We recently reiterated our Neutral recommendation on Cyberonics (CYBX), following our assessment of its third quarter 2011 results.
Cyberonics reported EPS of 25 cents for the third quarter of fiscal 2011, which was 13.8% lower than the year-ago quarter but ahead of the Zacks Consensus Estimate by a penny. This decline in the bottom-line was due to a significant increase in the effective tax rate from 3% in fiscal 2010 to 38% in fiscal 2011.
Revenues were $47.1 million, exceeding the Zacks Consensus Estimate of $46 million and 15.3% higher than $40.7 million in the year-ago period.
Based on the strong quarter, Cyberonics now expects revenues and income from operations in the range of $189-$191 million, (previous guidance of $187 - $190 million) and $47- $45 million ($45 - $48 million), respectively.
Cyberonics develops and markets Vagus Nerve Stimulation Therapy System which is approved by the U.S. Food and Drug Administration for the treatment of refractory epilepsy and treatment-resistant depression.
During the third quarter 2011, the world-wide epilepsy unit growth of Cyberonics was 7% with a strong 16% unit growth in U.S. Total sales for U.S. epilepsy business increased 24% driven by higher volume and increased average selling prices.
We note that the international environment for the neuromodulation industry is quite challenging. This is evident from the 15.4% decline in Cyberonics’ international revenue. The company is currently emphasizing on its international business by growing its products for epilepsy through a direct sales force and distributors in Europe, Latin America, Russia and Asia (including Japan and China).
Moreover, the company is focusing on research and development in the field of VNS Therapy for patients with refractory epilepsy specifically, seizure detection, responsive stimulation and associated technology.
Cyberonics is also emphasising on timely completion of clinical, research and development and regulatory projects including AspireHC generator, European regulatory approval of E-36 study and AspireSR generator in fiscal year 2011. In Japan it is focusing on physician training and fulfilling patient registry requirements. Although Cyberonics is still witnessing softness in the UK, the situation is expected to recover later this year.
However, the competitive pressures from Medtronic (MDT) and St. Jude Medical Inc. (STJ) in the neuromodulation space as well as the mounting third-party reimbursement issues may adversely affect the company’s performance going forward. Also the company’s sales from Japan are expected to suffer a major blow following the earthquake and tsunami.