Devices & Diagnostics

EnteroMedics is like a cat with nine lives. Will FDA make it immortal?

Analyst Debbie Wang of Morningstar remembers that day in  October 2009  when obesity treatment firm  […]

Analyst Debbie Wang of Morningstar remembers that day in  October 2009  when obesity treatment firm  EnteroMedics  (NASDAQ:ETRM)  held a conference call to explain that its highly anticipated Maestro device had  failed to meet a goal in a clinical trial.

“Honestly, the CEO sounded like he was shell-shocked,” she recalled. “He sounded like he couldn’t believe it. He was freaking out. I thought it was over. I thought there was no way to resurrect this thing. ”

Fast forward to 2012.

The Roseville, Minnesota company announced last month that it is  commercializing the next generation of the Maestro device in Australia  and has signed a distribution agreement with a partner in Saudi Arabia to sell it in the Middle East. On Tuesday, EnteroMedics said it  has raised a total of $25 million, through a separate debt and equity agreement.

EnteroMedics has a long way to go before it can celebrate — it still has to prove the efficacy of the device to the U.S. Food and Drug Administration. But it’s not every day that a medical device company has a bewildering failure and lives to tell the tale.

So what happened? And how has the company survived?

It all goes back to why the clinical trial wasn’t successful. For that, a quick primer on how the  Maestro device  works is useful.

The Maestro system incorporates a device implanted under the skin from which leads transmit electrical signals to the vagus nerve, which controls hunger and the feeling of satiety. The company calls this type of neuromodulation Vbloc therapy because it tricks the brain into thinking that it is not hungry by blocking those signals to and from the vagus nerve. Company executives believe that this treatment is far superior to bariatric surgical procedures that often lead to patients vomiting or feeling hungry or suffering from diarrhea.

When the clinical trial was designed, the FDA required both the active group that would receive the Vbloc therapy and the control group that wouldn’t be implanted with the full device system. To ensure the safety of all patients — including ensuring that there wouldn’t be a electrical charge building up on the vagus nerve and damaging it — even the control group patients received a lower level of energy for several hours in the day.

“All the experts in the field and all the models that were available to us indicated that that low energy would not cause block,” said Mark Knudson, CEO of EnteroMedics in a recent interview. “So we blithely went on and did our trial.”

At the end of the 12-month period, when executives looked at the results, they were shocked. While the active group lost weight as they expected, the treated group lost weight too.

The realization was devastating. The stock tanked. EnteroMedics laid off 40 percent of its workforce.

On the day that the conference call was held, the company did a very expensive round of financing and another one a few months later.

“Regardless of what the stock price is, if you discount it enough, you will find a buyer. So we did a rather significant discounted transaction twice,” recalled Greg Lea, EnteroMedics’ chief financial officer.

That brought in a much-needed $10 million.

After indulging in” suicidal thoughts” as Knudson characterized it, executives dug deep into the data to find out why the control group lost weight.

“What we found [was] that it took an hour-and-a-half for block to develop in the control group while it was instantaneous in the treated group,” Knudson said.

In other words, even those who got the very low amount of energy on the vagus nerve essentially felt their feelings of hunger controlled, which caused the weight loss. At least that’s what executives took the results to mean.

The company did an animal study to show this unintended placebo effect in rats. That convinced the FDA to OK the design of a new clinical trial, Knudson said. Called Recharge, this time the control group patients have undergone a sham surgery such that no energy, not even low amounts, will be delivered to them.

The Recharge trial is also testing the next-generation Maestro device — one that is rechargeable. The last patient of the study received the implant in December. The results will be published in the first quarter of 2013 and Knudson and Lea hope for an approval in the first half of 2014.

“We have always said that in the Recharge trial we have to prove that we can do a control group,” Knudson said.

Meanwhile, analyst Wang who had all but written off EnteroMedics will soon be looking to reevaluate the company. The $25 million it managed to raise Tuesday has given her some confidence.

“Until they did this latest round of financing, they were going to run out of cash by the end of the year,” Wang said. “Now that they have regained some financial stability, in the next week or two I will reevaluate the company and we might actually put out a rating because now they have enough money to see them through to launch probably.”

Wang, who believes that the safety profile of the Maestro system is unparalleled, doesn’t fully buy the story of the unintended placebo effect on the control group. Nonetheless, she feels that the company deserves a do-over.

“It is a question that is worth answering, which is what their current trial is trying to do,” she said. “When you think of the obesity market, it’s a  humongous market … [and] when you think of the potential payoff, OK give them $5, $10 million. Let them finish the trial.”

Assuming, this time it is able to meet both the safety and the comparative efficacy targets, all eyes will be on the FDA to see whether EnteroMedics can endure.

[Photo Credit: chrisroll]

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