Access Group: “$4.75 Cancer Detection Device co. could got to $196”

By Travis Johnson, Stock Gumshoe, March 24, 2008

This one comes in from what looks to be a new newsletter service called “The Access Group” that will run you $2,750 a year. Phew. This is a service that they claim will enable individual investors to get access to the kind of research hedge fund companies used to pay these analysts $30,000 a year for. So I guess you should be ever-so-thankful for the bargain, eh?

And as with so many of these types of teasers that I love, they’ve got a tight limit on the number of subscribers just to give you an extra impetus to get hot and bothered about signing up NOW before all 475 spots are taken! Quick!

The service is run by Marc Lichtenfeld, a former analyst who also used to write for TheStreet.com, though I don’t know that he does so anymore. It’s affiliated with Mt. Vernon Research, which is part of the massive group of Baltimore financial publishers centered around Agora.

As soon as you sign up, they’ll send you the report about this little skin cancer detection device maker that is hoping for FDA approval soon. Or if you prefer, you can just read on, find out the name of the company, and make your own research report, courtesy of your friendly neighborhood Stock Gumshoe.

So … I’ve already told you that the touters believe this to be an opportunity to make 10X or 40X your money, and that it’s a small company that makes a medical device that’s designed to detect skin cancer. What else do we know?

There’s an early investor, well known for picking good small cap potential … in their words,

“One of Wall Street’s ‘Start-Up’ Legends Is In On The Action … In fact, this gentleman started one of the first investment houses on Wall Street to focus exclusively on small-cap firms and start-ups. He and his partners launched the company with a $100,000 budget back in 1959 … In 2000, the company sold to Credit Suisse First Boston for $13.4 billion!”

So one thing we know for sure is that he’s really, really rich. And the ad says that he’s inviting his richie rich friends to get in on the action, because the one thing all copywriters know is that individual investors don’t trust the Wall Street muckety mucks and believe they’re all conspiring to profit at our expense and scratch each others’ backs. Which isn’t to say that’s not true.

That’s one big investor. What do we know about the company?

“… in a study of 352 lesions, this company’s device correctly identified all 28 cancers. And in all tests so far, the company’s device has correctly diagnosed cancer in 98% of the cases, compared to the 60% to 70% rate doctors are able to identify the disease using the ABCDE method.”

OK, 98% sounds pretty good. And it’s skin cancer, so we know it’s non-invasive. It’s a fancy camera/light thingamabob that looks like a Shaper Image handheld massager, though they use words that are a far sight more impressive than “thingamabob.” And they describe it as being similar in look to a “hair dryer”, though I’ve never seen a hair dryer quite like this. No need to quibble or start a great hair dryer/massager debate, however. I’ll stipulate that either one is a fine size and shape for cancer detection devices.

The ad tells us that doctors love the device, and they do several “what ifs” about how successful this would be if 10% of dermatology offices bought these, or what would happen if other specialists or general practicioners started buying them. The device is apparently going to be priced at about $2,500, which isn’t terribly expensive, and they believe that they’ll make most of their money by selling the individual memory cards that will be required for each patient.

So … this is a handheld cancer detection device, which effectively takes a super-fancy 3D photo of skin lesions, records that data on proprietary memory cards that are patient-specific, and compares it to their library of skin cancer pics to see what the likelihood is that this particular lesion is cancerous or worthy of aggressive treatment.

Here’s an excerpt about how they build the case for the valuation from the current $4.75 to a potential $196 a share:

“… based on very conservative sales of $240 million – and profit margins of even half of the projected 15% – this little company could soon be earning $1.20 a share or more. Using average industry price to earnings that translates to $59 a share – a long way from today’s price of around $4.75. And that’s just the short-term potential…

“What happens when this company’s machine finds its way into just a third of the country’s dermatologists’ offices – and revenues top $825 million? $4.75 to $196 a Share? It’s All-Together Possible.

“That’s when things really get fun. Based on the same, very conservative, 7.5% profit margin… and very conservative PE ratios… we’re looking at a share price for this company that could very well eclipse the $196 mark…”

Not bad, eh? So what is this “Hyper-Growth Stock”

The Thinkolator pulses and churns, and the Gumshoe can reveal to you, for far less than $2,750, that this stock is …

Electro-Optical Sciences (MELA)

Cute ticker, eh? The MELA is for their product, which they call MelaFind. They have a little video of the product on their website so you can jump in on the great massager/hair dryer debate if you like. They also have lots of info up there, including some presentations, if you want to understand the company’s idea of it’s own potential. There are a couple newsy articles on MELA at seekingalpha that might be worth a look. There are actually a few analysts who cover this one, too, a bit unusual for a sub-$100 million firm, and they all think you should buy it (their target prices are a bit more modest than the newsletter’s, between $8 and $12, but still a substantial gain from here).

The fact sheet from the company’s Investor Relations folks is here (pdf file).

Oh, and the Wall Street bigwig who owns shares? That must be Dan Lufkin, of Donaldson, Lufkin and Jenrette, which was the small cap investment bank bought out by CSFB in 2000. He is a Director of the company, and has picked up 330,000 shares or so — the most recent lump of which was bought on the open market last fall at prices between $4 and $6. Bonanza Capital, a hedge fund, is also a very larger holder of the stock, and though insiders have been heavy buyers of late with no recent selling, the institutions as a whole have been selling the shares over the last quarter. It’s not very widely held among institutions, as you might guess from the fact that it’s a tiny health care technology stock.

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Part of the teaser is that you can get in on a special conference call with the company that’s scheduled for April 7, but clearly the recommendation is out there now — the shares popped 25% today, so they’re now right around $6, not $4.75. Your humble Gumshoe servant apologizes for not taking a look in time for you to get in on that little run — but really, if you believe that it’s going to $196 let’s not quibble about $1.25. And if this is like other tiny heavily hyped stocks, there’s every chance that it will come back from today’s bump (or that the mighty rising tide of Gumshoe readers will push it up even further, who knows?)

The shares have bounced around a bit over the last couple years between four and seven dollars as various bits of promise and hype emerged — will this be the chance for the stock to break out, or is it just another bump on a newsletter recommendation? There appears to be no actual news on the company of late, though they did an investment conference presentation last week. The pivotal trial is supposed to be complete in the first half of this year, so sometime in the next three months, and application to the FDA would be almost immediately following that (assuming continued good results).

So, pop quiz, what is the one thing we should ask when we’re presented with a compelling argument about a tiny company that meets a pressing need?

That’s right, “who else meets this need?”

I haven’t slogged my way through all the financials, but I’m happy to stipulate that this product and company have compelling potential and may be worth more research. But I have done some quick browsing for other skin cancer detection devices, and I have no way of knowing how important this particular device will be in the vast realm of skin cancer devices, from the SolarScan to a simple lighted magnifying glass to the Clarity Pro system that tells you if you’re going to be at risk from UV exposure. And that doesn’t count the huge number of other digital imaging and microchip companies that believe their products might be useful in this area — even STMicro, which I’ve written about before, thinks one of their digital imaging chips might be good at helping to identify skin cancer, and academic research in this general area appears to be pretty active. I also have no idea what the patent portfolio of Electro-Optical is, so if this is a great product I don’t know how defensible their niche is — comparing an image to a library of skin cancer images to make diagnoses makes a great deal of sense (at least, to someone like me who knows nothing about the medicine), but if other folks can do something similar it won’t provide much of an advantage for long.

That’s not to say that this isn’t a groundbreaking concept or product, or that it won’t save lives. I just don’t have any idea whether the product can capture 1% of the market, or 10%, or 90% … and if I were going to invest my money in it, I’d like to know more. I do like the business model, since the most profitable strategy for medical devices in general seems to be the “razor and blade” concept where you build a base of users that have to come back and use lots and lots and lots of your disposable or near-disposable accessories, add-ons or, in this case, memory cards. That’s what brought Gillette to the forefront, but more recently it’s also what has allowed Intuitive Surgical to build a massive market cap in a relatively short time.

So … skin cancer is bad and very common, this thing detects it, they have a good business model, and apparently their product works (so far). Is that enough for you? If you dig deeper, let us know.

full disclosure: I own shares of Intuitive Surgical. I do not own shares of any other company mentioned, and will not trade in any stock mentioned for at least three days.


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