ETRM : EnteroMedics Stock Analysis and Research Report

2017-11-09 - by Asif, Contributing Analyst

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EnteroMedics is a medical device company focused on the development and commercialization of technology to treat obesity and metabolic diseases.

The vBloc®System, its initial product, is a U.S. Food and Drug Administration (FDA)-approved pacemaker-like device that delivers vBloc® Neurometabolic Therapy (vBloc Therapy) to help patients feel full and eat less by intermittently blocking hunger signals on the vagus nerve. The company's therapy limits the expansion of the stomach, helps control hunger sensations between meals, reduces the frequency and intensity of stomach contractions and produces a feeling of early and prolonged fullness. The company believe the vBloc System offers obese patients a minimally-invasive treatment that can result in significant, durable and sustained weight loss. The company believe that its vBloc System allows bariatric surgeons to offer a new option to obese patients who are concerned about the risks and complications associated with currently available anatomy-altering, restrictive or malabsorptive surgical procedures.

EnteroMedics has a limited operating history and on January 14, 2015 received FDA approval to sell the vBloc System in the United States. In addition, EnteroMedics has regulatory approval to sell the vBloc System in the European Economic Area and other countries that recognize the European CE Mark and do not have any other source of revenue. The company were incorporated in Minnesota on December 19, 2002 and later reincorporated in Delaware on July 22, 2004. EnteroMedics has devoted substantially all of its resources to the development and commercialization of the vBloc System, which was formerly known as the Maestro or vBloc Rechargeable System.

On May 22, 2017, the company acquired the Gastric Vest System™ through its acquisition of BarioSurg. The Gastric Vest System is an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in obese and morbidly obese patients. The device wraps around the plicated stomach, emulating the effect of conventional weight-loss surgery, and is intended to enable gastric volume reduction without permanently changing patient anatomy. The acquisition was completed under the terms of a merger agreement pursuant to which BarioSurg became a wholly-owned subsidiary of its company. The aggregate merger consideration the company paid for all of the outstanding shares of capital stock and outstanding options of BarioSurg was: (i) 1.38 million shares of its common stock, (ii) 1.0 million shares of its newly created conditional convertible preferred stock, which shares will convert into 5.0 million shares of its common stock subject to and contingent upon the post-closing approval of its stockholders in accordance with the NASDAQ Stock Market Rules, and (iii) $2 million in cash.

The company received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the vBloc System, for the treatment of adult patients with obesity who have a Body Mass Index (BMI) of at least 40 to 45 kg/m2, or a BMI of at least 35 to 39.9 kg/m2 with a related health condition such as high blood pressure or high cholesterol levels, and who have tried to lose weight in a supervised weight management program and failed within the past five years. In 2015 the company began a controlled commercial launch at select surgical centers in the United States and had its first commercial sales. During 2015, the company initiated a controlled expansion of its commercial operations and started the process of building a sales force. In January 2016, the company hired new executives to oversee this expansion. The company's direct sales force is supported by field clinical engineers who provide training, technical and other support services to its customers. Throughout 2016, its sales force called directly on key opinion leaders and bariatric surgeons at commercially-driven surgical centers that met its certification criteria. Additionally, in 2016, through a distribution agreement with Academy Medical, LLC, U.S. Department of Veterans Affairs (VA) medical facilities now offer the vBloc System as a treatment option to veterans using their veteran healthcare benefits. The company plan to build on these efforts in 2017 with self-pay and veteran patient focused direct-to-patient marketing, key opinion leader and center specific partnering—all of this in conjunction with a multi-faceted reimbursement strategy. The company's vBloc Therapy is a covered benefit for over 21 million U.S. veterans. The VA estimates that 78% of U.S. veterans are overweight or obese and nearly 25% of VA patients have diabetes.

To date, EnteroMedics has relied on, and anticipate that the company will continue to rely on, third-party manufacturers and suppliers for the production of the vBloc System.

In 2016, the company sold 62 units for $787,000 in revenue, and in 2015 the company sold 24 units for $292,000 in revenue. EnteroMedics has incurred and expect to continue to incur significant sales and marketing expenses prior to recording sufficient revenue to offset these expenses. Additionally, its selling, general and administrative expenses have increased since the company commenced commercial operations, and the company expect that they will continue to increase as the company continue to build the infrastructure necessary to support its expanding commercial sales, operate as a public company and develop its intellectual property portfolio. For these reasons, the company expect to continue to incur operating losses for the next several years. EnteroMedics has financed its operations to date principally through the sale of equity securities, debt financing and interest earned on cash investments.

The company's goal for the vBloc System remains broad coverage and reimbursement for vBloc Therapy. The company believe that the most significant barrier to adoption for patients who want vBloc Therapy has been cost and lack of payer coverage. In June 2017, the company launched its vBloc Now program. The vBloc Now program provides qualified patients battling obesity the opportunity to receive vBloc Therapy, including the device, procedure, and vBloc Achieve follow up program, at an affordable price in exchange for sharing detailed health data with EnteroMedics. The program is available for a limited time, will reduce patient total out-of-pocket costs, and compete with leading covered bariatric surgery procedures as well as other low-cost weight loss devices.

In addition, the vBloc Now program provides it with additional commercial data concerning vBloc Therapy in order to enhance its case with third-party payers that the vBloc System can produce a clinically meaningful level of weight loss while also providing a positive impact on diabetes and other comorbidities in certain patients. While the company do not expect to recognize any revenues in conjunction with the vBloc Now program, the Company anticipates that vBloc Now program expenses, which are included in selling, general and administrative expenses, will be offset by a reduction in marketing and advertising expenses and will not increase the Company’s overall operating expenses.

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