If you catch melanoma early enough, it has an extremely high survival rate.
But when detected in later stages, it is one of the deadliest types of cancer; 90,000 new cases are diagnosed each year in the U.S. and Europe, of which 15,000 die.
Currently, doctors evaluate suspicious lesions by examining abnormal growths, looking for one or more characteristics that are common to melanomas.
The system is known by an acronym, ABCDE. One or more of the following characteristics could signal that a biopsy is needed.
- Asymmetry
- Borders – uneven or ridged
- Color – multi-hued, or unusual color (red, purple)
- Diameter – usually larger than 1/4 inch
- Evolving – changes in size, shape, elevation, color
After examining the mole/lesion, the doctor assesses the risk and then decides whether a biopsy is necessary. A biopsy is the only way to confirm a melanoma diagnosis. Biopsies are avoided when possible, as they can be costly and leave scars.
The system works pretty well, saving thousands of lives every year. But the human eye isn’t perfect, and dangerous lesions can slip by even the most experienced dermatologists. An added obstacle is the fact that early-stage melanomas are especially hard to spot.
Potential Breakthrough in Screening
I don’t like using words like revolutionize when talking about stocks, but it might actually be appropriate in this case.
A small company called Electro-Optical Sciences (NASDAQ: MELA) is developing a product that could dramatically improve the melanoma screening process. EOS’s system is called MelaFind, and there’s nothing like it in the market right now.
It uses an optical scanner to capture images of the lesion, using 10 different wavelengths of light — including near-infrared varieties that can see 2.5 mm below the skin.
Once scanned, the image is analyzed by MELA’s proprietary software. It compares the patient’s lesion to a database containing thousands of growths and melanomas, ultimately issuing a recommendation on whether a biopsy is warranted.
The company is awaiting a final decision from the FDA, which could come any day now. Here’s what the final product will look like:
In clinical trials so far, the device has done well. According to ABC News:
In a clinical trial at seven locations across the U.S. last February, researchers used MelaFind to study more than 1,800 skin lesions from 1,300 patients, finding that MelaFind’s ability to accurately rule out skin cancer was 2.5 times greater than that of dermatologists.
The new photo technology accurately detected 98.3 percent of melanomas and reduced unnecessary biopsies by 90 percent, says Dr. Darrell Rigel of the New York University School of Medicine and a consultant for Electro-Optical.
Supposedly the system is especially good at spotting melanoma in situ, the earliest stage of the disease — when it’s hardest to spot, and the danger of overlooking it is highest.
Buyout Potential
Big drug and medical companies are always looking to snap up small companies with strong growth prospects. Sometimes buying growth is cheaper than driving it internally.
It’s often an advantage for the company being acquired, too. Gaining access to a large, well-developed sales and marketing team can shave years off the commercialization process.
I think MELA is a great buyout candidate. I’ve owned the stock for over a year now, always considering it a possibility. But the case got a lot stronger on January 11t when Charles Stiefel was appointed to their board.
Mr. Stiefel was formerly head of Stiefel Labs, a dermatology firm that was eventually sold to GlaxoSmithKline (NYSE: GSK) for $2.9 billion. Having a guy like this onboard is a fantastic development.
MELA Stats
- Currently trading at: $9.10
- 52 week range: $3 – $12.24
- Market cap: $200m
- Cash: $24m
- Total debt: 0
Risks
The chief risk is the upcoming FDA decision. While most people are expecting approval of MelaFind due to strong stage III clinical data, there’s always the risk of a product being rejected. But that’s pretty standard with development-stage medical firms.
Other risks are also run-of-the-mill for speculative firms: Dilution, commercialization problems, manufacturing, etc.
I’ve read up on EOS’s management, and I think they have a strong team in place to execute: brilliant Ph.D.s, M.D.s, and solid business people — really, all you can ask for.
Risk/Reward
I think MELA is a buy here. FDA approval is probable and the decision should come by summer, at latest. Some think it could come as early as this month. There’s always risk involved when buying speculative stocks like this, but the rewards can be huge.
Another positive is growing awareness of the company, with recent articles appearing in Barron’s and ABC.com. There’s apparently a lot of buzz in the dermatologist community, as well.
The buyout potential is one of the biggest reasons I like MELA. Blue chip health stocks are always hungry for more growth. EOS could give it that to them — while speeding up commercialization and rewarding shareholders at the same time.
Adam Sharp
Analyst, Wealth Daily
