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Cyberonics Inc. Reports Operating Results (10-Q)

November 22, 2010 | About:
10qk

10qk

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Cyberonics Inc. (CYBX) filed Quarterly Report for the period ended 2010-10-29.

Cyberonics Inc. has a market cap of $759.59 million; its shares were traded at around $27.2 with a P/E ratio of 22.11 and P/S ratio of 4.53. CYBX is in the portfolios of Carl Icahn of Icahn Capital Management LP, Jim Simons of Renaissance Technologies LLC, RS Investment Management, Paul Tudor Jones of The Tudor Group.

Highlight of Business Operations:

Our ability to successfully expand the commercialization of the VNS Therapy System depends on obtaining and maintaining favorable insurance coverage, coding and reimbursement for the device, the implant procedure and follow-up care. Currently, there is broad coverage, coding and reimbursement for VNS Therapy for the treatment of refractory epilepsy. The Centers for Medicare and Medicaid Services (“CMS”), which we estimate pays for approximately 25% of the VNS Therapy implants, issues an annual update to the reimbursement amounts received by our customers. In calendar year 2009, effective for calendar year 2010, CMS announced increases in the rates reimbursed to our customers for the procedures to implant both the generator and the lead portion of the VNS Therapy System. In November 2010, effective for calendar year 2011, CMS announced final rates for the reimbursement of the generator portion of the VNS Therapy System for hospitals. This rate represented an increase of approximately 6% over the rate in calendar year 2010. Further, CMS has introduced a new reimbursement code and "interim final" rate paid to hospitals for the implantation of both the generator and the lead portion of the VNS Therapy System. This code will replace the existing reimbursement code associated with implanting the lead only, and is effective beginning January 1, 2011. The new combined generator and lead reimbursement code rate is approximately 7% less overall when compared to rates for 2010 associated with the existing reimbursement code associated with implanting the lead only and the generator only. Further, CMS approved decreases in physician reimbursement for implantation of both the generator and the leads. A decrease in reimbursement rates or a change in reimbursement methodology by CMS could have an adverse impact on our business and our future operating results.

U.S. net product sales for the thirteen weeks ended October 29, 2010 increased by $6.5 million, or 19.5%, as compared to the thirteen weeks ended October 23, 2009, due to a sales volume increase of 13.4% and increased average selling prices of 6.1%. The average selling price increased due to continued higher market penetration of our DemipulseTM generator (single pin) and our Demipulse DuoTM generator (dual pin) and a price increase of approximately 4% in January 2010. International net product sales for the thirteen weeks ended October 29, 2010 increased by $0.2 million, or 2.8%, as compared to the thirteen weeks ended October 23, 2009, due to a sales volume increase of 6.2%, offset by a decreased average selling price of 3.4%. The average selling prices decreased due to a higher proportion of sales to distributors and an unfavorable foreign currency impact of 2.8%.

U.S. net product sales for the twenty-six weeks ended October 29, 2010 increased by $13.5 million, or 20.9%, as compared to the twenty-six weeks ended October 23, 2009, due to a sales volume increase of 13.3% and increased average selling prices of 7.6%. The average selling price increased due to continued higher market penetration of our DemipulseTM generator (single pin) and our Demipulse DuoTM generator (dual pin) and a price increase of approximately 4% in January 2010. International net product sales for the twenty-six weeks ended October 29, 2010 decreased by $0.4 million, or 3.1%, as compared to the twenty-six weeks ended October 23, 2009, due to a decreased average selling price of 7.5%, partially offset by a sales volume increase of 4.4%. The average selling prices decreased due to a higher proportion of sales to distributors and an unfavorable foreign currency impact of 4.2%.

Cost of sales consists primarily of direct labor, allocated manufacturing overhead, third-party contractor costs, royalties and the acquisition cost of raw materials and components. Our cost of sales for the thirteen weeks ended October 29, 2010 decreased 0.9 percentage points to 11.7% when compared to the thirteen weeks ended October 23, 2009. Our cost of sales for the twenty-six weeks ended October 29, 2010 decreased 1.3 percentage points to 11.9% when compared to the twenty-six weeks ended October 23, 2009. These decreases in our cost of sales were primarily a result of improved efficiencies due to higher production volumes and a higher proportion of our sales in the U.S. domestic market.

SG&A expenses consist of sales, marketing, general and administrative activities. SG&A expenses for the thirteen weeks ended October 29, 2010, as a percentage of net sales, decreased by 5.9 percentage points to 46.6%, as compared to the thirteen weeks ended October 23, 2009. SG&A expenses for the twenty-six weeks ended October 29, 2010, as a percentage of net sales, decreased by 7.3 percentage points to 46.9%, as compared to the twenty-six weeks ended October 23, 2009. These decreases were not only a result of increased sales but also due to decreased stock-based compensation and international expenses, partially offset by increased domestic sales and marketing expenses.

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