011, 2010, and 2009 is as follows:

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Table of Contents

	Number of Options			Exercise Price per Share		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)

Outstanding at December 31, 2008		1,460,000		$	1.23–6.18	$	3.44		3.68
Granted		1,885,000			1.24-6.09		3.94
Expired	—
Exercised	—
Outstanding at December 31, 2009		3,345,000		$	1.23–6.18	$	3.72		6.58
Granted		700,650			5.28-15.54		9.81
Expired		(120,000	)		2.78-3.59		3.25
Forfeited		(25,000	)		4.12-6.18		4.81
Exercised		(140,000	)		1.43-6.18		3.52
Outstanding at December 31, 2010		3,760,650		$	1.23-15.54	$	4.88		6.65
Granted		671,326			2.00-9.18		5.72
Expired		(120,000	)		3.28		3.28
Forfeited		(136,900	)		1.40-9.93		4.65
Exercised		(45,327	)		2.44-3.28		3.18
Outstanding at December 31, 2011		4,129,749		$	1.23-15.54	$	5.09		6.38

Exercisable at December 31, 2011		2,971,381		$	1.23-15.54	$	4.56		5.42

The estimated fair value of each option award granted was determined on the date of grant using an option pricing model with the following assumptions for option grants during the years ended December 31, 2011, 2010 and 2009:

	Year Ended December 31,
	2011			2010			2009
Weighted average risk-free interest rate		2.07	%		2.54	%		2.44	%
Weighted average expected volatility		74.64	%		73.80	%		74.58	%
Expected volatility		73.88%-79.11	%		72.16% - 75.4	%		73.12% - 86.0	%
Dividend yield		0	%		0.00	%		0.00	%
Weighted average expected option term (in years)		6.00			5.87			5.32
Weighted average grant date fair value	$	3.79		$	6.30		$	2.61

No dividend yield was assumed because the Company has never paid a cash dividend on its common stock. Volatilities were developed using the Company’s historical volatility. The risk-free interest rate was developed using the U.S. Treasury yield for periods equal to the expected life of the stock options on the grant date. The expected holding period was developed based on the mid-point between the vesting date and the expiration date of each respective grant as permitted under FASB ASC 718. This method of determining the expected holding period was utilized because the Company does not have sufficient historical experience from which to estimate the period.

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A summary of the Company’s non-vested options to purchase shares as of December 31, 2011 and changes during the twelve months ended December 31, 2011 and December 31, 2010 are presented below:

	Non-Vested Options
	Number of Options			Weighted Average Fair Value

Non-vested at January 1, 2010		1,516,916		$	4.09
Granted		599,400			9.38
Vested		(729,000	)		4.12
Forfeited		(25,000	)		4.81
Non-vested at December 31, 2010		1,362,316		$	6.39
Granted		670,826			5.72
Vested		(812,874	)		5.60
Forfeited		(61,900	)		8.58
Non-vested at December 31, 2011		1,158,368		$	6.44

Compensation expense recognized relating to stock options granted to employees totaled $3.6 million, $3.6 million, and $1.6 million, in 2011, 2010, and 2009, respectively. Since inception, the Company has recognized $14.4 million in expense related to stock option compensation. In 2011, $2.2 million was charged to general and administrative expenses, while $1.4 million was charged to research and development expenses. In 2010, $2.5 million was charged to general and administrative expenses, while $1.1 million was charged to research and development expenses. In 2009, $0.7 million was charged to general and administrative expenses, while $0.9 million was charged to research and development expenses. Additional compensation expense of $2.1 million, relating to the unvested portion of stock options granted, is expected to be recognized over a remaining average period of 1.83 years.

The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2011 is $0.6 million. The aggregate intrinsic value represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $3.05 as of December 31, 2011, which would have been received by the option holders had those option holders exercised their options as of that date.

A summary of the Company’s restricted stock activity as of December 31, 2011 and changes during the twelve months ended December 31, 2011 and December 31, 2010 are presented below:

	Restricted Stock Activity
	Number of Shares			Weighted Average Grant Date Fair Value

Non-vested at January 1, 2010		307,910		$	5.23
Granted		56,132			11.16
Vested		(296,452	)		6.02
Forfeited		—
Non-vested at December 31, 2010		67,590		$	6.71
Granted		188,277			5.67
Vested		(47,270	)		5.62
Forfeited		(15,065	)		8.35
Non-vested at December 31, 2011		193,532		$	5.84

Compensation expense recognized relating to restricted stock granted to employees totaled $0.7 million, $1.7 million, and $0.7 million, in 2011, 2010, and 2009, respectively. Since inception, the Company has recognized $4.2 million in expense related to restricted stock and warrant compensation. In 2011, $0.5 million was charged to general and administrative expenses, while $0.1 million was charged to research and development expenses. In 2010, $0.8 million was charged to both general and administrative expenses and to research and development expenses. In 2009, $0.2 million was charged to general and administrative expenses, while $0.6 million was charged to research and development expenses. Additional compensation expense of $0.6 million relating to the unvested portion of restricted stock granted, is expected to be recognized over a remaining average period of 2.35 years.

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Table of Contents

Warrants

A summary of warrant activity is as follows:

	The Plans
	Warrants			Exercise Price per Share		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)

Outstanding at December 31, 2008		2,464,087		$	3.01–4.53	$	4.30		3.15
Issued		1,650,760			3.44–3.60		3.54
Exercised		(103,512	)		3.44		3.44
Expired		(265,151	)		3.01		3.01
Outstanding at December 31, 2009		3,746,184		$	3.44–3.91	$	3.52		3.08
Issued		–
Exercised		(1,159,000	)		3.44–3.91		3.52
Expired		(74,250	)		3.91		3.91
Outstanding at December 31, 2010		2,512,934		$	3.44-3.60	$	3.51		2.45
Issued		–
Exercised		–
Expired		–
Outstanding at December 31, 2011		2,512,934		$	3.44-3.60	$	3.51		1.45

(4)	Income Taxes

The provision for income taxes differs from the amount computed by applying the statutory rate as follows:

	Year Ended December 31,
(in thousands)	2011			2010			2009
Income taxes using U.S. federal statutory rate	$	(10,501	)	$	(15,872	)	$	(7,643	)
State income taxes, net of federal benefit		(3,418	)		(4,276	)		(675	)
Foreign rate differential		52			–			–
Valuation allowance		20,563			15,041			5,671
Derivative charge		(5,292	)		5,423			2,913
Stock option exercises and cancellations		102			–			67
Research and development credits		(1,633	)		(519	)		(345	)
Other		127			203			12
Total	$	–		$	–		$	–

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Table of Contents

Significant components of the Company’s deferred tax assets are as follows:

(in thousands)	2011		2010
Deferred tax assets:
Employee compensation accruals	$	4,973	$	3,345
Accrued liabilities		283		231
Research tax credits		2,708		1,076
Other		3		14
Net operating losses		47,118		29,868
Total deferred tax assets		55,085		34,534

Deferred tax liability:
Total deferred tax liabilities		–		–

Valuation allowance		55,085		34,534
Net deferred tax assets	$	–	$	–

As of December 31, 2011 and December 31, 2010, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $122.1 million and $81.1 million, respectively. A portion of the federal amount, $10.2 million, is subject to an annual limitation of approximately $123,000 as a result of a change in the Company’s ownership through May 2003, as defined by Federal Internal Revenue Code Section 382 and the related income tax regulations. As a result of the limitation, approximately $114.3 million is available to offset future federal taxable income which expires through 2031. As of December 31, 2011 and December 31, 2010, the Company had net operating loss carryforwards for state and city income tax purposes of approximately $180.2 million and $129.3 million, respectively, which expire through 2031. As of December 31, 2011, the Company had a net operating loss carryforward for foreign income tax purposes of $241,841 which has an indefinite carryforward period. There were no foreign net operating losses prior to 2011.

Management has established a 100% valuation allowance against the deferred tax assets as management does not believe it is more likely than not that these assets will be realized. The Company’s valuation allowance increased by approximately $20.5 million, $15.0 million, $5.9 million, $3.2 million and $1.8 million in 2011, 2010, 2009, 2008, and 2007, respectively. The Company has a tax benefit of approximately $1.0 million related to the exercise of non qualified stock options. Pursuant to FASB ASC 718, the benefit will be recognized and recorded to additional paid in capital when the benefit is realized through the reduction of taxes payable.

The Company complies with the provisions of FASB ASC 740-10 in accounting for its uncertain tax positions. ASC 740-10 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely that not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740-10.

The Company is subject to income tax in the U.S., the Republic of Ireland, and certain state jurisdictions. The Company has not been audited by the U.S. Internal Revenue Service, international tax authorities, or any states in connection with income taxes. The periods from December 31, 2004 to December 31, 2011 remain open to examination by the U.S. Internal Revenue Service, and international and state tax authorities.

Delcath recognizes interest accrued related to unrecognized tax benefits and penalties, if incurred, as a component of income tax expense.

(5)	Commitments

Operating Leases

In February 2010, the Company entered into an agreement to lease (Initial Lease) 8,629 square feet of office space in New York, New York with an option to expand an additional 8,629 square feet. The term of the Initial Lease began in March, 2010 and provides for total annual base rental payments of $457,337 during years 1-3 and the first half of year 4 of the Initial Lease term, and of $491,853 during the second half of year 4 and years 5-7 of the Lease term. The Initial Lease also requires the Company to pay customary building operating expenses and a pro-rata share of real estate taxes.

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Table of Contents

In September 2010, the Company exercised its option right under the Initial Lease and entered into an agreement to lease (Lease Amendment) an additional 8,629 square feet of office space in New York, New York. The term of the Lease Amendment began in January 2011 and will expire in November 2020. In addition, the Lease Amendment extends the term of the Initial Lease to November 2020. The Lease Amendment provides for annual base rent of $504,078 for years 1-5 and of $547,533 for years 6-11 of the Lease Amendment term. In addition, the Lease Amendment provides for total base rent on the space leased under the Initial Lease of $543,627 for the extended term of November 2017 – November 2020. Combined, the Initial Lease and the Lease Amendment provide for annual rent of $961,000 in 2012, $970,000 in 2013, $996,000 in 2014 and 2015, $1.0 million in 2016, and $1.1 million in 2017-2020.

In September 2009, the Company entered into an agreement to lease 10,320 square feet located at 566 Queensbury Avenue, Queensbury, NY (the “Facility”) for a three year period with an option to purchase. The Facility houses a portion of the Company’s research and manufacturing operations. The term of the lease commenced on September 1, 2009. The lease provides for annual base rent of $51,600, as well as the payment of customary building expenses and real estate taxes. The Company has an option to purchase the Facility upon delivery of written notice to the Landlord at least 120 days prior to expiration of the lease term. The purchase price for the Facility is $425,000 if the Company acquires the Facility by September 1, 2011, and $440,000 if the Company acquires the Facility by September 1, 2012.

In October 2010, the Company entered into an agreement of lease for the lease of 8,000 square feet located at 2 Country Club Road, Queensbury, NY for a two year period with an option to extend the lease for an additional two years. The location houses a portion of the Company’s research and manufacturing operations. The term of the lease commenced on November 12, 2010. The lease provides for annual base rent of $96,000, as well as the payment of customary building operating expenses and real estate taxes.

In April 2011, the Company entered into an agreement of lease for the lease of 3,000 square feet located at 97-95 Park Road, Queensbury, NY for a one year period with an option to extend the lease for an additional year. The location houses a portion of the Company’s warehouse, manufacturing and office space. The term of the lease commenced on May 6, 2011. The lease provides for annual base rent of $24,000, as well as the payment of customary building operating expenses and real estate taxes. In July 2011, the Company entered into an amendment to the lease agreement for 97-95 Park Road, agreeing to lease the remaining 3,000 square feet at that location. The term of this amendment began on July 18, 2012 and is effective for a one year period with an option to extend the lease for an additional year. In addition, this amendment extends the term of the original lease to July 18, 2013. The amendment provides for total annual base rent of $42,000.

In August 2011, Delcath Systems Limited entered into an agreement of lease for an office and manufacturing facility located in the city of Galway, Ireland. This facility is approximately 19,200 square feet and is intended to be the location of Delcath’s European headquarters. The Lease is for a term of ten years, commencing August 2, 2011; although Delcath Limited has the option to terminate the Lease after the fifth year upon not less than six months notice. The Lease provides for fixed annual lease amounts payable in advance in equal quarterly installments. The annual lease amounts, which escalate annually, are as follows: Year 1 – €106,051, Year 2 – €134,974, Year 3 – €159,077 and Years 4 and 5 – €183,179. Annual lease amounts in years 6 through 10 are subject to adjustment based upon the percentage increase in the consumer price index as published by the Ireland Central Statistics Office. Delcath Limited is also required to pay for customary building operating expenses. Delcath Limited’s payment obligations and performance of the Lease are guaranteed by Delcath.

Future minimum lease payments under all operating leases at December 31, 2011 are as follows (in thousands):

Year Ended December 31:
2012	$	1,258
2013		1,158
2014		1,215
2015		1,233
2016		1,273
	$	6,137

Rent expense totaled approximately $1.2 million, $0.5 million and $0.2 million, for the years ended December 31, 2011, 2010, and 2009, respectively.

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Table of Contents

Cooperative Research and Development Agreement

The principal goal of the Delcath’s Cooperative Research and Development Agreement (CRADA) with the NCI is to continue the development of a novel form of regional cancer therapy by designing clinical protocols utilizing the Delcath chemosaturation system to regionally deliver chemotherapeutics to patients with unresectable malignancies confined to an organ or region of the body. Under the terms of the agreement, Delcath will pay $1.0 million in 2012 to the NCI for clinical support. These funds are payable in quarterly amounts of $250,000 and will be used for material support of the CRADA (including equipment, supplies, travel, and other related CRADA support), as well as for support of existing or new scientific or clinical staff to be hired by NCI who are to perform work under the CRADA. The Company incurred $1.0 million per year in expenses related to this agreement for each of the years ended December 31, 2011, 2010 and 2009.

Letters of Credit

Under the terms of the lease agreement for office space in New York City, the Company is required to maintain a letter of credit in the amount of $881,297. The letter of credit expires on February 1, 2013 if not renewed by the Company.

(6)	Assets and Liabilities Measured at Fair Value

Derivative Financial Instruments

As disclosed in Note 3, the Company allocated proceeds to the warrants issued in connection with a private placement and recent public offering that were classified as liabilities and accounted for as a derivative instrument in accordance with FASB ASC 815. The valuation of the warrants is determined using an option pricing model. This model uses inputs such as the underlying price of the shares issued when the warrant is exercised, volatility, risk free interest rate and expected life of the instrument. The Company has determined that the warrant derivative liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the option pricing model against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in FASB ASC 820. There are six inputs: closing price of Delcath stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of Delcath’s stock over that term; annual rate of dividends; and the riskless rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of Delcath stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (820-10). The riskless rate of return is a Level 2 input as defined in 820-10, while the historical volatility is a Level 3 input as defined in FASB ASC 820. Since the lowest level input is a Level 3, Delcath determined the warrant derivative liability is most appropriately classified within Level 3 of the fair value hierarchy.

Money Market Funds and Treasury Bills

Cash and cash equivalents includes a money market account valued at approximately $25.4 million. The fair market value of certificates of deposit at December 31, 2011 was $4.97 million.

The Company has determined that the inputs associated with the fair value determination are based on quoted prices (unadjusted) and as a result the investments are classified within Level 1 of the fair value hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
(in thousands)	Level 1				Level 2				Level 3				Balance at December 31,
	2011		2010		2011		2010		2011		2010		2011		2010
Assets
Money market funds	$	25,417	$	45,407		—		—		—		—	$	25,417	$	45,407
Marketable equity securities		—		20		—		—		—		—		—		20
Liabilities
Derivative instrument liabilities		—		—		—		—	$	2,439	$	18,005	$	2,439	$	18,005

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Table of Contents

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)	Derivative
Balance at January 1, 2010	$	11,207
Total increase in the liability included in earnings		15,951
Total liability reclassified to additional paid in capital upon exercise of warrants		(9,153	)
Balance at December 31, 2010	$	18,005
Total decrease in the liability included in earnings		(15,566	)
Balance at December 31, 2011	$	2,439

(7)	Accrued Liabilities

Accrued liabilities includes the following:

(in thousands)	December 31, 2011		December 31, 2010
Compensation, excluding taxes	$	1,688		—
Contract Research Organization		1,800		—
Other1		1,985		2,582
Total accrued liabilities	$	5,473	$	2,582

1 Other consists of various accrued expenses, with no individual item accounting for more than 5% of current liabilities at December 31, 2011 and 2010.

(8)	Quarterly Financial Data (Unaudited)

Set forth below is selected quarterly financial data for each of the quarters in the years ended December 31, 2011 and 2010.

	2011 Quarters Ended
(in thousands except per share amounts)	March 31			June 30			September 30			December 31
Operating loss	$	(7,814	)	$	(10,486	)	$	(12,181	)	$	(15,974	)
Derivative instrument income		5,966			5,027			3,872			702
Net loss		(1,848	)		(5,459	)		(8,309	)		(15,268	)
Basic and diluted loss per share		(0.04	)		(0.13	)		(0.18	)		(0.32	)

	2010 Quarters Ended
(in thousands except per share amounts)	March 31			June 30			September 30			December 31
Operating loss	$	(5,487	)	$	(8,305	)	$	(7,421	)	$	(9,529	)
Derivative instrument (expense) income		(8,688	)		635			(2,112	)		(5,787	)
Net loss		(14,174	)		(7,668	)		(9,530	)		(15,312	)
Basic and diluted loss per share		(0.39	)		(0.21	)		(0.24	)		(0.36	)

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Table of Contents

(9)	Subsequent Events

On December 29, 2011, we entered into a sales agreement (the “Sales Agreement”) with Cowen and Company, LLC to sell shares of the Company’s common stock, par value $.01 per share, having aggregate sales proceeds of $39.75 million, from time to time, through an “at the market” equity offering program under which Cowen and Company, LLC will act as sales agent. During the first quarter through March 5, 2012, we sold approximately 0.5 million shares of our common stock through the program for net proceeds of approximately $2.0 million. The net proceeds were used for general corporate purposes, including, but not limited to, commercialization of our products, obtaining regulatory approvals, funding of our clinical trials, capital expenditures and working capital. We have approximately $37.7 million available under the program.

Delcath completed an evaluation of the impact of any subsequent events through the date financial statements were issued and determined there were no other subsequent events requiring disclosure in or adjustment to these financial statements.

F-20

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, Delcath’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of December 31, 2011 (the end of the period covered by this Annual Report on Form 10-K), have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes to the Company’s internal control over financial reporting that occurred during the fourth fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Delcath’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Delcath’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such assessment, management has concluded that, as of December 31, 2011, the Company’s internal control over financial reporting was effective based on those criteria.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Delcath Systems, Inc.

We have audited Delcath Systems, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Delcath Systems, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, Delcath Systems Inc, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Delcath Systems, Inc. as of December 31, 2011 and the related consolidated statement of operations, stockholders’ equity, and cash flow for the year in the period ended December 31, 2011 of Delcath Systems, Inc. and our report dated March 05, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Metro Park, New Jersey

March 05, 2012

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Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers, and Corporate Governance.

Except for the information about our Code of Ethics below, the information required by this Item 10 is incorporated by reference from our definitive proxy statement for our 2012 Annual Meeting of Stockholders (the “Proxy Statement”).

We maintain a Code of Business Conduct and Ethics (Code) that applies to all employees, including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions, and including our independent directors, who are not employees of the Company, with regard to their Delcath-related activities. The Code incorporates guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws, rules and regulations. The Code also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the SEC and other public communications. In addition, the Code incorporates guidelines pertaining to topics such as complying with applicable laws, rules, and regulations; insider trading; reporting Code violations; and maintaining accountability for adherence to the Code. The full text of our Code is published on our web site at http://delcath.com/investors/governance. We intend to disclose future amendments to certain provisions of our Code, or waivers of such provisions granted to our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions on our web site.

Item 11. Executive Compensation.

The information required for this Item is incorporated by reference from our Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required for this Item is incorporated by reference from our Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required for this Item is incorporated by reference from our Proxy Statement.

Item 14. Principal Accountant Fees and Services.

The information required for this Item is incorporated by reference from our Proxy Statement.

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PART IV

Item 15. Exhibits and Consolidated Financial Statement Schedules

The following documents are filed as part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements: The following Consolidated Financial Statements and Supplementary Data of Delcath and the Report of Independent Registered Public Accounting Firm included in Part II, Item 8:

Consolidated Balance Sheets at December 31, 2011 and 2010

Consolidated Statements of Operations for the years ended December 31, 2011, 2010, and 2009 and cumulative from inception (August 5, 1988) to December 31, 2011

Consolidated Statements of Stockholders’ Equity, cumulative from inception (August 5, 1988) to December 31, 2011

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010, and 2009 and cumulative from inception (August 5, 1988) to December 31, 2011

Notes to Consolidated Financial Statements

2. Exhibits: The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DELCATH SYSTEMS, INC.

/s/Eamonn P. Hobbs
Eamonn P. Hobbs
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 5, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/Eamonn P. Hobbs	President and Chief Executive Officer, and Director	March 5, 2012
Eamonn P. Hobbs	(Principal Executive Officer)

/s/Graham G, Miao	Chief Financial Officer	March 5, 2012
Graham G. Miao, Ph.D.	(Principal Financial Officer)

/s/Barbra C. Keck	VP, Controller	March 5, 2012
Barbra C. Keck	(Principal Accounting Officer)

/s/Harold S. Koplewicz	Chairman of the Board	March 5, 2012
Harold S. Koplewicz, M.D.

/s/Laura Philips	Director	March 5, 2012
Laura Philips, Ph.D.

/s/Douglas Watson	Director	March 5, 2012
Douglas Watson

/s/Robert Ladd	Director	March 5, 2012
Robert Ladd

/s/Gabriel Leung	Director	March 5, 2012
Gabriel Leung

/s/Roger Stoll	Director	March 5, 2012
Roger Stoll, Ph.D.

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Exhibit Index

Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of the Company, as amended to June 30, 2005 (incorporated by reference to Exhibit 3.1 to Company’s Current Report on Form 8-K filed June 5, 2006 (Commission File No. 001-16133).

3.2		Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to Company’s Registration Statement on Form SB-2 (Registration No. 333-39470)).

4.1		Rights Agreement, dated October 30, 2001, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.7 to the Company’s Form 8-A filed November 14, 2001 (Commission File No. 001-16133)).

4.2		Form of Warrant to Purchase Shares of Common Stock dated June 15, 2009 issued pursuant to the Subscription Terms dated as of June 9, 2009 between the Company and Capital Ventures International (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 10, 2009 (Commission File No,. 001-16133)).

10.1	*	2004 Stock Incentive Plan (incorporated by reference to Appendix B to the Company’s definitive Proxy Statement dated April 29, 2004 (Commission File No. 001-16133)).

10.2	*	2009 Stock Incentive Plan (incorporated by reference to Appendix B to the Company’s definitive Proxy Statement dated April 30, 2009 (Commission File No. 001-16133)).

10.3	*	Form of Incentive Stock Option Agreement under the Company’s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005 (Commission File No. 001-16133)).

10.4	*	Form of Nonqualified Stock Option Agreement under the Company’s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005 (Commission File No. 001-16133)).

10.5	*	Form of Stock Grant Agreement under the Company’s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005 (Commission File No. 001-16133)).

10.6		Settlement Agreement, dated as of October 8, 2006, by and between the Company, Laddcap Value Partners LP, Laddcap Value Advisors LLC, Laddcap Value Associates LLC, any affiliate of the foregoing, and Robert B. Ladd (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 12, 2006 (Commission File No. 001-16133)).

10.7		Modification Agreement dated April 9, 2007 between the Company, Laddcap Value Partners, LP, Laddcap Associates, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 16, 2007 (Commission File No. 001-16133)).

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10.8		Form of Warrant issued to investors in connection with the Company’s September 2007 registered direct offering (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed September 24, 2007 (Commission File No. 001-16133)).

10.9	†	Cooperative Research and Development Agreement dated as of March 29, 2007 between the Company and the National Cancer Institute (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (Commission File No. 001-16133)).

10.10		Form of Indemnification Agreement dated April 8, 2009 between the Company and members of the Company’s Board of Directors (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 10, 2009 (Commission File No. 001-16133)).

10.11	*	Separation and General Release Agreement dated as of July 5, 2009 between the Company and Richard L. Taney (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 7, 2009 (Commission File No. 001-16133)).

10.12	*	Employment Agreement dated as of July 1, 2009 between the Company and Eamonn P. Hobbs (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 7, 2009 (Commission File No. 001-16133)).

10.13	*	Employee Stock Option Grant Letter dated as of July 6, 2009 between the Company and Eamonn P. Hobbs (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed September 17, 2009 (Commission File No. 001-16133)).

10.14	*	Employee Stock Option Grant Letter dated as of July 6, 2009 between the Company and Eamonn P. Hobbs (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed September 17, 2009 (Commission File No. 001-16133)).

10.15		Lease with Option to Purchase between Fitzgerald Brothers Beverages, Inc., and the Company, dated as of September 1, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 3, 2009 (Commission File No. 001-16133)).

10.16	*	Employment Agreement dated as of September 13, 2009 between Delcath Systems, Inc. and David A. McDonald (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 17, 2009 (Commission File No. 001-16133)).

10.17	*	Employee Stock Option Grant Letter dated as of September 14, 2009 between the Company and David A. McDonald (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 17, 2009 (Commission File No. 001-16133)).

10.18	*	Restricted Stock Agreement dated as of September 14, 2009 between the Company and David A. McDonald (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed September 17, 2009 (Commission File No. 001-16133)).

10.19	*	Employment Agreement dated as of September 30, 2009 between the Company and Krishna Kandarpa, M.D., Ph.D. (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed October 5, 2009 (Commission File No. 001-16133)).

10.20	*	Employee Stock Option Grant Letter dated October 20, 2009 between the Company and Krishna Kandarpa, M.D., Ph.D. (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (Commission File No. 001-16133)).

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10.21	*	Restricted Stock Agreement dated as of October 20, 2009 between the Company and Krishna Kandarpa, M.D., Ph.D. (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (Commission File No. 001-16133)).

10.22	*	Employment Agreement dated as of November 2, 2009 between the Company and Agustin Gago.

10.23		Lease between SLG 810 Seventh Lessee LLC and the Company dated as of February 5, 2010 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (Commission File No. 001-16133)).

10.24		Research and Distribution Agreement between CHIFU Trading Co Ltd and the Company dated as of February 9, 2010 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2010 (Commission File No. 001-161233)).

10.25	*	Amendment No. 1 to Form of Employee Stock Option Grant Letter dated as of March 11, 2010 between the Company and Eamonn P. Hobbs (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (Commission File No. 001-16133)).

10.26	*	Employee Stock Option Grant Letter dated as of March 11, 2010 between the Company and Eamonn P. Hobbs (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (Commission File No. 001-16133)).

10.27	*	Employment Agreement dated as of April 16, 2010 between the Company and Peter Graham.

10.28		Amended and Restated Supply Agreement between B. Braun Medical Inc and the Company dated as of May 4, 2010 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (Commission File No. 001-16133)).

10.29	*	Employment Agreement dated as of May 5, 2010 between the Company and Barbra Keck (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 11, 2010 (Commission File No. 001-16133)).

10.30		Underwriting Agreement between Canaccord Genuity, Inc. and the Company, dated as of August 16, 2010 (incorporated by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed August 17, 2010 (Commission File No. 001-16133)).

10.31		Lease Modification, Extension and Additional Space Agreement between SLG 810 Seventh Lessee LLC and the Company dated as of September 27, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 30, 2010 (Commission File No. 001-16133)).

10.32	†	License, Supply and Contract Manufacturing Agreement between Synerx Pharma, LLC and Bioniche Teoranta and the Company dated as of October 13, 2010.

10.33	*	Form of Restricted Stock Agreement under the Company's 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed December 20, 2010 (Commission File No. 001-16133)).

10.34		Form of Restricted Stock Agreement (Non-Employee Directors) under the Company's 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed December 20, 2010 (Commission File No. 001-16133)).

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10.35		Form of Restricted Stock Agreement (Consultants) under the Company's 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed December 20, 2010 (Commission File No. 001-16133)).

10.36	*	Form of Non-Statutory Stock Option Grant Letter under the Company's 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed December 20, 2010 (Commission File No. 001-16133)).

10.37		Form of Non-Statutory Stock Option Grant Letter (Non-Employee Directors) under the Company's 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K filed December 20, 2010 (Commission File No. 001-16133)).

10.38		Form of Non-Statutory Stock Option Grant Letter (Consultants) under the Company's 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 to the Company's Current Report on Form 8-K filed December 20, 2010 (Commission File No. 001-16133)).

10.39	*	Interim Agreement, dated July 6, 2011, by and between Delcath Systems, Inc. and Eamonn Hobbs (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 11, 2011 (Commission File No. 001-16133)).

10.40	*	Second Interim Agreement between Delcath Systems, Inc. and Eamonn Hobbs, dated August 8, 2011 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed August 11, 2011 (Commission File No. 001-16133)).

10.41	*	Employment Agreement between Delcath Systems, Inc. and Eamonn Hobbs, dated August 10, 2011 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed August 11, 2011 (Commission File No. 001-16133)).

10.42	*	Employment Offer Letter between Delcath Systems, Inc. and Graham Miao, Ph.D., dated August 31, 2011 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 26, 2011 (Commission File No. 001-16133)).

10.43		Form of Employee Confidentiality and Restrictive Covenant Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 26, 2011 (Commission File No. 001-16133)).

10.44	*	Letter Agreement between Delcath Systems, Inc. and David A. McDonald, dated September 28, 2011 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 4, 2011 (Commission File No. 001-16133)).

10.45		Lease Agreement, dated August 2, 2011 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (Commission File No. 001-16133)).

10.46	*	Employment Agreement between Delcath Systems, Inc. and Agustin Gago, dated December 6, 2011 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed December 8, 2011 (Commission File No. 001-16133)).

10.47		Amendment No. 4 to the Cooperative Research and Development Agreement, dated as of January 28, 2012, between Delcath Systems, Inc. and the National Cancer Institute (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 31, 2012 (Commission File No. 001-16133)).

23.1	**	Consent of Ernst & Young LLP

23.2	**	Consent of Grant Thornton LLP

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31.1	**	Certification by Principal executive officer Pursuant to Rule 13a 14.

31.2	**	Certification by Principal financial officer Pursuant to Rule 13a 14.

32.1	**	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	**	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

†	Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Secretary of the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

*	Indicates management contract or compensatory plan or arrangement.

**	Filed herewith.