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One Hot Stock to Avoid

Each week, Motley Fool editors cull a top stock idea from the pitches made on CAPS, the Motley Fool's 180,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow our weekly picks? Subscribe to our RSS feed or follow us on Twitter.

Company MELA Sciences (Nasdaq: MELA  )
Submitted By: zzlangerhans
Member Rating: 99.65
Submitted On: Sept. 16, 2011
Stock Price at Underperform Recommendation: $3.60

MELA Sciences Profile

Star Rating **
Headquarters Irvington, New York
Industry Medical devices
Market Cap $84.4 million
Industry Peers

Intuitive Surgical (Nasdaq: ISRG  )

MAKO Surgical (Nasdaq: MAKO  )

Antares Pharma (AMEX: AIS  )

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
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 (Nasdaq: CYTX  ) , Delcath (Nasdaq: DCTH  ) , 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:

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical and MAKO Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2011, at 7:08 PM, SamuelHasson wrote:

    No body is going to be fooled. Let the professionals in this field with experience render their judgement as to whether the Mela Device has merit for their patients or not. If the company really obfuscated their tests with statistical mirrors, then they are really the losers. And all of their effort, money, and time is for nought. I read this and your referenced article, and decided the analysis is nonsense. Don't waste our time with faulty thinking.

  • Report this Comment On September 22, 2011, at 11:05 PM, WillyMoe wrote:

    Me thhinks someone is heavily invested in this company??/????

  • Report this Comment On September 26, 2011, at 1:48 PM, saebel wrote:

    MELA has had its PMA application approved, now what?

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