Good day ladies and gentlemen and welcome to the EnteroMedics' Third Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host Greg Lea, Senior Vice President, Chief Financial Officer and Chief Operating Officer. Mr. Lea, please go ahead.

Thank you for joining us this morning to discuss our third quarter financial results 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 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. Mark?

Thank you, Greg, and thank you all for joining us this morning. Since our FDA-PMA advisory committee meeting in June, we have been working with the Food and Drug Administration toward an approval decision on VBLOC therapy. As many of you know, the FDA is currently reviewing our Pre-Market Approval application or PMA for the Maestro Rechargeable System as a treatment for obesity. Our dialog with the FDA continues to be open and productive, and as we have previously announced, we expect a decision to take place this year. In June, our clinical and scientific findings with VBLOC therapy were evaluated and discussed at a Gastroenterology and Urology Devices Panel Advisory Committee meeting. We were very pleased that the panel voted eight to one in favor of safety and six to two, that the benefits of the Maestro system outweigh risks with one abstention. While the efficacy vote was four to five against, the critical safety and overall benefit risk questions received strong positive votes. This outcome is particularly important, in light of the evolution of FDA's views on benefit risk paradigms for obesity devices. In a paper authored by Dr. Lerner, Deputy Division Director in FDA's Office of Device Evaluation and his colleagues in surgical endoscopy in 2013, the authors state, if a device fails to meet the predetermined primary endpoints of the trial, but has a good safety profile, the agency will review the submission in its entirety and make a final determination based on both benefit and risks. While the FDA is not bound by a panel's recommendation, it does take that recommendation into consideration, when reviewing a Pre-Market Approval application. If granted marketing approval, the Maestro Rechargeable System would be the first new medical device for obesity treatment approved by the FDA in over a decade.…

Thank you, Mark. For the three months ended September 30, 2014, the company reported net loss of $5.7 million or a negative $0.08 per share. Research and development expenses were $2.3 million and selling, general and administrative expenses were $3.3 million. For the nine months ended September 30, 2014, the company reported net loss of $19.9 million or a negative $0.30 per share. Operating expenses were primarily associated with the cost of supporting the company's PMA application, multiple ongoing clinical trials, including the ReCharge study, and continued development of VBLOC Therapy. On September 30, 2014, the company's cash, cash equivalents and short term investments totaled $16.3 million. We believe that our current resources will allow us to begin to build our commercial infrastructure, as we continue to work towards a pivotal regulatory milestone and FDA approval decision, which is expected this year. I will now turn the call back over to Dr. Knudson. Mark?

Thank you, Greg. To conclude, EnteroMedic continues to work toward our pivotal regulatory milestone and FDA approval decision on VBLOC therapy for the treatment of obesity. We maintain an open and productive dialog with FDA and expect that an approval decision will take place this year. As our discussions with the FDA progress, we are building an infrastructure for our U.S. commercial launch, as well as developing our global commercial strategy. All with the goal of delivering the option of VBLOC Therapy, to the millions of individuals suffering from obesity and its related comorbidities. With that, we can now open the line for questions. Operator?

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

Great, thank you. Can you hear me?

Yes Bill. Good morning.

Good morning. So I am just going to have two questions; one is FDA and the other one is inventory, as you ramp for the build -- build for the ramp. Just on the FDA, can you characterize what those current discussions with the FDA hereby kind of [ph], what are the topics of discussion?

The topics of discussion continue to focus around labeling and finalizing labeling, language, that sort of thing, and one or two minor technical issues, and then there were some discussions regarding our post-approval study, which all have been moving forward very productively.

Okay. And then -- thank you very much. Secondly, as we look at inventories, I think we have $1 million of inventory. Given the type of commercialization you're discussing, which is very -- it sounds like its going to be very cautious, kind of very focused. How much inventory do you need to build for this, and kind of what -- can you elaborate on this kind of commercialization strategy? How many centers would you hit the first year, the second year, third year, in a perfect world? And that's all I have, thank you.

Bill, I will comment on the inventory, and then Mark, he will comment on the commercialization side. But we are preparing our suppliers. As you know, we use contract suppliers for all of our components. We are in the process this quarter of running pilot commercial runs, so that they are all ready to go, and we feel that we will exit this year, ready with units on the shelf, ready to go for the commercialization. The limited launch that it will have in 2015 and have our suppliers prepared to produce on a quarterly basis, the volume we need going forward.

And on commercialization, we believe that we are well positioned with the centers that we currently have, across the United States, that have participate in our trials. We expect that we will start with those, so that is in the range of around 10 to 12 centers, that will be the focus of our -- both our sales and training efforts. Over the course of the first year or so, we expect that that number of centers may in fact double. But that's one of the reasons we brought Brad on board, to really now put some real depth into that strategy, and start to being able to lay that out in great detail and finality. So that's basically how we see the going out -- rolling out over 2015.

Great. Thank you.

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

Hi guys. Good morning. Can you hear me alright?

Yes Chris. Good morning.

First, going back to the FDA, it seems like the discussions are really progressing as planned, no real surprises. Is it safe to say that you feel more confident in your approval chances now than you did, maybe three months ago on your last call?

We feel that based on the tone and tenor of the conversations that we are having with FDA, that we feel that we are very confident that we will have an approval decision this year.

Fair enough. Then, in terms of the centers you talked about, how long do you expect it to take to get those centers fully trained and verified and validated, before they can start performing the procedure?

So the centers that are in the recharge trial, will only require a refresher, if you will; because it has been almost two and a half, three years since the ReCharge devices were implanted. So they will -- we will want to go out and do a refresher and recertification for those centers. But that's you know a -- half a day visit at the center and one, possibly two, proctored surgeries by one of our trainers. The onboarding of new centers is part of our training program, and that requires both the training of the surgeon and the center, and that's usually a day to day and a half of didactic training. The surgeons involve then about a half a day at the centers involved in the whole program, where we train the clinical coordinators and the nurses. And then the surgeons do a couple of proctored surgeries and then we view the next few surgeries that they do, at which point they are fully certified. So we view that as important and a very straightforward process, but its one that we want to, especially the first two or three times that we do it, we want to take that very seriously, and make sure that not only do we train the surgeons well, but we train ourselves well, so that as we roll-out into more and more -- more and more centers and a broader and broader geographic spread, that the training does not suffer, and that everyone is well trained and that good results occur at every center.

Okay, great. And then I understand its early and you are probably still working through this a little bit, but in terms of just kind of utilization per center expectation and those limited initial rollout commercial centers, can you give us a sense of any type of color on expectations around number of procedures performed per center, perhaps in the first year, once they are fully trained?

Right now, we are not forecasting anything in that area, and especially now that we just got Brad on board, I really want to let him be the one to start working on that with us. So at this point, we are not forecasting anything in regard to that. But as you know, these centers that we work with, are all centers of excellence and do several hundred up to -- close to 1,000 procedures every year. So we do have a good full two to draw from.

Chris, this is Greg. I will add a little to that, that we will need to work with our sales and marketing team at these centers to determine, by center, their capability to recruit self-paying patients in the first year, while we are pursuing reimbursement. So that's why we are being conservative, and walking through our rollout strategy here, as we go into 2015.

Okay. Thanks for the time.

Thank you. And our next question is from Suraj Kalia with Northland Securities. Your line is open.

Good morning gentlemen.

Good morning Suraj.

So Mark, thank you, lot of color given on the call. Let me see if I can rephrase some of the earlier questions and get some color from you. Mark, would it be fair for me to say, specifically on the labeling discussions you talked about, with the FDA that you all are currently having, there is no discussion about being adjunctive to drug therapy or after failing first therapy, there is no 'language' to that effect; is that a fair assessment?

That is a fair assessment.

Fair, okay. Second Mark, specifically in terms of the centers that participated in the ReCharge trial. I know that questions have been asked about capacity, so on and so forth; let me ask you a different way; the clinicians, who are familiar with VBLOC, who were vocal supporters of VBLOC, are they giving you some sort of an idea of a bolus of patients waiting on the sidelines for something like VBLOC? I mean, we all know the numbers for drug therapy, how its just not worked out there. Hence are any of these clinicians giving you an idea, hey, if you get approval, maybe its initially self-paying, but after X amount of time, I think so these many of my patients could come online, and we could deliver a bolus for VBLOC?

Suraj, we have as you correctly pointed out, we have a number of very supportive physicians and surgeons who were involved with the trial; and we also have new physicians and surgeons who are not actually in the trial but did speak at the panel, or have been involved in other ways with us, that are very excited about moving forward with VBLOC therapy. However as you know, the regulations surrounding marketing of devices like this prior to FDA approval, are very strict. And so we have been very rigorous with these physicians, especially our clinical teams, few clinical engineers and clinical research associates who interact with these centers on a daily basis, that we not do anything that could be construed as marketing or making claims about the device prior to approval. So I am very reluctant to make any comment about the number of patients that are lined up. I will just leave it at the fact that we do have a group of very enthusiastic physicians and surgeons involved.

Last two, and I will hop back in queue Mark. What has been the impact of the Type-II indication for VBLOC in Europe? How are your discussions changed? I understand you guys are not putting in the commercial emphasis yet, till the FDA decision is handed out, but has there been any change in the attitude and the reception, once you all have a Type-II indication?

It has changed the tone of the conversations that we have, both in Europe and in Australia, where we are moving to have our listing on the ARTG, expanded to include diabetes as well. And we expect that we will see the outcome of that, as we start to begin more detailed conversations with the potential partners who are interested in working with us, especially the European market.

And final one Mark, we know the trajectory of Qsymia, Belviq, Contrave; and this might be an unfair question for you all, especially since the regulatory approval is not there; what are some of the -- especially in terms of patient stratification, patient selection, you all obviously are putting in all the building blocks in place, what do you think of some of the lessons learned from the drug side of the equation, that -- internally you'd say, we have to avoid this at all costs, this is what we got to do, once we get approval? Thank you for taking my questions.

Well first thing I will say is, we are not going to overpromise. I think people had very high expectations for the obesity drugs; but once they got out there in the reality of what it takes to actually succeed on those obesity drugs, their side effects and those kinds of real world realities took hold. They have had a longer road than many thought. However, we see that they continue to make inroads, they continue to have a number of new patients every quarter, so that if its done -- anything it has reinforced how deep the pool of people suffering with these offerings remains, and how many of them are looking for a solution that doesn't require a dramatic anatomy altering surgery, and who know that diet and exercise in the long run just do not solve the problem for them. So we are taking those lessons to heart, and are speaking to people that have been involved with that. But we think that we are positioning ourselves to move forward very well in that therapeutic gap that exists.

Gentlemen, thank you.

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

Good morning gentlemen. Thanks for taking the questions.

Good morning Matt.

Few questions regarding ReCharge; when I look at the R&D expense in this past quarter, I will assume some of that expense was the continued monitoring of the patients from the trial. I would assume at this point, all of the initial patients that had been implanted with the same [ph] device, they have either been converted over or have elected not to go through with the procedure; is that a fair assessment?

Matt, we are still in the process of converting patients who want to. As you know, with the uncertainty going into panel and patients chose to wait, I think there is more clarity now. So we are seeing a ramp in those conversions. But if it relates to our expenditures, we have accrued for the majority of those. So what we are seeing is the cash results of that now.

Okay, okay, understood. And then secondly, I would think it would be coming up on another milestone as far as additional data. Is that something that you plan to publicize after you've kind of gone through it and read through it and had a chance to kind of put it together in a concise format, or is that something that will come out in a publication a year from now or something?

We expect that as we move forward in recharge trial, we have to submit annual reports to the FDA. Once we complete those annual reports and have closure on those with FDA, we will prepare scientific presentations, with regard to those data. And when those data are then ready to be presented in abstract form, we will then make a public announcement of those data, as appropriate. So yes, we will continue to keep everyone informed as to the results from patients in the ReCharge trial.

All right. Thank you very much.

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

Hi, good morning. Getting back to the U.S. commercialization process, with the clinical trial sites that were in the EMPOWER trial, were those also, get a half day refresh, or would they go for like a full day type onboarding?

That really depends entirely on which surgeon is there, and their level of remaining understanding; and that will be determined on a case-by-case basis Bruce.

Okay. And I know you're reluctant to talk about, whether or not there is any kind of patient backlog, if you will, but maybe could just tell us, qualitatively if I am a physician and I am talking to a patient how am I going to position VBLOC therapy in the discussion? So is it something where I am going to offer surgery first, and then maybe VBLOC if they don't want to do surgery, or is this going to be a frontline type of treatment that they are being offered?

So our vision for VBLOC therapy, is that it’s a frontline therapy for patients who want to control their weight and control their comorbidities, and that's how physicians are going to talk to them about it. It is, I think an ideal frontline therapy, and then if a patient ultimately continues to have trouble or whatever their other options available to them, but as we saw in the ReCharge trial itself, 70% of patients achieved at least a 5% bodyweight loss, which as you know is metabolically, very significant for patients, and helps them control many other problems associated with overweight. So we anticipate that that's the approach that's going to be taken, and we think that this is a much more interesting and palpable alternative for the specialty physician and primary care physician community to recommend for their patients as well, where they can start to have some assistance in managing their weight, as they go forward. And outside the U.S., in managing their diabetes and other metabolic disorders.

Okay. That's helpful. And then in terms of this patient population initially we are looking at self-pay patients, have you given any thought to what the self-pay average selling price is going to be, and do you have any pricing studies to support that price? Meaning, have you done any consumer research on that?

We have done some research. We continue to look at how we will position ourselves from a pricing strategy. I would suspect that there will be some incentives early on, that we can do to encourage patients. We all along have said that we think we will be competitively priced between the existing procedures, either other devices like Band or the surgical procedures, like sleeve gastrectomy or roux-en-y. So we will be very competitively priced.

Okay.

And we are also looking at just that financing options for patients as well. We are working with companies that specialize in those kinds of opportunities.

Okay. Then moving over to Australia, so that's a place where you have made some progress, previously on the reimbursement front. What's left to do in terms of getting the full reimbursement in Australia, and is the FDA approval a limiting factor in getting that process moving?

The FDA approval has been very much a rate limiting factor in getting that moving. Why? I don't know, but it has been; and we are prepared now to move through with that to finalize getting the reimbursement setup in Australia. But we have -- in waiting for FDA approval, we have dramatically curtailed any spending in Australia on that. So as soon as we have FDA approval, we will gear that back up, and get that started again during 2015.

Okay. And then could you potentially launch the device in Australia during 2015?

That's a decision that we will make, based on a number of factors over the next quarter, quarter and a half.

Okay. Then to round up the discussion on commercialization, you have got the CE mark, you have got the extended label on Europe, what are the commercialization options that you're looking at over there?

We have the metabolic indication now, and we are very actively looking at either targeting one or two countries, or developing, once we have FDA approval, and this extended indication, either a regional or indication partnership there. We really think that once the regulatory risk is behind us, that that has the potential to change the way that partners looked at us as a potential person to work with, or company to work with.

And then I mean, have you thought about working with a strategic partner or a distributor, have you given that any thought?

Absolutely. When I refer to partners, I refer both to strategics, and to regional and national distribution partners.

All right. That's it for me. Thank you very much.

Yup.

Thank you. And I am not showing any further questions. Please proceed with any closing remarks.

Well thank you very much for taking the time to join our call today. We look forward to finalizing this critical milestone for our company, with achieving regulatory approval in the United States, and to making that announcement, and until that time, we will say goodbye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.