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$MELA's Advisory Panel Recommendation Presents Trading Opportunities

publication date: Nov 19, 2010
As we alerted our subscribers yesterday via text message an email, the FDA's Advisory Panel handed down a suprise recommendation for MELA its its skin cancer detection system. The FDA briefing documents that were released early this week were the harshest we have ever seen.  So harsh in fact, that the price of MELA fell from the $7 range last week, to its close before the panel at $2.52, a drop of 64%.
It was an obvious surprise when the FDA's Advisory Panel made up of 'experts' in the industry answered the following question:
"Do the benefits of MelaFind outweigh the risks?"
Yes = 8 votes
No = 7 votes
Abstain = 1 vote
Is this a clear cut victory for MELA?  Absolutely not.  While this panel issued a near split decision, the FDA has the final say.  As we saw with ITMN, even with an overwhelmingly positive vote, the FDA may not follow the panel's recommendation (thats why its called a recommendation and not a decision).
Let's take a look at a few of the FDA's comments.  These are taken from Adam Feuerstein's live blog of the panel, so they may not be 100% word for word accurate, but you will get the point:
"The FDA needs to protect the public health... lot of inter-related issues here, we believe right now there is inadequate evidence to support the device's use."
"There is no data to support the proposed labeling. the indication is misleading."
"We believe there is not enough data to asssess the efficacy of MELAfind. There is no way to tell doc when or when not to biopsy. Too many false positives. Also dont know how to intrepret a negative result."
"We did not pre-approve all the steps in the study as MELA claims."
"We have empathy for use as a tool. melanoma is impt public health problem and device has potential, but struggle with high number of unevaluable lesions. altogether, this device was not able to get a pos reading on one-fifth of all melanomas. this raises serious issues with efficacy."
"The FDA review team recommends that this device needs a new prospective study."
Very tough language.  Not what you want to hear from the agency that is ultimately deciding the fate of your product.  It seems clear that the FDA is going to issue a heavy handed 'rejection' of MELA.  But the question is- When?
Medical devices, unlike drugs, do not have a specific date by which they will be approved by.  They can come at any time.  However, the FDA has had more than sufficient time to fully evaluate MelaFind.  Take a look at a timeline:
6/4/09 - MELA submits its PMA (Pre-Market Approval Application) to the FDA
8/4/09 - FDA accepts MELA's PMA
3/24/10 - FDA issues a "Not Approvable" letter to MELA, extending review 180 days.
5/26/10 - MELA announces the FDA has scheduled an advisory panel for 8/26/10
6/29/10 - MELA announces offering of common shares
7/10/10 - FDA delays advisory panel, eventually sets date of 11/18/10
11/18/10 - Advisory panel recommends MelaFind
It has now 15 months since the FDA originally expected MELA's PMA for review.  As well documented on websites such as TheStreet.com and others, the FDA has been very clear that it is not in support of MelaFind.
The biggest question is- when will the FDA issue a formal letter to MELA?  In my opinion it will not be long.  The FDA had clearly made up its mind BEFORE the panel and was just going through the motions.  
Shares of MELA more than doubled this morning when trading resumed, hitting a high of $5.85.  It seems clear to this bounce in share price is temporary, and it is just a matter of time before the FDA officially sends MELA's sahres down.
If you agree that MELA is destined for failure you have a few ways you can attempt to profit:
- Short MELA
- Purchase Options
For my personal portfolio I chose to purchase options.  I selected the Jan 22 2011 $4 Puts, as I feel the FDA should respond back to MELA within this time frame, and we have seen how far MELA can drop.  Many in the industry felt with a negative panel MELA would be trading in the $1.50 range, and I believe the history of the FDA's comments towards MelaFind indicate how strongly they are against this product.

Disclosure: MELA Jan 2011 4 Puts