Orange County’s robust medical device scene will soon welcome a new addition from St. Paul, Minn.: EnteroMedics Inc.
Entero bought ReShape Medical Inc. in San Clemente last week for about $61 million in cash and stock, according to Entero Chief Executive Dan Gladney. The purchase includes a manufacturing facility and headquarters office, approximately 9,000 square feet and 14,000 square feet, respectively. Gladney said the square footage “is more than enough space for [the combined company].”
EnteroMedics develops minimally invasive medical devices used to treat obesity, metabolic disease and other disorders—an epidemic that the Centers for Disease Control and Prevention estimates have affected more than 79 million U.S. adults, more than a third of the adult population.
Its vBloc Neuromodulation system is a rechargeable neuroregulator device implanted into the chest wall that intermittently blocks signals to the vagus nerve—which controls the heart, lungs and digestive tract—and thereby limits expansion of the stomach and feelings of hunger between meals.
ReShape makes dual weight loss balloons designed to take up space in a patient’s stomach so there’s less space for food and the patient feels fuller faster. The treatment lasts six months before a new balloon needs to be inserted.
Both products received Food and Drug Administration approval.
“ReShape offers immediate revenue, sales of $4 million for the 2017 calendar year, and a growth rate of 40% over the next few years,” Gladney said.
It has 55 employees, and Entero has a little over 40. The combined company will have about 75 employees once it moves to OC, according to Gladney. Employee reduction will likely be at the St. Paul office.
Full Suite
The deal is comprised of $5 million in cash, which will be used to pay ReShape’s outstanding debt, and about 2.4 million shares of common stock and 188,772 shares of series C convertible preferred stock, which will be converted into approximately 18.8 million shares of common stock. The conversion will need the approval of EnteroMedics’ stockholders.
EnteroMedics closed Thursday at $2.10 per share for a $17.4 million market cap.
The buy “adds a new, minimally invasive, revenue-generating technology to the EnteroMedics portfolio, [now we] have a medical device portfolio of three products, two of which are FDA approved,” said Chief Technology Officer Raj Nihalani. The portfolio includes over 100 issued patients in the U.S. and international markets, Nihalani noted.
He assumed the CTO role when he sold his company, BarioSurg Inc., in Lake Forest to EnteroMedics in May for about $28 million in cash and stock.
Nihalani said ReShape’s device “expands our addressable market and gives us another touchpoint along the continuum of care in obesity.”
BarioSurg develops Gastric Vest Systems, a long-term medical implant designed to alter the size of the stomach to reduce food intake. The procedure, done through a small incision, is less invasive than gastrectomy, which surgically removes all or part of the stomach—the current gold standard of surgical treatment for patients with a body mass index of 35 or above.
BarioSurg’s device has started clinical trials in Latin America. It plans to start clinical trials in Europe and the U.S. next year. EnteroMedics hopes to offer a full suite of products for the entire spectrum of obese patients once BarioSurg’s device is approved.
ReShape’s dual balloon system—“they are the only one doing dual balloon … dual balloon takes up more space in the stomach,” according to Nihalani—is designed for patients with BMI 30 to BMI, and EnteroMedics’ vBlocs are for patients with BMI 35 to BMI 45. BarioSurg’s gastric vests also target patients with BMI 35 to BMI 45, but have the capability to treat patients with BMI 45 or greater.
Patients with BMI 30 or greater are considered obese.
More than 20 million U.S. adults are obese, but less than 1% of that population seeks treatment, according to EnteroMedics.
“We think patients don’t seek treatment because there are no options,” said Gladney, adding that the gastrectomy procedure removes at least 80% of the stomach.
“We believe we can tap more than 1% of that market.”
Michael Mashaal, a ReShape board member and a managing director of New York-based investment firm HealthCor Management LP, has joined EnteroMedics’ board. A ReShape designee will be added later.
EnteroMedics reported revenue of $787,000 last year, up nearly 170% year-over-year. Units sold increased from 25 to 62.
Moving to OC After 10-Year Slide
It’s been a rough run for shareholders of EnteroMedics, which went public in December 2007.
The company has enacted three reverse stock splits, including a 1 for 70 on Dec. 28.
Gladney said the company has no plans to do another stock split.
“I came in late 2015, and there wasn’t much cash for the company,” he said.
Gladney replaced Mark Knudson as chief executive. He previously served as chief executive of Lanx Inc. in Westminster, Colo. The spinal surgery-product developer was acquired by Biomet Inc. in 2013.
Gladney said the company did two stock splits last year to keep the stock price above $1 in order to stay listed on Nasdaq. He also raised about $40 million from “family wealth funds and private investors that he says allows the company to grow with a debt-free balance sheet.
And now the move here. Gladney said EnteroMedics’ current lease will be up in about 12 months. The company plans to relocate to OC but maintain a satellite office in St. Paul.
Gladney will continue as president, chief executive and chairman of EnteroMedics. Former ReShape Chief Executive Michael Mignano has left the company.
Gladney said ReShape “investors have an opportunity to see returns sooner than staying a private company.”
The company hasn’t decided on a new name, and more details on the integration plan are being finalized.
Medical device makers with operations in OC employ over 18,000 workers, according to the Business Journal’s medical device makers list published this year.
