Cyberonics (CYBX) raised its second-quarter earnings guidance in light of the Food and Drug Administration's recent rejection of the company's request to approve its VNS Therapy device for treating depression.

Cyberonics also outlined its strategy for appealing the FDA decision, saying that its first choice would be an informal appeal and its next choice would be a formal appeal. If those efforts didn't work, the company said conducting additional clinical tests would be a last-ditch effort to convince the FDA to change its mind.

The company said it would know by year-end if it would be forced to conduct new tests which -- executives have said previously -- could take about three years from the design of the tests, to evaluating data, to the FDA's review.

As a result, future marketing expenses would be vastly lower, allowing Cyberonics to cut its originally projected loss of $9 million, or 38 cents a share, to $3.4 million, or 14 cents a share, for the second quarter ending Oct. 29. The sales projections remain the same at $25 million.

Houston-based Cyberonics had been forecasting a $9 million loss because it had been expecting FDA approval of the VNS device perhaps as early as October. An FDA advisory panel, by a 5-2 vote in mid-June, had endorsed the device as a treatment for depression.

The device, which is about the size of a pacemaker, is surgically implanted into a patient. It delivers mild electrical shocks to a nerve in the brain called the vagus nerve.

VNS Therapy is used in the U.S. as a treatment for epileptic seizures. Cyberonics had been seeking FDA approval for the device to treat people whose long-term depression isn't helped by medication, psychiatry or shock treatments. The device is approved for treating certain types of depression in Canada and in Europe. It also is used to treat epilepsy in those markets and in Australia.

Robert P. Cummins, the chairman and chief executive, said Cyberonics' two goals are to expand its VNS epilepsy market and to "obtain clarity and certainty" from the FDA on the best way Cyberonics can get VNS approved for treating depression.

His teleconference, in which he answered questions for about 10 minutes, was in subdued contrast to the angry, lengthy telephone conference he held on Aug. 12 after the FDA had rejected VNS for depression. "Our mission demands that we work diligently with the FDA," Cummins said Wednesday.

Needless to say, analysts have been readjusting their predictions and earnings models in recent weeks. First, they thought Cyberonics' second quarter would produce a loss of $3.4 million, or 11 cents, according to the consensus view of Cyberonics watchers polled by Thomson First Call.

On Aug. 11, Cyberonics predicted a second-quarter loss of $9 million, or 38 cents, because the company had anticipated higher expenses as it geared up for commercializing its VNS Therapy for treating depression.

The next day, the FDA rejected the company's VNS Therapy depression application, and Cyberonics hinted that the second quarter, which ends Oct. 31, wouldn't feature as big a loss due to reduced marketing expenses.

So, analysts revised their opinions again. Heading into Wednesday, they had been looking for a second-quarter loss of $4.2 million, or 18 cents, according to Thomson First Call.

Complicating Wall Street's evaluation has been the Aug. 20 announcement by Dallas-based

Advanced Neuromodulation Systems

(ANSI)

that it had acquired 3.5 million shares of Cyberonics' stock, or 14.9% of the outstanding shares, and wanted to explore an acquisition or merger. Cyberonics said it wasn't interested, and CEO Cummins reaffirmed that stand Wednesday, adding that his company hasn't received any formal requests for a merger. "We are not interested in any combination or merger," he said.

Advanced Neuromodulation, Plano, Texas, makes and markets implantable devices to manage chronic pain and other disorders of the central nervous system. It took advantage of the plunging Cyberonics stock following the FDA's action on Aug. 12. It made 81 purchases on the open market on Aug. 12 and Aug. 13 to buy the 3.5 million shares of its Cyberonics' shares, according to a document filed with the

Securities and Exchange Commission.

Prior to the sharp drop in its stock, Cyberonics had a larger market capitalization than its competitor; now Advanced Neuromodulation Systems is about 20% greater. However, Cyberonics has more revenue. For the fiscal year ended April 30, Cyberonics posted sales of $110.7 million. For the fiscal year ended Dec. 31, 2003, its rival had sales of $91.1 million.

Advanced Neuromodulation Systems is now the biggest shareholder of Cyberonics -- but not by much.

Boston Scientific

(BSX) - Get Report

owns 3.3 million shares.

In June, Boston Scientific said it would pay $740 million for privately held Advanced Bionics, which is working on implantable microelectronic devices for treating neurological disorders and managing pain. The unanswered question in June was whether Boston Scientific would keep, expand or reduce its stake in Cyberonics. The question remains unanswered.

Cyberonics' comments were issued Wednesday after markets had closed. The company's stock closed Wednesday at $20.10, down 71 cents, or 3.4%. (In after-hours trading, it lost another 70 cents). That's about the same price at which the stock was trading in mid June, before the FDA advisory committee's opinion launched the stock by 78%; before the FDA's "not approvable letter" Aug. 12 drove the stock down 40%; and before Advanced Neuromodulation's revelation on Aug. 20 pushed the stock up 30%.