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Cyberonics (CYBX) Discusses Profitability and Growth Possibilities in Epilepsy Market

Cyberonics, Inc. (CYBX) presented Wednesday at the Jefferies 2nd Annual Healthcare Conference in New York, NY. The company is a medical technology company with core expertise in neuromodulation. Cyberonics develops and markets the Vagus Nerve Stimulation (VNS) Therapy(TM) System, which is FDA-approved for the treatments of refractory epilepsy and treatment-resistant depression. This is done by surgically implanting a medical device that delivers pulsed electrical signals to the vagus nerve. The system includes a generator to provide the correct stimulation to the vagus nerve, and there is a lead that runs from the generator to the nerve itself.

Dan Moore, president and CEO of Cyberonics, stated “We believe there is significant potential in the epilepsy market. We have identified growth initiatives to fit into a strategic plan to capitalize on that market opportunity. We have pricing flexibility and we are targeting consistent profitability growth. The epilepsy opportunity in patients that do not get adequate response from drugs and fit into our labeling is 400,000 in the U.S. There is even more opportunity internationally because international labeling includes both partial and general seizures. International markets also do not have the pediatric limitations that we have in the U.S. Epilepsy will continue to be our focus.”

He continued, “We are undergoing geographical expansion. We still have not yet brought VNS technology to Japan, the second largest device market in the world. We also want to continue to improve the efficacy of the VNS Therapy, and that will go a long way in helping us further penetrate the markets for areas such as seizure detection. We have real programs that are currently focused on that.”

Mr. Moore went on to comment on Cyberonics lack of profitability in prior years, and how the company has addressed that issue. “After losing more than $50 million in each of the last two fiscal years, we thought it would be a good idea to get profitable. New management recently joined the company, and by our third quarter, we achieved operating profit. By the fourth quarter, we achieved net income. In our most recent quarter, our epilepsy growth was 20% in U.S. and 12% internationally. We also inherited a lot of litigation issues. We have settled some of those and have made good progress on that front.”

Finally, Greg Browne, CFO of Cyberonics, added at the conference, “We have been overcoming a fiscal drag from declining revenues over the last couple of y ears. We have overcome that and focused considerably on profitability. We are getting our expenses under control and reduced them by almost $11 million from Q4 of 2007 to Q4 of 2008.” He noted, “We filed our 10-K for fiscal 2008 last night, and I would like to point out that the ‘going concern’ limitation has been removed. We expect our gross margins to be in excess of 84% in fiscal 2009. Litigation settlements and return to positive operating cash flow have put our balance sheet in a very strong position. We had $92 million in cash at the end of fiscal 2008, and we were able to reduce our inventories by almost $5 million.”

Mr. Moore summarized, “We expect revenues in 2009 of $134 million-$138 million, a growth of 11-14%. We expect further improvements in our operating results. We expect consistent growth in all of our markets. Our goals overall are consistent volume growth in the 10-20% range over the next few years. We expect to get to operating margins of 25% in 2011 and continue to be the leader in medical devices for epilepsy. We are also seeking partnership opportunities and plan to grow this business long term. We will focus on execution because that will bring us success.”

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