Cyberonics (CYBX) Slammed as Whistleblower, Valuation Bubble Revealed

January 23, 2013 10:21 AM EST
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Shares of Cyberonics (NASDAQ: CYBX) came under heavy pressure Wednesday following a negative report by Infitialis posted at noted short-selling investigative blog

Infitialis, which boasts a track recover showing an average gain of 71% from the time of their past publications, called Cyberonics "out highest conviction exposé yet highlighting folly in the form of a significant valuation bubble." The firm cited "very serious allegations of unscrupulous and potentially fraudulent activity on the part of NASDAQ-listed Cyberonics."

The research firm notes the allegations have been documented in an amended complaint filed by the whistleblower in Massachusetts Federal Court on January 16, 2013.

Infitialis said the company will never grow into its current $1.5 billion valuation in the bull case and may decline by 80% in the bear case should any of the allegations in the whistleblower suit be proven in federal court.

Infitialis said the top five reasons to sell/short CYBX are:

  • As exclusively unveiled in this report, whistleblower Andrew Hagerty makes a convincing case that CYBX employees fraudulently induced patients to prematurely undergo surgery to replace batteries in their devices. These claims include detailed accounts of coercion on the part of sales people as well as the manipulation of testing tools used to gauge the battery levels. Each battery replacement is sold to the patient for $12,000 to $15,000 and costs CYBX only $2,000.

  • The science underlying VNS is inconclusive and subjective. We cannot remember any other medical device that had such a provocative history. Moreover the FDA Maude database highlights an unusually high death rate that has yet to be addressed by the company or discounted by market participants.

  • As with MLNX sell-side analysts covering CYBX completely misunderstand the true dynamics underlying the business. VNS does not work for TRD and will never be a valid treatment option, while the epilepsy market opportunity has been fully addressed, explaining the switch from new installations to battery replacements.

  • Insider selling of nearly $35 million in one year (amounting to the sum total of 2012 net income) confirms that even the insiders disagree with analysts as far as this bubble valuation is concerned.

  • At 41x T12M earnings CYBX shares have been bid up to a mathematically irreconcilable valuation. Even under the rosiest growth scenarios we cannot understand how any analyst could arrive at a price target that exceeds $32 a share. When incorporating the actual dynamics of the business and the whistleblower event we believe that CYBX is worth no more than $21.20 a share.

Pior to the release of this investigative report, TheStreetSweeper established a short position in Cyberonics and stands to profit by future declines in the stock price. TheStreetSweeper has sold a total of 52,260 shares of CYBX short at an average price of approximately $50.44 share at the present time.

Shares of Cyberonics Inc. (CYBX) are down 4.8 percent following the release of the report, but are off the lows.

The full report can be found here.

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