Medical Device Daily

For the second time in less than four months, embattled Cyberonics (Houston) has reported another restructuring designed to “enhance efficiency and reduce the cost of ongoing operations.”

The company said it would reduce its headcount by 12%, meaning about 65 employees. Cyberonics reported a similar restructuring plan in May, which resulted in the loss of 15% of its workforce, at that time equating to about 90 employees (Medical Device Daily, May 2, 2007).

Cyberonics said the roughly $2.5 million in costs associated with the reductions will be expensed in 2Q08, which will end Oct. 26. The workforce reductions are expected to result in significant cost savings beginning in the third quarter of this fiscal year, the company said.

Just as it did in May, the company is again pointing the blame for its restructuring on the decision by the Centers for Medicare & Medicaid Services not to provide national coverage for the company’s Vagus Nerve Stimulation (VNS) therapy as a treatment for Medicare beneficiaries suffering from treatment-resistant depression (TRD).

The company first received a preliminary ruling from the agency rejecting the coverage for VNS therapy for TRD back in February (MDD, Feb. 7, 2007), and the decision was then confirmed by CMS in May (MDD, May 9, 2007).

The VNS Therapy system consists of a stopwatch-sized device implanted in the chest to send electrical pulses to the brain via the vagus nerve. It gained FDA clearance in July 2005 for the TRD application, but the therapy has met much resistance from insurers and consumer watchdog groups for that indication, one of those groups complaining that adding the term “treatment-resistant” was essentially an attempt to a create a disease requiring the VNS therapy.

CMS provided full coverage for the pharmacoresistant epilepsy indication for the therapy in 1999.

Cyberonics said it would release further details about the restructuring during its first quarter earnings conference call with investors next Wednesday.

“The recent non-coverage determination by the Centers for Medicare & Medicaid Services has resulted in reduced sales of VNS Therapy Systems for treatment-resistant depression (TRD) patients,” said Dan Moore, the company’s president/CEO. “We are fully committed to creating shareholder value by returning the company to positive cash flow generation and profitability as quickly as possible.”

Moore, who previously worked for Boston Scientific (Natick, Massachusetts), was hired to head the company in May following the departure of Robert “Skip” Cummins, its president/CEO and chairman, and Pamela Westbrook, its CFO.

Cyberonics has been faced with a host of problems over the past 22 months, including the resignation of Cummins and Westbrook 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 admitted 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).

Commenting on the latest staff cutback at Cyberonics, Alex Arrow, senior VP and med-tech analyst at Lazard Capital Markets, wrote in a company note that the 12% reduction may benefit fiscal 2008 LPS by 11 cents and fiscal 2009 by 23 cents.

Arrow also estimates that the 12% reduction equates to about 65 employees with recurring expense of $120,000 per employee.

“Hence we are reducing our 2009 SG&A forecast by $6 million,” Arrow said in the note. “The net effect makes our [FY09] forecast call a profit of [17 cents] per share, whereas with the previous cost structure we believe the company was headed for a 6 cent loss.”

“Reducing depression-related expenses is, in our view, the best value-creating strategy for Cyberonics,” Arrow said. “Because the company’s opportunity to sell implantable neurostimulators failed to materialize, reducing the cost structure to match the base epilepsy business will likely return the company to profitability.”

Arrow added that his firm believes the base epilepsy business is capable of delivering 22% operating margins based on its previous performance.

“Biggest risks in either direction remain the potential for acquisition, or continued operating losses and a liquidity crisis,” Arrow said.

He cautioned, however, that the impact of the entry by Medtronic (Minneapolis) to the device/epilepsy market that Cyberonics now rules, in fiscal 2010 — a year after Cyberonics is most likely to become profitable — will likely weigh on investor sentiment in fiscal 2008.