This is an ad that probably many of you have already seen, from Marc Lichtenfeld for his Access Group newsletter. And yes, like so many ads do, they’re guaranteeing that you’ll double your money if you invest in this idea.
Which gives me a chance for a quick little digression before we dig into the meat of this one: What does “guaranteed” mean? For most newsletters it’s just an easy marketing promise, one that they’ll make for any stock or investment idea — if it doesn’t work out the way they predict, they’ll give you your money back.
But of course, investment newsletters are not really like most other products — if you buy a guaranteed toaster and it burns your toast, you’ll be happy to get your money back for the toaster, and it’s unlikely that you’ll be upset about losing those two pieces of bread. (If a toaster goes haywire and burns down your house, you’ll have to take it up with the lawyers).
Stock tips and investment ideas are another matter entirely — many newsletters “guarantee” their product, or will offer you money back or partial refunds if you’re every unhappy with them, but they guarantee only the toaster, not the toast — and in this case, the toast is probably a much bigger investment than the toaster. You might spend a few hundred or a thousand dollars for an investment newsletter, but you might invest perhaps $10,000 in just one idea (some a lot less, of course, some much more). The performance of that investment is never guaranteed by anyone — the only guarantee is that if you want your subscription money back, they’ll give it to you.
In this case Access Group membership is currently “on sale” for $1,750, on the pricey side for heavily advertised newsletters, but far from the most expensive (no word this time about the membership being limited to 475 people, which is how they pushed it a year ago at $2,750).
So if you invest $10,000 in this stock and it flops miserably and you lose $6,000, just for an example, the best you’ll get from the newsletter publisher is your $1,750 back. In their words, “Through this offer only, you can see all of our research right up until the FDA’s announcement risk free. And if the little company I’ve been telling you about isn’t trading a $8 per share anytime between now and a week following the news of the FDA approval, you can request and receive a full refund of any amount you’ve paid towards your subscription.”
That’s what a guarantee usually means in this business — and, to be fair, many newsletters offer no guarantee at all, so it is admirable when they do so, and when they back it up without putting up a fight, as most of the big publishers reportedly do. Just wanted to take a moment to hammer that point home, since people often ask me what exactly a “guarantee” means in a newsletter ad.
So … to the teaser, shall we?
Lichtenfeld is pushing a stock that we’ve looked at several times before in this space, with roughly the same kinds of promises attached to it — the ad is for a medical device stock, I’ll let his words explain it:
“…a medical device company that recently doubled in price for us – and continues to be one of the best money making opportunities I’ve seen in my 13 years of researching up-and-coming companies with breakthrough products.
“The company just aced its Phase III trial results, just as we predicted it would. And it’s now awaiting final FDA approval for the go-ahead to market a medical device that could revolutionize the way one of the deadliest types of cancer is detected.
“Once that approval comes, we expect this stock to double again within days of the announcement… and keep climbing from there as the company rolls out this innovative (and profitable) device to eager doctors throughout the country.”
So … we won’t push through all the folderol this time, I’ll just tell you that, yes, he is still promoting …
Electro-Optical Sciences (MELA)
… as his best money making opportunity.
There’s even the same valuation argument in the ad as we saw about a year ago from Lichtenfeld — and he still paints a picture of a possible move in the stock from $4 to $196. To see how that works, and understand the potential, let’s look at the company quickly:
Electro-Optical Sciences is a medical device company — they are developing a handheld tool that scans skin lesions and moles to help screen for melanoma, the deadly skin cancer. Essentially, this machine looks like an overgrown hair dryer, and you hold it up to a suspicious mole. It then scans the skin using several different wavelengths, and reportedly “seeing” under the skin at an extremely high resolution. Then it sends that data to a system that uses fancy algorithms to compares those images to their growing database of known benign and malignant tumors to determine whether or not the mole should be biopsied or removed.
This is the same thing that dermatologists do every day — sometimes dozens of times a day — looking at skin and making a judgement call about whether or not something needs a biopsy. It seems like MELA’s device (called MelaFind) aims to solve two problems: first, they catch some melanomas that might not have been caught by the doctor, which is a potential lifesaver for a scary disease like this that is best caught early; and second, they make the process of doing biopsies more efficient, cutting down on the number of benign moles that get biopsied (and therefore leave a scar and incur a cost).
Here’s how Lichtenfeld explains it in the tease:
“But here’s the thing: Studies show that even the best dermatologists miss up to 30% of all melanomas. That’s not only dangerous (and potentially deadly) for the patient, but thousands of doctors have faced expensive malpractice suits because they missed a mark on a patient’s body that later turned out to be cancerous.
“This company’s device eliminates the guesswork that can lead to these deadly mistakes.
“In Phase III clinical testing, the device accurately identified 125 out of 127 melanomas – a very impressive 98% success rate. Meanwhile, dermatologists using the ABCDE method were only able to identify 70% of the melanomas.
“That’s why doctors are very excited about this device. Not only does it allow them to provide much more accurate diagnostic advice to their patients, but it greatly reduces the chances of malpractice suits should they miss something during a routine check up.
“Listen to what one professor of dermatology at the University of Alabama in Birmingham said about this amazing little device: ‘All I have is my good judgment [to diagnose a lesion as suspicious for melanoma], but if I have a tool that will improve my performance, I think almost everyone will integrate this into their practice.'”
MELA aims to make money on this product using what most people now refer to as a “razor and blade” model — make some money on selling the product if you can, but sell a consumable attachment that must be used for the product to be effective, and over time you’ll build a large and ongoing revenue stream with much higher margins (like Gillette selling you a cheap razor and expensive refill razor cartridges, or like Intuitive Surgical selling you disposable attachments for each surgery done using the da Vinci robot). It’s a great model, though of course the product isn’t yet approved so we don’t know if it will work.
The idea is this, more specifically: MELA will essentially sell a dermatologist a machine for $5,000 (they won’t really own it, but they’ll get to use it, apparently) — then for each scan they do they’ll need to use a new proprietary memory card, and they’ll charge the patient (or the patient’s insurance company, or whatever) $100 for that card. Of that $100, MELA gets half and the doctor gets half. Those numbers probably aren’t final, but they’re the most recent I’ve seen.
Lichtenfeld puts forth a valuation argument that says the device might get into 10% of dermatologist offices and get used 60 times a week in each office. At $50 per use for MELA, that translates to $3.3 million in sales per week (total) from the initial 1,100 dermatologists, or $171 million a year as I do the math — plus another $5.5 million for the actual device “sales.” He gets a somewhat higher number of $240 million, but perhaps he’s making a higher assumption about the final pricing.
That would be nice, of course, but MELA has lost tens of millions of dollars already doing this research, so they’d like to have a better potential profit than that (no idea what the margin will be — Lichtenfeld says it’s projected at 15%, which actually seems pretty low unless they have a lot of selling costs to get the device out to doctors). So the real promise for extraordinary gains is if they’re able to get this device out into more than 10% of dermatology practices, and build consumer demand for it like Intuitive Surgical did (not many hospitals would have bought million-dollar robots unless patients demanded that their prostatectomy be done using these machines) — if there’s marketing behind this that makes consumers aware of it, and people have a choice of dermatologist, those doctors may see it as a competitive requirement to avoid losing market share to competitors … or, if it works well enough or gains widespread acceptance, perhaps as a way to avoid malpractice suits if they miss a melanoma.
And of course, the binary choice between the MelaFind and a doctor’s eye may be a false one — there are plenty of other devices that aim to help screen skin lesions, too, some that use different types of photography or scanning, though most are not nearly as fancy as this one or nearly as potentially capable, from what I can tell, since they don’t use a database like MELA does to actively screen … and who knows, in a constantly evolving field there’s always a threat that new innovation will destroy existing businesses, a phenomenon which could either benefit or harm MELA in the years to come. In fact, even just getting dermatologists to make more skin evaluations instead of non-specialist doctors might be as important, something that several other companies are working on (using body imaging and fancy cameras to bring images to the specialist). I don’t know how MelaFind will be accepted by the marketplace if it’s approved, just wanted to point out that there may be many shades of grey between “blockbuster” and “flop.”
It does seem very likely (though I’m no expert) that the MelaFind will get approved, the numbers from the Phase III trial that were released a few weeks ago were very good, and it is indeed much easier to get a medical device or diagnostic tool approved than a drug (it seems there are no real safety concerns to speak of, save for potential misdiagnoses). The application to the FDA will probably come pretty soon, they’ve said that they’re just waiting to finalize the statistical analysis of the study … and the FDA has agreed to “fast track” the approval, so there will probably be a committee report on MelaFind a couple months after the application, and a decision within six months.
I said that MELA had been teased several times, and has been a newsletter favorite — if you’d like to see some past comments about the stock and the device the initial writeup from a year ago is here, and some notes about the stock while the late Georges Yared was teasing it are here, and another newsletter editor who has recommended the shares chimed in with a comment just a few weeks ago. For a tiny company (MELA’s market cap is less than a hundred million dollars), they get a lot of attention.
There have also been some useful articles on MELA across the blogosphere — in particular, a couple recent ones from BioMedReports on their latest MelaFind results, and on a recent corporate presentation.
And just to square the circle here, though it may or may not impact the shares, I should note that it seems quite likely that they’ll have to raise some money in the next year. They have $15 million on the bank, and that’s not going to be enough to manufacture and market these devices. They won’t be blowing through cash as fast as they were when the Phase III trial was underway, and they went through $15-20 million a year, but they will need money, particularly, I’d guess, for ramping up marketing. They’ve raised cash several times in the past at share prices right around these levels, but I have no idea how they’re likely to time future share sales, or if they’ll instead try to tap the debt markets (kind of hard at the moment), just something to keep in mind if you’re trying to consider the possibilities. The shares are getting clobbered this morning as I type, but I have no idea why — could easily be just the typical exhaustion of a newsletter-driven buying frenzy over the past couple days from this “Guaranteed Double” marketing campaign, which itself followed a big run following the positive trial results a few weeks earlier.
Will MELA really double when the application is submitted, or when (if) it’s approved? I have no idea — my guess would be that most investors already assume the approval is coming, and that the real questions about adoption (how quickly the devices get used, how often, whether and how insurance companies reimburse, whether the pricing works, whether the marketing works, etc.) will be the more likely drivers of MELA’s potential profitability in the years ahead. In the meantime, however, it would not be at all surprising to see some very big moves in the share price around the FDA timeline — if only because, thanks to a lot of newsletter interest and other investor enthusiasm, there are a lot of folks watching for news.
I know many of you have invested in this one, or at least looked into it in the past, so feel free to share your thoughts below. And if you’ve ever subscribed to Access Group or any of the other Biotech newsletters, please click here to review them for us now.