EnteroMedics' (ETRM) investors are likely quite frustrated these days. Just 4 months after a 1-for-15 reverse split to solve NASDAQ listing requirements, the company finds itself once again trading below the $1.00 per share NASDAQ minimum. EnteroMedics will need to shift some focus to getting into NASDAQ compliance and, again, investors seem to be bracing for yet another reverse split discussion.
The company makes a weight loss device that stimulates a nerve in the body which makes patients feel that their hunger is satisfied. The device garnered FDA approval in early 2015, but the company has not been able to effectively market the device. Sales have been much lower than needed for equity appreciation, and the cash situation at the company is less than optimal for launching the type of campaign needed.
This is not about whether or not the device works as much as it is an indictment on the anti-obesity sector as a whole. In my opinion, the EnteroMedics vBloc device fills a small niche in the marketplace between pills, injections, and full bariatric surgery.
Last week the company issued a press release that essentially recycles known information. The press release was an announcement that the Obesity Journal published the results of a previously announced clinical trial in its most recent publication. Getting results published is a good thing, but for investors, the critical element is getting the patients signed up and buying the vBloc device.
News that is not really new news is not a strategy that builds investor confidence. With a company in EnteroMedics' position, it comes off as a desperate move designed to stop the equity from slipping further. The reality is that sales of the vBloc device are struggling and the company essentially has its hands tied. When the company was last involved in a delisting process, it was able to garner $25 million in cash for convertible notes. The needed cash buys the company some time, but the impacts of convertibles to the average shareholder can be catastrophic.
At this stage, EnteroMedics has been trading under the $1.00 NASDAQ requirement for 12 days and seems to have nothing on the horizon that can get the equity above $1.00 in the next 18 days. On May 6, 2016, if the stock is not above $1.00 per share, the company will get another delisting notice. This will create the need for company actions which will likely include asking shareholders to approve yet another reverse split.
Many retail investors have suffered big losses in this stock, and many still held out hope after the last reverse split. The company currently has a market cap of just $7 million, and we have seen little progress in Q1 on getting the vBloc device into the marketplace with numbers that are meaningful.
I had an investor recently communicate that EnteroMedics could be a good buyout target. Investors need to differentiate the stock from the company. Yes, EnteroMedics could be a buyout target. That being said, would the buyout price make you whole? Most likely it would not.
Stop and think about this for a moment. The last reverse split 1 for 15 with the stock at $0.12 per share. The current price of $0.83 per share adjusted for that first reverse split has this company trading at just $0.06 per share. The situation is getting worse, not better. Even if a company were to offer double the current price, the result would be getting back to where things were in the first week of this year.
A bit over a year ago, a critic of mine called EnteroMedics a "screaming buy" at $1.30 per share and bought into the company himself calling it a great play in the anti-obesity space. My caution in this company has always been that the vBloc device fits a small niche in a market that is simply not developing the way many thought it would. The effective price of that persons stake is now $0.6 per share. It is almost a total loss at this stage. These days, people in that position tend to simply hold on and hope for a miracle. Hope is not an investment strategy, and while a miracle could happen, it is not at all likely. Investors in this position would need to see the stock rise by a factor of 20 to even be near breaking even. Simply stated, even a buyout would fall well short of delivering what is needed.
It is my opinion that retail investors still in this equity run a serious risk of seeing this company taken private at a price that will not be very rewarding to long-term holders. The bottom line is that EnteroMedics is a company with financial issues, marketing issues, and equity issues. None of these issues are easy to resolve. Separate the product from the company for a moment. Even if you think that vBloc is the greatest product in the world, it may not be a good investment. 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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