On Dec 29, we issued an updated research report on Cyberonics Inc. (CYBX), a medical technology company with core expertise in neuromodulation.

Cyberonics posted a mixed second quarter fiscal 2015. The company posted a meaningful 26% rise in its second-quarter fiscal 2015 earnings per share of 63 cents and a 4.7% increase in revenues to $73.4 million. However, while the bottom line steered ahead of the Zacks Consensus Estimate, the top line failed to meet the same.

Meanwhile, Cyberonics continues to rein in surging demand for its VNS Therapy for the treatment of refractory epilepsy. Recent data considers epilepsy as the fourth most common neurological disease after migraine, stroke and Alzheimer's.

Cyberonics encouragingly noted that the market for epilepsy is huge and is as yet, to a great extent, underpenetrated in the U.S. While nearly 9 million people live with epilepsy in the U.S., Europe and Japan, we note that the global market remains about 80% underpenetrated.

According to the company, around 90% of patients who are implanted with VNS come back for a reimplant when their battery is depleted. The company witnessed higher utilization and adoption for its VNS Therapy generators, as reflected in the strong quarterly sales. During the quarter, a record number of patients were implanted with VNS in the U.S., including new patients (9% sequential growth) and replacements. The average selling price of the offering also improved in the reported quarter.

Moreover, continuous solid overseas growth amid several macroeconomic uncertainties in the European market offers hope. Pipeline development, at the same time, bolsters confidence. Meanwhile, Cyberonics has been rewarding its shareholders with attractive share repurchases.

However, the CMS decision of non-coverage within the U.S. with respect to reimbursement of VNS Therapy for patients with treatment-resistant depression (TRD) indication was a major downfall for the company. Although, the company continues to support patient and psychiatrist appeals to the national non-coverage determination and is working with other interested parties to pursue access to the VNS Therapy System for patients experiencing TRD, the timing and outcome of these efforts remain uncertain.

While we derive comfort from the advantages of VNS therapy and the strong untapped potential of the epilepsy market, we are wary about competitive pressures from larger players in the neuromodulation space.

Other Stocks to Consider

Cyberonics currently carries a Zacks Rank #4 (Sell). However, stocks worth considering in the broader medical sector are Affymetrix Inc. (AFFX), Acorda Therapeutics, Inc. (ACOR) and GTX Inc. (GTXI). All the three stocks hold a Zacks Rank #1 ( Strong Buy).

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