) plunged into a depression after it tried and failed to expand
from its core epilepsy market into treating depression.
But Cyberonics is a much healthier medical-device company
today than in 2007.
That year was a low point, marred by the Centers for Medicare
and Medicaid Services' refusal to cover costs of its devices to
patients with severe depression.
The company had invested heavily to sell its implantable
devices to such patients, especially after the FDA -- in a
controversial 2005 decision -- approved it for depression
patients who didn't respond to other therapies.
As it directed more resources to the new strategy, Cyberonics
neglected its epilepsy business, which fell off as a result.
"When (the depression market) dried up, the whole company fell
apart," said Raj Denhoy, a Jefferies & Co. analyst.
A new management team was brought in. They returned Cyberonics
to its original focus: epilepsy patients not responsive to drugs
and other therapies.
The result: Cyberonics revenue has grown 15% to 20% annually
since 2009. Profit has risen in double digits for six straight
"We're excited about the epilepsy market," said Chief
Financial Officer Greg Browne. "New-patient adoptions are growing
in our key U.S. market and we have a replacement business that
continues to grow 10% a year and should approach $100 million
this fiscal year."
Epilepsy is a brain disorder that causes recurring seizures.
Less than 1% of the population suffers from it. About 70% can
control their seizures through medication.
"The remaining 30% represent the market opportunity for us,"
The implants stimulate the vagus nerve in the neck area,
sending electrical signals to the brain, which disrupt some
currents in the brain.
The FDA approved the firm's Vagus Nerve Stimulation, or VNS,
therapy in 1997, for the treatment of refractory, or
But since the FDA excluded certain types of seizures and nixed
patients under 12, Cyberonics' market opportunity in the U.S. is
limited to around 350,000 patients, Browne said.
He said the devices have been implanted in 55,000 patients in
the U.S. since 1997.
That number may seem relatively small, but it's been enough to
keep the company's coffers in pretty good shape, especially after
growth in new patients turned up in recent years, 6% to 7% in the
last year alone.
Also, business in Europe has been growing in double digits,
though expansion into Japan has been slow going. International
revenue accounts for 15% of the total.
And unlike the U.S., regulators don't put as many restrictions
In the fiscal year ending in April, company earnings jumped
31% to $1.32 a share on revenue of $219 million, which was up 15%
over the earlier year.
In the first quarter ending in July, earnings rose 36% to 38
cents a share on revenue of $60.3 million, also up 15% from the
prior year, driven by growth in new patients and
About 75% of the cost of the $24,500 device is for the
pacemakerlike generator. When the battery wears out, the whole
generator must be replaced.
The other part consists of a lead that runs from the generator
in the upper chest to the vagus nerve in the neck.
Sales of the newest and premium-priced generator, AspireHC,
accounted for 15% of U.S. unit sales in the recent quarter.
While Cyberonics returned its focus to epilepsy, it never
really forgot about depression. It kept following data on
patients who received VNS therapy prior to the CMS decision to
Now, with new clinical evidence and papers in medical journals
showing positive results in patients implanted with the devices,
Cyberonics plans to ask the CMS to reconsider.
And, as Denhoy points out, the American Psychiatric
Association's treatment guidelines now include VNS as an
additional treatment option for patients not responsive to at
least four antidepressant therapies. The group based its
inclusion on a greater amount of data collected on outcomes.
Management plans to submit a new application to the CMS by
year end or early in 2013. The approval process could take a
If approved, the new indication would be "transformative" to
Cyberonics, Denhoy said.
"Depression is probably a market opportunity at least as big
as epilepsy," he said. "And the patient population is probably
more motivated, as is the clinician community."
Management estimates that 70,000 treatment-resistant
depression patients in the U.S. could use VNS therapy.
With CMS' approval, Denhoy estimates implants in depression
patients could add $12 million in incremental revenue in fiscal
2014, $42 million in 2015 and $61 million in 2016.
He gives approval a 50-50 chance and assigns a share value of
15 based on that coin toss (or 30 with an approval).
"There's a lot of data and clinical support for use of this,"
Denhoy said. "On the other hand, getting decisions overturned by
Medicare doesn't happen that often. And there are budget issues
now. Medicare is not in the mood to pay for anything more than it
"Having said that," he added, "it is efficacious therapy. And
the data show it's cost effective."
Management is taking a cautious approach, having learned a
lesson from predecessors.
"The new management team is not betting the farm on
depression," Denhoy said.
Meanwhile, the team, led by CEO Dan Moore, has high hopes for
treating new epilepsy patients in Japan, where it received
approval two years ago.
"We're starting to make a little progress there. That
opportunity lies ahead of us," Browne said.
Piper Jaffray analyst Thomas Gunderson figures the "nearly
untapped" market of 350,000 treatment-resistant epilepsy patients
in Japan could offer new growth for the company starting in the
next fiscal year.
Though Japan is a barely penetrated large market opportunity,
"the spark to light the fire has been elusive," he wrote in a
research report on Aug. 29.
Meanwhile, new products are in the pipeline, including a
generator with seizure response functions and an event tracking
and monitoring device.
And there could be more sparks beyond depression. A new study
is planned to look into expanded use of VNS therapy for chronic