EnteroMedics Inc. (ETRM) is a medical device company focused on designing and developing devices that use neuroblocking technology. These devices are used in the treatment of metabolic diseases, obesity and other gastrointestinal disorders. The company develops a pacemaker-like device, viz. Maestro Rechargeable System, that uses EnteroMedic's proprietary technology, viz. VBLOC vagal blocking therapy, to achieve weight loss. Currently, Maestro is approved in Australia and Europe and is awaiting approval in the U.S. The System is on the Australian Register of Therapeutic Goods in Australia and received the CE mark in Europe. The company has a distributor Device Technologies Australasia Pty Limited in Australia; and an agreement with Badar Sultan & Brothers Co. W.L.L. for commercialization and distribution in Gulf Coast Countries.
The company has collaboration with the Mayo Clinic for the research and development of its products. The trials are being run U.S., Mexico, Norway, Australia and Switzerland. It's a $126.85 million market capitalization company, with 32 employees.
The VBLOC vagal blocking therapy targets the vagus nerve which is responsible for regulating activities in the human body, providing a two-way communication between the body and the brain. These regulate activities that affect digestion and activities of stomach, pancreas and intestines. The VBLOC targets the psychological effects of these vagus nerves, by disrupting the signaling, which affects the perception of fullness and hunger.
The VBLOC therapy interferes with the food intake and processing signaling between the brain and the stomach, which results in reducing appetite and resultantly creating weight loss. The signaling is blocked using the pace-maker like implant known as the Maestro® Rechargeable System. The system is implanted using a minimally invasive laparoscopic procedure, and preserves the normal digestive system. The device is programmed by the physician according to the needs of the patients, and can be adjusted, deactivated, reactivated or completely removed. Additionally, the patient isn't subject to any food restrictions or nutritional deficiencies.
The company's VBLOC therapy is delivered using the Maestro Rechargeable System, which is currently awaiting approval in U.S. It consists of a rechargeable neuroregulator that is subcutaneously implanted and two electrodes laparoscopically implanted, in a procedure of 60-90 minutes. The VBLOC therapy is delivered via the electrodes implanted at the trunks of vagus nerves, above the junction between esophagus and stomach. The device works during the waking hours of the patient, and consists of a neuroregulator, lead system, mobile charger, transmit coil, and a clinical programmer.
The Maestro System has been implanted in more than 600 patients, some for almost five years. The clinical trials have demonstrated efficacy, safety, and sustained weight loss. The company recently announced the safety and efficacy results (18 months) for its VBLOC vagal blocking therapy's 5 year ReCharge Pivotal trial. A total of 117 patients were treated in the VBLOC group, and achieved excessive weight loss of 25%, or a total body weight loss (TBL) of 10%. On the contrary, the control group patients (n=42) achieved 12% of EWL or TBL of 5%. The difference in EWL of 15% between the VBLOC and sham control group was found to be statistically significant (p<0.001). Overall, 54% VBLOC patients achieved at least 20% EWL, and 25% EWL was achieved by 41% patients, relative to 26% and 17% respectively, in control group for the 18 months. And the adverse events related to the device in the 18 month interval for VBLOC group was 4.3%, with no cardiovascular effects. Some of the adverse events listed for this device include heartburn, pain, nausea, depression, constipation, diarrhea, organ or nerve damage, infection, surgical explants or revision, device malfunction, device movement and allergic reaction to implant.
The company's price target was recently increased from $2 per share to $3 per share, by Roth Capital, owing to its recent run and positive trial results. Additionally, Northland Capital Markets also raised their price target from $3 to $7, with an outperform rating. The analyst Suraj Kalia doesn't see any mixed or negative ruling from the FDA based on the 18-month data. He also suggests that the potential of the company also makes it an attractive target for a takeover.
An Advisory Committee panel meeting is anticipated in the first quarter of 2014, for which the company is preparing. Furthermore, the approval from the panel is expected to result or strengthen the chances of an approval decision by FDA in the first half of 2014. This approval is expected to cause a major rally, as only the positive study data from Maestro system caused an approximate 63% spike.
Fundamentals and Potential Risks
The company has been reporting losses since its inception and reported a net loss of $19.2 million in the first nine months of 2013, and a total of $219.2 million losses. The company isn't generating any revenue; however it did recognize $311,000 revenue in 2012, from ex-U.S. sales. The lack of revenue in 2013 was attributed to the increased resources deployed for the U.S. approval. The company has cash and equivalents of $24 million, out of which $2.7 million is attributed to the use of ATM facility with Canaccord Genuity in October. It has a cash burn of $14.1 million for the nine month ending September 30.
The company is faced with the risk of FDA not approving the Maestro system or asking for additional trials, as there is speculation that the device doesn't provide substantial benefit over placebo. However, the company has reported positive results since the 2009 report of inability to meet endpoints, but there is still skepticism associated with it.
Furthermore, the company is short on resources as can be seen in its inability to carry commercialization in approved ex-U.S. markets on account of investing efforts for U.S. approval. The company will have to expand its workforce and revenues to commercialize Maestro systems upon expected approval in U.S.
Additionally, there is a chance that some of the obese patients may opt towards pills available in the market to avoid implants. Even though Maestro provides substantial benefits as compared to anti-obesity drugs, but it may still take time to be adopted widely.
The company doesn't have direct competitors for its neuroblocking technology for obesity; however there are companies developing and marketing anti-obesity devices. These include Apollo Endosurgery; BAROnova; and IntraPace. Among these competitors Apollo has a marketed product Lap-Band; whereas BAROnova and IntraPace are currently developing their products. IntraPace however does have an abiliti system which is based on the pacemaker technology and has received the CE mark in EU. Also to note is BAROnova's Transpyloric Shuttle, inserted into the stomach through endoscopic procedure, causing stomach to fill faster and stay full longer. It has not yet been approved for in U.S. or internationally.
Other competitors in the obesity space for conventional methods of treatment include Arena Pharmaceuticals (ARNA), Orexigen Therapeutics (OREX), and VIVUS Inc. (VVUS), for their anti-obesity oral pills.
Currently there is a single approved obesity device in the market known as the Lap-Band, originally of Allergan (AGN), now sold to Apollo Endosurgery Inc. for an almost $110 million deal. Lap-Band is an adjustable gastric banding, that is implanted laparoscopically around the stomach, reducing its capacity.
The Maestro Rechargeable System has edge over the Lap-Band as the former doesn't require any adjustments due to displacement, frequent physician visits; has lower side effects, more effective EWL, and doesn't require diet adjustments. Furthermore, Lap-Band is not very popular among the surgeons and patients as shown by numbers, giving Maestro a sure shot edge over its competitor.
The company already has the right distribution partners outside U.S. for Maestro Rechargeable system, and is looking for adding diabetes and hypertension to the existing indications. Once the company gets the FDA approval, I believe they will accelerate their commercialization activities in all regions and thus are expected to reap increased revenues.
Financially the company is relatively stable at the moment, despite large amount of debt, an ATM facility of almost $20 million, continued losses and no revenue. The company has cash enough to service the operation for a little over three quarters, which include the commercial activities for Maestro System upon approval. The company isn't seeking partners for its commercialization in U.S., thus will have to fund these activities with the existing cash. All in all, the company has a long way before it turns to profitability, and that too if the product is approved by FDA.
The Maestro System does have potential if it's approved, as it provides the patients with ease of use and less hassle as compared to other weight loss options. There is no lifestyle change associated with the use of this device and little or no adverse affects. It's easy to believe that the device when approved will bring in major profits for the company and will do well to positively impact the growing obesity epidemic. As far as the competitors are concerned, the company is well positioned as the product has benefits and it is publicly listed, giving it the ability to raise additional capital through offerings.
The company has seen a decent run since the positive data from the data of Maestro clinical trials, but many analysts are skeptical as to the momentum left in this run. The stock spiked 63% only on the positive data on December 3, and if the product is approved we can expect a major rally. Thus, if there is a price dip without negative news, which is expected, it is an opportunity for risky investors to buy the shares of the company and await the rally following approval. However, there is the chance of FDA not approving the device, or asking for another trial, which may substantially bring down the prices.