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Plenty of Red Flags Still Exist with MELA Sciences (NASDAQ: MELA) Despite FDA Approval Letter of Pre-Market Approval Application for MelaFind

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It would be fair to say that MELA Sciences (NASDAQ: MELA) has had a September to remember as they followed news of a CE Mark approval for their skin cancer detection device MelaFind, which allows them to market the product across the 27 nations comprising the European Union, with news of an approval letter from the FDA, putting them one step closer to finally marketing the device within the United States. Since closing the first trading session of the month at 2.11 and sinking to a low of 1.88 the following day shares of MELA have skyrocketed, hitting a high of 6.20 on the day they announced the FDA approval letter and while they have pulled back slightly, trading around the 4.60 -4.80 level on Thursday, they remain significantly higher than their 50-day moving average of 2.65 as well as their 200-day moving average of 2.88.

On the surface it would appear that MELA is now on the path to generating substantial revenue for their long suffering shareholders but it may not be wise to celebrate too quickly. MELA didn’t exactly receive an approval letter from the FDA, they received a conditional approval letter, more specifically an approval letter for their Pre-Market Approval (PMA) application, and the conditions that must be met prior to final approval for commercial launch could severely restrict the sales volume of their MelaFind device. Right now MELA is working with the FDA to finalize the physician and patient labeling, package insert, user’s guide, training program and clinical protocol for a post-approval study in order to obtain that final approval.

While it would be great if the final hurdle was simply putting together the obligatory labeling, inserts, guide to use, etc. the reality is this isn’t a matter of “crossing the t’s and dotting the i’s.”

For starters MelaFind, which does not actually diagnose melanoma or other skin cancers but rather helps doctors determine whether to biopsy certain indeterminate pigmented skin lesions, will be sold exclusively to dermatologists and not, as MELA had originally hoped, to the much broader field of general practitioners. Before the device can be sold to these dermatologists they must first complete a training course on its use and how to interpret the results, and while MELA hasn’t mentioned who will pick up the cost of that training it will likely fall on their shoulders.

This is just one caveat in the for the FDA/MELA agreement for labeling instructions for use of MelaFind in the U.S. That four paragraph label has been published by MELA and reads as follows:

MelaFind is intended for use on clinically atypical cutaneous pigmented lesions with one or more clinical or historical characteristics of melanoma, excluding those with a clinical diagnosis of melanoma or likely melanoma. MelaFind is designed to be used when a dermatologist chooses to obtain additional information for a decision to biopsy. MelaFind should NOT be used to confirm a clinical diagnosis of melanoma.

MelaFind is only for use by physicians trained in the clinical diagnosis and management of skin cancer (i.e., dermatologists) who have also successfully completed a training program in the appropriate use of MelaFind.

The MelaFind result is one element of the overall clinical assessment. MelaFind positive lesions (which may include malignant melanoma, melanoma in situ, high grade dysplastic nevi and atypical melanocytic proliferation/hyperplasia) should be considered for biopsy; the biopsy decision of a MelaFind negative lesion should be based on the remainder of the entire clinical context. Lesions that are “non-evaluable” by MelaFind should be carefully re-evaluated for biopsy.

MelaFind is indicated only for use on lesions with a diameter between 2 mm and 22 mm, lesions that are accessible by the MelaFind imager, lesions that are sufficiently pigmented (i.e. not for use on non-pigmented or skin-colored lesions), lesions that do not contain a scar or fibrosis consistent with previous trauma, lesions where the skin is intact (i.e., non-ulcerated or non-bleeding lesions), lesions greater than 1 cm away from the eye, lesions which do not contain foreign matter, and lesions not on special anatomic sites (i.e., not for use on acral, palmar, plantar, mucosal, or subungual areas). MelaFind is not designed to detect pigmented non-melanoma skin cancers, so the dermatologist should rely on clinical experience to diagnose such lesions.

That’s an extensive label that highlights some serious limitations to MelaFind’s intended design. Now this isn’t to say what MelaFind does isn’t substantial, as pointed out by MELA the device demonstrated a 98% sensitivity in their 1,383-patient U.S pivotal trial, whereas dermatologists had a 72% sensitivity in the adjunctive reader study, it’s only to say that its efficacy is based on rather specific criteria.

Despite the agreement that is apparently in place MELA has offered no real timeline as to when they can expect to receive final approval from the FDA and company CEO Joe Gulfo has been quiet about MelaFind’s U.S. launch expectations, only saying MELA anticipated 200 US box placements by the end of 2012.

As for their marketing efforts in Europe there are plans to roll out the device by the end of the year with Germany being the first country to receive the device. Germany is thought to be the ideal start for MELA given the fact that the country has the highest incidence of melanoma in the EU and more than 20,000 Germans are expected to be diagnosed with the skin cancer by 2016. Also working in MELA’s favor is Germany happens to be the only country in the world that has a national skin screening effort in place for people over the age of 35. These are certainly positives for MELA but Germany, and really the EU in total, won’t be enough to get the company out of the red.

Obviously MELA needs the U.S. and while the FDA approval of the Pre-Market Approval application has been granted there are serious concerns among investors about the revenue potential tied to MelaFind. In previous price guidance the company mentioned a $5,000 placement cost per device and if the company was to secure those 200 U.S. placements by the end of 2012 that would be $1 million. To put that into perspective, as of June 30, 2011 the company had an accumulated deficit of $108.9 million.

MELA hasn’t offered much in the way of solving this riddle either and while it has been said that they would share in the revenue generated from each exam performed by the dermatologist there really hasn’t been clarification on that front. Given the significant deficit that MELA has accumulated and recognizing the potential troubles that MelaFind hit in terms of penetrating the market there are some serious concerns about jumping into this company right now. Yes the CE Mark approval and FDA approval letter were monumental achievements but they are certainly no guarantee that MELA is destined for profitability any time soon.

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