Cyberonics: Worth a Second Look

By some measures, Cyberonics (CYBX) is a volatile medical device maker. God knows the management have had their share of trouble with issues ranging from the options scandal to FDA approval of its core product, but things can't get much worse at these levels.

Cyberonics makes a neurological implantable device that provides electric stimulation to a major nerve. This device is has been approved to treat epilepsy and depression. The latter application has generated controversy amid concerns the Food and Drug Administration granted approval in 2005 based on insufficient data.

Controversial Device
The Cyberonics VNS Therapy System consists of an implantable generator that delivers an electrical signal to an implantable lead attached to the left vagus nerve, a cranial nerve that extends from the brain stem through the neck to organs in the chest and abdomen. Stimulation of the left vagus nerve in the neck modulates various structures and alters blood flow bilaterally in various areas of the brain.

The device delivers an electrical signal to an implantable lead attached to the left vagus nerve, a cranial nerve that extends from the brain stem through the neck to organs in the chest and abdomen. Stimulation of the left vagus nerve in the neck modulates various structures and alters blood flow bilaterally in various areas of the brain.

Cyberonics faces quite a few obstacles, but there are reasons to like this company. First, lets looks at the obstacles and what they mean for Cyberonics. The company has been focused on defending their product for the use of depression and lack of sufficient data means the procedure is not reimbursable. This also means that patients who can't afford to pay out of pocket don't have access to the $25,000 procedure.

Meanwhile, the Centers for Medicare and Medicaid Services [CMS] has expressed doubt in the technology earlier this month and reimbursement approval seems unlikely without additional data.

The company released earnings last week and they were not impressive. Cyberonics, in its focus on depression and the costs incurred to market their product for this disease, reported a net loss of $0.76 per share in the 3rd quarter ending on January 26th, compared to a loss of $0.60 in Jan 2006.

Financial Highlights
In the 9 months ending January 26th, net sales were a record $99.5 million compared to $87.4 million for the nine months ended January 27, 2006.

Gross profit margin for the quarter ended January 26, 2007 was 84.4%, compared to 87.6% for the quarter ended January 27, 2006. Gross profit margin for the same period came in at 87.4%, compared to 86.9% a year ago.

Despite these lackluster earnings and the issues mentioned above, Cyberonics is worth a second look. For one thing, it has extremely high margins on its product if used for epilepsy. A shift in management might bring about the right focus on this treatment.

Additionally, Cyberonics has almost no competition in this space - at least for now and with a small market cap of around $550 million, could be the object of a buyout offer from Medtronic (MDT), Boston Scientific (BSX) and even Johnson and Johnson (JNJ).

Finally, Cyberonics is currently developing next generation brain stimulators to control obsessive compulsive disorders, treat migraine headaches and help stroke patients regain motor functions.

Now one interesting this to note is that Carl Icahn is the biggest shareholder of CYBX. Since the announcement of his purchase last November, the stock is up 23%, but down 17% from December highs.

For the speculative part of your portfolio, this is an unspeculative company that will not stay down for long - not with the technology it has.

CYBX 1-yr chart: