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Cyberonics Reaffirmed at Neutral

Zacks Equity Research

We reiterated our Neutral recommendation on Cyberonics (CYBX) with a target price of $40.00, following our assessment of its third quarter 2012 results.

Cyberonics reported third quarter 2012 EPS of 34 cents, surpassing the Zacks Consensus Estimate of 30 cents and was 36% higher than the year-ago quarter’s adjusted EPS. Revenues increased 16% year over year (same at constant exchange rates or CER) to $54.5 million and surpassed the Zacks Consensus Estimate of $53 million.

Cyberonics’ VNS therapy system is the first implantable medical device to receive U.S Food and Drug Administration (:FDA) approval for the treatment of epilepsy. The device has the potential to treat other neurological disorders, such as depression, Alzheimer’s disease, anxiety, chronic migraine headaches and bulimia. The device is widely accepted amongst neurosurgeons as evident from the company’s impressive results.

During the reported quarter,epilepsy sales in the US market increased 15% year over year with higher units sold (up 10%) on the back of both new patients and replacements. We also expect the recent FDA approval for the re-designed AspireHC generator to boost its top-line performance in the upcoming quarters. Over the last 4 years, epilepsy revenues in the US increased 97%, with Cyberonics enjoying a major share of the total proceeds.

The company is currently emphasizing on its international business by expanding its epilepsy portfolio through direct sales force and distributors in Canada and Europe. Cyberonics also intends to extend its epilepsy business in Latin America (including Brazil), Russia, Australia and Asia (including Japan, China, India and Taiwan), where it foresees huge growth potential.  The regulatory bodies in these countries have approved VNS Therapy for the treatment of epilepsy without any age restrictions or seizure-type limitation.

The persistent rebound in Cyberonics’ overall international business was backed by excellent performance in Europe. Increased investment in the European market along with changes in the organizational structure enhanced the company’s performance in this region.

Additionally, the FDA approval of the redesigned AspireHC is expected to pave the way for the AspireSR seizure response system generator, which is the subject of the E-36 clinical trial in Europe. Cyberonics plans to submit the re-designed AspireSR generator to the ethics committee and competent authority approvals for the E-36 clinical trial is expected by the end of fiscal 2012.

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.Over the last three years, Cyberonics’ research and development (R&D) expense for epilepsy increased by more than 300%.

Presently, Cyberonics retains a Zacks #2 Rank (short-term Buy rating). The company faces pricing pressure along with stiff competition in the neuromodulation space from the likes of Medtronic (MDT) and St. Jude Medical Inc. (STJ).

Moreover, Cyberonics derives 17% of its revenues from international operations, primarily Europe and an upward swing in the numbers is expected. Therefore, a strengthening US dollar, primarily against the euro and pound, can hurt its internationalrevenues and bottom line. Foreign exchange movements are expected to unfavorably impact results in 2012.

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