EnteroMedics Inc (NASDAQ:ETRM): Life After The Raise

EnteroMedics Inc (NASDAQ:ETRM) has been a real roller coaster throughout 2017 so far. The company rocketed up to $28 a share mid-month, before collapsing back down to lows just ahead of $5.60 a share within the space of about a week. Over the last few days, PPS has risen once again, and currently sits around $7.75 a share – a 40% gain on the lows, but still a 70% discount from January highs. The driver behind the action was the announcement that the company has brought on board a couple of new institutions to sell its lead weight loss product, as well as a raise, which – as of this week – is now closed and the capital in the bank.We covered the company a couple of times already this month, both on the back of the incredible gains seen in the wake of a seeming non-release, and the subsequent correction that we viewed as inevitable. Of course, the question now, is what happens next. Can the company maintain its current form, and continue to gain strength with a view to closing the gap on the recent correction? Or, alternatively, is the recent bounce just that – a temporary boost as shorts take profits off the table, and in turn, a signal of a longer-term return to the downside?We think, the former is the more realistic of the two scenarios right now.The thing with his company, is that it has a valuable asset on its books, one that it has carried through the clinical development process in the US – a notoriously difficult and expensive thing to do – and one that is (albeit gradually) drawing the attention of physicians and patients alike. We've said it many times before, it needs insurance coverage if it is going to go mainstream, and nothing has really changed in that regard. With that said, however, this doesn't undermine its value to the point where it becomes worthless.By way of a quick introduction to what we're talking about, for readers who have not come across this one before, EnteroMedics' lead asset is a medical device called vBLOC, which is designed to promote weight loss in obese patients. It acts on a nerve called the vagus nerve to stimulate the sensation of satiation, and by proxy, results in patients fitted with device eating less and losing weight. It works, and there is plenty of evidence to back up the suggestion that it is as effective, if not more so, than the currently available standard of care treatments in the space – gastric band, gastric sleeve, etc. The problem is, and as mentioned, it is not currently covered by any major insurer, and that means that for a patient to get one fitted, they have to shell out more than $18,000 of their own cash. In some instances, insurance companies will cover a portion of this, but not for the majority, and this is a real sticking point.The thing is, however, to expect major insurers to accept this device for coverage so soon after it has picked up approval is unrealistic. Companies need to demonstrate to insurers that a demand exists for their products before said insurers will accept them for coverage, and this is the phase in which EnteroMedics finds itself right now. In order to prove this demand, it is going to have spend money, and that is why it just raised funds. The question shareholders need to ask themselves, is are they willing to wait out this demand-proof phase, or not? The risk lies in the company running out of money before it can adequately support a case for coverage. However, this is – in our eyes – is mitigated almost entirely by the potential for another company to swoop in and buyout EnteroMedics; one with deeper pockets and the ability to wait for organic coverage without risking operational survival.We will be updating our subscribers as soon as we know more. For the latest updates on ETRM, sign up below!Disclosure: We have no position in ETRM and have not been compensated for this article.