STJ ST. Jude Medical, Inc.

We recently reiterated our Neutral recommendation on Cyberonics (CYBX) with a target price of $29.00, following our assessment of its first quarter 2012 results.

Cyberonics reported first quarter 2012 EPS of 28 cents, which surpassed the Zacks Consensus Estimate of 26 cents and was 12% higher than the year-ago quarter’s adjusted EPS.

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 continuous expansion in its top line, attributable to the company’s pioneer product, VNS Therapy System, especially indicated for the treatment of epilepsy.

During the reported quarter, Epilepsy unit sales increased 6% in the US to 1,060 units on the back of both new patients and replacements. This was strongly driven by higher volume and increased average selling prices. This reflects a 97% upside in revenues within a span of four years. The company continues to expect US replacements to increase 10% to approximately 4,500 units in fiscal 2012.

The company is currently emphasizing on its international business by expanding its epilepsy portfolio through direct sales force and distributors in Canada and Europe. Cyberonics also intends to expand its epilepsy business in Latin America (including Brazil), Russia, Australia and Asia (including Japan, China, India and Taiwan), where it sees huge growth potential.  The regulatory bodies in these countries have approved VNS Therapy for the treatment of epilepsy without any age restrictions or seizure-type limitation. During the first quarter of fiscal 2012, the company’s international revenue was $8.9 million, and contributed 17% of the total revenue.

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.

Presently, Cyberonics retains a Zacks #3 Rank (Hold) in the short term that corresponds with our long-term ‘Neutral’ recommendation. The company faces mounting third-party reimbursement issues along with stiff competition in the neuromodulation space from players such as Medtronic (MDT) and St. Jude Medical Inc. (STJ). Both Medtronic and St. Jude Medical are Zacks #3 ranked peers with Neutral recommendations.

 
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