EnteroMedics: Fat Zapper or Pulsing Placebo?

ST. PAUL, Minn. ( TheStreet) --Into the obesity treatment fray rumbles EnteroMedics ( ETRM), which is developing a surgically implanted device that uses electrical pulses to block the primary nerve regulating digestion. Unlike pacemakers, patients power the EnteroMedics' VBLOC device on and off with a control belt worn around the waist. When VBLOC is on, patients are supposed to feel less hungry, eat less and lose weight.

VBLOC is an obesity treatment potentially less invasive and reversible, unlike gastric bypass surgery. But EnteroMedics is also developing VBLOC at a time when the obese have far easier treatment options in the recently approved pills from Vivus ( VVUS) and Arena Pharmaceuticals ( ARNA).

EnteroMedics is currently conducting a phase III study of VBLOC compared to a dummy device in obese patients. Results from the study are expected before the end of February.

With a stock price under $3 per share and a market cap of $122 million, the upside potential in EnteroMedics heading into the phase III study data is greater than the downside risk. But, of course, EnteroMedics is "cheap" today because of significant doubts about the efficacy of VBLOC. A previous phase III study failed badly.

In its favor, EnteroMedics designed the current phase III study to optimize the weight loss potential of VBLOC while at the same time make it more difficult for control patients to also lose weight. For this reason, EnteroMedics has better odds of winning with the current VBLOC study than it did the last time.

On balance, however, it's tough to be overly optimistic about VBLOC's chances. Data from the previous study raise many red flags. Let's take a look.

The EMPOWER study enrolled 294 obese patients with a mean Body Mass Index (BMI) of 41. A 5' 4" woman with a BMI of 41 would weigh 240 pounds.

All the patients underwent surgical implantation of the VBLOC device. Two-thirds of the patients were randomized into the treatment group, which meant their VBLOC devices were fully operational. The remaining one third of patients were randomized to the control group, with VBLOC devices that were set at a minimal, sub-therapeutic level. Patients in both arms also underwent weight-loss counseling.

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