Houston, Texas, -based Cyberonics (CYBX), a medical instruments company engaged in the design, development, marketing, and sale of implantable medical devices to hospitals and ambulatory surgery centers, has been witnessing surging demand for its VNS Therapy for the treatment of refractory epilepsy. Moreover, the company has been rewarding its shareholders with attractive share repurchases. I am bullish about the company's potential in VNS Therapy in an under-penetrated epilepsy market, where Cyberonics has strong untapped opportunities.
The company's stock made a 52-week low at $42.31 earlier this year and currently it is hovering around $52. I feel that the stock has the potential to touch $70 within the next twelve to eighteen months due to the company's strong emphasis on product development and international expansion. In this article I will focus on the company's potential growth drivers, while making a bullish case for the stock.
Cyberonics: Company Overview
Cyberonics offers VNS (vagus nerve stimulation) therapeutic systems that provide neuromodulation therapy for the treatment of refractory epilepsy and TRD (treatment-resistant depression). VNS Therapy is delivered through a small pacemaker like generator implanted in the chest that sends preprogrammed, intermittent, mild electrical pulses through the vagus nerve in the neck to the brain. The company is also investigating the use of VNS for other indications, such as CHF (chronic heart failure) and management of epilepsy without implantation.
Why You Need to Take a Closer Look at Cyberonics
The global market for epilepsy is ~80% under-penetrated and offers an incredible investing opportunity. I believe Cyberonics could be an excellent proxy play for investing in the epilepsy market. The primary reason for considering Cyberonics as an investment option is that the company is currently actively focusing on research and development in the field of VNS Therapy for patients with refractory epilepsy, particularly seizure detection, responsive stimulation and associated technologies.
For increasing its market share Cyberonics is emphasizing on developing a robust pipeline. The company is currently developing VNS Therapy Systems utilizing heart and brain-induced seizure detection technology, rechargeable battery technology and wireless communication technology. I feel these new technologies will help the company significantly penetrate the epilepsy market.
According to recent data from the U.S. Centers for Disease Control and the National Epilepsy Foundation, ~2.7 million people in the U.S. suffer from epilepsy, which translates into ~0.4 million potential patients (with drug-resistant epilepsy) for the company's VNS Therapy. Furthermore, a minimum of 125,000 epilepsy patients are detected every year, leading to 15,000-24,000 new patients for Cyberonics on an annual basis.
In the last three years, the company has invested heavily in developing two new VNS Therapy generators, the AspireHC (High Capacity) and the AspireSR (Seizure Response), with the intention of replacing the older models. The AspireHC has been generating strong momentum in the U.S. with an improving ASP. It addresses the need among some patients for a device with a higher capacity battery and also provides a platform for the AspireSR generator. I expect the replacement business model will drive significant growth for the company on a sustainable basis.
Cyberonics' Product Development Activities
For maintaining its leadership position in the VNS Therapy market, the company is focusing on developing some unique products, which are listed below:
AspireSR: For the AspireSR generator, Cyberonics initiated the E-36, EU clinical study to support CE Mark submission. The company completed enrollment in the clinical study in the first quarter of the current fiscal. Cyberonics plans to submit AspireSR for European regulatory approval no later than the end of fiscal 2014. For the E-37 clinical study of AspireSR in the U.S., the company started enrolling patients and expects to complete enrollment of the first phase of the trial in the current fiscal year.ProGuardian: The company's ProGuardian system is its in-home monitoring system that is designed to aid the detection, recording and notification of epileptic seizures accompanied by heart rate variations or movement. The company's aim is to submit the first product of the ProGuardian platform for regulatory approval in Europe by the end of the fiscal year 2014.Relay Generator: The development of Cyberonics' Relay Generator, a wireless-enabled VNS Therapy generator, has continued to progress as the company advances towards regulatory submissions.Programming Tablets: For the programming tablets, the company is transitioning from the handheld PDA programmer to a new tablet computer programmer. Shipments of the new tablets have already begun.Apart from the products listed above, the company completed enrollment and implant activity in the ANTHEM pilot study for the Neural Autonomic Regulation Therapy for chronic heart failure. Further activities in this area remain contingent on the results from this pilot study.
Positive Catalysts for the Stock
Strong FY14 Guidance: Cyberonics provided strong outlook for fiscal 2014. The company expects revenues in the range of $279 - $283 million. Income from operations is expected in the range of $85 - $88 million resulting in net income of $53 - $56 million and adjusted EPS of $1.93 - $2.01 for fiscal 2014.
International Markets Focus: Cyberonics has a strong international presence and it sells its products directly, as well as through independent distributors in the U.S., Europe, Latin America (including Brazil), Russia and Asia (including Japan, China and India). The company has already made implants in 68,000 patients internationally.
Epilepsy is the second most prevalent neurological disorder in the world. The recent World Health Organization study on epilepsy showed that there are over 3.0 million individuals with epilepsy in Western Europe with over 150,000 new cases diagnosed each year. In Japan, these numbers are 1.0 million and 50,000, respectively. Cyberonics is focused on physician training, fulfilling patient registry requirements and initiatives to secure reimbursement to expand globally. The company seeks to increase top-line from its international operations by deploying senior sales and marketing teams overseas, particularly in Europe and Japan. Cyberonics plans to build a second manufacturing facility in Costa Rica, which the company believes, after being fully operational by fiscal 2015, will provide faster global market access.
Collaborative Initiatives: In September 2012, Cyberonics invested $2 million in Germany-based Cerbomed GmbH. Cerbomed manufactures the Nemos t-VNS Device for the treatment of epilepsy, pain and depression. Cyberonics has plans to invest further in the company up to $5.5 million if it achieves some significant clinical landmarks. The company has the option to conduct a clinical trial in the U.S. to gain the FDA approval.
In June 2012, Cyberonics inked a deal with Magnetic Resonance Imaging ("MRI") electrophysiology tools developer Imricor Medical Systems to develop MRI-safe VNS Therapy System. The company has commenced several clinical studies on VNS therapy for patients with refractory epilepsy.
Valuation and Projected Stock Price
Cyberonics is a cash-rich company with cash and equivalents of $106.32 million on the balance sheet as of quarter ending June 2013, against a debt to equity ratio of zero.
However, the company's gross margin being under pressure, the stock witnessed significant correction from its 52-week high at $56.73. Beginning from 2012, the company witnessed its gross margin has contracted on a consistent basis. The margin pressure was primarily due to the expansion of the company's marketing team, higher expenses associated with the E-36 clinical study and costs related to establishing the new facility in Costa Rica. Cyberonics management expects that in FY2014 margin pressure will remain an overhang. The company expects gross margin to hover around 89.5% in FY2014.
Despite the margin pressure I remain bullish on the stock and consider the correction as an opportunity to buy. I believe that the reasons for margin compression will lead to higher revenues and profitability from the next fiscal. Moreover, an expanding book value per share coupled with a steady ROE around 20% is pretty impressive. Since 2012, the stock traded in a Price/Book range between 5.2x and 7.75x. I expect the company's book value per share to reach $9.50 within the next twelve months. Assigning a Price/Book of 7.5x on that value I get $71.25, the company's projected stock price for FY2015.
Cyberonics is currently trading at a P/E of ~31x on a trailing twelve months basis, slightly above the peer group average of 29x. Among its peers, Techne (TECH) is trading at ~25x, Given Imaging (GIVN) at ~36x and St. Jude Medical (STJ) at ~24x. The company guided that its adjusted EPS will be in the range between $1.93 and $2.01 for FY2014, which I feel has already been factored in the current price of the stock. However, the company's EPS is expected to rise at a CAGR of 20% and for FY2015 I expect the EPS will be in the range between $2.30 and $2.45. On average the FY2015 EPS would be $2.38. Assigning the peer group average P/E of 29x on that EPS, I arrive at my one-year target price of $69 for Cyberonics, which broadly tallies with the projected price based on Price/Book ratio.
Summary: Reasons to Buy
The global market for epilepsy is under-penetrated by a huge margin and Cyberonics offers an excellent investing opportunity in this space.Cyberonics is emphasizing on developing a robust pipeline for maintaining its leadership position in the field of epilepsy treatment.The AspireHC has been generating strong momentum in the U.S. with an improving average selling price.The AspireSR is undergoing clinical trials in the EU (E-36), which upon successful completion would lead to commercialization of the product that would boost the company's top- and bottom-line significantly.The company's international focus and collaborative efforts should be EPS accretive on a sustainable basis going ahead.The company is cheaply valued in terms of FY2015 earnings, and therefore has limited downside in corrective phases.Potential Risks
Cyberonics is currently working hard to obtain coverage for VNS Therapy for treatment-resistant depression. However, its recent request to the Centers for Medicare and Medicaid Services ("CMS") to reconsider the non-coverage decision taken in 2007 has been declined in May this year. It came as a major setback for Cyberonics.Depressing gross margin is a bit worrying in the near term due to higher short-term expenses. However, if the expenses remain at an elevated level for a prolonged time period, the stock could see significant correction.Cyberonics faces stiff competition from players like Medtronic (MDT), St. Jude Medical etc. Medtronic obtained FDA approval for its deep brain stimulation ("DBS") device for controlling the tremor in Parkinson's disease, which is slightly negative for Cyberonics.The Bottom Line
Cyberonics is a shareholder-friendly company, which consistently returns values to its shareholders through share repurchase programs. In January 2013, the company approved a new share repurchase program with authorization to repurchase up to one million shares of the company's outstanding common stock. This indicates that the company is confident in expanding its horizon, both geographically as well as product wise. The stock is certainly worth considering for a long-term investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
No comments:
Post a Comment