Medical Device & Diagnostic Industry

CYBERONICS >>

Turning Things Around Gunderson, managing director and senior research analyst
This was the environment that Moore, a division president with Piper Jaffray & Co. (Minneapolis).
at Boston Scientific, walked into when he took over as presi- “I think they grew too far, too fast, and had an infra-
dent and CEO in May 2007. Why would someone from one structure that was too large relative to the business that they
of the biggest companies in the entire industry want to take could do,” he says. “They hit a wall with reimbursement,
the reins at a smaller company whose future was in doubt? repeatedly, until new management said ‘We are going to run
“First and foremost, it was the potential of neuromodu- this business for profit.’ They refocused their sales force on
lation,” says Moore. “My belief, having been with Boston the reimbursable product for epilepsy. And they introduced
Scientific since 1989, was that we and some other big com- new [hardware] products with higher price points.”
panies had solved a lot of the issues regarding [minimally in- Neuromodulation devices, like pacemakers, need hard-
vasive surgery] in the heart and the coronary and peripheral ware replaced every so often. Cyberonics received approval
arteries. And we solved a lot of issues around the electrical for a new generator, the Demipulse, in July 2007. It is small-
system of the heart. But the final frontier is the electrical er than previous models and has been very well received.
system of the brain. We will be seeing major advances in that Each part of the company had to figure out what it could
area in the next 5–15 years.” do to turn things around, and the legal department was no

And he saw Cyberonics in 2007 as similar to Boston Scien- exception. One of its biggest challenges was dealing with tific in 1989: Each had about $100 million in annual sales at bondholders to whom the company owed $125 million. the time, and each was poised to become a major player in a After the stock-options controversy, Cyberonics had to field that was about to undergo stunning growth, thanks to restate earnings and was late in making some filings to the technological innovation. Securities and Exchange Commission.

He liked that Cyberonics had a foot- The bondholders were required to be hold in the business for 10 years. VNS notified within 10 days of when filings Therapy as a treatment for epilepsy were made. They believed that, because was proven to work, and it had gone the filings were late, Cyberonics had through four generations of models. defaulted, and they went to court to get So Moore thought the best way to such a ruling. start was to focus on growing the epi- “We did not think we had default-lepsy application, which had lagged ed,” Moore says. “We had to provide in sales in recent years as the firm had the bondholders our 10Q submissions devoted more of its resources to treat- within 10 days of being filed, but there ing depression. This might be one of the Cyberonics’s headquarters in Houston. The was nothing in the agreement about quickest ways to right the income state- facility holds what Moore describes as a having to have them by a certain date.” ment, which had been $50 million in very resilient team. In other words, Cyberonics was still the red each of the previous two years. providing the material within 10 days “Many people here believed that we could grow the epilepsy of when it was filed, even though it was filed at a later date business if we focused on it,” he says. “We determined that than expected. And once it sorted out its restated earnings, the market was underserved, and that new technology on the its submissions were on time again. hardware and software sides could help us grow it.” In June 2007, a court agreed with Cyberonics. The bond-

And grow it did, as the epilepsy business has had four holders were going to appeal, but instead of continuing to straight quarters of double-digit growth—if you count a rack up legal fees, Cyberonics decided to make a deal. It rounding up from 9.9% in one quarter. Growth has been agreed to push up the call date of the bonds from September particularly strong outside the United States, where the firm 2012 to December 2011 in exchange for the bondholders increased its focus. In 2007, epilepsy revenue grew 8.3% dropping their appeal, and for reclassifying the debt as long domestically and 21% internationally. term instead of short term. So the bondholders will be paid

Management, including a new CFO, Greg Brown, then off nine months earlier. The company has already bought had to sort out what to do with the depression indication. back more than $25 million of the bonds. And one factor

“We had put a lot of effort into it, but we could not continue that was contributing to the perception that the company at the pace we were on,” says Moore. “If you’re not getting would not survive has been eliminated. Today, the auditors reimbursement but you’re continuing to spend so much are no longer including the dreaded “going concern” clause in their reports.

Another factor in the turnaround, says Moore, was the employees who remained. “Once we determined that we were returning to the epilepsy business, 500-plus people decided to reapply their drive to the epilepsy field. That was the first and foremost reason why we were able to be successful.” Given all the turmoil that the company has gone through in its history, it is not at all surprising that Moore inherited a very determined team.

“Because of the number of problems the company faced,

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money on it, it’s time for a change.” So management made the painful decision to severely cut the funding of depression operations and shift personnel and resources to epilepsy operations. Layoffs, unfortunately, were necessary.