STJ ST. Jude Medical, Inc.

We recently reiterated our Neutral recommendation on Cyberonics (CYBX) with a target price of $30.00, following our assessment of its fourth quarter 2011 results.

Cyberonics reported fourth quarter 2011 EPS of 26 cents, which missed the Zacks Consensus Estimate of 29 cents and were well below the year-ago quarter adjusted EPS of 40 cents. The year-over-year decline was attributable to significant increase in income tax expense ($5.5 million in the reported quarter compared with the year-ago quarter level of $.03 million).

Cyberonics develops and markets Vagus Nerve Stimulation (VNS) Therapy System, which is approved by the US Food and Drug Administration (FDA) for the treatment of refractory epilepsy and treatment-resistant depression (TRD).

During the quarter, Cyberonics witnessed a continuous expansion in its top line, attributable to the company’s pioneer product, VNS Therapy System, especially for the treatment of epilepsy. Revenues increased 7.1% year over year to $51.1 million in the reported quarter but were marginally below the Zacks Consensus Estimate of $52 million.

In fiscal 2011,Epilepsy unit sales increased 6% in the US on the back of both influx of patients and replacements. This was strongly driven by higher volume and increased average selling prices. The company’s US epilepsy revenue surged significantly from $82 million in fiscal 2007 to $160 million in 2011. This reflects a 97% upside in revenues within a span of four years.

Cyberonics also provided its financial outlook for fiscal 2012. The company expects revenues and income from operations in the range of $212 – $215 million and $54 – $57 million, respectively.

The company is currently emphasizing on its international business by expanding its epilepsy portfolio through direct sales force and distributors in Europe, Latin America, Russia and Asia (including Japan, China and India) However, the company expects international growth to resume in fiscal 2012. 

Moreover, the company is focusing on research and development in the field of VNS Therapy for patients with refractory epilepsy specifically, seizure detection, responsive stimulation and associated technology.

However, stiff competition from Medtronic (MDT) and St. Jude Medical Inc. (STJ) in the neuromodulation space as well as the mounting third-party reimbursement issues may adversely affect the company’s performance going forward.

 
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