CYBX :Depression Ball Starts To Move, But Slowly
2005-11-22 06:00 (New York)
Piper Jaffray & o.
(CYBX - $28.37)
Outperform Volatility: Medium
Depression Ball Starts To Move, But Slowly
Thomas J. Gunderson, Sr Research thomas.j.gunderson@pjc.com
Amy J. Sullivan, Research Analyst
amy.j.sullivan@pjc.com
Timothy B. Nelson, Research Analyst
timothy.b.nelson@pjc.com
KEY POINTS:
* In-line results: CYBX reported Q206 revenues of $29.1 million and EPS of
($0.88), in line with the preannouncement and our revised estimates. While
shying away from quarterly guidance, management provided FY06 revenue
guidance of $140 million and net loss guidance of $50 million.
* Reducing our forecasts: Now with one data point (approximately 200 units
implanted for depression since launch) on the new VNS indication, we are
toning down our forecasts to accommodate a slower adoption in the first 13
weeks since the U.S. launch. But with higher-than-expected demand, we
believe implant rates can still increase quickly, although there is some
risk that Q2 was backlogged patients and that the current quarter will be a
truer test of new adoption.
* Higher revenues and lower expenses: Because of the massive "swing for the
fences" launch dynamics in the opening quarter, we expect SG&A expenses to
decrease over the next two quarters as marketing outlays (e.g., marketing
materials, training, and programmer costs) were heavily front-end loaded. We
also suspect that many in the new sales force will have guaranteed
compensation that should keep sales costs relatively flat, even as revenues
increase.
* Small steps toward better reimbursement: The effort of obtaining clearance
for an expensive device/procedure falls to the 68 reimbursement specialists
that work with doctors' office personnel to pre-approve the implant. We
believe that pre-approval will be the norm for private payors for the
foreseeable future.
* Our view: This is a stock for iron stomachs and longer-term investors only.
We are lowering our target in sync with our lower sales forecast. Our new
target price is $40/share, utilizing the same multiples as before (3.9x
Epilepsy and 6.0x Depression) on our revised revenue estimates for CY06. But
with >40% upside from current levels we continue to rate CYBX as an
Outperform. We also reiterate our caveat that investors will have to endure
CYBX' own brand of volatility, as the unpredictability of the business is
likely to persist.
From To Price: $28.37
Changes (Previous) (Current)
52 Week High: $47.77
Rating -- Outperform
52 Week Low: $18.10
Price Tgt $50.00 $40.00
Price Target: $40.00
Shares Out (mil): 28.7
Market Cap. (mil): $814.2
Avg Daily Vol (000): 675
Book Value/Share: $0.60
Cash Per Share: $4.85
Debt to Total Capital: 88%
Div (ann): $0.00
Est Next Rep Date: 02/21/2006
Fiscal Year End: Apr
INVESTMENT RECOMMENDATION:
By any measure a slow start. In the first quarter of the depression launch,
the market education process began. Our October survey supported the view that
doctors are increasingly aware of VNS therapy for TRD. CYBX is inching the
ball forward. With 163 sales reps, we estimate that 160 VNS TRD implants were
performed. But despite the lower-than-expected revenues, our investment thesis
remains positive. It was a slow start, but nonetheless a start. Over 1200
psychiatrists submitted paperwork for prospective patients, over 250
additional surgeons were trained. With virtually no competition and a strong
patent position, GM was 87% (and with direct parts and labor representing
about half of the costs, there is even more leverage potential). A near
monopoly, high margins, large unmet need and cash in the bank coupled with low
investor expectations and valuation causes us to reiterate our Outperform
rating.
RISKS TO ACHIEVEMENT OF TARGET PRICE:
Risks include continued execution on its epilepsy business model,
reimbursement coverage for depression, ability to convert psychiatrists to a
device-based therapy, and plans for heavy spending levels.
COMPANY DESCRIPTION:
Cyberonics, Inc. develops and markets medical devices for the treatment of
epilepsy and other debilitating neurological disorders.
Important Research Disclosures
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Analyst Certification - Thomas J. Gunderson, Sr Research Analyst
The views expressed in this report, including the Key Points and Risk sections
in particular, accurately reflect my personal views about the subject company... |
