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Cyberonics Reaffirmed at Neutral

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We have reiterated our Neutral recommendation on Cyberonics Inc. with a target price of $46.00, following our assessment of its fourth quarter and fiscal 2012 results.

Cyberonics reported fourth quarter fiscal 2012 EPS of 38 cents, surpassing the Zacks Consensus Estimate of 35 cents and was 46% higher than the year-ago quarter EPS. For the full year, EPS came in at $1.28, a penny short of the Zacks Consensus Estimate but higher than the previous year adjusted EPS of $1.01.

Revenues increased 13% year over year during the quarter to $58 million, marginally beating the Zacks Consensus Estimate of $57 million. For the full year, revenues were up 15% to $219 million, ahead of the Zacks Consensus Estimate of $217 million.

Cyberonics’ VNS therapy system is the first implantable medical device to receive U.S Food and Drug Administration (FDA) approval for the treatment of epilepsy. The device is widely accepted amongst neurosurgeons as evident from the company’s impressive results.

We also expect the FDA approval for the re-designed AspireHC generator, received in January this year, to boost its top-line performance in the upcoming quarters. Over the last four years, epilepsy revenue in the US shot up 97%.

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 is also expanding its epilepsy business in Latin America (including Brazil), Russia, Australia and Asia (including Japan, China, India and Taiwan), where it sees huge growth potential.

Data shows encouraging prospects in these regions, especially in Europe and Japan, for Cyberonics. The regulatory bodies in these countries have approved VNS Therapy for the treatment of epilepsy without any age restrictions or seizure-type limitation.

Additionally, the FDA approval of the redesigned AspireHC is expected to pave the way for the AspireSR seizure response system generator, which is the subject of the E-36 clinical trial in Europe. Cyberonics plans to submit the re-designed AspireSR generator to the ethics committee and competent authority for approval of the E-36 clinical trial in fiscal 2013.

However, Cyberonics derives 15.5% of its revenues from international operations, primarily Europe and an upward swing in the numbers is expected. Therefore, a strengthening US dollar, primarily against the euro and pound, can hurt its international revenues and bottom line. Foreign exchange movements are expected to unfavorably impact results in 2013.

The company also faces pricing pressure along with stiff competition in the neuromodulation space from the likes of Medtronic (MDT - Free Report) and St. Jude Medical Inc. .

With the fourth quarter of fiscal 2012 result, Cyberonics also unveiled its guidance for fiscal 2013. The company expects to report revenues of $241−$244 million and $70−$72 million of income from operations resulting in EPS of $1.49−$1.59.

The current Zacks Consensus Estimates of $244 million in revenues and EPS of $1.56 for fiscal 2013 are in line with the guidance. Presently, Cyberonics retains a Zacks #3 Rank (short-term Hold rating).

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