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Setback for CYBX Ahead of 4Q13 Result

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Cyberonics Inc. (CYBX) recently revealed that the Centers of Medicare and Medicaid Services (CMS) declined its request associated with the company’s reimbursement claim submission. This was to review its decision on the 2007 National Coverage Determination for the treatment-resistant depression (:TRD) indication for its well-regarded VNS Therapy System.

While we await further details on the CMS decision (to be disclosed during the fourth-quarter earnings call on Jun 5), the news comes as a major blow for the company which resumed reimbursement efforts in Apr 2013.

As part of its strategic priorities, this leading player in the neuromodulation space was seeking reimbursement coverage for all TRD indications for its VNS Therapy System. Earlier, Cyberonics submitted an appeal to reconsider reimbursement coverage for VNS Therapy for TRD to CMS. Subsequent to the request, the company expected some form of formal feedback from CMS, either affirmative or dissenting, before the end of Mar 2013.

Per management, Cyberonics was optimistic about securing reimbursement coverage for VNS Therapy for TRD on the back of positive clinical outcomes obtained in the last five years and four peer-reviewed journals. However, the stand taken by CMS failed to soothe fears regarding another unsuccessful attempt at gaining national reimbursement coverage for the depression indication. Consequently, shares of Cyberonics declined a considerable 4.71% (or $2.25) during after-hours trading following the announcement.

VNS-TRD Overview

The VNS Therapy System was approved as treatment for TRD in 2001 in Europe and Canada. Subsequently, the system received approval in the U.S. (for patients of 18 years or above) in Jul 2005. Regulatory bodies in the European Economic Area, Canada and Israel also approved the system for patients without age restrictions.

However, Cyberonics no longer actively sells or markets the product for depression in the U.S. market due to reimbursement issues following CMS determination of non-coverage of VNS Therapy for patients with TRD. The company also does not actively market VNS Therapy for TRD in Europe and Canada.

Cyerbonics Still Warrants a Look

Despite the setback, Cyberonics’ effort to extend VNS Therapy treatment for other indications like Obstructive Sleep Apnea (:OSA) and Chronic Heart Failure (:CHF) is impressive. The company’s effort to strengthen its pipeline improves its growth prospects.

We believe that Cyberonics, carrying a Zacks Rank #1 (Strong Buy), is worth considering on account of the uptrend in the core epilepsy business, pipeline development, strategic investments and consistently impressive quarterly performance.

Other Zacks Rank #1 medical stocks are Conceptus Inc. (CPTS) and Natus Medical Inc. (BABY). Intuitive Surgical Inc. (ISRG), holding a Zacks Rank #2 (Buy) is also expected to do well.

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