Here's What Happened With EnteroMedics Inc (NASDAQ:ETRM) On Tuesday

EnteroMedics Inc (NASDAQ:ETRM) ran up early morning on Tuesday, as markets loaded up ahead of a prescheduled conference call that was set to take place at 11am EST. The call took place, and the company sold off throughout the latter half of the day to close out a couple of percentage points down on the open, and around 20% off highs. A look at pure price action would suggest that the call was negative, and that the selloff came on the back of some bad news put forward by management.We sat in on the call, and that's not the case. Here's what happened, and what it means going forward.Before we get started, regular readers will know that this is one we've looked at on a few occasions over the past few quarters, and it's one that we've been somewhat bullish on throughout the period. Our bullishness is rooted in the quality of the company's lead product – a weight loss product called vBloc. However, as we've said in pretty much every piece of coverage to date, the product needs insurance coverage. If it doesn’t get coverage, it's going to be a very low seller at best, or a total flop at worst. With that said, coverage doesn’t come overnight, and this is the crux of our frequent return type focus. Small steps add up, and EnteroMedics has made a number of these small steps over the last six months.By way of a quick intro to vBloc, it's a device that attaches to what's called the vagus nerve. The technology that underpins it is the same technology that is used in pacemakers, and it blocks hunger signals that would otherwise pass between the brain and stomach. This blocking can make patients feel fuller longer and reduce the amount of food they eat as a result. Less food intake, less weight gain, or more weight loss. It's in direct competition with things like a gastric band or a gastric sleeve, and is priced comparably, but (and herein lies the problem mentioned above) the latter two are covered under most insurance policies, while the vBloc technology is not.The conference call addressed the final quarter of last year and the company's full year results, and put forward a number of highlights, most of which we've addressed in previous coverage. There are a couple of things that were noted, however, that are worth looking at here. The first is rooted in capital position and structure. The company ended last year with $3.3 million on hand, and then effected a $19 million raise in January. Additionally, it retired the last of its $18.75 million of senior amortizing convertible notes, and in doing so, regained compliance with NASDAQ listing requirements.Why are these things important?Because cash runway and the potential for a delisting, as well as the dilutive impact of the convertibles, put an incredible amount of sell pressure on the company throughout the latter half of last year. These three pressures are now removed, and so there's far less friction associated with an upside run for the company and its PPS.A number of catalysts hit press late last year – veteran availability, live surgical installation, some efficacy data in diabetic patients, some comparable rescue therapy data, that sort of thing – that should have boosted EnteroMedics' market cap. They didn’t, at least not to any noticeable degree, and this is because of the above mentioned downside pressure. With this pressure removed, any fresh catalyst should have an impact proportionate to their implications, and not by muted by short fueled cynicism.So why did the company sell off on the call? Perhaps a more apt question, is why did it run up to start with? The answer is that it drew some speculative volume on the back of shorter term players' expectations that management was going to put out some game changing information. Management didn’t, and this speculative volume flowed back out of EnteroMedics. That the company didn’t decline further than it did on the back of the outflow might even be interpreted as positive.This is an end of year call, after all, and one in which management can't really address the first quarter (because it's not been audited yet).The insurance coverage risk remains the number one issue here, and until we see some development in that arena the company isn’t going to generate much more than its current circa $1 million annual revenues from vBloc, but from a forward positioning perspective, EnteroMedics is stronger than ever.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.