Greg Lea - SVP, CFO and COO Mark Knudson - President and CEO.

William Plovanic - Canaccord Genuity Matt Hewitt - Craig-Hallum Capital Group Suraj Kalia - Northland Securities Chris Lewis - ROTH Capital Partners Bruce Jackson - Lake Street Capital Markets.

Good morning ladies and gentlemen and welcome to the EnteroMedics’ First Quarter 2014 Financial Results Conference Call and Business Update. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time.

(Operator Instructions) As a reminder, this conference call is being recorded. I will now turn the call over to Greg Lea, Senior Vice President, Chief Financial Officer and Chief Operating Officer to start the call. Mr.

Lea?.

Thank you for joining us this morning to discuss our first quarter financial results and business update. As a reminder, this conference call, as well as EnteroMedics’ SEC filings and Web site at enteromedics.com, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Our actual results could differ materially from those discussed due to the known and unknown risks, uncertainties and other factors.

These risks and uncertainties are described more fully in the Company’s filings with the Securities and Exchange Commission, particularly those factors identified as risk factors in the Company’s 10-K filed March 27, 2014. With me on the call from EnteroMedics is, Dr. Mark Knudson, our President and Chief Executive Officer.

We will begin with prepared remarks when these are concluded, we will open the call for questions. I will now turn the call over to Mark..

Thank you, Greg. Our focus for the last several quarters has been centered on preparing for advisory committee or panel meeting with the FDA, as part of a larger goal of achieving regulatory approval in the U.S.

of the Maestro System as a treatment for obesity with the June 17th date now scheduled and published in the federal register we are closer than ever to achieving this goal. The obesity epidemic is one widely described by the medical community and regulators as a serious and urgent threat to the public health.

Among existing options for treating this disease, there exists a significant gap in the treatment spectrum as evidenced by the lack of progress in reducing the rates of obesity.

We believe that VBLOC Therapy may fit in this gap as a unique alternative to options that are either ineffective or fail quickly, or which patients avoid for fear of adverse safety and lifestyle effects. VBLOC is a safe, effective and patient-friendly option for those seeking a long-term solution to achieve their health and weight loss goals.

It works by controlling, both hunger fullness while promoting healthy weight loss without punitive dietary or other long-term side effects. EnteroMedics has built significant experience with VBLOC Therapy. More than 600 patients having done implanted with the Maestro System to-date, some received their devices over five years ago.

The cornerstone of our regulatory effort is the five year ReCharge Pivotal Trial for which we have announced safety and efficacy results at 12 and 18 months.

At 12 months the trial demonstrated statistically significant, durable and medically meaningful weight loss of 24.4% excess weight loss compared to a sham control group weight loss of 15.9%, a superior record of safety was also demonstrated with a 3.7% related serious adverse event rate, well below the pre-specified threshold of 15%.

At 18 months, patients maintained their weight loss at about 25% with a very similar safety profile and a 4.3% related serious adverse event rate.

Under a variety of analysis including as observed or completed data and various modeling methods such as last observation carry forward, mixed effect models, regression and multiple amputation, all of which have been presented to the FDA, these data remain robust, ranging from 24% to 28% excess weight loss at 12 months and 21% to 26% at 18 months.

Significantly in addition to maintaining their clinically important weight loss at 18 months, the VBLOC group widened the difference in weight loss over the sham from 8.5% to over 13%.

The sham group gained back 40% of the weight loss they had achieved during this time with the majority of the weight gain occurring under blinded study conditions, underscoring the unfortunate reality of most people with obesity and their attempts to lose weight.

These 12 and 18 month results demonstrate the attractive benefit risk profile of VBLOC Therapy. While ReCharge did not meet its pre-defined efficacy endpoints, we believe that this was an effect of the study design rather than a reflection on the benefit of this revolutionary technology.

Given the strong safety profile and significant medically meaningful weight loss we anticipate a productive discussion with the panel this June and look forward to continued open dialog with the FDA leading into their approval decision anticipated for this year.

While the regulatory pathway continues to be our priority moving forward, we have also begun to prepare for U.S. commercialization in the areas of sales, marketing and reimbursement.

We continue to explore all potential strategic partnering relationships on a geographic and indication basis, while simultaneously planning for the initial commercial rollout of the Maestro System in the United States.

As we have highlighted in the past, we believe this rollout can be achieved with a limited sales and field support staff targeting our current clinical centers. As part of the future commercial team, we announced earlier this month that we appointed Mark Bullivant as our Vice President of Marketing.

His extensive marketing experience, both in and outside of the United States, will be important as we translate our experience into a successful U.S. commercialization effort. Another part of this effort is moving forward in establishing third-party reimbursement.

To-date we have received six new Category III CPT codes from the American Medical Association, which we anticipate will support Category I CPT payment codes in the future following FDA approval of VBLOC Therapy.

The Category III CPT codes are important because they have allowed us to begin preliminary discussions with private insurers about our technology and the benefits of our approach to treating obesity and its comorbidities such as diabetes and hypertension. While our efforts in the U.S.

currently consume the majority of our resources and attention, we continue to work on several ex-U.S. initiatives. In Australia, we are focused on reimbursement for the implantation procedure and our device in parallel.

Reimbursement of the hospital and surgeon is reliant upon obtaining an item number code while listing on the Prostheses List secures reimbursement for our device. Covering a greater breadth of markets, our team is also working to enhance our Maestro System CE Mark for obesity to include two new indications, one for diabetes and one for hypertension.

Once our pathway in the U.S. is clear we expect to accelerate our activities in these territories, as well as exploring new geographies where the Maestro System holds meaningful commercial potential. With that, I will now turn the call back over to Greg to cover our financials for the quarter..

Thank you, Mark. For the three months ended March 31, 2014, the Company reported a net loss of 6.7 million, or a $0.10 per share. Research and development expenses were 2.6 million and general and administrative expenses were 3.9 million.

Operating expenses were primarily associated with the cost of supporting multiple ongoing clinical trials, including the ReCharge Study, the Company's PMA Application and continued development of VBLOC Therapy. On March 31, 2014, the Company's cash, cash equivalents and short-term investments totaled 24.4 million.

As of April 29, 2014 the Company had raised a total of approximately 16.8 million under its $20 million ATM equity facility.

Utilizing this facility in combination with our current capital and expense projections, we have the resources to fund operations through our upcoming pivotal regulatory milestones and to begin building our commercial infrastructure in anticipation of the positive FDA approval decision for VBLOC Therapy this year. I will now turn the call back to Dr.

Knudson.

Mark?.

Thank you, Greg. To conclude, EnteroMedics stands at the cusp of a transformative event, the potential for FDA approval of VBLOC vagal blocking therapy for the treatment of obesity. In support of this goal, we remain focused on preparing for advisory committee panel meeting and on working with the FDA toward an approval decision.

As these efforts progress, we will continue to explore strategic partnering opportunities while we efficiently build an infrastructure for our U.S. commercial launch, as well as develop our global commercial strategy, all with a goal of delivering VBLOC Therapy to the millions of individuals suffering from obesity and its related comorbidities.

As is customary in our industry, approaching the June 17th advisory committee meeting we expect to turn the majority of our attention to final preparation for panel. We therefore expect to enter a quiet period starting mid-May. Once we are through the panel meeting, we look forward to discussing results with you and to communicating our path forward.

With that I will open the line for questions, operator?.

Question:.

and:.

Thank you, Dr. Knudson. (Operator Instructions) Our first question comes from William Plovanic with Canaccord. Your line is open..

Great, thanks. Good morning.

Can you hear me okay?.

Great, thanks. Good morning.

Can you hear me okay?.

Yes, good morning Bill we can hear you fine..

Good.

So you just hired Mark Bullivant and obviously within a high towards commercialization my general kind of question here is you have the panel meeting come up in June when do you start like putting resources behind like serious resources behind the commercialization and building an infrastructure is it post panel if it’s positive enough or is it post actual FDA clearance I mean given kind of the cadence of this technology to market thus far?.

Good.

So you just hired Mark Bullivant and obviously within a high towards commercialization my general kind of question here is you have the panel meeting come up in June when do you start like putting resources behind like serious resources behind the commercialization and building an infrastructure is it post panel if it’s positive enough or is it post actual FDA clearance I mean given kind of the cadence of this technology to market thus far?.

Bill, this is Greg. We are taking the -- as we have discussed in the past taking the commercialization rollout steps one step at a time when we get FDA approval we’ll expect to recruit and retain additional personnel for our commercial operations that will include sales and marketing and customer service to support the commercial launch.

For now as Mark had mentioned earlier we’re focusing on a obtaining approval and beginning our commercial rollout plan which was started with announcing Mark Bullivant.

And doing some of the longer lead time initiatives like reimbursement that we’ve already ramped up strategically we feel it’s important to use the most prudent use of our resources right now focusing on the FDA approval process.

We also believe that the initial stage of the commercial launch a limited sales and field support staff as Mark mentioned earlier we’ll target the existing centers and that are all strategically positioned across the country.

And as I will remind everybody we’ve had -- we've got experienced surgeons onboard already and healthcare teams in place so we’ll start there. And we’ll discuss our commercial plans in greater detail once we get through the PMA process..

Okay, thanks. That’s all I had..

Okay, thanks. That’s all I had..

Thank you. And our next question is from Matt Hewitt with Craig-Hallum. Your line is open..

Good morning gentlemen..

Good morning gentlemen..

Good morning..

A couple from me, first you the 12 month data from ReCharge that was released in February of last year and I am just wondering if you have had a chance to look at 24 month data is that something that you have compiled, will we and investors get a chance to maybe see that information or obviously I would assume that you’re going to be providing it for the FDA as well?.

A couple from me, first you the 12 month data from ReCharge that was released in February of last year and I am just wondering if you have had a chance to look at 24 month data is that something that you have compiled, will we and investors get a chance to maybe see that information or obviously I would assume that you’re going to be providing it for the FDA as well?.

For the study plan and the clinical investigation plan and FDA requirements, we continue to provide updates to FDA during the entire five year term of the ReCharge study. At this time, we are not planning to release anything about the 24 month data before panel..

Okay.

And then just regarding the partnership opportunities maybe walk us though kind of what you’re looking for whether it’s geographically is it potential partnerships in Europe or in Asia Pacific region, is it situation where maybe domestically there is an opportunity to partner with somebody maybe not necessarily on the sales and marketing front but maybe they’ve got some applications or some fingers into different markets just any kind of guidance there would be helpful?.

Okay.

And then just regarding the partnership opportunities maybe walk us though kind of what you’re looking for whether it’s geographically is it potential partnerships in Europe or in Asia Pacific region, is it situation where maybe domestically there is an opportunity to partner with somebody maybe not necessarily on the sales and marketing front but maybe they’ve got some applications or some fingers into different markets just any kind of guidance there would be helpful?.

Matt as we’ve talked this is Greg, as we have talked in the past we’re really open to any type of partnership first of all that may increase most important, shareholder value and support our technology. But I think you’ve mentioned some of them. We’ll look at really potential distribution agreements outside the U.S.

once we get through this approval process. We certainly would be interested in partnerships that would help us explore other indications related to our technology, but as we suspect the majority of that interest or discussions I think because we’re still close to this panel date now will occur after we get through this process..

Okay. And then maybe one follow-up on that and then I’ll jump off.

But as far as these partnerships are concerned is it safe to assume that with those contracts you would be looking for some type of upfront payment from these partners therefore reducing your need to comeback to market to raise additional equity?.

Okay. And then maybe one follow-up on that and then I’ll jump off.

But as far as these partnerships are concerned is it safe to assume that with those contracts you would be looking for some type of upfront payment from these partners therefore reducing your need to comeback to market to raise additional equity?.

Clearly we’re exploring all financial opportunities but that certainly would be one of them that we would be very focused on with the positive outcome from a panel and the FDA would be to receive some kind of capitalization as part of the partnership..

Okay, great. Thanks for the update..

Okay, great. Thanks for the update..

Thank you. (Operator Instructions) Our next question is from Suraj Kalia with Northland Securities. Your line is open..

Good morning gentlemen..

Good morning gentlemen..

Good morning Suraj..

So, Mark and Greg, if you could give us some color on the composition of your MOC panels and what areas are your MOC panels focusing on?.

So, Mark and Greg, if you could give us some color on the composition of your MOC panels and what areas are your MOC panels focusing on?.

So our MOC panels have been extremely helpful in preparing us for our panel presentation. We try to match the MOC panelists with the types and expertise of panelists that have historically been on panels of the division that were in the gastrointestinal neurological devices group of FDA.

And generally the panels have focused on the three areas that we expected are the critical questions that all of us are waiting for obviously FDA generally asks more than these three, but the question on safety, the question on demonstration of efficacy and the question on demonstration of a positive benefit risk.

And those are the areas that we are focused on with those panels and have helped us really hone our discussion about the effect of a sham control trial and in the face of excellent and predicted weight loss in the treatment arm. And it’s been a very effective piece of preparation for us..

So Mark, is it fair to say that your MOC panels and again I do understand this might be an unfair question I am just trying to understand the preparation behind the scenes.

Is it fair to say that the MOC panels you’ll are not really focusing per se on EWL versus TWL the sham arm between 12 to 18 months is it fair to say that is not a core area of focus?.

So Mark, is it fair to say that your MOC panels and again I do understand this might be an unfair question I am just trying to understand the preparation behind the scenes.

Is it fair to say that the MOC panels you’ll are not really focusing per se on EWL versus TWL the sham arm between 12 to 18 months is it fair to say that is not a core area of focus?.

I guess it’s hard to answer that question because the FDA is moving more toward using total body weight loss but that was not a TBL or TWL or IPWL whatever acronym, whatever piece of literature your reading happens to use but the real focus for us has been really to build the story around positive benefit risk which takes into account EWL or total body weight loss and a safety profile in this group of patients for which there really is right now a very large fair clinic gap between diet exercise and drugs and the currently available bariatric surgical procedures.

So that’s really where we have been focused Suraj..

Fair enough.

And Mark forgive me my memory fails me here did you release the median I know the mean is there the 12 and 18 months meaning EWLs have you released the median EWL at any time point?.

Fair enough.

And Mark forgive me my memory fails me here did you release the median I know the mean is there the 12 and 18 months meaning EWLs have you released the median EWL at any time point?.

No we released though the responder data and we also released both the standard deviation and the 95% confidence intervals which indicate that there is not a lot of skewness to the data so the mean and median are relatively close..

Fair enough. Gentlemen, thank you for taking my questions..

Fair enough. Gentlemen, thank you for taking my questions..

Thank you. And our next question is from Chris Lewis with ROTH Capital Partners. Your line is open..

Hi guys thanks for taking the questions..

Hi guys thanks for taking the questions..

No problem..

In the prepared remarks you mentioned the study design which led to some of the maybe shortfalls on efficacy endpoints I was hoping you could just elaborate on your views there and perhaps how have you seen those these type of sham control trials evolve since the ReCharge trial design and endpoints were established?.

In the prepared remarks you mentioned the study design which led to some of the maybe shortfalls on efficacy endpoints I was hoping you could just elaborate on your views there and perhaps how have you seen those these type of sham control trials evolve since the ReCharge trial design and endpoints were established?.

Sure Chris.

Well as you know FDA about the time that we were designing this trial five years ago or however long ago it was seems like the answer but that’s just me, was really looking to try to do sham controls and to include very aggressive super superiority margins and what we’ve seen since then is several trials in which sham controls have responded very well and it’s not surprising when you think of the fact that if people are willing to undergo the kind of procedures that are required to actually undergo a sham control trial you add that on top of your are ending up with a sham device in our case we had a very robust response.

And so while we were able to show statistically a significant effect of VBLOC Therapy over even the background therapy that the sham control had I think that right now we are moving toward a discussion revolving around the fact that the responder analysis is really the key to understanding in these kinds of instances of how a therapy truly works and whether it is effective for patients and as you saw in the initial data release that we did we had a very vigorous and robust responder analysis with all patients with all the EWL thresholds above 20% or at 20% and above showing that it has performed twice to 13 times the level of the sham control which again shows therapeutic effectiveness.

The other thing that we think is quite interesting about the trial design is that by 15 to 18 months as you saw in the data we released that the EWL in the sham arm had fallen off dramatically they had regained 40% of the weight that they’d lost whereas the treated arm continued to maintain that weight loss.

So for a number of reasons we think that our discussion about the efficacy of the device having met what we thought it would the excellent safety profile and the need lead to a very positive benefit risk profile..

Great, thanks for the color there.

So just to confirm the penal will have access to both that 12 and 18 month data so they can see the discrepancy in the arm, in the sham arm?.

Great, thanks for the color there.

So just to confirm the penal will have access to both that 12 and 18 month data so they can see the discrepancy in the arm, in the sham arm?.

Yes they will..

Okay.

And then in terms of the briefing docs usually put out earlier in the week or the week before can you walk us through the expectations you have there in terms beyond the three traditional questions any other relative discussion points that we can expect and then any new kind of takes or highlights on your data that will be highlighted in those documents?.

Okay.

And then in terms of the briefing docs usually put out earlier in the week or the week before can you walk us through the expectations you have there in terms beyond the three traditional questions any other relative discussion points that we can expect and then any new kind of takes or highlights on your data that will be highlighted in those documents?.

At this point we are getting so close that we do not feel that we should speculate on the tone of either our briefing book or FDA’s briefing book to-date we have enjoyed a good working relationship with FDA and that relationship has involved an open and productive dialog and that has continued.

And that’s really all I feel comfortable saying right now..

Understood. And then could you walk us through the timing expectations on the reimbursement front in the U.S.

post approval, what needs to be done for Category I approval?.

Understood. And then could you walk us through the timing expectations on the reimbursement front in the U.S.

post approval, what needs to be done for Category I approval?.

Good question Chris, this is Greg.

First and foremost we need to get the product approval which is the process we’re in right now then we’ll create the RC of information that will include a complete and detailed description of the production and the procedure, a detailed description of the typical patient and the work provided by the physician or healthcare practitioner, patient diagnosis for whom the procedure would be performed, copies of peer reviewed publication from U.S.

journals related to the safety and efficacy, along with an estimate of the frequency of the procedure that would be performed and as its projected performance.

And any supportive information and that would all go in, the timing depends on when we receive panel approval obviously and the panel deliberation takes place three times a year for CPT I codes at the editorial panel meetings and the panel review the code changes and code applications and it begins one month prior to each panel meeting.

So it is necessary to have the application in and that’s kind of the steps we’ll go through once we have the product approved..

Understood, okay. Thanks for the time guys..

Understood, okay. Thanks for the time guys..

Thank you. And our last question is from Bruce Jackson with Lake Street Capital. Your line is open..

Good morning.

Just to be clear on the commercialization time line did you say you’re going to start hiring after you have the PMA approval in hand or after you get an affirmative panel vote?.

Good morning.

Just to be clear on the commercialization time line did you say you’re going to start hiring after you have the PMA approval in hand or after you get an affirmative panel vote?.

The majority of the hiring Bruce will take place after we have a positive direction from the panel. We’ll really gear up then, start looking at the resources we need, we’ve started the process of designing and determining what we will need to do once we get through that panel decision..

Okay.

And then do you have any kind of a ballpark budget figure that you’re working with in terms of how much it’s going to cost you to build up that commercial operations group?.

Okay.

And then do you have any kind of a ballpark budget figure that you’re working with in terms of how much it’s going to cost you to build up that commercial operations group?.

We haven’t announced anything publicly but back when we IPOed we did talk about building a staff and my comment on this call that we’d start small with a smaller organization and feel that even at the maximum we’re talking 75 to 100 employees about 50% of them would be technical support staff and 50% of them would be sales and marketing for the sales organization.

And that would be part of the budget the majority of the budget that we would talk about going forward..

Okay. Then the other component of the commercial launch is the manufacturing.

Can you tell us just broadly in terms of the preparations you’re making for manufacturing, are there any FDA inspections that have to be done, do you have your supply chain lined up, how quickly do you think you could start building units?.

Okay. Then the other component of the commercial launch is the manufacturing.

Can you tell us just broadly in terms of the preparations you’re making for manufacturing, are there any FDA inspections that have to be done, do you have your supply chain lined up, how quickly do you think you could start building units?.

Our supply chain is all lined up as we’ve commented in the past we have FDA approved contract manufacturers supporting us at all of the components of the Maestro System they go through reviews with the FDA just like we go through reviews as part of the panel process they’re all lined up and ready to go they’re sitting there waiting to move with us and accelerate with us once we get approval..

And again when you say approval, is that a process that would start after the panel or after the formal PMA is received?.

And again when you say approval, is that a process that would start after the panel or after the formal PMA is received?.

Well, we’re already in the process of preparing our suppliers and going through the appropriate testing and build proxies to make sure that they can ramp with us so that’s ongoing right now. We’ve acquired what we think is the appropriate lead times and inventory pipeline and that’s starting.

But Bruce the majority of that will occur once we get the positive direction from the panel in preparation and anticipation of the FDA approval..

Okay, thank you very much..

Okay, thank you very much..

Thank you. And I am not showing any further questions, Dr.

Knudson, would you mind proceeding with any further remarks?.

Certainly. Well thanks everyone. We look forward now to moving into the panel approval process and then from there into our continued work with FDA towards receiving a full FDA approval. Thank you very much for joining us on the call today. If you have any further questions, please do not hesitate to contact the Company. Thank you very much. Good bye..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day..