EnteroMedics Inc (NASDAQ:ETRM): Here's What's Really Important

EnteroMedics Inc (NASDAQ:ETRM) is having a pretty wild ride this week.The company kicked off the session on Monday trading in and around $1.75 a share. Shortly after lunch on Tuesday, this had risen to $2.26, tacking 15% onto market capitalization in a little over a session. Early morning activity on Wednesday has trimmed a few percentage points off the gains and EnteroMedics will open the day at just shy of two dollars apiece.What's driving the volatility?The company announced on Tuesday that it has agreed to acquire privately held ReShape Medical. The latter is a weight loss medical device company and its lead portfolio asset is what's called the ReShape Dual Weight Loss Balloon, which is an FDA-approved, minimally invasive intragastric balloon designed to treat obesity patients with a body mass index (BMI) between 30 and 40, with one or more related comorbid conditions. ETRM Daily ChartIt's an approved asset and one that complements EnteroMedics' currently approved product portfolio (comprised entirely of its vBloc asset) and, while the company hasn’t put out any information as to the impact of the deal from a revenue perspective (in terms of how much the weight loss balloon should add to topline at EnteroMedics) it is reasonable to assume that the addition of a second product to a one trick pony portfolio should have a substantial impact on dollar volume revenue generation.As per the terms of the deal, EnteroMedics is paying a little over 2.3 million shares of common stock and 187,000 shares of preferred series C convertible (which converts into about 18.7 million shares of common on shareholder approval), as well as around $5 million in cash. The cash will be used to pay off some existing debt for ReShape, meaning while there is a cash payment involved, the transaction is essentially all stock.So what is the impact of this deal on our long-term thesis for EnteroMedics?Well, if shareholders approve the transaction, as mentioned, it's going to expand the company's product portfolio and should help to boost topline near-term. From a long-term perspective, however, we are still very much focused on the successful commercialization strategy for vBloc.For those not familiar with this one, vBloc is a weight loss device that can be used to bring about results comparable to a gastric band or a gastric sleeve but can be far less invasive and, in some instances, is favorable to any of the current standard of care options in the weight loss space.However, because none of the major insurers cover the device, it can't compete with SOC weight loss treatments as things stand.So why do we think it might be able to going forward?Back in August, EnteroMedics raised some cash and took a hit to its market capitalization on the announcing of the issue that underpinned the raise. We pointed out, however, that markets seemed to be missing the fact that the primary use of proceeds from this raise was the conducting of a postmarketing study of vBloc, designed to collect the data payers are asking for and to, in turn, use this data to support an argument for insurance coverage.Specifically, payers are looking for 125 to 150 patients implanted in a commercial setting with 6-month follow-up data on both weight loss and co-morbidity improvements to compare well with the results from the company’s previous ReCharge PMA study.The recently announced vBloc Now program is a 150 patient study that falls in line with the protocol and goals outlined in the previous paragraph.So that is what is important here.Sure, the ReShape acquisition is going to drive a bit of volume heading into the close of 2017 and, as mentioned, it's causing a bit of volatility right now, but we are looking to the outcome of the vBloc Now program as the primary long-term upside catalyst for EnteroMedics.Check out our previous coverage of ETRM here. We will be updating our subscribers as soon as we know more. For the latest updates on ETRM, sign up below!Image courtesy of Xiaojun Deng via FlickrDisclosure: We have no position in ETRM and have not been compensated for this article.