Cyberonics Down on Broker Concerns - TheStreet

Shares of

Cyberonics

(CYBX)

dropped Thursday after two analysts cut their ratings on the Houston, Texas-based medical devices company.

Recently, the stock was down $1.59, or 7.9%, to $18.51.

Analysts at Lazard Group and Piper Jaffray said comments late Wednesday during a teleconference on financial guidance weren't encouraging about Cyberonics's bid to get government approval for its VNS Therapy device for treating depression. The device was rejected as a depression treatment last week by the Food and Drug Administration even though an FDA advisory panel, by a 5-2 vote in June, supported the company's application.

The VNS 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 has been used in the U.S. for six years as a treatment for epileptic seizures. 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.

But two analysts said Thursday that they feared Cyberonics would have to conduct additional expensive and time-consuming clinical tests to convince the FDA to change its mind.

Cyberonics said Wednesday it hoped that an informal appeal to the FDA would work; if that failed, then Cyberonics would make a formal appeal. The choice of last resort would be additional tests. The company said it would know by year-end if it would be required to conduct those tests.

More tests are "likely needed," said Alexander K. Arrow, of Lazard Group, in a Thursday research note as he cut his rating to sell from hold.

Arrow said Cyberonics shares have been propped up in recent weeks by investors' beliefs that the FDA might change its stance quickly or that

Advanced Neuromodulation Systems

(ANSI)

, of Plano, Texas, might do a deal with Cyberonics. Advanced Neuromodulation Systems makes and markets implantable devices to manage chronic pain and other disorders of the central nervous system. Last week, it said it had acquired 3.5 million shares, or 14.9%, of Cyberonics stock, adding that it was interested in acquiring or merging with its Houston rival. Cyberonics reiterated Wednesday that it isn't interested.

Those comments convinced Arrow that Cyberonics' stock will be heading downward to his price target of $14. (Arrow doesn't own shares; his firm is a market maker and it says it has provided investment banking services for Cyberonics.)

Thomas J. Gunderson, of Piper Jaffray, cut his rating to market perform from outperform. Gunderson described as "improbable" the prospects that informal negotiations would cause the FDA to change its stance. And given Cyberonics dismissal of a possible takeover attempt, Gunderson said "the upside for near-term appreciation in the stock price has been met," he told clients in a research report. (He doesn't own shares; his firm is a market maker in Cyberonics.)

Cyberonics said Wednesday it was cutting 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, which ends Oct. 29. The sales projections remain the same at $25 million.