I have been an observer of this board for a while but have never...

I have been an observer of this board for a while but have never felt the need to post. I would like to add the below to the conversation in order to get others' thoughts.

One of two things happens on this review. First, the FDA decides the risks of HA are unacceptable and stops the trial. Looking at a few others enrollment halts (most of which were for actual deaths), these decisions seem to take anywhere from 4 weeks to 4-5 months. Let's assume 4 months for the math below (which again considering they are reviewing 4 cases and zero mortalities seems conservative).

The company has (all numbers US$) $51mln as of 12/31 and has historically burned $9mln/q of cash. R&D is $6mln/q, which they've said on previous calls is mostly the trial. The trial consists of the costs of new patients (marketing, screening and implant) as well as reimbursement costs for monitoring of existing patients. I'm going to assume by stopping new enrollment cash burn drops to $7.5mln/q. Therefore, if the decision comes in 4 months, the company should have $36mln of cash ($51-2 q's of cash burn). Let's assume the company takes 3 months to sell itself or return cash to shareholders, which i believe would be the only two viable options at this point, and burn is $5mln during this quarter (severance costs if shutting the company or transaction costs if there's a deal, and explant of existing patients that have the device and haven't been explanted yet, etc). They would have $31mln of cash. Using a sharecount of 475mln shares, assuming no value for the business or IP, that's $.065/share, vs a closing price (in USD) of $0.115 ($0.15 AUD*.78 exchange rate). This seems to be the absolute worst case situation, as I just can't believe if the trial is stopped and the company can't find a buyer they would then try to raise money to continue as a going entity, the dilution cost would be too great and existing shareholders wouldn't vote in favor of authorizing the necessary new shares.

Now keep in mind, at this point the company will have the efficacy data from the Endo Trial (an RCT of 325 patients) and will still have its CE mark so will be able to sell outside the US. The question is whether the results of one trial that are slightly above the much greater experience of 2900 patients globally will change people's view of the safety of the device. I'm not so sure it will in totality, although it will on the margin, so there still should be some T2D OUS business (there are a ton of drugs/devices that have approval in one jurisdiction but weren't approved in another globally that still do just fine, albeit perhaps less than they would if they didn't have a negative ruling in one place). And keep in mind, we're talking about a slight deviation from the expected number on one trial on a device that has data on a much larger number of patients and is also going through a few government sponsored trials in Europe. There's also all the IP the company has that blocks anyone from really doing anything endoscopically re: the GI tract, which are each two of the bigger areas of focus in bariatric surgery (metabolic and endoscopic). There are a bunch of other potential uses for the current device outside of T2D (there's an IIT in Israel for PCOS, there's the Restrictor simply for weight loss, etc). Finally, GSK funded the Bile Salt trial in order to learn more about the Method of Action of the device because it works similarly to RNY gastric bypass and they wanted to use the study to inform targets for future drug development, something that is much easier, safer, cheaper, faster and most importantly unique versus actually operating on patients just to observe them.

So the question is, is all of this (ROW T2D, IP for future devices/indications to be used both offensively as well as defensively, modifications of existing device for other indications which are already in progress, or in house lab work to inform research direction in a $50bln global T2D drug market) worth $24mln to someone. Considering both MDT and JNJ spent at least this amount to build their current stake (and yes, while when they did that there wasn't a halted US trial, it is also true that at that time the company wasn't sure if it would have to do a PHII trial before the Endo Trial, the company was in litigation with WL Gore as to whether they actually owned the IP, there wasnt the data on 2900 patients in terms of risk/benefit, the company was more focused on obesity vs diabetes which is the better market, there wasn't anywhere near as much research on how the device works, the company wasnt even close to NUB-1 statues in Germany which is the largest European device market, and let's not forget, just because the Endo Trial is stopped it doesn't preclude the company or it's acquirer from starting a new trial here).

Or think of it another way. The company has spent around $250mln USD so far. The question is, is the value of this work worth no more than 10c on the dollar. Again, if not, there's no downside from last sale. In fact, if the decision were to come earlier or the value for all the above were worth even $100mln, we could be looking at over a double($38mln in cash and $100mln in enterprise value, or 29c USD, which would be 37c AUD)

Finally, Obalon, which is a balloon that is implanted for 3 months and shows around 8% TBL (almost half of what EB does) just raised $20mln in equity (as well as another $10mln in debt) which i'd assume values the company at at least $100mln (but at the very least more than $30mln assuming the premoney valuation was $0).

On the flip side, assuming the FDA allows enrollment to proceed, the company might be better off for this stoppage. As GID said on the call, the FDA is going to be reviewing the risk/benefit. To do this, I would assume the FDA is going to be looking at all the SAEs as well as taking a look at efficacy shown so far. By allowing enrollment to begin again, they are implicitly saying that so far, with the trial over 60% enrolled, the EB is showing positive results.

I would also assume with this delay, the company would be more willing to look for a partner, either for a sale or some other strategic deal, which would not only be + for the stock, but take away future equity funding risk, so as shareholders today, while this has cost us time, it has probably saved us future dilution as well as shortened the time to some sort of catalyst.

So I think the downside is limited to another 5c US or 8.3 AUD. I think in reality the true downside in the worst case is extremely limited (think of it this way, if this were just a pool of patents on GI endoscopy devices, it would trade for more than $25mln alone, meaning there's 0 value to the $250mln the company has spent on other things) and in fact there's most likely some upside. Best case, we get an early read on the trial courtesy of the FDA and are more likely to have a partner sooner than we were last week (and while in theory this partnership would be on worse terms, the number of potential interested parties as well as the FDA's early look at the data will act as an offset to this headwind).

So then the question is what will the FDA decide, and the answer is who knows. But I look at it two ways. First, this SAE isn't that scary. While it is true the mortality rate is currently around 5% for HA (the higher numbers are older data, both treatment and diagnosis has improved signficantly), it's also important to look at the cause of most cases of HA: liver transfer, liver cancer, and liver puncture. Of course the mortality rate is high in these patients. For Endo-caused HA, we have 0 deaths out of over 30 cases (4 in Endo Trial, and 1% of 2900 patients OUS). In fact, as they said on the call, some patients did their own Risk/Benefit analysis and kept the EB in while receiving antibiotics. Also importantly, one can't have HA without knowing it. The symptoms are obvious. So if it's treatable upon diagnosis, and diagnosis is likely because the symptoms are obvious, what's the real risk, at least versus the benefit (think of it this way, WITHOUT the EB, for obese T2Diabetics, what's the mortality rate? is it worse that 0.05%, which is the worst case here, or 5% of 1%).

In addition, look at recent FDA approval in the obesity space, forget the diabetic space. the FDA is rightly saying these are serious diseases, and we need as many tools as possible to fight it. I would seriously hope they wouldn't throw out this device which has been globally shown to be safe, has massive support from doctors and patients, is better than any drug on the market, and is still much safer than any surgery, all over 1 additional case of HA versus the expectation out of 325 patients. The Maestro device had a 9% SAE rate in their trial (3% for the device, 6% b/c it's laproscopic surgery), which was the 2nd trial they failed to meet any endpoint, showed a 3% placebo adjusted weight loss and no efficacy for T2D (wasn't an endpoint). I think if the FDA stops this trial you will see massive outcries from a lot of stakeholders.

But the FDA is 100% right in reviewing the data, that is their job. They are being responsible in stopping future enrollment (one other point: if they were that worried, I think they'd have ordered explant of existing patients while doing their review as there's very little risk to that procedure so no harm in ordering this). This cautiousness is part of their mandate and every potential future patient should be happy they are doing it. But I just don't believe, based on what we know and the extremely small sample set in this trial, they are going to kill the trial, because by doing so they cause real risk to cutting off access to this device to all US T2D, at least for the years it would take to restart and complete a new trial, while forcing these potential patients to either choose less effective drugs or higher risk surgery as their only option. In other words, pausing enrollment was prudent. Killing the trial would be imprudent.

But even if they do, I think downside is limited. If they don't, I'd assume we'd see a quick partnership. The terms of that partnership would dictate what upside is left from there, but that's looking out too far into the unknowns (but I would think, based on both the FDA's interim review as well as the number of interested parties, two of which already own big stakes in the company, MDT and JNJ, the deal would be such that there should be plenty left).

Any thoughts or pushback welcome.