EnteroMedics Receives Key Approval

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With its pivotal trial well under way and cash running out, EnteroMedics ETRM remains in a race to get its only product candidate to market before the clock runs out. Fortunately for the firm, it has received a couple shots in the arm recently, and we're leaving our fair value estimate unchanged.

EnteroMedics had been faced with the distinct possibility of running out of cash by late 2009. However, it has cobbled together a combination of debt and a private placement that should give the firm enough cash to last into mid-2010, when it expects to file for domestic regulatory approval of its Maestro weight-loss system. Considering the rather difficult conditions that have prevailed in the various markets where firms typically seek financing, the fact that a developmental-stage firm like EnteroMedics has secured it is a feat within itself. We think this underscores what's known of the strength of EnteroMedics' technology. Of course, these private sources of funding may dry up if the pivotal data released in mid-2009 are not favorable. But for now, it looks as if the firm has enough cash to continue operating through the rest of this year.

Another spot of good news came in the form of Maestro's regulatory approval in Europe. While we are not particularly optimistic that this will result in meaningful European sales this year, we do think the approval suggests EnteroMedics has a legitimate shot at getting FDA approval and entering the domestic market. The competitive dynamics are somewhat different in Europe and will probably lead to slower uptake of the Maestro device. European governments are typically slow to establish reimbursement for these newer and more expensive technologies. This is a key factor that hinders uptake. Further, Allergan's AG N Lap-Band is well established in Europe for minimally invasive gastric bypass. It may take some time for surgeons to become familiar and comfortable with the electrical Maestro system.

Debbie Wang is a senior stock analyst and former associate director of stock analysis on the health-care team. Before joining Morningstar in October 2002, she was a vice president and senior brand planner at Leo Burnett, where she led brand strategy on a variety of accounts, including Allstate, Amoco, McDonald's, Heinz, 7UP, Smucker's, Morgan Stanley Dean Witter, Pepto-Bismol, and Celebrex. Wang holds an MBA from the University of Chicago Graduate School of Business and a bachelor's degree in anthropology from Colgate University.

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