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EnteroMedics Inc. (NASDAQ:ETRM)

Business Update Call

September 26, 2008 10:00 am ET

Executives

Greg S. Lea - Senior Vice President and Chief Financial Officer

Mark B. Knudson Ph.D. - President and Chief Executive Officer, Chairman

Analysts

Mike Weinstein - JP Morgan

Operator

Welcome everyone to the EnteroMedics International Federation for the Surgery of Obesity Data Presentation Conference Call. (Operator Instructions) I will now turn the call over to Greg Lea, Chief Financial Officer to start the call.

Greg Lea

Thank you for joining the EnteroMedics International Federation for the Surgery of Obesity Data Presentation Conference Call.

With me on the call today are Dr. Mark B. Knudson, president, CEO, and chairman and Dr. Katherine Tweden, vice president of research and interim VP of medical affairs.

As a reminder this conference call as well as the EnteroMedics SEC filings and web site at enteromedics.com contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those discussed through the known and unknown risks, uncertainties and other factors. These risks an and uncertainties are described more fully in the company’s filings with the Securities and Exchange Commission, particularly those factors identified as risk factors in the company’s 10-K filed March 13. 2008. The company is providing this information as of the date of this conference call and does not undertake any obligation to update any forward-looking statements contained in this document as a result of the new information, future events, or otherwise.

With that I will turn the call over to Dr. Mark Knudson.

Mark Knudson

We are excited about the data presented today by Dr Jim Toouli, Professor of Surgery at Flinders University Medical Center in Adelaide, Australia. They were presented here at the International Federation for the Surgery of Obesity and Metabolic Disorders in Buenos Aires. Importantly, these data support our belief that the pipeline for VBLOC therapy indications can be expanded.

Specifically, I would like to discuss the results Dr. Toouli presented today and their implication for the future development of VBLOC therapy. We will then conclude the call by opening up for questions and answers.

As a reminder VBLOC therapy is designed to treat obesity by intermittently blocking the vagus nerve between the stomach and the brain with a high-frequency, low-energy electrical impulse delivered via an implantable pacemaker sized device. This mechanism of action is primarily designed to produce appetite suppression, feelings of fullness and corresponding weight loss.

EnteroMedics in conjunction with multiple centers of excellence in weight management and metabolic surgery around the globe is studying VBLOC therapy in several clinical trials including two feasibility studies VBLOC-RF1 and VBLOC-RF2. As part of our plan for these trials we have looked at specific sub-groups of patients to better understand how VBLOC therapy affects two key co-morbidities associated with obesity: those are type 2 diabetes and hypertension.

The data presented today demonstrates that the effects of VBLOC in these co-morbidities are quite substantial. There were six patients in the RF1 and the RF2 trials with type 2 diabetes. At baseline the mean BMI in this group was 41.5 and the mean hemoglobin A1C was 8.7%. Following activation of VBLOC therapy there was a rapid and marked improvement in A1C. There was as statistically significant reduction of 1.4% to an A1C level of 7.4% as early as one month of therapy and the effect was durable with a six-month statistically significant reduction of 1.7% to an A1C level of 7%. As a comparison in published trials patients treated with Amelynspiada [ph] a current diabetes drug showed a 0.8% reduction in A1C at 30 weeks.

The other sub-group that we evaluated was patients with hypertension. We analyzed data from 19 patients following activation of VBLOC therapy. We are pleased to report that both systolic and diastolic blood pressure were normalized bringing these patients to a blood pressure of close to 120/80. Specifically there were statistically significant reductions in systolic blood pressure of 19.8 and 20.4 mm of mercury at one month and six months respectively from a baseline of 144.6 mm of mercury.

Similarly diastolic pressure was statistically significantly reduced to 10.4 and 6.4 mm of mercury from a baseline of 87.9 at one month and six months respectively. Here again the effects of VBLOC therapy were both rapid and durable.

Of equal significance four of eight patients were able to either reduce or discontinue hypertension medication and there was no significant change in blood pressure observed in subjects with normal baseline systolic or diastolic blood pressure. These results demonstrate that VBLOC therapy may have great promise in improving the obesity co-morbidities of diabetes and hypertension independent of and prior to substantial weight loss.

At this meeting as well as the American Society for Metabolic and Bariatric Surgery meeting held earlier this year, the effects of obesity therapies on improving co-morbidities have been receiving more and more focus because the treatment of co-morbidities directly affects long-term outcome; specifically the morbidity, mortality and quality of life for patients with obesity. If supported by further study these findings could enrich the scope of VBLOC therapies clinical application for obesity as well as position the company with additional indications thereby potentially creating significant additional value.

We plan to expand our clinical development program with feasibility studies in each of these co-morbidities beginning with diabetes.

For diabetes we have launched a prospective, open label, single arm study know as ENABLE that will recruit up to 40 diabetic subjects at four study centers outside the United States. The study will evaluate VBLOC therapy’s effect on glucose regulation at 1, 6, and 12 months. This study is currently enrolling patients with a target date for enrollment completion this year. We will report progress of this study in early 2009 and in addition, as you recall, we are evaluating the effect of VBLOC therapy on glycemic control as part of our EMPOWER trial as well.

We are assessing similar options with regard to a US investigational device exemption for a hypertension therapy feasibility study. We anticipate reviewing those plans with you in more detail in early 2009.

In support of our development efforts in these indications we have filed patent applications for the use of VBLOC therapy in both hypertension and diabetes.

We are very excited about these new opportunities, but remain focused first and foremost on developing VBLOC therapy in obesity. This remains our most important and advanced indication with the randomized, double-blind, placebo-controlled and power pivotal study now fully enrolled and all patients having been activated. We have kept to our schedule and remain on track to lift the EMPOWER study blind approximately 12 months from now.

In summary, we are very excited about these new data and about the potential expansion of our indication pipeline. We believe that these studies will enhance VBLOC therapy’s value to the medical community, patients, and our shareholders.

That concludes our prepared remarks.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Weinstein of JP Morgan.

Mike Weinstein - JP Morgan

Let’s start off by spending a minute on the additional clinical work that you’re going to be doing over the next several months and to make sure we all have that down.

Mark Knudson

We are currently enrolling in a trial that we are calling ENABLE and that trial will evaluate approximately 35 or 40 type 2 diabetic patients. We will look at what happens with those patients, A1C, as well as several glucose homeostasis hormones over at one month, six months, and twelve months. That trial is currently enrolling and we expect enrollment to be completed before the end of this year.

Mike Weinstein - JP Morgan

In your discussions with the FDA, assuming you see the outcomes that we’re seeing thus far in this early data, it’s only 35, 40 patients. What can you do with that and how can that be incorporated, if at all, into the ultimate label?

Mark Knudson

I think a lot of that will depend on what we see in the diabetic sub-study portion of the EMPOWER trial, but certainly it will give us the data we need to do a pivotal trial on these two indications as we move forward. Any other advantages or acceleration will actually have to wait until further conversation with the FDA.

Mike Weinstein - JP Morgan

And from, I know we’re talking about small numbers here, but from the diabetic patients that you evaluated here in this study, the ranging of the response between the patients, do you have any hypothesis on why some patients are having a greater response than others or any thoughts on that?

Mark Knudson

Well as you point out this is a small number, but we did have a fairly wide range. In fact I think the highest A1C that we saw in this trial was slightly over 12 and that patient had a dramatic response getting down to 8 which is actually pretty good in those conditions. So we do believe that there is a direct effect and it may be related to delayed gastric emptying as well as an affect on the hormones that control insulin and glucose production, which are very much vagully mediated effects. We don’t know at this point and we expect to try to understand that as part of the ENABLE trial.

Mike Weinstein - JP Morgan

Obviously there is no control here to the paragons, but you wouldn’t see a placebo effect with A1C is that your statement?

Mark Knudson

No you would not.

Mike Weinstein - JP Morgan

The hypertension sub-group analysis, can you give us your thoughts on the mechanism there and the improvement we’re seeing in hypertension?

Mark Knudson

I think it is quite interesting that we have selectively reduced the blood pressure of hypertensives without affecting the blood pressure of normotensives, which shows that it is having an effect on how blood pressure is controlled in patients with that normal blood pressure.

How this actually happens is something that we want to further explore and one of the reasons that we’re taking a little more time before designing a feasibility trial for hypertension. But we believe that it is probably a vagully mediated central reflux that we are affecting.

Mike Weinstein - JP Morgan

There is some interesting work that’s going on with at least one company, but a couple different companies in the private world that you are familiar with, I’m sure, relative to hypertension and potentially implantable devices. The data you’re generating here is interesting. Are you going to look at patients that have more severe hypertension that have basically higher baselines and try and generate some bigger numbers in terms of the data?

Mark Knudson

That is one of the important considerations that we’re looking at as part of the IDE feasibility trial, yes.

Mike Weinstein - JP Morgan

You are generating some really interesting data. The numbers of patients are small but the data is very compelling and we are talking about data opportunities and we are talking about diabetes and hypertension. How do you fund these opportunities? Cash is tight and you are trying to manage through the EMPOWER studies. How do you manage the desire to go after what could ultimately have a meaningful impact on the company versus the realities of the balance sheet today?

Greg Lea

As you recall, when we did the initial public offering and discussed the model and the budget of the company, we had already forecast in that to having to do some additional feasibility studies, yet we hadn’t determined exactly which ones. So we feel pretty good with our budgeting process and our cash, where we’re at today. As you know we projected we had enough cash through 2009. We continue to look at all other possibilities or multiple avenues of financing whether that is renewed debt agreements, partnering, or equity financing as we go forward, at the right time. So we feel good with where we’re at.

Mike Weinstein - JP Morgan

Mark can you spend a minute on your OUS market strategy, Europe and Asia?

Mark Knudson

Yes at this point we are still expecting to receive CE mark by the end of this year and at that point we will begin to evaluate selected markets where we may be able to get VBLOC therapy introduced and to have sales. We still are not yet in a position to announce though where we would launch those at the outset and we also are exploring the possibility of using partners for distribution in certain areas of the world.

Mike Weinstein - JP Morgan

You think we could hear something by year-end?

Mark Knudson

I would say year-end or early first quarter, yes.

Operator

There are no further questions.

Mark Knudson

Then that concludes our conference call. As always, if you have any additional questions please do not hesitate to call us at 651-789-2860. Thank you very much for participating in the call and have a good day.

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