On Thursday, would-be medical device manufacturer MELA Sciences (Nasdaq:MELA) got its day in front of an FDA advisory panel. Despite an unrestrained barrage from the FDA regarding the utility, safety and efficacy of the company's investigational device, MelaFind, the panel nevertheless gave an equivocal vote on the device. In the final tally, the panel voted that the device was safe and effective, and very narrowly voted that its potential benefits outweighed the risks.
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Will The Panel Sway a Skeptical FDA?
Here again is the time and place for the boilerplate notice that although the FDA often does follow the advice of its panels, it is not obligated to do so and has in the past issued decisions contrary to the panel's vote. This seems to be an example of another case where that is likely.
I have worked in the medical device industry as a securities analyst and consultant for nearly 15 years, and I have never seen the FDA object to a device with as much rigor as they directed toward the MelaFind. There have certainly been debates and disagreements in the past; panels for medical device makers like Cyberonics (Nasdaq:CYBX) and Therasense (now part of Abbott Labs (NYSE:ABT)) featured some intense disagreements and pointed barbs, but nothing quite like this.
Simply put, the FDA representatives seem convinced that the clinical trials to date do not demonstrate adequate efficacy to approve this device and that there would be significant risks in allowing it to go to market. How can a diagnostic device harm anyone? It is a fair question and the FDA's case is basically this - it believes the device is flawed and that if doctors came to rely on it, they would miss (and fail to biopsy/treat) some melanomas. And while melanoma is a very treatable cancer in its earliest stages, metastatic melanoma - melanoma that spreads beyond the initial lesion(s) - is an incredibly serious form of cancer. (For related reading, see A Checklist For Successful Medical Technology Investment.)
Making matters worse, MELA's CEO, Joseph Gulfo, has been rather pointed in his criticisms regarding the FDA's views and actions in this approval process. Just last night, for instance, he was quoted in a Reuters report as saying that the panel got "bad information" from the FDA. The agency does not like being embarrassed, and that will not help the company, especially as there is really no higher authority for the company to appeal to, because there is no real precedent of successfully suing the FDA for failing to grant approval.
There is certainly some chance that the surprising panel decision will lead the FDA to reconsider its position and grant approval for MelaFind (the agency did issue a non-approvable letter to MELA earlier in the year). What is more likely, though, is that the FDA asks for another prospective study. This would effectively be a rejection; the FDA never rejects a device outright, it just continues to send non-approvable letters requesting more data until the company abandons it.
But even if the FDA does approve the device, there is no guarantee that MELA can secure reimbursement for the MelaFind. Healthcare payors rarely ever pay for non-approved devices, but approval does not guarantee full or even partial reimbursement. Consequently, MELA investors need to be prepared for even more uphill battles, even if the device gets the FDA's approval. (For more, see Stocks On Drugs: What It Takes To Get High.)
There is no argument whatsoever that MELA is critically dependent on the approval and launch of the MelaFind; without approval, it is a company with cash, but no other product candidates. With about $35 million in cash, MELA would likely have to raise more money or find a partner to conduct another pivotal trial. Large imaging companies like General Electric (NYSE:GE), Philips (NYSE:PHG) and Siemens (NYSE:SI) are unlikely to be interested, leading the company to seek out smaller candidates like Welch Allyn, or a dark horse like Alere (NYSE:ALR).
What about MELA shareholders? This surprisingly positive panel meeting (many observers thought the final votes would be a rout against the device) will certainly lift hopes and the stock price. Ultimately, though, it is the FDA that makes the final decision for this company; if the agency really was showing its cards on Thursday, it is still highly skeptical about Melafind, making MELA an extremely risky stock to own. Nevertheless, MELA has its true believers and if the company somehow manages to defy the odds, the rewards are likely to be impressive.
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