We recently reiterated our Neutral recommendation on Cyberonics (CYBX), a medical technology company with core expertise in neuromodulation.
Cyberonics reported an EPS of 25 cents in the first quarter of fiscal 2011, surpassing both the Zacks Consensus Estimate of 21 cents and 23 cents in the year-ago period. However, excluding the benefit associated with debt refinancing, EPS in the first quarter of fiscal 2011 was 15 cents.
Revenues were $44.8 million, marginally beating the Zacks Consensus Estimate of $44 million and 16% higher than $38.5 million of the year-ago period. Based on a strong quarter, Cyberonics raised its outlook for fiscal 2011. The company now expects revenues in the range of $184–$188 million (previous guidance of $182–$187 million).
Cyberonics develops and markets Vagus Nerve Stimulation (VNS) Therapy System, which is approved by the US Food and Drug Administration (FDA) for the treatment of refractory epilepsy and treatment-resistant depression (TRD).
At present Cyberonics is focusing on Japan, a market with immense potential. Subsequent to the approval from the Japanese Ministry of Health, Labor and Welfare to market VNS Therapy System for the epilepsy indication in January 2010, the company has also received reimbursement coverage effective July 1, 2010. The company expects to treat 7,500 patients in the first five years and aims at a 10% penetration rate over the next 10 years.
We are also encouraged by the improvement in margin during the reported quarter. Gross margin improved 170 basis points (bps) to 87.8% due to higher production volumes, improved manufacturing efficiencies and higher selling price. Further, despite the 3.7% increase in operating expenses, operating margin expanded 920 bps to 26.1% attributable to higher sales of the higher-margin Demipulse generators.
While sales from Japan are expected to rise following the reimbursement coverage of the VNS therapy system, the scenario in Europe is different. Penetration of the European market is less than the domestic market with the potentially large Asian market remaining virtually untouched. The company has witnessed weaker unit sales in Europe, especially in Germany and Scandinavia and to a lesser extent in the UK. However, the company expects the situation to improve later in fiscal year 2011.
Another area of concern is related to reimbursement. While Cyberonics has reimbursement approval for epilepsy, it does not have any meaningful reimbursement coverage for the treatment of depression. Moreover, the company faces tough competition from players such as Medtronic (MDT) and St. Jude Medical (STJ).