Cyberonics Management Discusses Q3 2014 Results - Earnings Call Transcript

Feb.20.14 | About: Cyberonics, Inc. (CYBX)

Cyberonics (NASDAQ:CYBX)

Q3 2014 Earnings Call

February 20, 2014 9:00 am ET

Executives

Daniel Jeffrey Moore - Chief Executive Officer, President and Executive Director

Gregory H. Browne - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Analysts

Brooks E. West - Piper Jaffray Companies, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Raj Denhoy - Jefferies LLC, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

William J. Plovanic - Canaccord Genuity, Research Division

Suraj Kalia - Northland Capital Markets, Research Division

James Sidoti - Sidoti & Company, LLC

Charles Haff - Craig-Hallum Capital Group LLC, Research Division

Stephen G. Brozak - WBB Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Cyberonics Third Quarter Fiscal Year 2014 Earnings Conference Call. My name is Saeed, and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Dan Moore, President and Chief Executive Officer. Sir, you may proceed.

Daniel Jeffrey Moore

Thank you, Saeed, and welcome to Cyberonics Fiscal 2014 Third Quarter Conference Call. Joining me today is Greg Browne, our Chief Financial Officer, who will summarize the Safe Harbor statement and provide detailed financial information.

Gregory H. Browne

Thank you, Dan. The presentation and earnings call includes forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, including may, believe, will, expect, anticipate, estimate, plan, intend and forecast, or other similar words. Statements in the presentation are based on information presently available to us and assumptions that we believe to be reasonable. Investors are cautioned that all such statements involve risks and uncertainties.

Forward-looking statements on this call include statements concerning building stockholder value; achieving consistent sales and profitability targets and growth worldwide; achieving clinical, regulatory and product development milestones; evaluating and advancing other medical device and neuroscience opportunities; completing the previously announced stock repurchase programs; and fiscal guidance for fiscal year 2014. Our actual results may differ materially. For a detailed discussion of the factors that may cause our actual results to differ, please refer to our most recent filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 26, 2013.

With that, I'll turn the call back to Dan for a business update.

Daniel Jeffrey Moore

Thanks, Greg, and good morning. The Cyberonics team achieved solid financial results during the third quarter. Financial and operating highlights included: net product sales of $68.2 million, a growth of more than 9%; record international net sales of $15.2 million; continued record international unit and sales growth of approximately 10%; 20% unit growth including 100 units that shipped as part of a single contract; operating earnings of $21.1 million, another quarter with operating earnings over 30% of revenue; earnings per share growth of 9%; completion of enrollment in the E-37 clinical study for the AspireSR generator in the U.S. and CE Mark approval of the AspireSR generator in Europe.

Over the last 6 years, our U.S. sales team has regularly exceeded both internal and external expectations. While the quarter was progressing generally in accordance with plan prior to the December holidays, we experienced some weakness in the last 4 weeks of the quarter. Having recently completed our normal quarterly meeting with our commercial management team, our analysis suggests that the shortfall was primarily due to delays and/or schedules. Those delays caused by a combination of the holiday calendar, inclement weather and an unusually large number of changes in insurance coverage. As a reminder, VNS Therapy is generally an elective surgery which requires prior authorization.

As implied by the unchanged sales guidance, our commercial team expects to meet our fourth quarter and annual sales goals. The AspireHC generator accounted for 30% of sales in the U.S. in Q3, reflecting continued market adoption. And in international markets, AspireHC now accounts for more than 12% of unit volume.

In addition to continued solid sales growth in Germany and the U.K., France posted an excellent quarter. European growth was again enhanced by good results from our partners in Central and Eastern Europe. We expect to make another large shipment pursuant to the tender in Q4 and complete this contract with a small shipment in Q1 of fiscal '15. With respect to other international regions, the performance in Latin America was also strong.

Now turning to the topics of market development and reimbursement. Our support for global peer-to-peer educational events for health care professionals continued this quarter in a manner similar to prior quarters. We believe these programs are important in helping physicians adopt and use VNS Therapy as a more foundational part of their practice for patients with refractory epilepsy. A new physician communication campaign highlighting that, sometimes the best medicine isn't another medicine, was introduced at the American Epilepsy Society meeting in Washington, D.C. and was well-received. The new patient engagement program called Epilepsy Connections is now underway. This patient to potential patient program along with a new patient website introduced during the quarter, is expected to continue to drive VNS Therapy awareness with patients and their families.

CMS hospital outpatient reimbursement rates for calendar 2014 were finalized in late November. Providers are receiving an average increase of 5% to 7% for their VNS Therapy procedures for Medicare-covered patients this calendar year. We continued to be pleased with the steady increases providers have received from CMS over the years, reflecting the value VNS Therapy brings to both patients and payers.

In Japan, our plans to accelerate market adoption by adding direct resources are progressing. And as discussed previously, we expect to deploy 3 to 4 field-based employees over the next 12 months.

Now an update on product development. We continue to make progress with our new product pipeline. Here are a few of the highlights by project. First, you know last quarter, we submitted our CE Mark, and we're pleased to report that we now have CE Mark for the AspireSR generator in Europe. Now that we have received the approval, we anticipate sales in Europe will commence within the next couple of weeks. Training of the EU commercial team was recently completed and launch materials are ready for the planned limited commercial launch.

The AspireSR generator, the U.S. clinical study, the E-37. Clinical investigators continued to enroll and implant patients in the study during the quarter. We are pleased to report that the enrollment of the first phase of that study was completed at the end of Q3. As stated earlier, we plan to use the results of this first phase of E-37, along with the data from the E-36 to optimize the second phase of the U.S. IDE study, a phase expected to begin in our next fiscal year if required by FDA.

The ProGuardian system. The ProGuardian system is our in-home monitoring system designed to aid in the detection, recording and notification of seizures accompanied by heart rate changes or movement. Our product development team has commenced formal verification activity and submission of the first product of the ProGuardian platform for regulatory approval is now likely to occur early in fiscal '15. That regulatory approval will be followed thereafter by a limited market launch.

The Centro generator, formerly referred to as the Relay generator. Development of a wireless-enabled VNS Therapy generator continues to progress. The Centro generator platform, along with the new tablet, RF programmer, facilitates faster communication and more efficient patient to physician interaction during routine follow-up. Our objective has been to submit this product for regulatory approval by the end of fiscal '14, just a few months away. We now expect the submission to occur in the first half of fiscal '15.

In the area of Autonomic Regulation Therapy for chronic heart failure. As announced on our last call, enrollment and implant activity in the ANTHEM-HF pilot study is complete, and we continue to gather follow-up clinical data. Contingent on the complete 6-month follow-up results and initial analysis from this study, we plan to increase our investment in this area while we consider partnership opportunities. We expect to submit the results of the pilot study in May for possible presentation at the European Society of Cardiology Meeting in early September.

Greg will now take us through a discussion of our financial results and guidance in more detail. Greg?

Gregory H. Browne

Thank you, Dan. Product sales in the third quarter of fiscal 2014 were $68.2 million, representing growth of 9.4% as of the third quarter of the prior year. U.S. unit sales were flat for the quarter, although with both generator ASP growth of 3.5% and increased lead sales, this resulted in an overall increase in U.S. product revenue of 5.3%. Excluding the 100 units delivered as part of a single contract that Dan referred to earlier, international unit sales increased by 9.4% to a record 1,050 units, and revenue by 9.2% to a record $13.1 million.

For the fiscal year-to-date, worldwide sales increased by 11.4% to $207.2 million and unit volume by 8% to over 10,200 generators. The impact of foreign currency movements when compared to the third quarter of last fiscal year had an immaterial impact on international revenue for this quarter.

With respect to U.S. lead sales, quarter-to-quarter variations will occur for a variety of reasons and may not be indicative of underlying activity. For example, physicians decide to replace some leads each quarter. For the third quarter of fiscal 2014, U.S. epilepsy lead sales are estimated at 1,198 compared with 1,083 in the previous year, an increase of 10.6%. The trailing 4-quarter growth rate in U.S. leads was also 10.6%.

For this fiscal year, we have guided growth for U.S. replacements in the mid-single digits. And while our third quarter results were below that guidance, this growth rate of replacements is still our approximate expectation for the full fiscal year.

As Dan mentioned, the AspireHC generator accounted for 30% of U.S. unit sales in the most recent quarter, up from 26% in the second quarter. The DemiPulse generator represented 58% of unit sales, and the pulse generator was at 12%. This growth in market adoption of the AspireHC generator continues with a solid price premium for the DemiPulse generator.

The reported gross profit of 90.5% in the third quarter was marginally higher than the previous quarter, and comparisons to last year's third quarter are still affected by the inclusion of a full quarter of the medical device tax. We expect that gross profit will be approximately 90% for the full fiscal year.

For the third quarter of fiscal 2014, operating income was $21.1 million or 30.9% of sales compared with $20.4 million or 32.6% of sales in the third quarter of fiscal 2013. The third quarter of fiscal 2013 was particularly strong quarter in terms of operating income. The increase in operating income this quarter was achieved despite a reduction in license revenue, as well as the inclusion of additional $500,000 for the medical device tax.

Operating expenses were lower than the second quarter's expenses, primarily due to lower compensation expense. Research and development spending continues to range between 16% and 17% of revenue, and we now expect that R&D spending will be approximately 16.5% of revenue for the full fiscal year.

As stated at our recent Investor Day, generating operating leverage continues to be a key objective, and we are pleased that operating income represented almost 31% of sales during the quarter. While this is an important focus, we emphasize investment in both market and product development, including related clinical activity, and as a result, variations in operating income percentage are likely to occur from quarter-to-quarter.

Earnings before interest, depreciation, amortization, equity compensation expense and other adjustments totaled $25.2 million in the third quarter, an increase of 5.7% over the third quarter of the prior fiscal year.

For the third quarter of fiscal 2014, we had an effective tax rate of 34.1%. This was lower than prior quarters due to the higher-than-expected research and development tax credits and other adjustments. We expect the tax rate of approximately 36% to 36.5% for fiscal 2014 as a whole. This rate now excludes any impact of the research and development tax credit for the last 4 months of fiscal 2014 because it has not yet been extended beyond December 31, 2013.

Stock repurchases in the quarter reduced the number of shares included for the purposes of diluted earnings per share calculation to 27.3 million. As stated in our press release, we repurchased 330,000 shares in the third quarter and we expect to complete purchase of the remaining balance of the share authorization by the end of fiscal year 2015.

Income per diluted share of $0.51 increased by 9% compared to $0.47 per share in the third quarter of fiscal 2013. Overall day sales outstanding were at 56 days, up from 53 days at the end of fiscal 2013, and this increase was primarily driven by the increase in international revenue.

Our balance sheet remained strong, with stockholders' equity of approximately $240 million and approximately $117 million in cash and short-term investments and no interest-bearing debt. It's worth pointing out that Cyberonics profitability over the last 6 years has now offset all losses accumulated since the company's founding in 1987, and our balance sheet reflects positive retained earnings at quarter end for the first time in the company's 26-year history.

For the third quarter of fiscal 2014, we increased our investments in both Imthera and cerbomed by a combined $5 million. These companies continued to advance their respective business objectives and through shared promise. As discussed previously, we expect to submit the first regulatory approvals for the Costa Rica manufacturing facility in the next few months.

With respect to guidance, as Dan mentioned, we are maintaining our guidance for net sales for fiscal '14 in the range from $281 million to $285 million. We are also maintaining our guidance for adjusted income from operations in the range from $86 million to $88 million. However, we are increasing our guidance for adjusted net income which we now expect to range from $55 million to $57 million. Previously, that was at $54 million to $56 million. And we now expect that adjusted earnings per share will be in the range from $2 even to $2.05 per diluted share from a previous guidance of $1.97 to $2.03.

We'll now open up the call for questions. Operator, first question, please?

Question-and-Answer Session

Operator

[Operator Instructions] And first question comes from Brooks West from Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

Dan, I wanted to push you a little bit on initial expectations for AspireSR in Europe. Are you going to run a full launch? A controlled launch? Expectations for price, should we think about this being a premium to AspireHC, and then also kind of impacted de novo implants and also potential upgrades?

Daniel Jeffrey Moore

Thanks, Brad. The first part is, consistent with all of our other product launches, we anticipate a limited launch. And the reason for that is it's one thing to develop a product, get it through clinical trials, get it through regulatory approvals and it's a whole another thing to learn the actual impact of that product and how to maximize the impact of that product in the market. So consistent with our other product launches, we intend to go out in a limited fashion. The second part of your question around price, also consistent with the past, we would expect to take a price premium over our other products on the market. And again, that's part of that limited launch to see how much of a price premium we can take for the product. As far as the future combinations of products, I think that's one of your questions, we believe that, over time, we will be able to take the best features of our product like with the Centra product wireless and combine that with the SR feature that we're seeing with AspireSR. And I think that captured everything you asked. If not, come back, please.

Brooks E. West - Piper Jaffray Companies, Research Division

Yes. Just maybe to finish that thought. Just thoughts on potential impact, the de novo implant volume. I mean, could we expect a tick up there in Europe? And then also thoughts around upgrade, and then I just had one follow-up on U.S.

Daniel Jeffrey Moore

Yes. I think anytime we're developing therapy, not only through our market development efforts but through our product development efforts, our objective is to get that uptick in new patients. So with a better product, with a product with new features, that gives people a reason to try the product, both in existing patients and for potential new patients.

Brooks E. West - Piper Jaffray Companies, Research Division

Great. And then just on the U.S. weakness you talked about in the last 4 weeks of the quarter, have you guys seen some evidence that those sales are being made up here near term?

Daniel Jeffrey Moore

Greg, you want to take...

Gregory H. Browne

Yes, sure. Brooks, I think it's early in the quarter, and some of the factors that contributed to the weakness in, particularly, in January, the last 4 weeks of our fiscal quarter, some of those have continued, of course, whether I don't [ph] think all the insurance changes have worked their way through the system yet. Having said that, of course, as Dan said I think quite clearly in his remarks, discussions with the commercial team would indicate confidence in hitting the targets in the fourth quarter and for the fiscal year, and of course, we've maintained our sales guidance. So I think we're working through those, and as -- we feel comfortable that we'll meet the guidance.

Operator

And our next question comes from Matthew Dodds from Citigroup.

Matthew J. Dodds - Citigroup Inc, Research Division

A follow-up on the U.S. I assume the insurance, you're talking about the Affordable Care Act changes. Is that kind of primarily the issue here?

Gregory H. Browne

Matt, there was -- the Affordable Care Act changes clearly had some part of that. We also saw significant changes in the Medicaid programs in California, particularly Medi-Cal. And so a combination of those and other changes in different parts of the country that contributed to the delays, and our case management team is working through that. As you know, we have a case management group here that assists patients, not all, but assists patients when necessary with prior authorization along with education and so on. And so that's where we get that feedback from.

Daniel Jeffrey Moore

So Matt, what ends up happening is when there's a switch from even one private payer to another private payer for someone whose insured just typically delays the process, because each insurance carrier has their specific set of guidelines, and that starts with just who is in network and who is out of network. From a physician standpoint, the outpatient clinics, the hospitals, there's different pre-authorization requirements and overall coverage benefits, including changes to co-pays and deductibles. So all of that and just getting through that process forces a patient, whether they are a new patient or a replacement patient to go back through a procedure that they may have already done in another system prior to switching.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then on the o U.S. sales, the tender order, I'm pretty sure you said that was in the Middle East where you got the tender?

Daniel Jeffrey Moore

We have Europe and the Middle East combined into one entity, and it's within that entity.

Matthew J. Dodds - Citigroup Inc, Research Division

And then you did say that there's another tender coming this quarter, I thought of the same magnitude?

Daniel Jeffrey Moore

Yes, it's all the same tender. It's just the contract calls for 3 separate shipments.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. So when we look at the current quarter then, is it fair to assume that the underlying international business is growing 10% and this will have the same kind of magnitude benefit in the current quarter, this new tender or the second piece of this tender?

Gregory H. Browne

Matt, I think that's fair to say. Our international business is growing around that double-digit number, and the magnitude will be reasonably consistent in the fourth quarter, we expect.

Matthew J. Dodds - Citigroup Inc, Research Division

And then one last one, Greg, for you. The med tech tax, I thought I heard you say, was $500,000. I think that's lower than the past 2 quarters. Is that an anomaly or is that more the right run rate?

Gregory H. Browne

No, what I tried to say, and I might not have put it as well as I should have, but the marginal increase in the med tax -- med device tax for the third quarter was $500,000 when compared to the prior year.

Operator

And our next question comes from Raj Denhoy from Jefferies.

Raj Denhoy - Jefferies LLC, Research Division

I wonder if I could just ask a little bit on that -- the international revenues, as well. Just doing some of the math on which you provided us, it looks like the ASPs in international markets increased fairly dramatically in almost $14,500 in international ASP at this point. Is that again related to this tender, or was there something else that drove the international ASP up so much?

Gregory H. Browne

Well, first of all, the international tender that we have talked about certainly was at a higher ASP than we would normally see in our international markets, was at the higher end of the range. Secondly, the ASP is also driven by country mix in Europe and within the other regions. So -- but most of the increase this quarter would have been a result of that tender and that shipment.

Raj Denhoy - Jefferies LLC, Research Division

So as we think about the future from here, do you expect it's going to stay in this, because it's been sort of in that 12-ish thousand range? And it popped out this quarter, you think we should expect it to sort of stay in that $12,000 to $13,000 range going forward?

Gregory H. Browne

Yes, yes, we do, Raj, obviously, with the exception of the shipment to take place in Q4, which will have an impact. But yes, I would suggest that, that would be a comfortable range going forward.

Raj Denhoy - Jefferies LLC, Research Division

Okay. And then just on the U.S. business, again, with some of the detail you provided, it looks like the hit from the external issues you mentioned was primarily on replacement as opposed to the de novo growth as its -- as we look at the lead number. Is there a reason why we would have seen more of that hit on the replacement side as opposed to the de novo lead-based implants?

Gregory H. Browne

Yes. I think what we saw was increased leads and the generator minus lead number implying a hit to replacements. I don't know that the underlying activity will be entirely consistent with that. I think both new patients and replacements were impacted and significantly so in the last 4 weeks, the 4 weeks of the quarter.

Raj Denhoy - Jefferies LLC, Research Division

Okay. And then just picking on that the insurance issue you mentioned. Was there anything specific to Cyberonics over the reimbursement for VNS that changed in the quarter? Was it really just this kind of broad disruption in reimbursement for some of your patients?

Gregory H. Browne

Nothing specific to Cyberonics with the exception of the fact that we're an elective surgery. So if you're in a situation where there's an emergency, you're going to get one type of care because it is an emergency whereas we're an elective procedure, so things can get delayed without potential implications.

Operator

Our next question comes from Matthew O'Brien from William Blair.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Just questions. Just to follow up a little bit on the U.S. and be specific on this. You mentioned the replacement cycle or the replacement piece of the business was the source of the shortfall. Do you think you experienced any pull-forward of procedures given some of the insurance changes that were coming beginning of the year, and that, that may normalize a little bit here in your fiscal fourth quarter?

Gregory H. Browne

So Matt, I think that the weakness in replacement, as I alluded to in the script, is we think more due to the issues in January that we've talked about. We don't think that the underlying trends have materially changed. And we expect, from where we sit today, to return to the sort of mid-single-digit growth that we've talked about.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay, Greg. But I think you said new patient -- you said lead growth in the U.S. was up 10.6%, slightly above the high single-digits that you talked about in the past?

Gregory H. Browne

Yes.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Do you think there was some pull-forward, maybe November, December in front of ACA that you may have seen in terms of volumes there?

Gregory H. Browne

So I don't think there was any pull-forward ahead of the ACA. And also, of course, you know that the lead growth is only an indication of new patients and not always perfectly aligned with underlying implants.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Understood. And just one quick follow-up on the international side with the big tender orders here. Were those contemplated in the guidance that you've provided a couple of quarters ago, $280 million to $285 million? And then what kind of impact do you anticipate? I know you don't want to get into '15 guidance, but in terms of what kind of impact do you think that will have going forward on your international business in a couple of quarters, is -- are Korea and Japan big enough to offset any pressures -- not pressures you may see, but just lack of further ordering from those territories?

Gregory H. Browne

Yes. So I think with respect to that sorts of tenders, there's always a certain amount -- there's always uncertainty associated with those until everything is signed and shipments stay in place and delivery occurs and so on. So we did take a portion of that into account when setting annual guidance whenever we assigned at a lower probability, if you will, and that's why after we set a range on the guidance because there are number of uncertainties at the beginning of the year. I think part of the reason for pointing out the shipment was, first of all, that with or without that shipment, our international business reached new records for the quarter, but it may impact the comparisons a year from now. And hopefully, we'll be able to overcome that as we go into our planning for fiscal '15, but we'll have to see where those final plans come out.

Daniel Jeffrey Moore

And the mindset doesn't change. It's for every U.S. territory, it's for every country in Europe, every country manager. Each distributor in Latin America, Asia, Middle East, wherever they are, we always have an expectation of further penetrating the market and growing. So hopefully, the sum of all of those territories, countries, regions will overcome any growth that we built this year.

Operator

And our next question comes from Bill Plovanic from Canaccord.

William J. Plovanic - Canaccord Genuity, Research Division

A couple of questions here. First of all, just a simple question for you, Greg. Just the lead sales o U.S.

Gregory H. Browne

Yes. Just give me a minute, my apologies. Yes, the international leads in the quarter were 870, and that did include 100 leads that were shipped as part of that tender.

William J. Plovanic - Canaccord Genuity, Research Division

Okay. And then just the -- in terms of the ANTHEM-HF, when do -- when should investors expect to see any readout top line data? Is the first look we're going to get to that September, or will we actually -- or will there be something out there in April or May?

Daniel Jeffrey Moore

The first look will probably be September, and the reason for that is, obviously, if we start putting things out, that prevents the investigators to be able to publish the way they'd like to publish or present at major meetings. So first look will be providing there's an acceptance by the European Society. First look would be early September.

William J. Plovanic - Canaccord Genuity, Research Division

And if there is not an acceptance by the ESC?

Daniel Jeffrey Moore

We'll plan accordingly. I mean, we'll look at alternatives for where else the data could be presented.

William J. Plovanic - Canaccord Genuity, Research Division

Okay. So the first look will be at a podium. It will be presented. There won't be any press releases or high-level data or anything that any investors will get prior?

Daniel Jeffrey Moore

That's the plan as of now, Bill, but always subject to change.

William J. Plovanic - Canaccord Genuity, Research Division

Got you. And then just, I think this insurance, the change in reimbursement or the insurance, what have you, if you could actually explain that in a little more clarity. I'm just trying to understand exactly what's going on, and how long this impact will occur? And that's my last question.

Daniel Jeffrey Moore

Yes. Let me just go back to the third quarter and what we typically see in the U.S. because I know we've been focused on the insurance, but as we mentioned in our earlier comments, it's really -- as we assess the situation of what went wrong in the last 4 weeks of the quarter with our commercial team, it wasn't just insurance. If you look back year-to-year, in 6 out of the last 7 years, our U.S. units typically go down from Q2 to Q3, and the first part of that, we believe, is the holiday. You've got Thanksgiving, you've got Christmas, and that impacts overall sales from Q2 to Q3. This year, when we look at the holidays landing -- Christmas and New Year's both landing in the middle of the week, that's less than ideal, too, as far as we're concerned, because it can have people taking the entire week off instead of a longer weekend. So it started with the holiday. And I think everyone that's turning on the news everyday sees the impact of cold weather throughout the country, including even here in Houston, we've had a couple of days where we've shut down. The challenge there is that, when things get backed up, again, coming back to us being an elective surgery, if I'm a neurosurgeon and I'm repairing aneurysms versus putting in a vagus nerve stimulator, when a schedule gets pushed whether on the outpatient center, the hospital, the physician who is performing the procedure, because ours is an elective procedure, it's going to tend to get pushed down into the schedule and pushed off or rescheduled. So those are 2 factors. And then -- so your question on the insurance, I think any of us who have switched insurance plans, and as a company, we're doing that this year as well, when we go from one carrier to another, you kind of start everything over with that new carrier, whether it's a prescription or a procedure, and just understanding which hospital, which outpatient centers, who's in my network from a facility standpoint. From a physician standpoint, is my neurologist and epileptologist in, and then which surgeons can I go to that are in network, or if I'm going to go out in the network, I'm going to face a higher deductible. So I think the insurance changes starts there. All the authorizations you're going through where you may have been in the system in 1, -- with 1 carrier, with 1 hospital or outpatient clinic, and you're known to them and can get the procedure, the replacement, for example, quite fast. When you start over -- if you're starting over with another carrier, you go through that whole process again. So we expect, over time, all of that's going to even out. But as we saw the Affordability Care Act and a lot of questions around people changing plans, what was going to happen to their plans, were their plans kept intact, did they keep the plan they liked, or was there plan going to be canceled? That just caused a lot of disruption. So it's a combination of weather, holidays, insurance, but less than ideal all-around.

Operator

Our next question comes from Suraj Kalia from Northland Securities.

Suraj Kalia - Northland Capital Markets, Research Division

So Dan, one question for you and one for Greg. Dan, specifically for the AspireSR. You just got your CE Mark, and my understanding is the 60% of the ecto tacky [ph] cardiac sort of [ph] company by seizures. So the CE Mark study, if I remember correctly, that was like 30, 40 patients, and I'm just speaking for memory here, then walk us through how do you all convince the physician population have bought of adopting a new technology, a new device, especially there's 60% -- there's a 60% correlation to seizures. I'm just trying to understand how we get to the value proposition and how you all charge a higher premium?

Daniel Jeffrey Moore

Well, I think any time physicians have a product that's going to add a feature at little or no risk of adding that feature, it's why wouldn't they? VNS has been around for more than 10 years, pushing 20 years just depending on the market. And it starts with the fact that we've got 100,000 implants and 70,000 patients and 500,000 patient years with VNS. So it's a product that they understand. They also understand magnet mode, and there's data out there of over 9,000 magnet swipes and patients reporting what benefit they've got from those magnets swipes. And in 62% of those magnets swipes, patients reported a benefit either stopping the seizure in about 24% of the cases, or diminishing the effects of the seizure in another 38%. So 38%, it didn't make a difference. So if we can automate a feature, which we believe we're doing with seizure response, detecting when a seizure is probably occurring and having that stimulation occur automatically without, by the way, removing the background stimulation so it continues to provide that benefit of background stimulation, and also not removing the magnets so the patient still has that sense of control. But for all those patients who don't have a magnet, don't have the aura, this feature would help in what we think over 50% of patients. So let's play that forward and say, you happen to be in the 38% if those percentages actually work out, the 38% of patients where they didn't get anything from the magnet mode. What the physician has essentially implanted then is an AspireHC, and they can program the SR feature with not only multiple settings of the SR feature but they have the capability to turn that feature off. So if after some period of time, 6 months, 1 year, 2 years, whatever the patient and physician decide, SR is not giving them the benefit that they expected, they can turn off that feature and basically be left with a product that is now 30% of our U.S. sales and 12% of our international sales, the AspireHC. So we see it as a win-win for patients and our physicians who are treating them.

Suraj Kalia - Northland Capital Markets, Research Division

Greg, one last question for you. If I look at the $285 million, the high-end of your guidance, I know you haven't specifically said -- broken down Q4. But to the extent that you can shed color, if I assume 100 additional balls [ph] units from just international contract order, what would the remaining components U.S. versus o U.S. that are built into that guidance? I'm just trying to understand, is it going to be more heavily U.S.-weighted, at least that's what qualitatively your commentary is indicating. Any color you can shed.

Gregory H. Browne

Yes. I mean, clearly, any time you talk about guidance at the end of the third quarter, there is some implicit discussion about the fourth quarter guidance. We expect -- clearly expect a rebound, and a significant rebound in our U.S. business in the fourth quarter. Traditionally, it's the strongest quarter for us of the fiscal year. This year, we expect it to be a little stronger given the delays that occurred in January that we've already discussed. So yes, we expect the significant increase in the U.S. business. International, I think will probably -- generally also, by the way, excluding any specific tender, but generally also, the strongest for the year internationally, and we believe this year will be no exception.

Operator

And our next question comes from Jim Sidoti from Sidoti & Company.

James Sidoti - Sidoti & Company, LLC

Can you just give us a little more color on the timeline for the E-37 trial? When do you think that will conclude? When do you submit, and when do you expect U.S. approval?

Daniel Jeffrey Moore

Yes. The E-37, again, we are glad to report that we've completed the enrollment of Phase I of the E-37, and the next step there is to get the data from the last patient or patients who have to go through EMU at this point. Once we have that data, it'll be to summarize all of that data and then combine that with the E-36 data, which we expect to happen over the next few months. And then hopefully, by around summertime, we're back to FDA, to talk to FDA about what we've learned with E-36 and E-37, and have a discussion with them about whether or not another study is required.

James Sidoti - Sidoti & Company, LLC

And if there is another study required, how long do you expect that would take?

Daniel Jeffrey Moore

Very difficult to know at this point, because I think our starting position would be, we shouldn't need another study to be able to automate a feature similar to what we've done with the CE Mark. If we have another study, obviously, we're going to try to keep endpoints there very short. Today, we look at after the patient's implanted, they're brought back to an EMU so that we can actually track how well the seizure response product is working. So what will determine the length of that trial largely will be the endpoints. And our objective is, first, no trial; second, if there is going to be one, to have very short endpoints. But if those endpoints get pushed out, that will lengthen the completion of any trial.

James Sidoti - Sidoti & Company, LLC

But do you think it's reasonable to assume that at some point in fiscal '15, you are likely to at least have the application submitted?

Daniel Jeffrey Moore

Definitely in fiscal '15.

James Sidoti - Sidoti & Company, LLC

Okay. And Greg, can you just...

Daniel Jeffrey Moore

Jim, let me clarify that. When you say the application submitted, we're talking about the application of a Phase 2 of that IDE. So I don't want to imply that we will definitely be into a submission for regulatory approval of the AspireSR until we come to some agreement with FDA. If there is no study required, then yes, we could be submitting sometime during fiscal '15. If there's a study required, what we're going to be submitting is the specifics around the Phase II of an IDE.

James Sidoti - Sidoti & Company, LLC

Okay, understood. And Greg, can you update us on the share buyback program? Exactly, how much is left on it? And is there any plans to renew that program once this one is completed?

Gregory H. Browne

Jim, as you know, and we announced December 5 that the board had authorized another 1 million shares to be added to the program that was nearing completion at that point in time. During this quarter, we bought back 330,000 shares, some of which from the previous program and some from the new authorization. We expect to complete the current authorization, of which there's approximately 930,000 shares left by the end of fiscal '15. I think we would, no doubt, have some discussions with the Board towards the end of that period and see whether adding to the share buyback program makes sense at that time, but it's a little far off, I think, to indicate either way at this point.

Operator

And our next question comes from Charles Haff from Craig-Hallum.

Charles Haff - Craig-Hallum Capital Group LLC, Research Division

I had 2 questions regarding the pipeline. I think that you mentioned in the prepared remarks that you increased your investment in cerbomed. Was that accurate? And if so, was that increased investment due to milestones, or are you seeing some encouraging results from cerbomed? Any additional color there would be helpful.

Daniel Jeffrey Moore

In the case of the investments this quarter, we made additional investments in both Imthera and cerbomed. And yes, the cerbomed was tied to a milestone. As Greg mentioned, we're pleased with the progress that both of those companies are making in their respective areas of obstructive sleep apnea and vagus nerve stimulation.

Charles Haff - Craig-Hallum Capital Group LLC, Research Division

Okay. And is the cerbomed product, are you thinking about that in terms of a t-test on -- if a candidate would be a good candidate for VNS? Or would the cerbomed VNS product be more of a stand-alone product in your view at this point?

Daniel Jeffrey Moore

Yes and yes, but it's very early. You can envision someone starting with an external stimulation, and if they're getting benefit from that, they may want to internalize that product over time. Others may want to leave it as a stand-alone product. But understand any test like that, any clinical to prove that out would take a long period of time.

Charles Haff - Craig-Hallum Capital Group LLC, Research Division

Okay. And then my last question is on ProGuardian. You are expecting early fiscal '15 approval, I think you said, correct me if I'm wrong. And you mentioned at the Investor Day that it was a little bit early to lay out your plans for the commercialization strategy. Now that we're coming up on the approval, can you give us any insights into your commercialization strategy at this point?

Daniel Jeffrey Moore

Yes. As we proceed with ProGuardian similar to any other product, we will go forward with a limited launch. In this case, it will be a very limited launch, and the reason for that is, again, this is a very different product platform. But first thing we have to do is complete the clinical work. We've had a lot of patients who have kind of different parts of the ProGuardian platform, and we like what we see. However, until the product has a regulatory approval, there is no limited launch. And once we get that regulatory approval, we expect to start with a limited launch.

Charles Haff - Craig-Hallum Capital Group LLC, Research Division

And would this be a product that is marketed to physicians, or would it be marketed to consumers directly?

Daniel Jeffrey Moore

And the answer to that I think is both. Primarily to physicians. I think we always want the endorsement and advocacy, the epileptologist and neurologist who know the disease, the condition, they know their patients, they know how the product could help their patients. But when I say some of both, shipments may ultimately go directly to a patient as opposed to a physician's office.

Operator

And we have a question from Steve Brozak from WBB Securities.

Stephen G. Brozak - WBB Securities, LLC, Research Division

Most of the questions I've been looking at have been asked and answered. But Dan, I do have one for you on -- from the Investors Day. What would you say, because there was about 3, 4 months ago -- 3 months ago now, what would you say you would look to see in the next, let's say, 1 quarter to 2 quarters or some of the highlights that you have mentioned on the Analyst Investors Day that we could look to expect? And then I've got one financial question for Greg after that.

Daniel Jeffrey Moore

Steve, it's actually a very good question, because when you look at everything that's happening here at Cyberonics, we remain very excited about our future. If you look at the year-to-date revenue, you look at the year-to-date operating income, you look at our gross margins, you look at the progress we accelerated activity on AspireSR and we were able to submit that for CE Mark and get the CE Mark approval. We've completed the enrollment of E-37. We have a new Motion Tablet out there with some new firmware on it. We've again had an increase in our reimbursement for CMS. We've made great progress. We don't talk a lot about our operations team. But meanwhile, while they're pumping out product as it gives us very good margins, they built a facility in Costa Rica, and we've made a lot of progress with that. We're setting up our equipment in Costa Rica now and we expect to have regulatory authorities through that plant in the next few months. The indication for new patients over the fourth quarter average that we use, we like. We're still seeing a lot of physician activity coming to our market development programs. We're seeing this patient ambassador program coming together so that we get patient to patient. We have a great pipeline of products, so we're liking what we have here. And the original investment thesis that we came in with 6 or 7 years ago of an underserved patient population is still there. I was with a group of patients last night and they're saying, "I wish I would've known of VNS earlier, sooner." So everything that we've said in the past is still there today, and we continue to pursue those things. And over the next few months, we would continue to expect to make good progress against our strategies, be those sales, market development, product development in all areas we expect perfection. So we'll continue to pursue perfection, and we expect good results.

Stephen G. Brozak - WBB Securities, LLC, Research Division

Okay, Dan. And Greg, obviously, with the weather on not being as bad as it is for you down there as it is up here in New Jersey, but still there's a lumpiness effect, and a lot of things can detract in terms of how procedures are done. But lumpiness has a tendency to sort itself out in more than 1 or 2 or 3 quarters. It's not like any of these procedures that "may have been postponed" are -- use the word elective, but realistically, they're not elective in the same sense. It's not like someone's going to decide, well, maybe I won't do this. It's just a function of postponement. So you could see a lumpy quarter going forward where you'd be surprised in terms of additional procedures. Would that be a fair assessment? And obviously, I don't have anything after that, so I'll hop back into the queue.

Daniel Jeffrey Moore

Steve, as you look at the guidance, again, we don't give quarterly guidance. But if you do the math, you would see that uptick in Q4 that we normally see as part of Q4. And I know there was a question early on about delays to procedures, and you expect to make some of that up. The expectation, if you look at the guidance, assumes that there will be some of that made up. So yes, we don't like lumpiness. We -- so it's the way we operate our business is we're constantly trying to build patient pipelines and bring patients to the therapy and get them implanted so they can benefit from VNS as soon as possible. And again, that happens around the world. So our expectation, as you can see, based on that guidance is that Q4 would pick up.

And I think that's about it on the questions side. I want to again thank the entire Cyberonics team for their efforts this quarter. We had another good quarter in many facets of our business. Those efforts that have continued to ensure that our patients with epilepsy have access to this foundational therapy in many countries across the world. So thanks for listening today and for your interest in Cyberonics, and we look forward to talking to you within the next quarter. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.

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