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EnteroMedics aims for $16M share offering to take obesity-fighting device to market

|Includes: ReShape Lifesciences Inc. (RSLS)

Hoping to push its groundbreaking obesity-fighting device across the proverbial finish line, EnteroMedics Inc. (NASDAQ:ETRM) is selling 12 million new shares to the public, according to documents recently filed with the Securities and Exchange Commission.

If the sale were held today, EnteroMedics would receive $24 million, based on its current price of around $2 per share. In September, the company, based in Roseville, Minnesota, raised $6.3 million from selling preferred stock to top investors, including MPM Capital, Bay City Capital and Aberdare Ventures.

EnteroMedics’ stock sale seems to reflect the company’s growing confidence about winning approval from the Food and Drug Administration for its Maestro device, which uses electricity to control hunger by blocking nerve signals between the brain and stomach.

That’s a stunning turnaround from a year ago when EnteroMedics teetered on the brink of disaster. In October 2009, the company said initial results from the EMPOWER studies of more than 400 patients showed people who used the Maestro device lost just as much weight as patients implanted with the dummy device.

EnteroMedics stock plummeted as executives realized they needed to raise more money in a difficult economy and redesign a study to show Maestro works.

In August, the company said the FDA approved a new 12 month study dubbed ReCharge. The trial will enroll 234 morbidly obese people who will randomly be implanted with Maestro or a sham device. This time, the dummy device will have no wires connected to the nerve. Patients also will use an updated Maestro device in which the battery pack will be worn around the belt instead of implanted.

Since late August, EnteroMedics stock has climbed about 29 percent.

The company recently sold 3.4 million shares of preferred stock to investors. (Preferred shares carry special dividends and allow investors to receive top priority for payment, should the company file for bankruptcy.) In addition, EnteroMedics granted those investors warrants to purchase another 3.4 million shares at $2.15 per share.

Investors can exercise those options six months from now or if EnteroMedics’ sale of 12 million shares generates at least $15 million. In other words, the company is betting either the new stock offering will immediately fetch more than $2.15 a share, or the stock eventually will exceed that price. Either scenario could mean significant profits for the top investors who bought the preferred shares and related warrants.

Once the common stock sale is complete, EnteroMedics estimates Bay City Capital’s 22.7 percent ownership stake will drop to 10.9 percent, according to SEC documents. The next two largest investors, MPM Capital and Aberdare Ventures, would see their stakes fall to 7.9 percent and 4.5 percent, from 16.5 percent and 9.5 percent, respectively.

Disclosure: No positions.