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Trade Update:

Shares of CombiMatrix (NASDAQ:CBMX) surged almost 200%, exceeding even my expectations, following my article discussing the company as an undervalued story with significant catalysts on the immediate horizon. As noted in the "comments" section of the article, I advised taking some profits when shares had hit the short-term target mentioned in the article.

Introduction:

Nothing excites investors more than a small biotech company making significant progress in extending human life. The meteoric rise of Geron (NASDAQ:GERN) and EntreMed (NASDAQ:ENMD) in the late 1990s are quintessential examples of the potential returns this euphoria can generate in the market for early investors. Geron surged 300% overnight on a stem cell study that some optimists proclaimed was the holy grail to immortality. EntreMed opened at a breathtaking $85 from a prior close of $12 following a report about the ability of the company's lead product to shrink tumors in mice. Just as speculators ultimately proved to be vastly overestimating these companies' discoveries, I believe investors are currently underestimating a company that may in fact hold the holy grail in the fight against cancer.

EDAP: The Holy Grail in Eradicating Cancer?

Prostate cancer is the most common cancer among men in the United States, and the second leading cause of death. EDAP TMS S.A. (NASDAQ:EDAP) has a cancer-killing weapon by the name Ablatherm-HIFU, using High-Intensity Focused Ultrasound (HIFU) to eviscerate localized prostate cancer. In sharp contrast to Geron's "holy grail," EDAP's technology has advanced well beyond laboratories and mice. In fact, a landmark 15 year outcome study published just last week shows just how effective EDAP's Ablatherm-HIFU really is. The 705 patient study included 78.5% of men with intermediate or high-risk disease. The post-treatment survival rate was an astounding 99% with a metastasis-free survival rate of 95% . This compares very favorably to the 15 year relative survival rate, without the often painful and debilitating side effects of treatments like radiation or invasive surgery. Stefan Thuroff, M.D., Primary Investigator and Vice Chairman of the Department of Urology at the Harlaching Clinic, proclaimed the results "extremely important...clearly demonstrating the extent of cancer control afforded by HIFU therapy." John Rewcastle, Medical Director of EDAP, agreed that this is an "extremely important publication" because it demonstrated that "prostate cancer did not appear to reduce the life expectancy of those men diagnosed with the disease who underwent HIFU."

As HIFU is "clean energy," it does not damage surrounding tissue, enabling subsequent treatments if necessary or following failed radiation therapy. The treatment is performed on an outpatient basis with minimal side effects. Because of the precise targeting of the tissue ablation, incontinence and erectile dysfunction are much less likely to occur after HIFU treatment.

Equally as exciting is the promise this technology holds to combat a multitude of other diseases. Significantly, EDAP is also exploring HIFU as a treatment for other forms of cancer including metastatic liver cancer. Focused ultrasound is even being studied for the treatment of Parkinson's Disease. We may well be witnessing a monumental paradigm shift in how we approach the fight against cancer. As a result of EDAP's technology, we may someday look back at poisonous radiation and crippling surgery as primitive, obsolete treatments of formidable diseases.

Game-Changing Catalysts on the Horizon

Those who follow me know that I like to find companies with catalysts that I believe will propel their shares significantly higher. No form of treatment using HIFU has been approved in the United States for the treatment of any stage or grade of prostate cancer. FDA approval will represent a monumental game-changer for EDAP for a number of reasons that I will discuss below. Earlier this month, EDAP submitted its Pre-Market Approval (PMA) application to the U.S. FDA. The submission included data from ENLIGHT, the completed Phase III Ablatherm-HIFU FDA clinical trial. The CEO discusses the significance of this milestone here. FDA regulations provide 180 days to review the PMA and make a determination. Thus, EDAP may receive an FDA decision by the end of the summer.

I believe FDA approval is highly probable for EDAP, much more so than a typical biotech awaiting a decision, due to a variety of factors. Ablatherm-HIFU is already approved in several parts of the world, including Europe, Canada, Russia, Australia and South Korea. More than 32,000 prostate cancer treatments have been successfully performed. The exhaustive clinical publications further support the efficacy and safety of Ablatherm-HIFU. Finally, the 15 year outcome study discussed above weighs heavily in favor of a "yes" decision. Absent some glaring flaw in the ENLIGHT trial data included in the PMA, all the available data strongly support FDA approval.

U.S. FDA approval will be a game-changer for EDAP. The United States holds enormous market potential for EDAP simply due to the population and incidence of the disease. Additionally, higher rates of early detection before the cancer metastasizes makes patients ideal candidates for Ablatherm-HIFU treatment. In addition, other countries may be encouraged to explore and advance this therapy themselves upon witnessing the United States doing so. Finally, doctors in regions where Ablatherm-HIFU has already been approved may be more comfortable recommending the treatment with the blessing of the FDA, and insurers more likely to cover it.

I believe the FDA will ultimately concur with the statement of Marc Oczachowski, Chief Executive Officer of EDAP:

We have clearly seen a paradigm shift in prostate cancer, as patients are diagnosed earlier than ever before. Low risk patients need a middle ground between radical treatment, which is often overly-aggressive, and the anxiety of 'watchful waiting.' Ablatherm-HIFU is well-positioned to address this unmet medical need by providing a unique non-invasive and fully robotic treatment option.

EDAP is holding a conference call on Tuesday, April 2, that may generate some buzz among shareholders. I would expect this event to act as a catalyst for shares, as investors anticipate further positive developments out of the company.

Valuation

EDAP's market capitalization currently stands at under $60 million with a strong balance sheet. The fact that the market currently assigns higher valuations to cash-bleeding operations with bleak futures such as Peregrine Pharmaceuticals (NASDAQ:PPHM) and Cell Therapeutics (NASDAQ:CTIC) is, frankly, mind-blowing and nonsensical. Dendreon's (NASDAQ:DNDN) prostate drug Provenge has recently been named the second worst drug launch in history, but the stock still sports a market capitalization of well over 14 times higher than EDAP's. Unlike most speculative biotechs, EDAP is already generating a substantial, reliable revenue stream. In addition to its Ablatherm-HIFU technology which has been the focus of this article, EDAP also has a rapidly growing lithotripsy division (for the treatment of urinary tract stones) using its Sonolith ESWL technology. EDAP recently reported fourth quarter revenue growth of 25% year-over-year with record sales in its Urology Devices and Services (UDS) division. Once Ablatherm-HIFU gains access to the U.S. market, EDAP has the potential for explosive growth. I believe the market has just begun to realize how undervalued EDAP is, and shares are on the launchpad with the FDA catalyst ahead.

I'm not the only one who sees tremendous value in EDAP shares. According to a 13G filing with the SEC dated February 14, Goldman Sachs Asset Management established a position of over 1.1 million shares of EDAP, representing a 6% stake in the company.

Risks

The monumental results recently published in the studies discussed above, in addition to the proven success of Ablatherm in other countries, bode well for FDA approval. Of course, this is no guarantee, as the FDA has proven quite unpredictable at times in the past. EDAP is the global leader in HIFU treatment, but SonaCare Medical is also in the space of ultrasound therapy and poses a potential competitive threat, along with others who may enter the marketplace following its widespread acceptance in the U.S. Investors also usually need to consider the possibility of capital-raising with small biotechs. However, cash generated from EDAP's current business operations should allay these concerns for its investors. The company increased its cash position in 2012, with its operations cash stable throughout the year.

Takeover Prospects

Large pharmaceutical companies are often reluctant to acquire smaller biotechs without having some idea of how effective their technologies and treatments are on the human population, frequently relying on clinical trial data. EDAP has a proven, highly successful track record in both prostate cancer and lithotripsy treatments over a number of years in real-world populations. Johnson & Johnson (NYSE:JNJ) could acquire EDAP with its pocket change in order to expand its reach beyond its current metastatic prostate cancer drug Zytiga. Even a company like Medivation (NASDAQ:MDVN) looking to expand its prostate portfolio would have no trouble swallowing up EDAP with the cash on its books or using its soaring stock as currency. The large medical device companies like Medtronic (NYSE:MDT) or Baxter (NYSE:BAX) may also be interested in an EDAP acquisition if they sense a new paradigm shift in HIFU treatment following U.S. FDA approval.

Conclusion

The weeks and months ahead should prove to be exciting, and in my estimation, very prosperous, for EDAP shareholders. If, upon FDA approval, the market speculates that HIFU will become the standard of care in treating localized prostate cancer, and ultimately multiple other diseases, then EDAP's shares could stage a rally reminiscent of Dendreon's historic run from $4 to $58 following FDA approval of its prostate drug Provenge. Regardless of the eventual outcome, I expect shares of EDAP to climb ahead of the upcoming conference call, and to propel higher in anticipation of the pending FDA decision in the months ahead. As evidenced by the recent breathtaking move in Novagen (NASDAQ:NVGN), investors are on high alert for a biotech story stock with a promising cancer treatment and a significant catalyst. EDAP fits the bill and is on the verge of a massive breakout.

Source: EDAP: The 'Holy Grail' In The Fight Against Prostate Cancer