Non-coverage by Medicare and Medicaid for Cyberonics’ (Houston) Vagus Nerve Stimulation (VNS) therapy for treatment-resistant depression (TRD) continues to contribute to lower earnings, the company said during a conference call yesterday, in which it also elaborated on some recent restructuring moves that it made earlier this month.

The company reported a 1Q net loss of $8.2 million, or 31 cents a share, on sales of $29.1 million, for the period ended July 27. That compared with a net loss of $8.5 million, or 34 cents a share, on sales of $33.7 million, for the year-ago quarter. International net sales increased by 44.6% from $4.1 million to $6 million compared to the first quarter of the prior year.

“Despite our challenges with the TRD indication, U.S. epilepsy sales experienced some growth, and we continued to achieve double-digit growth in our international sales,” said Dan Moore, president/CEO of Cyberonics during the call on earnings. “We believe we will further increase sales of VNS [vagus nerve stimulation] therapy for epilepsy patients, and our recent management changes are aimed at that objective,” said Moore who was hired by the company this past May (Medical Device Daily, May 2, 2007).

“I believe we’re turned the corner, although it’s very early,” Moore said. “We do have a plan in sight that will get us to profitability.”

Other recent management changes included the naming in early July of Gregory Browne as the new CFO and the early August appointment of James Reinstein as VP of sales and marketing and general manager of international operations, to replace Michael Cheney, who resigned as VP of sales and marketing. Shawn Lunney also resigned his role as VP of market development.

The company said U.S. revenue decline is primarily attributable to a significant reduction in the number of VNS therapy systems being utilized for TRD, following both the preliminary and final non-coverage determinations by the Centers for Medicare and Medicaid Services in February and May 2007, respectively (MDD, Feb. 7, 2007; MDD, May 9, 2007).

Citing operational cost reductions, Cyberonics last week reported that it would lay off another 12%, or about 65 of its employees (MDD, Aug. 24, 2007), on top of a May announcement that it would lay off 15%, or 90 of its 600-employee workforce.

At the time of the last employee reduction in May, Cyberonics Chairman Hugh Morrison told Medical Device Daily that the company was poised to refocus its energies on the epilepsy market, “That’s not exclusively, but I think we have perhaps been a bit over-focused on [treatment-resistant] depression [TRD],” Morrison said.

During the conference call, Moore said the company has made progress in refocusing its efforts back into the epilepsy market He said that the company, as promised back in May, has realigned the sales force in the U.S., redirecting them from calling primarily on psychiatrists for TRD to emphasizing contact with neurologists and the epilepsy opportunity.

Moore stressed that the company is not giving up on the TRD application but rather is creating a special unit within the company to focus solely on this opportunity, albeit significantly scaled back from previous efforts.

“We’re taking 20 people and focusing 100% of their time on TRD while the rest of the organization overall will focus on the epilepsy opportunity with 100% of their time.”

He said the company was stressing the epilepsy business because it is already well-established, having garnered approvals nearly a decade ago and it already has established Medicare payment codes in place.

Conversely, he noted that the depression market “is a pioneering effort. We have some positive clinical results [but] we recognize that we need more.”

Moore said that aligning the sales forces to target and call on specific groups instead of trying to spilt time between the TRD and epilepsy markets makes good business sense. “My experience in the device world has shown that you align your sales forces to physician specialties. The neurologist and the epileptologist are different from the psychiatrist.”

“I do think in Q1 we’ve made solid progress in reorganizing ourselves and directing the sales force [primarily] back towards epilepsy,” he said.

On the new product front, Moore cited the FDA approval in July of the company’s Demipulse and Demipulse Duo Generators for use in VNS therapy. The generators are 43% smaller in volume than the current Model 102 generators and, according to the company, incorporate greater functionality for the benefit of patients and their physicians, including continuous projection of time to end of service, improved diagnostics, such as direct lead impedance measurement, and faster communication with a programming system.

The Demipulse generators also provide a platform for the introduction of added features and functionality in the future. The Demipulse models, currently in limited release in Europe, are expected to be in limited commercial release in the U.S. late in the company’s fiscal second quarter at a premium to the Model 102 pricing, Cyberonics said.

Moore reported that the company implanted the first Demipulse in a patient in the U.S. this week.

Cyberonics has been faced with a host of problems over the past 22 months, including the resignation of Robert “Skip” Cummins, its president/CEO and Pamela Westbrook, its CFO, in November 2006, in the wake of a stock options investigation (MDD, Nov. 21, 2006). (In June Cummins filed a defamation lawsuit against SunTrust Banks [Atlanta] and two SunTrust analysts claiming that the analysts defamed him by suggesting a 2004 grant of 150,000 stock options to him may have been illegal [MDD, June 5, 2007]).

Other issues have included responding to governmental investigations related to its stock option grants, several shareholder lawsuits and a forced change in its board membership by dissident shareholders backed by billionaire investor Carl Icahn (MDD, Jan. 30, 2007).

Also, in January, the company reported that its financial statements for the fiscal year ended April 28, 2006, included in its annual report, contained a “going concern” modification to the audit opinion from its independent accounting firm KPMG (MDD, Jan. 17, 2007).