Here's What EnteroMedics Inc (NASDAQ:ETRM) Needs To Do With Its Capital

EnteroMedics Inc (NASDAQ:ETRM) is a stock that we have covered on a number of occasions over the last six months. The company is one of those biotechnology companies that has the potential to take off, but for a number of reasons (and in this instance, primarily one specific reason) hasn't quite been able to pick up any long-term momentum. Early this year, during the first couple of weeks of January, it looked as though EnteroMedics was about to run. The company popped from around two dollars a share at the annual open to highs ahead of $27 a share on January 10. That is a more than 1200% gain in less than two weeks, and it came on the back of nothing more than the company announcing a couple of fresh facilities that were trained in the use of its lead asset.At the time, we noted that the movement was unusual, and likely to pull back near term. It didn't really alter our long-term bias, but it made us a little wary, given that the gains didn't come on the back of the one catalyst we are looking for (which we will look at shortly), but instead something seemingly insignificant.Anyway, for many, and for some of the shareholders that have had to sit through numerous dilutive tranches and an end of year reverse split, the run came as a welcome holiday bonus – regardless of its driving forces. Those that cashed out at or near the top are sitting pretty.Many will have held on for further gains, however, and chances are these traders aren’t particularly happy right now. The company has corrected over the last 10 days to give back the majority of its early January run, and currently trades for little over five dollars a share.Compounding this downside run (and despite what we just said, it is probably something more than a simple correction given its scope) is a just announced public offering, which is going to force investors to sit through yet more dilution.With all this going on, it is tough to form any sort of near-term bias. What do shareholders do? Has the stock bottomed out post correction, or is the floor even lower? On the other side of the coin, is this an opportunity to get in at a discount, given that we have seen the company can run up to the late 20s on very little news?It all comes down to how markets interpret the latest financing round, and, beyond that, how EnteroMedics puts the raised capital to use. Dilution is always frustrating, but it is part and parcel of an investment at this end of the healthcare space. What separates good dilution from bad dilution (no dilution is good of course, but stick with us) is when the company that raises capital can use the funds to stimulate growth, which adds value above and beyond that which shareholders lost as a result of the raise.So which category does this one fall into?The company is looking to raise $15.2 million through a combination of common stock, preferred stock and warrants. Combined with cash as of September 30, this should result in around $21 million cash on hand. In the Use of Proceeds section of its prospectus, EnteroMedics doesn't give too much detail into how it intends to allocate the capital, other than to say it intends to use it to advance the commercialization strategy for its lead asset, vBloc.Now, as we have mentioned on numerous occasions in the past, this asset is worth basically nothing unless the company can pick up some degree of insurance coverage for it. If it is to pick up coverage, it is going to need to educate physicians and the general public about the advantages of the treatment, when compared to other options in the space. This, of course, costs money. $21 million would go a long way towards achieving recognition for the product on a national basis, and this recognition could underpin some major coverage. As such, if management allocates the capital effectively, this race could be a pivotal point for the company. In this instance, therefore, current prices may represent a discount to longer term valuation.At the end of the day, it all comes down to how markets perceive management's ability to exercise this allocation.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.