Biotech Stock Mailbag: Mela Sciences

BOSTON ( TheStreet) -- Housekeeping item: The next Biotech Stock Live Chat is scheduled for Thursday, Sept. 15 at 12 p.m. ET. Please join me and bring all your biotech stock investing questions.

Mela Sciences ( MELA) received a CE Mark, or regulatory clearance, to sell its MelaFind skin cancer-detection device in Europe this week.

Via Twitter, @VexTrades says, "Greetings from vacation in Lake George, NY. Great news for $MELA, and the bashers are still out in full force, headed by @adamfeuerstein"

@TimMcFadden2 asks, "Come on Adam, MELA is blowing up today. Still sticking to your guns on its demise?"

Bob S. emails, "How much sales will a CE mark for MELA garner?"

Let's clear up the confusion this CE Mark announcement caused:

A CE Mark is not the European regulatory equivalent of an FDA medical device approval. The lead sentence from a Reuters story Wednesday on medical device regulation in Europe sums it up best:

"Pacemakers and electric toasters have little in common, yet in Europe the same regulatory framework covers both and a growing number of doctors think the system is no longer up to the job."

Mela was able to garner a CE Mark for MelaFind because the only regulatory hurdle is basic patient safety. Clinical trials that determine patient benefit or efficacy of a medical device are generally not required in Europe for a CE Mark. The standards for most (not all) medical device approvals are higher in the U.S., which is why you see so many medical device companies seeking approvals or clearances in Europe first.

Mela, of course, knows all too well how tough the FDA can be. The agency has refused to approve MelaFind, with FDA reviewers sharply criticizing the accuracy of MelaFind's skin-cancer detection results. FDA reviewers have also raised concerns about the potential for misdiagnosis of skin cancer that could result if MelaFind were used incorrectly.

"FDA's Mission is to Protect and Promote the Public Health and the FDA review team has significant concerns this device has not been studied adequately for its current indications for use and therefore puts the health of the public at risk," FDA reviewers warned in their MelaFind review released last year.

Barring a miracle or major (and scandalous) political intervention, MelaFind is not going to receive U.S. approval any time soon. Mela's CE Mark in Europe is the consolation prize, which does allow the company to sell the device to European dermatologists. Convincing European doctors to buy and use MelaFind is a much more challenging task given the dark cloud hanging over the device due to the FDA's concerns.

Perhaps Cytori Therapeutics ( CYTX) is the best proxy for making an educated guess about how well Mela will perform commercially in Europe. Cytori has a CE Mark for its Celution System device, which extracts stem cells from fat tissue for use in reconstructive surgery. Cytori has not been able to gain FDA approval for Celution System, however, because the company hasn't yet conducted the clinical trials FDA requires.

Cytori has convinced a smattering of European cosmetic surgeons to purchase and use Celution System, but nowhere near the levels required to make Europe a profitable business opportunity.

Mela lacks the infrastructure, expertise and funds to sell an unproven medical device in Europe. My best guess is that Mela, just like Cytori, will find it difficult to generate significant revenue in Europe. I see no reason to change my bearish fundamental view of the company and its stock.

And for the record, my skepticism over Mela and its CE Mark is consistent with similar bearish view I hold about Delcath Systems ( DCTH).

Funny coincidence. After Achillion Pharmaceuticals ( ACHN) CEO Michael Kishbauch wrapped up his investor presentation Wednesday at the Stifel Nicolaus Healthcare Conference, I saw him chatting with a reporter from DealReporter.

Thursday, DealReporter published a story claiming that Achillion's CEO was considering a merger or a hepatitis C drug licensing deal with Pharmasset ( VRUS).

Really? That's a head scratcher. I can think of no reason why Pharmasset would want to sign a deal with Achillion. I'm not the only one who has doubts about this rumor. Brean Murray Caret biotech analyst Brian Skorney is an Achillion fan, thinks their portfolio of early-stage Hep C drugs has a lot of potential, but a deal with Pharmasset? Not going to happen.

"Pharmasset has everything they need right now," Skorney told me. "Any Hep C company would be open to partnering with Pharmasset and that is likely all that Achillion management meant by saying they would entertain a Pharmasset deal."

At a New York investor conference on Thursday, Pharmasset's CEO said the company had no interest in acquiring any outside Hep C drug assets. That should pretty much put the Achillion rumor to rest -- until the next DealReporter story.

@Biopharminvest tweets, "@adamfeuerstein any comment on KERX potential co. selling?"

As I wrote on Wednesday, perifosine could be a $600 million-ish colon cancer drug if the ongoing phase III study is a success, and the drug is approved. So yes, there is potential for Keryx Pharmaceuticals ( KERX) to find a buyer for the company, which is what CEO Ron Bentsur called his top priority.

I'd caution against using a Keryx takeout as the sole basis for your investing thesis. For starters, perifosine doesn't have the strongest intellectual property protection. It's an old drug with a composition of matter patent that expires in 2013. If approved, Keryx will be able to extend the drug's patent life out by at least five years, perhaps more if new method-of-use patents are granted.

Whether potential acquirers see this limited patent life as a liability and reason to walk away from a deal is a possibility you need to consider.

Put aside the Keryx buyout speculation and just focus more narrowly on the looming results from the perifosine phase III colon cancer study expected in the first quarter of next year. Super positive results, and Keryx's stock is an easy double or more from here. The hard part, of course, is trying to predict whether perifosine is going to work or not, but that's why biotech investing is so exciting!

Randy M. emails, "Is this the time that Discovery Labs (DSCO) finally gets Surfaxin approved?

You think the fourth attempt at FDA approval finally gets Surfaxin across the finish line? I'm rooting for these guys, if only so that another of my 2011 biotech predictions comes true.

Do I have confidence that Discovery will finally convince FDA to approve Surfaxin? Absolutely not, and neither should you, based on the company's dismal track record. If there's a way to screw up approval for the fourth time, Discovery will find a way.

If Surfaxin is approved, I do have a suggestion for Discovery. Since the infants in the original Surfaxin studies are now adults, they can promote the drug if it's approved.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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