Enteromedics (NASDAQ:ETRM) has essentially avoided any discussion of how many implants have happened and instead is selling a "Plan B" to investors in hopes that they will buy it. New management is essentially asking that investors allow the reset button to be hit and to keep the faith that "Plan B" will offer fundamental differences from "Plan A". In my opinion this is looking to be a situation where the initial failures were so bad that a stark shift was needed and the company is pinning all hopes on the new strategies.
In 2015 Enteromedics focused on signing up centers, training doctors, and trying to get insurance companies to cover its anti-obesity device called vBloc Maestro. The device is a surgical implant that controls signals in a nerve that theoretically control the patients desire to eat. The year 2015 was a miserable failure which ultimately led to a stock price decline that took the company out of NASDAQ compliance. Even after a 1-15 reverse split in January of 2016, the company is flirting with NASDAQ compliance for listing yet again.
In its quarterly conference call Enteromedics management seemed to gloss over the bad financials and instead outline the new strategy to seek out cash paying patients in selected regions. Essentially the company is chasing wealthy people that have a body mass index rating of over 35. In the company's latest conference call they even compared the success rate of prospects to that which is seen in elective surgery. Elective surgery is essentially relegated to the vanity market. It seems that in one breath the company speaks to an overwhelming unmet medical need, but in the other breath is comparing the vBloc procedure to the elective surgery market.
I think current management perhaps was successful in building hope for investors that need it, but fell well short of building a case that the current strategy would work to a level that can allow the company to get past debt, revenue, and cash burn issues. In my mind the conference call carried a flavor of getting the listener to take a specific message to the street rather than the important message. See Below:
- Company focuses on one recent patient that lost 50 pounds in 3 months. This sounds great, but in an advertisement I can already see the disclaimer that this persons results may not be typical.
- Company calls its device a bridge between pharmacological intervention and full bariatric surgery. That segment is more of a niche than a bridge, and these days there is now more than one device trying to fill that niche. The treatment dynamic is diet and exercise. If that fails, the typical next step is a extremely low calorie diet and monitored exercise. If that fails, pills are tried. If that fails, surgical options are then on the table.
- Company speaks of Winthrop University hospital and the fact that its 8,000 employees and spouses now have coverage for vBloc. The 8,000 number seems impressive, but how many of those 8,000 would even qualify or need such a treatment? A handful perhaps. Remember, a basic requirement is a BMI of over 35. I have seen dozens of communications referencing 8,000 people. Savvy investors look deeper. Think about it. We are all eligible to file for disability benefits under Social Security, but that does not mean that hundreds of millions of people in this country will get them.
- Company speaks to "1,000's of leads". Radio ads do generate leads. The percentage that go from responding to the ad to an actual procedure is very limited.
- Company spells out a 3 to 6 month process from first contact to surgery. That has essentially always been the case, but reiterating it buys management time to hopefully increase sales.
The bottom line with Enteromedics is that it has a nifty medical device that will help some people but is filling a niche that is difficult to fill. The company is burdened with a financing deal that has $25 million due in less than 24 months, and is once again teetering on dipping below $1.00 per share. "Plan A" was an abject failure, and there is no concrete evidence that "Plan B" can get this company to a stable position. Time is working against this company, and for the reasons outlined it is my opinion that this equity is very, very speculative and will remain in that category for quite some time. I found it quite telling that management avoided any real in depth discussion of the financials in its recent presentation and tried to lead with a rosy hope-filled strategy.
Is ETRM worth a play? I am sure there will be a handful of press releases highlighting some positive or another that will deliver a 10% pop. Traders will love this play, but investors that are not already in it will wait for concrete results before pulling a trigger. Stay Tuned!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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