Cyberonics Worth Looking Into: A Low-Risk Stock With Decent Upside

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.

CYBX Cash and Equivalents data by YCharts

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.

CYBX Gross Profit Margin Quarterly data by YCharts

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.

CYBX Price / Book Value data by YCharts

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.

CYBX PE Ratio TTM data by YCharts

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...)

View the original article here

Regeneron Pipeline Worth Tens Of Billions In Market Capitalization

I tend to shy away from stocks that are high on momentum and carry high P/E (price to earnings) ratios. A flattening of revenue or profit growth can lead to P/E reductions that bring big losses, at least short-term, to investors. Yet occasionally a P/E can seem high, but the stock price still does not begin to reflect the long-term profit potential of the company. In looking at the biotechnology companies in the Nasdaq 100, I believe that Regeneron Pharmaceuticals (REGN) is such a stock. Of course there are caveats, which I will discuss.

Regeneron currently has one big money maker, Eylea (aflibercept), which is currently used to treat wet AMD (Macular Degeneration), a disease that can lead to blindness. Eylea was approved by the FDA in late 2011. In Q2 2013 Regeneron reported revenue of $330 million from Eylea sales. Eylea is a large protein molecule (biologic), monoclonal antibody that works by inhibiting vascular endothelial growth factor (VEGF), which can cause excessive blood vessel growth. In the AMD market it competes mainly with Lucentis. Both drugs are injected into the eye. Since Eylea works well when injected into the eye less often, every 1.7 months vs. 1 month for Lucentis, it has tended to gain market share since its introduction. The other competitor is Avastin, which has not been approved by the FDA for AMD (but it is approved for treating a variety of cancers). However, Avastin is a VEGF inhibitor, it works, and it is much cheaper.

Looking at the usual factors in Regeneron's stock price (September 6, 2013 close of $267.57), Q2 total revenue was $457.6 million, up 50% from $304.4 million in Q2 2012. GAAP diluted Earnings Per Share (EPS) was $0.79, up 13% from $0.70 year-earlier. Non-GAAP EPS was $1.73 per share, down sequentially from $1.78, but up 92% from $0.90 per diluted share year-earlier.

That is pretty astonishing y/y growth, but it comes from the usual nature of the ramping a new drug in by a company that had little or no prior revenue. The growth rate could justify a high P/E, but only if the revenue and profit ramp will continue. Regeneron's trailing non-GAAP P/E is 35.7 (a rule of thumb is any P/E above 20 indicates expectations of at least moderate profit growth; there are formulas that give exact numbers, but they rely on assumptions about the average rate of return on investments and guesses about future profits, so good rules of thumb are more practical). GAAP trailing earnings are $4.63, so trailing GAAP P/E is 57.8, even higher.

On the negative side, after hitting $1.72 in Q3 2012, GAAP EPS has dropped sequentially each quarter. Non-GAAP EPS was $2.29 in Q3 2012, so it has also been declining, but more gradually. Usually companies with stocks with a history of decline have P/Es of 15 or under. Revenue was $428 million, which means the sequential increase from Q2 2012 to Q3 2012 brought most of the revenue growth in the last year. The main reason for the declining earnings despite rising revenue is in expenses, which were (GAAP) $225 million in Q3 2012 but had risen to almost $300 million in Q2 2013. In particular, R&D expense rose $29 million and SG&A (administration) expenses rose $25.6 million.

But here the difference between the short term and the long term makes a big difference. To optimize short term profits Regeneron would have cut the R&D budget to as close to zero as possible. To optimize long term profits more drugs have to be developed, and even Eylea needed to get approved by the FDA for indications other than AMD.

Future Eylea revenue alone might justify the extraordinarily high P/E because it has just begun its international expansion. The pipeline of other drugs, of course, should be treated with a reasonable degree of caution. Not every drug will be approved by the FDA, and of approved drugs some may not sell well due to competition.

Eylea is a pipeline unto itself. Improperly regulated VEGF, it turns out, plays a role in a number of diseases, including solid cancers, where growth is dependent on the formation of new blood vessels (recall Avastin, a cancer therapy, has the same mode of action). A second eye-related indication, CRVO (Macular Edema following Central Retinal Vein Occlusion), was approved by the FDA in September 2012, where again its chief rival is Lucentis, and was approved in Europe on August 29. A variation on Eylea, ziv-aflibercet or Zaltrap, was approved in August 2012 for second-line colorectal cancer in a collaboration with Sanofi (SNY). There are also European approvals for these indications. On August 6 positive Phase III data for Eylea for diabetic macular edema (DME) was reported and Regeneron is planning to submit the drug to the FDA for approval later this year. That means a likely new revenue ramp in the second half of 2014, as DME is a problem for well over one-half million Americans, and can become a problem for any of the 25 million Americans with diabetes.

Finally, Eylea is also in Phase III trials for Macular Edema following Branch Retinal Vein Occlusion. Also in Phase III and looking likely is Sarilumab for rheumatoid arthritis, which if approved could have a very large addressable market, but will be in competition with a large number of therapies including older generics. Alirocumab (PCSK9 Antibody) for lowering cholesterol (LDL, the bad kind) is also in Phase III. While it is entering a crowded market, it can be administered (if approved) at two-week or even one-month intervals.

In Phase II we have Dupilumab (IL-4R) antibody for eosinophilic asthma and atopic dermatitis; it reported positive Phase IIa data in May. Fasinumab (NGF Antibody) for pain from osteoarthritis has been on clinical hold since in late 2010, but not because of anything seen in its trial. Another company's anti-NGF therapy has a serious adverse event, so all anti-NGF trials are on hold until the issue is sorted out. [This is the type of thing that can come up even after FDA approval, which is why I like to use conservative probabilities to calculate future values of pipeline candidates.]

Regeneron has 8 monoclonal antibodies in Phase 1 (safety trials), mainly targeted at advanced metastatic cancers.

One early stage candidate was pulled from development recently for not meeting expectations. Probably the single most valuable asset of Regeneron, in the long run, is its ability to generate a practically unlimited series of monoclonal antibodies in house which can be put into the pipeline. Of course all of this requires R&D dollars, so it will happen gradually. Management, as a result, does not have to hang onto marginal candidates that may flop in Phase II or Phase III. Regeneron can kill a marginal candidate in pre-clinical or Phase I trials, saving the company a lot of money that would be wasted if a therapy failed to reach commercialization.

In short, long-term Regeneron looks like a biotechnology gold mine. It looks to me like it will be worth tens of billions in market capitalization over the next decade. (Current market capitalization is $26.4 billion.)

So the various analysts and others who have been hyping Regeneron, as far as I can tell, are right. That does not mean the stock will go up in a straight line. Its high P/E indicates somewhere between a year and two years of EPS growth are already priced into the stock. A number of factors could depress the price in the short run: failure or delay of a therapy that is expected to get FDA approval; pricing pressures; increased competition resulting in lost market share; a general decline in the stock market, or just profit-taking by investors who got into REGN early and want to spend some of their gains.

I don't see, however, a significant likelihood that Regeneron will be under $300 per share two years from now. More likely, with new revenue and profits, and with a pipelines where candidates are continuing to progress, any decrease in the P/E would be more than compensated for by increased earnings.

I don't think it is a good idea for me to put out a specific number for, say 2016 EPS or a stock target, given the many events and likely variances (including, particularly, pricing of new therapies) ahead. However, I would buy Regeneron today, with good (but of course not 100%) confidence that it will be one of the stocks that will have me and a lot of investors far richer by, say 2020. Most people can't think that far ahead, which is why the stock is bargain-priced today.

However, I said I would not make this new biotech investment round without going through the full process and sharing it with my readers and friends. Next up, the last of my Nasdaq 100 biotechnology checklist companies, Vertex Pharmaceuticals (VRTX). After that I will research and write about perhaps 10 to 15 smaller companies before wrapping up this round.

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...)

View the original article here

Navidea - Worth A Look?

Sometimes when investing in the pharmaceutical space, it is better to identify an up-and-coming company than one that already has established drugs. It is not that companies with established drugs lack value. Rather it is that there oft seems to be high value placed on potential. If you time an investment correctly, it can be quite rewarding.

Navidea (NAVB) is an up-and-coming player with a pipeline of potential at critical stages of trials. If the company has successful results, the stock could appreciate substantially. The trick here is trying to gauge the likelihood of success, and when various results might become available.

The Pipeline - Lymphoseek

On March 13, 2013, the Navidea drug Lymphoseek garnered FDA approval for use in lymphatic mapping procedures to assist in the localization of lymph nodes draining a primary tumor in patients with breast cancer or melanoma.

Lymphoseek (Technetium Tc99m Tilmanocept) Injection is a first-in-class mannose receptor (CD206) binding radiopharmaceutical agent developed for use in external lymph node imaging.

The initial FDA approval is simply the beginning for Lymphoseek. Navidea is conducting an additional Phase 3 clinical trial in patients with head and neck cancer. This trial reached a pre-planned interim analysis point in 2013. The company reports positive topline results which it says demonstrates that Lymphoseek meets the primary efficacy endpoint of accurately identifying sentinel lymph nodes (SLNs) in subjects with squamous cell carcinoma of the head or in the mouth, as compared to the removal of all lymph nodes during multiple level nodal dissection surgery of the head and neck.

Navidea, after final assessment of the data will evaluate the possibility of filing a Supplemental New Drug Application (SNDA) late in 2013. Navidea is also considering additional studies of Lymphoseek in other cancer types.

With an FDA approval under its belt, and positive studies in other areas, Navidea took the additional step of submitting a Marketing Authorization Application (MAA) for Lymphoseek® to the European Medicines Agency (EMA) in December 2012. The company and investors alike await word on the European front.

The driving concept of Lymphoseek is the theory that a better diagnostic and better mapping can help doctors focus on the most critical areas of need and avoid unnecessary surgical complications.

Lymphoseek, a radioactive tracing agent, is injected at the site of the primary tumor and follows the drainage path of the tumor to the nearest lymph node or nodes. After injection of the radioactive agent, external gamma detection-based imaging can be performed to assist in the pre-operative localization of nodes. A gamma detection device is then used to track the pathway of the tracing agent. Lymph nodes in the potential drainage path are identified using the radioactive tracing agent. Essentially the doctor is presented with a virtual road-map identifying areas of higher risk. Nodes that are not on the path have, in general, a tendency to be free of disease.

NAV4694 - Alzheimer's

NAV4694 is a Fluorine-18 labeled precision radiopharmaceutical candidate for use in the imaging and evaluation of patients with signs or symptoms of cognitive impairment such as Alzheimer's. NAV4694 helps to identify amyloid plaque in the brain. Amlyoid plaque is present in all patients with Alzheimer's Disease. The ability to diagnose early allows for more treatment options. One difficulty with current options is that the contrast in images is not easy to read. NAV4694 offers higher contrast imaging, which, in theory, helps assist in earlier detection.

NAV4694 is currently being evaluated in Phase 2b and Phase 3 registration clinical trials.

Last week Navidea announced that it is the recipient of a Small Business Innovation Research grant from the National Institute On Aging regarding this drug.

NAV5001 - Parkinson's

NAV5001 is investigational small molecule radiopharmaceutical imaging agent being developed as an aid in the differential diagnosis of Parkinsonian syndromes, including Parkinson's disease (PD) and other movement disorders, as well as Dementia with Lewy Bodies (DLB). Similar to NAV4694, the biggest feature is the quality of imaging for doctors to read, and the ability to gather an early diagnosis. As with many conditions, early diagnosis presents more treatment options for doctors and patients to consider.

NAV5001 has been administered to more than 600 subjects in multi-phase clinical trials to date. During 2013, Navidea initiated the Company-sponsored Phase 2b program for NAV5001 in DLB and anticipate the start of pivotal, parallel Phase 3 registration studies of NAV5001 as an aid in the differential diagnosis of Parkinsonian syndromes.

Last week Navidea announced an agreement with the FDA regarding this drug and future studies.

RIGScan

The concept with RIGScan is that it is an agent that binds itself to specific cancer types. A patient is injected with RIGScan and the agent goes through the body. When surgery occurs, the doctor can seek out the identifiers via a scan to identify tissues that need removal. RIGScan can identify target tissues that traditional scans can miss. Used successfully, it can have the potential of increasing the survival rate of cancer patients and serve to reduce the use of further surgeries.

Essentially surgery is guided by the radioimmuno agent and the process is called RadioImmunoGuided Surgery (RGS), RIGScan has completed clinical studies for enhanced detection of occult cancer in stage IV primary or recurrent colorectal cancer.

The Fundamental Story

Make no mistake. This company is a speculative play. That means the stock price will be driven more on perceived potential rather than the fundamental story. Do not look for profits soon, but do pay attention to the cash burn. In its most recent quarter, Navidea lost 9 cents per share, 2 cents worse than analysts' expectations. This quarter the company is expected to lose 8 cents per share and deliver revenues just under $1 million. The company has about $26 million in cash that can take it a few more quarters, but as a spec play investors will want to monitor this. Essentially we are looking at a balance between potential and the time that potential will take to get to the bottom line vs. whether or not debt, refinancing, or dilution need to come into play.

Navidea has about 30% upside to re-test 52 week highs. A stock driven by decent news can achieve this with relative ease. On the downside, the equity is a 30% haircut away from 52 week lows. That can happen easily as well. The potential may be worth a bet, but I would be more of a player at a price about 10% lower than current levels. Watch closely, as Navidea is speculative.

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...)

View the original article here