Greg Lea - CFO & COO Mark Knudson - President & CEO Brad Hancock - Chief Commercial Officer.

Willaim Plovanic - Canaccord Genuity Chris Lewis - Roth Capital Partners Suraj Kalia - Northland Securities Matt Hewitt - Craig-Hallum Capital Bruce Jackson - Lake Street Capital Josh Jennings - Cowen and Company.

Welcome to EnteroMedics' Fourth Quarter and Year-End 2014 Financial Results Conference Call. [Operator Instructions]. And I would now turn the call over to Greg Lea, Chief Financial Officer and Chief Operating Officer. Your may begin..

Thank you for joining us this morning to discuss our fourth quarter and full year 2014 financial results. As a reminder this conference call as well as EnteroMedics' SEC filings and web site at enteromedics.com contain 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 and Brad Hancock, our Chief Commercial 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.

Mark?.

Thank you, Greg. And thank all of you for joining us this morning. A few short weeks we announced our most significant achievement to-date as an organization gaining U.S. Food and Drug Administration approval of the Maestro system delivering VBLOC therapy.

For adult patients with obesity the device is indicated for patients who have failed at least one supervised weight management program within the last five years and who have a body mass index of at least 40 to 45 kilograms per meter square or a body mass index of 35 to 39.9 with at least one obesity related core morbid condition.

This approval was a defining moment for EnteroMedics. This is the culmination of a decade of support from our employees, suppliers, investors, the FDA, patients and the medical community. This first of it's kind approval is the first new category of medical device to be approved for obesity by the FDA in over 10 years.

As a new scientifically advanced neuroscience based approach to the treatment of obesity, VBLOC addresses the significant treatment gap that exists between currently available options. Options that fail to address the struggle faced by many in dealing with the health and financial consequences of this disease.

On one end of the spectrum, diet, exercise and pharmaceuticals help some namely those who can maintain the lifestyle modifications or manage the adverse effects and serious risks of the pharmaceutical therapies. However most patients need to seek additional treatment.

For those patients at the other end of the spectrum, those who need to find another option they must take the leap to invasive bariatric surgical.

These anatomy altering surgeries well often producing rapid weight loss come with significant personal and monetary costs including serious side effects such as leakage, band slippage, nutritional malabsorption, the stigma associated with the daily changes to lifestyle, limited food choices and the expensive supplements.

As a result fear exists among individuals considering these surgeries leading to an adoption rate of less than 1% among eligible patients.

We believe that by offering a safe reversible option for treating obesity that does not permanently change the anatomy, VBLOC therapy is an important new choice to help fill these treatment gap not only for patients but for physicians who now have a middle ground to offer their patients. With this regulatory approval we have begun to ramp up our U.S.

commercialization strategy. I will now turn the call over to Brad Hancock, our Chief Commercial Officer who will provide an update on this strategy.

Brad?.

Thank you, Mark. We’re very excited about FDA approval of VBLOC therapy. With the approval execution of our global commercialization strategy to launch VBLOC therapy is now underway, as we have emphasized in the past our focus has been heavily centered on U.S. regulatory approval. This approval is a contributing factor for success not just in the U.S.

but in global markets that recognize the high hurdles the FDA sets. With this approval and addition to the U.S. commercial roll-out which I will detail shortly we have begun to reevaluate markets outside the U.S. where the Maestro system could hold meaningful commercial potential in obesity as well as diabetes. Although the U.S.

market remains our top priority we will continue to update you on our OU.S. strategy as it begins to take shape in the coming quarters. In the United States, our robust commercialization is moving forward making an option that has never existed before available to patients.

To support commercialization we have recently hired a marketing director and four regional sales director who are focused on a controlled commercial roll-out of the Maestro system in the United States.

They will support and manage the recertification of our existing centers as well as identify and train new centers of excellence in key self-paying markets using our well-developed selection, training and certification process.

We anticipate that by the end of the year we will have between 20 and 25 existing and new and planning VBLOC therapy centers on-board. Published clinic study support VBLOC therapy as the safest surgical device option available to patients today.

This unprecedented safety profile combined with our unique mechanism of action which blocks the nerve signals that create the feelings of hunger and satiety make VBLOC therapy a therapy of choice for choice for patients looking for a reversible option that delivers meaningful, healthy weight loss and control over their core morbidities.

These same attributes will be attractive to surgeons who do not have less invasive surgical options to offer their patients who resist the traditional anatomy altering for restricting procedures available today.

In the immediate hours after FDA approval our communication efforts reached a global audience of over a 0.5 billion leading to a significant number of inquiries from patients and physicians alike. Patients want to be implemented and physicians want to be trained.

We’re currently responding to these inquiries while in parallel we built a comprehensive education program for patients who are exploring the benefits of VBLOC therapy for their lifestyle. This program will begin later this month with a serious of patient education webinars hosted by world renowned bariatric surgeons.

This campaign will also include the launch of a new patient facing website and a sophisticated social media platform so prospective patients can read about VBLOC safety profile here from patients who are benefiting from VBLOC therapy today and join a supportive community of VBLOC patients.

Another key component to our commercialization strategy is establishing third party reimbursement in both the public and private insurer markets. In both cases we have gathered experienced reimbursement teams who have a history of securing reimbursement for new technologies for physicians and patients.

Private payors are the first prong of this strategy. We have initiated conversations with several private payors focusing on those with a history of adoption new technologies and those that currently offer bariatric surgery coverage.

These discussions were in progress before approval and we’re optimistic that the first coverage decisions maybe reached in the near term. We believe that physician initiated local coverage decisions combined with patients willing and able to pay for our therapy will drive initial implants in our targeted markets.

On the public side the second prong of our reimbursement effort was triggered by FDA approval. It involves conversion of our six Category III correct procedural technology or CPT codes from the American Medical Association and the Category I CPT payment codes.

Our Category III codes will be valuable and securing reimbursement from private insurers while we work toward the Category I CPT payment codes. As a first step we recently presented data supporting this conversion to the CPT Advisory Committee.

As this meeting so closely followed FDA approval we took it as an opportunity to gain valuable insight into the process and to determine a support necessary to lead it to a favorable decision at a later committee meeting. While we work to secure reimbursement, we understand the need to support the self-pay market.

Therefore we have partnered with a nationally recognized healthcare lender to setup payment assistance and another financing options to provide broader access to VBLOC therapy.

FDA approval combined with our commercial strategy now allows us to deliver on the enthusiasm for VBLOC therapy that has been expressed by patients and physicians looking for an innovative option to achieving healthy weight loss. With that I will now turn the call over to Greg.

Greg?.

Thank you, Brad. For the three months ended December 31, 2014 the company reported a net loss of 6.2 million or a negative $0.09 per share. Research and development expenses were 3 million and selling, general and administrative expenses were 3.1 million.

For the 12 months ended December 31, 2014 the company reported a net loss of 26.1 million or a negative $0.39 per share.

Operating expenses were primarily associated with a cost of supporting multiple ongoing clinical trials, commercialization of the VBLOC, companies VBLOC vagal blocking therapy including regulatory and reimbursement activities and the continued development of VBLOC therapy delivered to the companies Maestro rechargeable system.

On December 31, 2014, the companies, cash, cash equivalence and short term investments totaled 11.6 million. As of February 18, 2015 the company has raised a total of approximately 6.4 million under the $25 million ATM facility off which 5.5 million was raised in 2015.

We believe that our current resources will permit us to start to build the necessary infrastructure, invest in inventory, fund product improvements and implement process changes to support our commercial strategy.

As we achieve our early commercial objectives we will continue to review actions required to strengthen our balance sheet to support the growth requirements of our strategy into 2016. I will now turn the call back over to Dr. Knudson for closing remarks.

Mark?.

Thank you, Greg. We’re very excited about the commercial potential of VBLOC therapy both here in the United States and in markets around the world.

It's approval is a transformative event not just for EnteroMedics but for the millions of patients struggling with obesity, who lack acceptable treatment options and for their physicians yearning for new safer alternatives to offer their patients. We’re proud of this accomplishment and remain squarely focused on growing our U.S.

commercial infrastructure and evolving our global commercial platform. With that I will open the line for questions.

Operator?.

[Operator Instructions]. Our first question comes from Willaim Plovanic with Canaccord Genuity. Your line is open. .

First question just on the CPT coding, is it fair to say that given the level of data and the FDA decision that the only thing holding you back from a positive CPT coding decision is for that data to be formally published in the peer review journal or are there other boxes that you need to check to get the code converted?.

That’s pretty much it, that and having a couple of commercial implants..

Okay, have you had your first commercial implant yet?.

No we haven't had our first commercial implant, we’re in the process right now of just trying to work our way through the hospital, certification process. In most cases that will take anywhere from 2 to 3 months before you’re allowed to actually start doing implants in the hospital. So we have a little bit of time before that will take place..

And then OU.S., I think you’re talking about that a little more than you’ve in the past. Seems like that’s maybe taking a little higher priority.

Is that international commercialization going to be direct through you or are you talking to partners that you might sign either a local or a global partnership for that? Any updated thoughts?.

As we have said we’re definitely looking to develop partnerships for OU.S. distribution and now that we have FDA approval that really does help with that part of our partnerships. In the U.S., the other two things that partners are looking for are for us to show reimbursement and some commercial transaction, both of those in the U.S.

we’re confident now that we can move forward with. So we crossed the major hurdle which was standing in the way which was FDA approval and now we’re moving rapidly to put the other two pieces of that in place..

And then just clarity on your comments in terms of reimbursement, U.S. reimbursement or local coverage decision.

Is this -- I mean do you expect these to be kind of one-off type of decisions rather than blanket coverage policies, so it's -- you’ve a patient they get pre-qualified payor -- payor will actually pay for one implant but it's not necessarily a policy decision.

When you say that in terms of coverage is that what you mean or do you mean like actual blanket policy coverage decisions?.

No, Bill you’re exactly right, it's a local policy coverage decision on a one-off and obviously you have to have that kind of support from the physicians before you can start considering a broader coverage of policy but that’s the way we will start..

Thank you. Our next question comes from Chris Lewis with Roth Capital Partners. Your line is now open..

First, I was hoping you can elaborate on the procedures and kind of the evaluation process the company is taking to determine the most attractive and viable self-pay markets out there?.

Sure. So we have done some analysis already working with our lending, our partner to identify the markets right now that already have a pretty robust self-pay market.

So we know where those markets are, we’re presently identifying bariatric centers of excellence in those markets and we will resource both the centers and ourselves to ensure that we have everything we need to take advantage of the patients who are willing and able to pay for the VBLOC therapy..

And off the 20 to 25 centers you expect this year, can you break that out between existing centers that have performed the procedure in the past versus potentially new centers of excellence and how should we think about the rate of those centers coming on board as we progress throughout the year?.

Sure, I would imagine that we I'll have between 8 and 10 of the centers that are participated in our clinical trial moving to the commercialization process so leaving around another 15 new centers that we would identify. The process starts with identifying the center going through a certification process.

We want to make sure that they are going to be able to provide good surgical outcomes, good aftercare outcomes as well and once we identify [inaudible] as I’ve mentioned before you’ve to start working through the process to gain approval in that hospital to implant and typically that can take us as long as three months to get on their schedule and to work through their own approval process..

I guess given that can you give any sense of how many procedures you expect this year from those 20 to 25 centers?.

At this point we haven't really settled on a number, we’re relatively new at this and so I would like to withhold any estimates until we get a little bit more insight into the adoption in the market..

Next question comes from Suraj Kalia with Northland Securities. Your line is open..

So I guess first question for Mark and/or Brad, you know PMA approval, can you give us some color on what the feedback has been from European clinicians, [inaudible] on some additional indications for VBLOC in Europe.

Are you sensing that there is enthusiasm building up, there is some early sights that are being lined up, any sort of color would be great..

So our focus has really being on the U.S. launch, we have started to do some due diligence within Europe now that we have had FDA approval. But I think it's probably too soon to really indicate what type of response.

We believe though that having the CE Mark diabetes opens up a new market in Europe and we’re very interested in exploring what that potential could be..

And Brad, you mentioned quite a bit on your education campaign to patients and also setting up some sort of looking at third party agents either for medical loans or at least that’s the way I understood.

Can you again, it seems like you’re all going direct to consumer and how would something like a third party agency work, would it completely out of pocket pay? Would you all have to sign off waiver that if the patient doesn’t provide the co-pay or just the dynamics of how that would work would be greatly appreciated..

Sure, so we have identified a partner that has worked with healthcare lending for years. We won't actually be involved in working with the patients as they move through the process for gaining coverage and gaining support for the self-pay procedures. That’s completely done by a separate company.

We’re affiliated with them and patients will have access to that company through our website but from that standpoint it's really somewhat of an arm's length distance for us..

So, Brad, you would not have to sign off any waivers, any co-pays or you know this would be completely out of pocket, it's not like it's dependent on the patient going and getting a pre-certification and then you will have to wait, this is all outside of EnteroMedics for the most part.

Is that a fair assessment?.

That’s a fair assessment, yes..

And finally I guess Mark and/or Brad, you know how many reps have been hired so far and are you all looking to tap into any of the existing drug company pool also for any lessons learned or how to avoid some of the mistakes that the drug guys have done? Thanks for taking my question..

Yes so we have hired a four regional sales directors at this point and they are going to take responsibility for getting the initial centers recertified and also identifying the new centers.

Our intent is to be flexible in terms of ramping up the distribution organization and as we see adoption take place across the country we will fill those markets with therapy consultants. We’re fully prepared to ramp this up as quickly as needed..

[Operator Instructions]. Your next question comes from Matt Hewitt with Craig-Hallum Capital. Your line is open..

Maybe first question, inventory, have you guys started to build inventory in anticipation of the commercial launch?.

Yes we have Matt, and we’re very comfortable with where we’re at with that. All of our suppliers are engaged in the production process and we feel good about where we’re at with that activity..

And then given some of the M&A activity in the space, have you guys -- the four regional sales managers for example, what type of experience did they bring to the table where they formerly drug reps or were they device guys or girls that were looking for new opportunity, maybe a little bit of color on their experience would be helpful..

Absolutely, so we hired four regional directors both women and men and everybody came from a fairly high position within the respective organization, a regional directors or above and they all came with them some pretty good knowledge and experience of the bariatric market..

Thank you. Our next question comes from Bruce Jackson with Lake Street Capital. Your line is open. .

So with the first commercial implant, will we expect to see that sometime during Q2 or Q3?.

I think that’s fair to say, given the interest from many of our clinical centers are going through the commercialization process.

They have a lot of patience that wanted to participate in the recharge study that have come back now and asked for additional information and they want to talk to the bariatric surgeons about VBLOC therapy now that we’re commercially approved.

My sense is that the former clinical centers will be the first ones that will come online and be available to do implants and so I think your timing, if we look at towards the end of Q2 beginning of Q3 is pretty safe..

And then if we look at the clinical trial recruitment experience those sites did about 1.3 per month or about 3 implants per quarter, would that be a reasonable assumption to put in in terms of the level of implants at first?.

With respect to the post market study, we’re still on the process as Mark mentioned of finalizing that protocol, so I think it's probably a little too early to say on what the recruitment efforts will be.

Again there is a pool of patients out there that we know are very interested and access to the VBLOC therapy, so it could be that we see similar rates but it's probably a little premature for us to give you a real firm number..

And then you made a comment about coverage decisions being near-term, is near term like Q2, Q3 next week? Can you give us some insight on when we might hear something?.

So we would imagine based on the fact that we have initiated discussions, we have meeting setup with many of the private payors, those will take place in Q1. I think we’re hopefully that we will start to get some coverage decisions coming back in Q2 but again we’re working with the payors time table and not necessarily our own..

And then in terms of the anticipated selling price, I know you’ve been doing some research on what to charge for the device itself.

What's your current thinking on the selling price?.

Our current thinking really hasn’t [inaudible] that much off of what the guidance that we have provided in the past, the range will be between 15,000 and 20,000 for the VBLOC system. Our list price will probably be closer to the $20,000 price but we want to leave some room for discounts and early adopters..

Okay.

And then turning to Australia, you guys had a distributor lined up down there and everything and you were pretty far down the road in terms of getting reimbursement, so can you give us just a quick update the two components the provider reimbursement and the device reimbursement and when you think you might have those two things in hand?.

We continue to work with that distributor and we have -- now that we have FDA approval and can begin to start to looking outside the U.S. again. We have reinvigorated our reimbursement process in Australia and we would expect that this year we would have some information on that reimbursement situation and where we’re in the process to relate to you.

So I would assume that by third quarter, fourth quarter that we will be able to make some definitive statements about reimbursement in Australia..

Okay, and then might we see any commercial implants there this year?.

That is something that we continue to explore and when we have some -- right now we’re not committing to OU.S. Sales simply because our focus still remains fully on U.S. commercialization..

Okay, last question, the burn rate are you still thinking it's going to be in the 5 million to 6 million per quarter range for the rest of the year?.

Well we certainly see that in the foreseeable future we will try and control that and hold that burn rate at that level.

As we progress through the year and look at the activities going and the response we’re seeing in the marketplace, we were hopeful that there will be some pressure on that burn rate so that we can grow the organization, respond to the number of centers that want to come on board.

But for right now Bruce, I think that’s a good view to look at -- we will manage that burn rate very carefully..

Thank you. Our next question comes from Josh Jennings with Cowen and Company. Your line is open. .

Realizing it's still early days, just was wondering if how many of the non-trial participating or new centers have been approached and if so how is the center -- just trying to get some sense clinician instead of outside of historic [inaudible] champions for VBLOC now that we have FDA approval in hand..

Sure, we started a process, we actually trained our regional sales director two weeks ago so last week was the first week that they were out having some of those initial meetings and for the most part those meetings have gone exceptionally well.

As we mentioned earlier there is a very high interest from surgeons who want this therapy for those patients that are not willing to move towards the anatomy altering a surgical procedures.

I would imagine if I were to give you a number that we’re seeing 1 to 2 new centers every week in all four regions and we anticipate that will probably continue with that rate over the next several weeks..

And just a follow-up on your comment about those centers that had participated in recharge or empower, 8 to 10, you’re assuming come on board and they are certified and trained and will be part of this initial plan to 25.

Those centers that are not going to be certified and retrained, is there any rationale behind those that have dropped off, surgeons left or any other issues around those centers?.

Yes, in those centers and really none of the centers have indicated that they do not want to participate in the commercialization strategy and in some centers we have lost the PI, so we’re trying to identify a new champion. Whenever you go through the value analysis committee process you’ve to have somebody who champions the therapy.

So for us it's more of a matter of just identifying who that surgeon will be..

Understood, I thought there was a bit more behind than that. And then can you just remind us about the logistics of the clinical trials recharge particularly in terms of reimbursement.

Did payors agree to reimburse for the procedure or did EnteroMedics fund the entire cost and during the trials just trying to get a sense of there was a historic reimbursement rate and if not where should we expect some of these initial decisions or preapprovals, the level of reimbursement that we can anticipate or you’re anticipating? Thank you..

I will comment on the history of the trials. We funded almost entirely the trials both the device procedure and care to the -- and follow-up to the study patient. And we’re not anticipating that we will do anything like that going forward.

There certainly will be some -- in our part encouragement for patients to participate in the register requirement going forward if they want to participate in that. And as Brad, mentioned earlier we will look at what kind of incentive programs we need to offer early on off of our list prices to encourage patients to participate..

And just in terms of future reimbursement levels for the procedure with the list price of 20ish and getting in between 15 and 20, can you just give us a quick landscape of reimbursement levels for bariatric procedures and where EnteroMedics will fall in? Thanks a lot..

Sure. So we’ve crossed walked our code to the VNS [ph] code which is going to provide somewhere between $26,000 and $28,000 in a public market. So that’s where we came up with the pricing range that we have of $15,000 to $20,000 but again we think that our list price is probably going to be closer to the $20,000 price..

[Operator Instructions]. Our next question comes from Willaim Plovanic with Canaccord Genuity. Your line is open. .

Just two questions, one what topics have the payors been focused as you’ve gone through those discussions to get the coverage?.

So Bill, we have actually we have had one meeting so far and so I don’t want to generalize too much but I think the main focus for the payors is on the safety profile of the VBLOC therapy and they are looking at it from a benefit and a risk standpoint and so obviously we have got our clinical data that we’re presenting to them and again we hope to hear back from them in the next month or so with respect to how they receive that data..

And then as you said with the CPT coding we need publication, when do you expect the pivotal trial to be published in peer review journal?.

So the pivotal trial, the 12 month data have been published in JAMA already. We’re now planning to publish both 18 and 24 months follow-up publications, those are in process now and we’re also publishing long term data on the VBLOC, VM-II enable trial. The OU.S. trial and Type 2 diabetes.

So we expect to have several publications this year on both the core morbidities as well as the pivotal trial and long term data supporting both efficacy, long term and continued long term safety..

So then to go back to my initial question, if you have the data and it's published and you’ve the society support then at this point you just need to get a couple of commercial implants theoretically to get the CPT code to move to a level one or do you need the 18 and 24 month data published?.

Yes, I think that is our strategy and that is exactly what we’re working for. As you know there are three CPT committee meetings each year, so we have May and October yet to go this year and we will be striving to achieve those goals for one of those two meetings..

Okay. And then just with the ATM out there going forward in the capitalization needs, it looks like you had the money, you’ve 17 million - 18 million plus would have burn off this quarter.

It's obvious, you’re going to need money, are you going to continue to do it through the ATM, do you plan on doing it through a full marketed deal, do you think your talks are close with an international partner? I mean I think most investors have looked at this company and they are just trying to figure out how you’re going to capitalize it going forward and so just any clarity or color you would like to give on that would be greatly appreciated.

And thanks for taking my questions today..

We feel we have enough capital to support our initial launch here, Bill. We clearly agree with you that we need to focus on continuing to capitalize the company as we make our milestones and move into 2016. We’re looking at and have plans to look at all of the ideas and strategies you mentioned there.

We have the ATM at our disposal but we’re looking at what other potential avenues exist to capitalize the company and we will certainly keep everybody apprise of that as we move forward..

So then Greg, if you could just set what are the near term milestones we should focus on that are value creators?.

I think from our perspective the near term are the initial commercial sales that we’re starting to seeing in the self-pay environment, the number of clinics and surgeons that bring on to prepare us for stronger move in 2016.

Clearly any feedback and process we can get with the private carriers, will certainly be a very significant milestone for us and then the progress we’re making on the CPT conversion process.

I think it will be our milestones going forward for this year and we intend to keep you all apprised of our progress in all of those and every opportunity we can..

Thank you. Our next question comes from Chris Lewis with Roth Capital Partners. Your line is now open..

In terms of the high level inquiries from the surgeon community you’ve received since the approval announcement, can you just elaborate on what areas those surgeons are asking about what excites them the most about the technology and how has that generally that level of interest compared relative to your expectations?.

I can't really say I was surprised because I just don’t have the background to know what they were interested in.

But what I would say when I met with a lot of these bariatric surgeons is that they see this tremendous gap in terms of a viable option to offer patients who are coming into their office and they are looking for some type of support, an intervention to help them with their weight loss objectives.

But surgeons will walk these patients through all of the options available today and the range that I’ve heard from the physicians is anywhere from 30% to 20% of those patients leave their office because they just can't get comfortable with the existing options and so I think physicians look at this as new tool that they can offer patients.

It's certainly going to help them recruit patients as well when they are able to go out and talk about this new, unique, innovative therapy. But the excitement that I think I feel for this opportunity really stems from the excitements that I’ve seen from the surgeons across the country with the introduction of VBLOC therapy..

[Operator Instructions]. And I'm showing no further questions. I would like to turn the call back over to Mark for further remarks..

Well thank you very much for joining us on our call and for your questions. I think you can sense our excitement about the response that we’ve had since FDA approval both from the public and from the surgeon community. The excitement about the potential for VBLOC therapy is palpable in the U.S. and in the markets around the world.

So we are very confident moving into the commercialization of VBLOC therapy delivered via the Maestro that this is in fact a transformative for these patients and for this market. We’re excited to be able to be moving into this new environment and look forward to sharing with you our progress as we move forward.

Thanks again for your support and we look forward to further conversations. Good bye..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect..