What is the “Algorithm Gun” … and can it really make you 1,000%?

by Travis Johnson, Stock Gumshoe | December 14, 2009 11:30 am

Uncovering a teaser from David Eifrig's Retirement Millionaire

Dr. David Eifrig[1], who I’ve written about once or twice before, has stepped away from his usual Retirement Millionaire[2] topics to write about an individual stock — well, tease us about a stock, anyway. If you’ll sign up for the good doctor’s newsletter to find out about his favorite retirement[3] freebies and savings strategies, he’ll tell you all about the “Algorithm gun.”

I’ve had a huge number of folks forwarding these ads to me for the last couple days, so I thought it might be worth our time … even though, it turns out, this is a company I’ve written about several times before.

How does he tease this idea?

“NYC Medical Doctor says new Algorithm Gun ‘has the potential to save lives like nothing we have seen.’

“Could this new technology generate 1,000% or more for early backers? Or is it a wash? I set out to see for myself. Here are my findings….

“I came across a situation that might be too good to pass up.

“It’s a ‘revolutionary new device’ that could dramatically reshape the way doctors practice medicine. Pending Government approval, early backers are hoping to collect returns of 1,000% or more.”

And this is, in fact, a real company — to reinforce that fact, Eifrig quotes a Barron’s article:

“‘If approved by the FDA[4], the device will revolutionize the way doctors screen patients… and transform the NASDAQ-listed firm into a powerhouse. If all goes according to plan, its shares could surge… ‘ ~Barron’s”

The device, this “Algorithm Gun” that we’re being teased about, is actually a little handheld scanner — I’ve described it as looking more like a blow dryer, but “gun” certainly sounds cooler, and it is used to detect skin cancer. Here’s more from Dr. Eifrig:

“You should know upfront this opportunity has nothing to do with a cancer cure, cancer treatment or ‘silver[5] bullet’ of any sort.

“In fact, it can’t “treat” cancer in any way, shape or form. Unfortunately, as a medical doctor, I know the sobering truth about cancer: We’re not going to see a legitimate cure any time soon.

“And as an experienced investor and analyst, I can tell you there’s certainly no short-term money to be made from investing in cancer cures or treatments either.

“However… over the next 12-36 months, it looks like there could be a heck of a lot of money on the table in detection.

“Big difference…

“You see, I’ve come across a company that’s invented a new and better way of detecting one of the deadliest and fastest growing cancers out there…

“Like some cancers, it’s frighteningly lethal, killing one person every hour.

“It’s the fastest rising cancer in the country, with 150,000 new cases reported each year. It’s growing fastest among men over 65. And, for some inexplicable reason, it’s found at higher than average rates in New England states.

“But there’s really only one thing you need to know about this particular strain of malignancy:

“If detected early, it’s almost 100% survivable. If not, then it’s one of the deadliest cancers we know.

“To my knowledge, no other type of cancer has that kind of all-or-nothing odds.”

And he goes on to give his description of the device itself …

“Introducing the ‘Algorithm Gun’

“I’ve seen this device in action…

“It looks like a 22nd century handgun… as if the company lifted it straight from the science-fiction pages of a Philip K. Dick novel.

“But this gun doesn’t fire bullets. It’s not a weapon.

“The ‘gun’ fires a spectrum of light that the human eye cannot detect and the human brain cannot process… And it’s powered by some of the most powerful and complex algorithms ever cooked up.

“And get this: When this ‘gun’ is used on your body to detect cancers, you can’t feel a thing… not even a tiny pin prick. There’s no cutting… x-raying… or anything like that.

“The algorithms processed by this gun take images captured by beams of blue and infrared light, run them through a powerful database of over 9,000 known cellular samples… and let the doctor know within seconds if you have a malignancy.

“‘The device is exceptionally simple to use: The physician… pulls a trigger on the handle. The entire analysis only takes several seconds,’ says Amit Hazan from Oppenheimer & Co.”

And he gives his take on the performance of the device so far:

“Does it Pass the 2-Part Test?

“To evaluate a biomedical-screening device like the “Algorithm Gun”, you must answer two questions:
1) Does the device catch the disease (the sensitivity)?
2) Does it also tell you who’s disease-free (the specificity)?

“The makers of the “Algorithm Gun” just wrapped up the largest prospective study of its kind ever conducted:

“At SEVEN major medical centers, including Harvard Medical School, Massachusetts General Hospital, NYU Medical Center and Washington Cancer[6] Institute…

“They tested the ‘Algorithm Gun’ on roughly 1,500 patients.

“The results?

“‘The device accurately detected 98.3 percent of [cancers],’ said Dr. Darrell Rigel of New York University School of Medicine.

“That’s much better than even the best [doctors] could do on their own,” Rigel adds.

“So, the ALGORITHM GUN passed the first test – sensitivity – with flying colors.

“What about the second test – specificity?

“The company conducted a parallel study, using the exact same data… to see how living, breathing doctors fared against the machine – the “Algorithm Gun”.

“The result?

“The specificity of the ALGORITHM GUN was 2.5 times better than the doctors.

“The device passed both tests. So, now what?

“So now it’s up to the Government… “

So yes, this is another teaser for a stock whose future lies in the hand of the FDA.

And if you’ve been sailing on the good ship Gumshoe for any length of time, you may well already know what company we’re looking at here … this “Algorithm Gun” is actually called the MelaFind, and the company who makes it is called Electro-Optical Sciences (MELA — click here for the free trend analysis of MELA[7]).

This one has been on our radar screen for quite a while — I first wrote about it back in March of 2008 for a Marc Lichtenfeld[8] ad (he thought the shares could go to $59 or even $196), and he has reused that teaser a few times, I wrote about it again, with more detail about the company, back in April of this year[9], after their device had already been fast-tracked by the FDA and the excellent Phase III testing results were out. And Lichtenfeld wasn’t the only one to jump on MELA, it was also a favorite pick of the late Georges Yared[10] for a while last year.

Lichtenfeld has already been proven right with his first level of promise for this one (he “guaranteed” a double in the stock from April’s price of around $4-5, and that has happened) — of course, we’re a long ways off from knowing whether his predictions of $59 or $196 will be accurate for Electro-Optical Sciences.

And what does Dr. David Eifrig promise? He thinks there could easily be a big pop in the stock when (if) the FDA approves the MelaFind, but that it will do much better after that. This is from the ad:

“The real money stands to be made in the 12-24 months following the FDA’s decision.

“You see, companies with new and approved medical devices need to have a business plan for turning their technology into a bona fide commercial success….

“Remember… there is NO EXISTING MARKET FOR THIS TYPE OF CANCER DETECTION. And there is no real competition to worry about either. In clinical trials, this device has proven to be 2.5 times more successful than cancer specialists at detecting certain types of cancer.

“As a researcher at Oppenheimer Co said recently, ‘There is simply no competitive device on the market that can aid doctors in making this judgment.’

“In other words, this tiny company could have a new market entirely to itself.

“How much money could that mean to you, as a potential shareholder?

“I’ve had the opportunity to look over the company’s business model for the next 3 years.

“Conservatively speaking, I suspect the “Algorithm Gun” stock could rise 1,000%.

“The company can begin selling and shipping units as soon as the FDA gives the final go-ahead. So I predict you could see these devices hitting medical offices and labs in the next few months.”

Will that really happen? Well, the timing is right — MELA filed for approval for the MelaFind with the FDA on June 9, and with expedited review the answer could come as soon as six months later … which would be right now. As far as I know they haven’t yet heard anything from the FDA or met with the advisory panel. When asked about the filing, the CEO at a recent conference confirmed that the application was filed on June 9, that it got expedited review and that the “median time” for approval/response from the FDA for diagnostic devices with this kind of review has recently been between 200-300 days (that’s my paraphrase, not the exact numbers) — so if the pattern holds, the expectation is probably reasonable that the response (and potential approval) will come in the first quarter of next year, if not sooner. Of course, this is a new type of device, and the FDA may have lots of questions, so there’s no guarantee.

MELA has been making the rounds of investment conferences lately (you can see many of those webcasts linked from the Electro-Optical Sciences website[11]), and the shares have been fairly active, particularly since it was profiled in Barron’s back in late August[12] (it jumped almost 20% the Monday after Barron’s covered it, and is still right near that price). So the shares may well see an other jump from this big push from Dr. Eifrig’s newsletter with Stansberry, though they don’t have quite the reach or influence of Barron’s. Definitely read that article[13] if you want a slightly more sober look, from folks who are pitching a $12 price for MELA as opposed to a $196 price.

And they do have a business plan that they think will work — it’s a disposable razer/blade model, with the machine using individual “disposable” $50 chips for each person tested, and the machine will effectively be “placed” with dermatologists for $5,000 (MELA continues to own the machine). The company expects dermatologists to probably put a 100% markup on the chips and charge patients $100 or more for a scan of their moles, which they apparently think is quite reasonable, and which their clients tell them will allow for a pretty rapid uptake of the technology even in the year or two before (as they expect) insurance companies start to cover the device.

As I said when I last wrote about this one, the consensus seems to be, (and it seems reasonable to me), that the device will be approved, and that the key for them will be the first year or two of marketing the device and figuring out how it will be integrated into dermatology offices. They’re pushing to start in the Northeast, in the Tri-State area (New York, New Jersey, Connecticut), which has a lot of dermatology practices and a lot of disposable income, and when they “prove” the concept from a marketing and integration point of view they’ll expand their footprint (assuming, of course, that the system is working in practice and patients are asking for it).

For a big national network that allows for them to market to, support, train and service dermatology practices around the country they would have to become a much larger company with a large sales force — whether that ends up being them acquiring someone with a big network, or being acquired by another dermatology company or larger medical company, or something else, they don’t know yet and it would just be a guess. It does seem that their initial rollout over the first year, with roughly 200 systems focused in the Northeast, will be the test period of commercialization, and that investors will be watching closely to see how it goes.

MELA, as I’ve noted before, is obviously going to need more money to get past the first phase of rolling out to the tri-state area, and they don’t know if the financing will come from partnerships, debt, or dilutive equity financing, but they will be burning through a fair amount more money before they become profitable, though I’d guess (and this is just a guess) that they’ll probably wait for approval before they raise more money, to put them on a stronger footing or allow for raising equity at a higher share price.

Will it make you a million? It’s impossible to say, of course — analysts put price targets on MELA that average out to about $12, but there’s a lot of uncertainty about when the firm will become profitable, and whether this will quickly become a mass-adopted technology by thousands of dermatologists or it trickles out into the marketplace much more slowly. I’ll be watching MELA, and might even speculate on the shares at some point (not for at least three days, of course, per my rules) — the business model is certainly a proven one in general in the medical space, and it sounds like with any decent volume it could be very lucrative, the only real questions are whether the FDA will approve in a timely fashion without big questions, how the rollout and initial commercialization progress in selling dermatologists on the machine, and whether the results from the clinical trials hold up in mass use and get patients excited about, and demanding, the MelaFind for their suspicious moles.

There are always potential hiccups, of course, as with anything medical, but at least a fair amount of the uncertainty over the shares has been worked out over the past couple years — my early articles showed more skepticism about the company than I feel now, and I’ve received lots of response from doctors both for and against the device and, importantly, whether it will really be good enough to avoid unnecessary biopsies, or if fear of malpractice will drive dermatologists to biopsy moles regardless of the MelaFind’s results — so don’t come away with the impression that this is guaranteed, or that even FDA approval necessarily means that these shares will double, the approval of the device is quite obviously already assumed by the market to a great degree, so it’s hard to imagine the shares doubling in a day with approval, for example. What we’re waiting for is to see how it’s approved and how it works commercially.

What do you think? Eager to jump on the MELA bandwagon with Eifrig, Lichtenfeld and others? Skeptical of this new device and its ability to create a new market? Worried about the share price or FDA approval? Let us know with a comment below.

And if you’ve tried Eifrig’s Retirement Millionaire newsletter, let us know what you thought by clicking here to review it for your fellow investors[14]. Thank you!

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