EnteroMedics Inc (NASDAQ:ETRM): Weighing Up VBLOC's Chances Of Coverage

EnteroMedics Inc (NASDAQ:ETRM) just keeps getting cheaper and cheaper. The company is down 97% across the last twelve months, and the decline shows no sign of slowing down heading into the close of the year. The company has attempted to stem the bleeding by way of a steady flow of positive press releases, but none have been strong enough in their implications to form much in the way of support. Alongside this, and the primary driver behind the decline, management has relentlessly diluted shareholders with tranche after tranche of double-digit million dollar capital raises, the use of which doesn't seem to be doing much other than fund a weak marketing strategy and line the pockets of staff.It's a bit of a strange situation.The company has what looks to be an excellent product, which the FDA approved in January 2015. It is targeting a multibillion-dollar market, and seems to have certain advantages over the current applications in the space. However, it's expensive, and as yet, has little to no insurance coverage in the US.Without coverage, it's basically going nowhere.The question is, then, what are the chances of the treatment in question picking up some coverage from a major insurer? To try and estimate these chances, we've got to look at the above-mentioned advantages, and the to-date performance of the treatment, in line with the cost difference over that and current SOC options.The treatment is called VBLOC, and it's an electronic impulse tool that acts on what's called the vagus nerve to control a patient's appetite. It temporarily blocks the nerve, which simulates satiation and reduces appetite, and helps a patient to curb and control food intake.The sales pitch is basically this: the treatment offers pretty much the same outcome as current bariatric options (gastric band, that sort of thing) without physically altering any part of the patient's body. There can be some pretty nasty side effects associated with things like a gastric band, and there is some evidence that VBLOC helps offset these side effects (although it's got some safety issues of its own).There's a great breakdown of VBLOC versus other options at this link (it's a pretty big list, so we won't reproduce it here, but we recommend you take a look).For us, there are a few important points on this list.The first, cost. VBLOC is around $18,500, which is cheaper than both a gastric bypass and gastric sleeve, but $10,000 more expensive than a gastric balloon. The difference is, however, bypass and sleeve are available on insurance, balloon and VBLOC are not.Weight loss is also an issue for VBLOC. Expected loss after five years is 17-28%. This compares to close to 75% with the sleeve, 70% with the bypass and 26-46% after six months with the balloon.So while it's cheaper than the two better performing surgeries without insurance, only a tiny fraction of patients will pay full price for the bypass and the sleeve. It also won't provide as much weight loss in five years.So where are the advantages?The complication rate is far lower for VBLOC – 3% versus up to 15% for bypass. It's reversible, which the latter two aren’t. Procedure time is lower (but only marginally) but the big kicker in this field is it is outpatient, whereas a sleeve or bypass requires a 2-3 day hospital stay. Back to work time is also vastly superior, averaging out at 3-4 days versus around 2 weeks for bypass and sleeve.We are basically asking this question – do the advantages justify the cost increase over current alternatives?From a physical perspective – perhaps not. The results are lower (although a recent study has suggested they are actually better than first thought) and the difference in side effects, while apparent, is minimal on aggregate.From a recovery, and time lost perspective – yes. Insurance companies will want to get their patients out of the hospital as quickly as possible (average daily cost of a hospital stay across the US, although admittedly this varies greatly from state to state, is $5,220) and – in instances where insurers cover work time lost – back at work as soon as they canWe think this is what it's going to pivot on. If insurers are willing to offer an option that isn’t any better than the current SOC, it's going to want to save money, and the procedure, recovery and time to work elements all skew bias in VBLOC's favor.We're watching this one closely for any sign of an insurer backing down and covering the procedure. Sign up to our newsletter and we will bring you more insights like this direct to your inbox!Disclosure: We have no position in ETRM and have not been compensated for this article.