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...)

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Clovis: After Data, Company Looking For Acquisition

Months after presenting incredibly good Phase I data for drugs CO-1686 and Rucaparib at ASCO 2013, Clovis Oncology (NASDAQ: CLVS) is starting to look at potential acquirers with help from Credit Suisse and unnamed consulting firm(s) (link). The company, which held its IPO on NASDAQ in November 2011, multiplied its value by about six times since.

It seems that the company is making a great move for its long-term shareholders, since the company has a $2.25 B valuation based primarily on the two Phase I compounds mentioned earlier. The company has the funding and institutional support for clinical development, but the current bloated valuations given to certain oncology assets (like CO-1686 and Rucaparib) makes it easier to understand why Clovis would shop itself this early in the game.

CO-1686 is the more impressive of the two drugs at this point, and the bulk of the company's intrinsic value. CO-1686 was originally designed by a biotech company named Avila Therapeutics, a covalent drug-focused entity that was acquired by Celgene on March 7th, 2012, in a $925 M deal. The compound was introduced to the Clovis pipeline in a $209 M partnership made in 2010 between Avila and Clovis, and the IND application was accepted not long before the company held its IPO on April 3rd, 2012.

The molecule is a covalent drug that irreversibly inhibits epidermal growth factor receptor (EGFR), which aids cancer cells in proliferation. Clovis is specifically developing it as a non-small cell lung cancer (NSCLC) treatment, since it can bypass certain obstacles in NSCLC cells that other EGFR inhibitors cannot.

A big problem that other EGFR inhibiting NSCLC drugs like Tarceva (erlotinib) and Erbitux (cetuximab) have is their vulnerability to particular mutations in cancer cells that can bypass their mechanism of action. In particular, a frequently seen mutation known as T790M is known to counteract EGFR inhibition in nearly two out of every three cases. Other, less common mutations like L858R and del19 cause similar disruptions.

What makes CO-1686 unique relative to its peers is the molecule's ability to inhibit EGFR in patients that have T790M, l858R, del19 and other drug-disabling mutations while avoiding inhibition of non-mutated (or wild type) EGFR. It was hard to believe that a NSCLC drug could be so well designed, although the Phase I data that Clovis presented at ASCO 2013 seemed to reinforce the notion that the drug works as intended.

In the trial 42 total patients were enrolled, 24 entered the dose escalation phase of the study, and 6 reached the highest daily dose of the drug (1800 mg, twice daily). According to biopsies taken from the 42 patients, 74% were positive for the T790M mentioned earlier, implying that the efficacy results would be a good gauge of whether or not CO-1686 worked as well as it should in lung cancer patients with that mutation.

Patients saw none of the typical signs of EGFR inhibition-related toxicity - specifically rash and diarrhea - up to a 1800 mg daily dose of the compound (N=6) as mentioned. There was 1 possible exception in the 900 mg arm that included diarrhea and some other serious side effects, labeled as an instance of dose limiting toxicity (DLT). Total adverse events (grade 3 or higher) were limited to 4 patients - including the DLT patient, and were explained to be unrelated to the administration of CO-1686. Total adverse events were seen in 62% of the population although the most frequent of these were common symptoms like fatigue and nausea.

Rucaparib is a potent PARP inhibitor - or a Poly(ADP-ribose) polymerase inhibitor being developed for breast/ovarian cancer indications. This compound was originally one of Pfizer's oncology drugs and was named "PF-01367338" during its tenure as drug for solid tumors, although the development was handed over to Clovis in a deal announced in 2011 that gave Clovis full responsibility over the development and commercialization of the compound in exchange for an upfront payment and milestone payments of up to $255 M. At ASCO, this drug seemed to be overshadowed by Tesaro's niraparib which targets the same indications.

The lack of data supporting CO-1686 and Rucaparib might make it difficult for the company to sell itself at a substantial premium, which is why the market may hesitate to keep CLVS above $80/share. While there is a lot of potential behind the company's assets, the drugs are huge investments at their current valuation and present substantial risk to a would-be acquirer. Most cancer drugs fail in late-stage development because of their inability to replicate positive results from prior trials.

On top of risk of failure, a company would also factor in the expensive clinical trials that would be needed for CO-1686 and Rucaparib, and the time value of an investment that may not generate any revenue for 10+ years.

It's clear that CO-1686 is one of the best early-stage cancer assets out there, but $2.5-3 B still seems expensive for anything in the early stage. We'll just have to see whether Wall Street's current valuation of Clovis matches big pharma's.

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. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Improving results of cataract surgery by looking at outcomes important to patients

Main Category: Eye Health / Blindness
Article Date: 31 Jul 2013 - 1:00 PDT Current ratings for:
Improving results of cataract surgery by looking at outcomes important to patients

Special issue of Optometry and Vision Science focuses on patient-reported outcome measures

Cataract surgery can lead to good results from a clinical standpoint yet have poor outcomes from the patient's point of view, reports a study, "Analyzing Patient-Reported Outcomes to Improve Cataract Care", appearing in the August issue of Optometry and Vision Science, official journal of the American Academy of Optometry. The journal is published by Lippincott Williams & Wilkins, a part of Wolters Kluwer Health.

Using well-designed and validated tools to assess patient-reported outcomes can lead to new insights for improving the results of cataract care, suggests the study by Mats Lundström, MD, PhD, of Lund University and Ulf Stenevi, MD, PhD, of Sahlgren's University Hospital, Sweden. Their paper is part of a special theme issue on "Measuring the Patient's Perspective" in optometry research and clinical practice.

Study Compares Clinical and Patient-Reported Outcomes of Cataract Surgery

Using a nationwide registry, Drs Lundström and Stenevi evaluated clinical and patient-reported outcome measures in nearly 10,000 cataract surgeries performed in Sweden between 2001 and 2011. For example, a major clinical outcome measure after cataract surgery is visual acuity. But improved visual acuity may not always reflect patient ratings of change in vision from before to after the procedure - especially in performing everyday functional tasks.

Not surprisingly, a comparison of the two sets of outcomes found that patient-reported measures were affected by clinical measures. Factors affecting patient-reported outcomes included visual acuity in both the operated and nonoperated eyes, change in visual acuity in the operated eye, and any other eye-related conditions ("ocular comorbidity").

However, more useful information was gained by looking at factors related to better or worse patient-reported outcomes. For example, patients who reported better visual function before surgery or who had poor visual acuity in the nonoperated eye were more likely to have poorer patient-reported outcomes after cataract surgery.

Implications for Decisions about Cataract Care

Ocular comorbidity was also related to worse patient-reported outcomes. These findings may indicate that, as in other chronic diseases, "some patients are too healthy and some too sick to benefit" from cataract surgery, Drs Lundström and Stenevi write. "It is possible that patients who are very satisfied with their vision and have no problems in performing daily life activities should not have cataract surgery at present."

The study also looked at situations where the clinical outcomes were good but patient-reported outcomes were poor - which happened in about seven percent of cataract surgeries. In many of these cases, poor near vision after the procedure was a major contributor to patient dissatisfaction.

There's a growing emphasis on patient-reported outcomes and quality of life in assessing various medical or surgical treatments. But there's been little attention to linking patient-reported outcomes to clinical outcomes in an attempt to improve health care. Age-related cataract is a good model for quality outcome studies: it is a very common, progressive condition that affects daily life and activities, and one for which surgical treatment is effective.

The new study helps vision care professionals in understanding how patient-reported outcome measures might be used to improve on the results of cataract surgery from the patient's perspective. For example, Drs Lundström and Stenevi suggest that surgery could be delayed or not performed in patients who feel they aren't having a lot of problems with daily activities - perhaps especially if they have good near vision.

The special theme issue presents 20 papers on topics related to the use of patient-reported outcomes in vision care. "These papers focus on new tools that are being increasingly used to assess the patient's perspective on a wide range of important conditions, problems, and outcomes," comments Anthony Adams, OD, PhD, Editor-in-Chief of Optometry and Vision Science. "These measures allow us to rigorously measure the outcomes important to patients, and to do so in a very meaningful way."

Article adapted by Medical News Today from original press release. Click 'references' tab above for source.
Visit our eye health / blindness section for the latest news on this subject.

Optometry & Vision Science: August 2013 - Volume 90 - Issue 8 - p 754-759

Lundström, Mats*; Stenevi, Ulf*

Abstract - Analyzing Patient-Reported Outcomes to Improve Cataract Care

Purpose: The purpose of this study was to analyze three models of how patient-reported outcome measures can be connected to clinical outcome measures in cataract surgery to identify opportunities for improvement of quality of care.

Methods: Three models were used to analyze the following questions: Is there a relationship between clinical parameters and patient-reported outcomes? (1) Is there a relationship between clinical parameters and a good or poor patient-reported outcome? (2) When and why do clinical and patient-reported outcomes diverge? (3) The study material to exemplify these models consisted of follow-up data on cataract extractions collected by the Swedish National Cataract Register in 2008 to 2011. Patient-reported outcome was measured using the Catquest-9SF questionnaire. A total of 9707 pairs of questionnaires completed before and after a cataract extraction were analyzed together with clinical data.

Results: Factors related to any change in patient-reported outcomes after surgery were the preoperative self-assessed visual function, the preoperative visual acuity in both eyes, the postoperative visual acuity, and ocular comorbidity. Factors related to poor patient-reported outcomes after surgery were good preoperative self-assessed visual functions, poor preoperative visual acuity in the better eye, ocular comorbidity, surgical complications, and large refractive deviation. Poor near vision after surgery was the main factor noted in situations where the clinical outcome was good and the patient-reported outcome was poor. Analyses 2 and 3 were the most useful analyses to give ideas for clinical improvement work.

Conclusions: The best models to give ideas for improved quality of care by using a patient questionnaire in our study were analyzing the risk factors for a poor patient-reported outcome and analyzing the factors associated with disagreement between clinical outcomes and patient-reported outcomes.

Wolters Kluwer Health

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Tracking variability in a bacterial population means looking beyond averages

Main Category: Genetics
Article Date: 30 Jul 2013 - 1:00 PDT Current ratings for:
Tracking variability in a bacterial population means looking beyond averages

As a result of the variable nature of gene expression, genetically identical cells inhabiting the same environment can vary significantly in their numbers of key enzymes, which in turn results in strikingly different cellular behaviors. This cell-to-cell variability can manifest in the form of anything from differences in growth rate, to the specific biochemical pathways used and the types of metabolic byproducts produced by each cell.

Incorporating data from studies of gene regulation and protein distributions in single cells, the research group of University of Illinois chemistry professor Zaida Luthey-Schulten was able to identify several behavioral subtypes within a modeled population. The researchers' computer model predicts emissions of metabolic byproducts and pathway selection to balance energy (glycolysis pathway) and protein costs (ED pathway) as a function of growth. The research also suggests that tracking the behavior of a few genes "may be sufficient to capture most of the metabolic variability of the entire population," the authors wrote.

"Our investigations provide the first calculations linking variation in specific pathway usages to the growth rate distribution of a microbial population," Luthey-Schulten said. "By looking beyond the average growth rate of a colony, our work provides insight into the different strategies used by bacteria for survival. "

Article adapted by Medical News Today from original press release. Click 'references' tab above for source.
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University of Illinois at Urbana-Champaign. "Tracking variability in a bacterial population means looking beyond averages." Medical News Today. MediLexicon, Intl., 30 Jul. 2013. Web.
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