Cyberonics Pinned at Neutral


On Dec 24, we reaffirmed our long-term Neutral recommendation on Cyberonics Inc. (CYBX). While we are optimistic about the huge and underpenetrated market for epilepsy, the recent Centers for Medicare and Medicaid Services (CMS) decision on treatment-resistant depression (:TRD) indication was a major downfall for the company. This medical technology company with core expertise in neuromodulation presently carries a Zacks Rank #3 (Hold).

Why the Reiteration?

Cyberonics posted a 13.6% rise in its second-quarter fiscal 2014 earnings per share (EPS) to 50 cents, and a healthy 12% increase in revenues to $70.1 million. The numbers also surpassed the respective Zacks Consensus Estimate of $0.49 and $69 million.

The company continues to rein in surging demand for its VNS Therapy for the treatment of refractory epilepsy. Consistent solid overseas growth amid several macroeconomic uncertainties in the European market is encouraging. The pipeline development also bolsters confidence. Meanwhile, Cyberonics has been rewarding its shareholders with attractive share repurchases.

However, the CMS decision on TRD indication was a major downfall for the company. Furthermore, contributions from Japan lagged the company’s expectations for another quarter. Moreover, gross margin pressure remains an overhang. Considering the ongoing costs associated with the development of the Costa Rican facility and product development initiatives, Cyberonics expects the margin pressure to continue in fiscal 2014.

While we derive comfort from the advantages of VNS therapy and the strong untapped potential of the epilepsy market, we are wary about competitive pressures from larger players in the neuromodulation space.

Cyberonics envisages revenues in the range of $281−$285 million against the earlier expected range of $279−$283 million. The current Zacks Consensus Estimate of $283 million remains within the company’s guidance. Cyberonics expects global unit growth of roughly 10% (unchanged from the earlier guidance).

Adjusted income from operations is expected in the range of $86−$88 million (against earlier $85−$88 million), resulting in net income of $54−$56 million ($53−$56 million) and adjusted EPS of $1.97−$2.03 ($1.93−$2.01) for fiscal 2014. The current Zacks Consensus Estimate of $2.00 for fiscal 2014 lies within the guided range.

Despite the lucrative market opportunity, we remain on the sidelines until we see improved execution. However, better-ranked healthcare stocks include McKesson Corporation (MCK), Align Technology Inc. (ALGN) and Cardinal Health, Inc. (CAH). While McKesson sports a Zacks Rank #1 (Strong Buy), Align Technology and Cardinal Health carry a Zacks Rank #2 (Buy).

Read the Full Research Report on ALGN
Read the Full Research Report on CAH
Read the Full Research Report on MCK
Read the Full Research Report on CYBX

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