So much for efficient markets.
Even though Cyberonics' (NASDAQ:CYBX) management had been telling investors for some time that an eventual launch of a therapy for treatment-resistant depression would be costly, investors still took the shares down Tuesday morning on precisely that news.
While Cyberonics reported a decent third quarter, Wall Street was apparently spooked by the company's acknowledgement that it would be roughly doubling its sales force and spending at least $7 million in prelaunch activities.
Last week, the company received word from the Food and Drug Administration that its application to market its Vagus Nerve Stimulation (VNS) therapy for treatment-resistant depression was "approvable." Although final approval has yet to be granted and depends on final labeling and protocols for a follow-up study, there should be no major roadblocks preventing Cyberonics from launching the sales effort in the middle of this year.
As the company focuses its efforts on preparing for approval, it is reasonable to expect that its existing epilepsy business will suffer. Sales were down about 8% in the January quarter, and sales for the next quarter are likely to be down both sequentially and year over year. These declines have little to do with the quality of VNS therapy but rather reflect that the company will be pulling its sales force out of the field to prepare it for the launch of the depression therapy.
I'd argue that this is not really a big problem for the long run. The potential market in depression could be 10 times the size of the company's refractory epilepsy market, and the epilepsy market is not really a major growth opportunity for the company at this point. Consequently, management is likely making the right decision by steering its resources toward the larger and more lucrative opportunity.
Though I'm generally a hard-core, value-conscious investor, I'd argue that trailing valuation on Cyberonics really isn't especially meaningful. Capturing even one-half of 1% of the depression market should translate into about $300 million in revenue -- almost triple the company's best full-year revenue. What's more, gross margins are very solid, and a larger revenue base should allow the company to leverage its growth into very strong profit growth.
While Cyberonics is certainly not a "widows and orphans" stock, those Fools looking to take on some risk in exchange for an aggressive growth opportunity might want to explore this one.
Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned.
