MELA Sciences (NASDAQ:MELA)

CAPS Rating: 1 out of 5

A medical device company which focuses on designing and development of a non-invasive, point-of-care instrument to assist in the early diagnosis of melanoma.

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Player Avatar zzlangerhans (99.73) Submitted: 9/16/2011 3:33:54 PM : Underperform Start Price: $3.60 MELA Score: +10.87

MELA is enjoying a nice double this month, courtesy of receiving a CE Mark designation for MelaFind in Europe. I was too cautious to red thumb then in the heat of enthusiasm last week, but it looks like the market has served me another opportunity. There's no question that the CE Mark is a positive development, but I believe that its significance is being overestimated by those bidding up the price of the stock.

With respect to drug marketing, an EMA approval carries similar weight to an American FDA approval. In this case, a regulatory body has made a specific determination that the benefits of a drug outweigh its risks. Such an approval carries significant weight as an endorsement of efficacy as well as a justification for insurance reimbursement.

On the other hand, the process of device approval differs significantly in the US and in Europe. While American device approvals are regulated by the FDA in a similar manner to drug approvals, the CE Mark is a much looser designation that does not appear to carry any significance regarding the efficacy of the device. The CE Mark indicates that the device is generally safe and functions in a technical way as described in the manufacturer's specifications. There is a substantial difference between this technical functionality and an endorsement of medical efficacy. For example, CE Mark approval of an insulin pump might establish that the pump injects insulin underneath the skin at a certain rate as described in the manager's specifications. However, it would have no bearing on a claim by the manufacturer that the pump provided better control of blood sugar than two daily subcutaneous injections.

The CE Mark is not confined to medical devices. It is required for many different categories of machines and other instruments from hot water boilers to recreational craft. Despite extensive research, I was unable to determine what regulatory authority in Europe is responsible for conferring the CE Mark. I did come across one interesting paragraph that reads as follows:

"It is the responsibility of the manufacturer to determine whether or not a product is eligible to be CE marked. After the product has been assessed according to one of the conformity assessment procedures required in the applicable directive(s) and the manufacturer is satisfied the product meets the essential requirements of the directive(s) which apply to the product, the general requirement is that a responsible officer of the manufacturer completes an EC declaration of conformity. The manufacturer can then affix the CE marking to a product."

When translated from bureaucratese this paragraph seems to indicate that a CE Mark is essentially self-awarded according to an honor system, at least for some categories of devices. While the process may be different for medical devices, it seems clear to me that CE marking is more of a bureaucratic stamp than a regulatory step of any significance.

Like Cytori, Delcath, and many others before them, MELA was quick to trumpet the CE Mark in a press release as "European approval". It remains to be seen whether this designation will translate into European sales of the device which is in regulatory limbo with the FDA and whose PMA will likely never be approved. I suspect that European physicians and dermatologists won't be fooled by the company's spin of their validation study data and come to a conclusion more similar to mine as delineated here: http://caps.fool.com/Pitch/MELA/5311582/lots-of-interesting-pitches-al.aspx.

Member Avatar fish733 (< 20) Submitted: 9/28/2011 4:00:57 PM
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I read your post after the CE Mark but before the FDA Approval. You make an extended case that CE Mark is not the equivalent of FDA approval, and on that point you are no doubt right. The flaw in your thinking is that they are relying on some after glow from the CE Mark designation to drive sales. They aren't counting on that at all. All they needed from the CE Mark is AUTHORIZATION to sell their device in Europe and now they have that. Before they couldn't proceed and now they can. Before they had no path to revenues except through the FDA and now they have. The market reacted, perhaps over reacted to the CE Mark announcement because this greatly reduced the chances that MELA would go broke waiting for the FDA. With a path to revenues and an ability to proceed they would be much more able to raise capital. This also triggered a lot of short covering.

Obviously they now have an "approvable letter" from the FDA. Barring major disaster and more delays this should translate into full approval by the 2nd half of 2012, perhaps earlier. It would seem based on your thesis that this harder to get and more important designation should help drive sales in Europe and the US. Wouldn't that follow from the case you were making?

Instead skeptics are focusing on the idea that new "restrictions" included by the FDA will limit MelaFind's market, but none of these are new. The indications for use provided by the FDA are perfectly in line with how MelaFind was intended to be used all along. Skeptics also point to the questions raised by the FDA in their briefing docs back in Nov 2010 but on closer inspection most of those concerns are based on misguided assumptions. Some of them were apparently resolved by the Advisory Panel of experts convened by the FDA. If they were not resolved to the FDA's satisfaction, how can you explain their subsequent approval?

FYI MELA was originally going to request approval for dermatologists only but changed their original PMA to "all physicians" based on a request by the FDA reviewer they were working with at that time. They changed it back more recently in a PMA amendment based on comments from the Advisory Panel and the current FDA review team.

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