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Analyst Blog

On July 2, we issued an updated research report on Cyberonics Inc. (CYBX - Analyst Report). This medical technology major with core expertise in neuromodulation posted an unimpressive fourth-quarter fiscal 2014 with in-line earnings and its revenues missing the Zacks Consensus Estimate. However, we are encouraged by the favorable market trend that can benefit the company going ahead.

Cyberonics posted a 19.6% rise in its fourth-quarter earnings per share to 55 cents, and a healthy 9.5% increase in revenues to $74.8 million. However, the bottom line remained only on par with the Zacks Consensus Estimate while the top line missed the benchmark of $74.8 million by a whisker.

Cyberonics continues to rein in surging demand for its VNS Therapy for the treatment of refractory epilepsy. Recent data considers epilepsy as the fourth most common neurological disease after migraine, stroke and Alzheimer's.

Cyberonics encouragingly notes that the market for epilepsy is huge and is as yet, to a great extent, underpenetrated in the U.S. Nearly 2.2 to 2.8 million individuals in the U.S. suffer from some form of epilepsy.Further, there are in excess of 3.0 million individuals with epilepsy in Western Europe. In Japan, the number tolls 1 million. However, the global market remains about 80% underpenetrated.

A number of clinical studies have shown that more than 30% of people with epilepsy continue to experience seizures in spite of treatment with seizure medications. This translates into approximately 0.4 million potential patients (with drug-resistant epilepsy) for Cyberonics’ VNS Therapy.

Moreover, continuous solid overseas growth amid several macroeconomic uncertainties in the European market offers hope. A robust pipeline development, at the same time, bolsters confidence. Meanwhile, Cyberonics has been rewarding its shareholders with attractive share repurchases.

However, the Centers for Medicare & Medicaid Services (CMS) decision on treatment-resistant depression (TRD) indication was a major downside for the company. Moreover, gross margin pressure remains an overhang. While we derive comfort from the advantages of VNS Therapy and the strong untapped potential of the epilepsy market, we are wary about competitive pressures from larger players in the neuromodulation space.

Other Stocks to Consider

Cyberonics currently carries a Zacks Rank #3 (Hold). Some well-placed stocks in the medical instruments sector are Hologic Inc. (HOLX - Analyst Report), Cepheid (CPHD - Analyst Report) and Navidea Biopharmaceuticals, Inc (NAVB - Snapshot Report). All the three stocks carry a Zacks Rank #2 (Buy).

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