Medical Device Daily Associate

Vagus nerve stimulation (VNS) developer Cyberonics (Houston) reported that its CEO and CFO have resigned, following an investigation that revealed errors in the company’s stock option practices. A review by the company’s audit committee showed flaws in its reporting of stock option grants between 1999 and 2003, the company said. The errors mean Cyberonics must restate results for the fiscal years 2000 through 2005.

As a result of the audit committee’s findings, Cyberonics will lose the most vocal — and often combative — proponent of its VNS system. Robert “Skip” Cummins, president/CEO of the company, has resigned. Also resigning was CFO Pamela Westbrook.

Although the company’s management and its independent registered public accountants said they have not yet completed their review of the audit committee’s findings and determined the exact amount of non-cash expenses, it is currently estimated at about $10 million.

The outspoken Cummins is not leaving the company empty-handed, however; he will receive $1.7 million cash as part of a severance package that includes 75,000 shares of unregistered stock, the company disclosed in a regulatory filing.

Reese Terry, Jr., the company’s co-founder, former CEO and a current director, has been named interim CEO. In addition, George Parker III has been named interim COO, and John Riccardi has been named interim CFO. The company’s board said it has already initiated a search for a permanent CEO and CFO with the assistance of an executive search firm.

Cummins became a director of Cyberonics in June 1988, according to the company’s Web site, and was named president/CEO in September 1995. He became chairman six years later.

Westbrook, who was also VP finance and administration, will receive a payment of $300,000 in cash, along with the acceleration and vesting of any stock options and restricted stock that would have vested within the next 12 months if she had remained employed by the company.

Westbrook has been retained by the company as a consultant and will advise it with respect to financial matters, including the preparation and filing of the company’s annual report for the period ending April 28, and quarterly reports for the quarters ending July 28, and Sept. 29. The company will pay Westbrook $1,200 per day for those services.

The restatements will have no effect on the company’s cash position or ongoing business, it said.

Guy Jackson, chair of the company’s audit committee, said, “We look forward to moving forward and focusing our efforts on enhancing shareholder value now that the audit committee has concluded its review and informed the full board of its conclusions. It was important for the audit committee to conduct this review and to do so in a diligent, thorough and objective manner and we are pleased that the company is in a position to move forward from this point and execute on its business plan.”

Cyberonics has recently been under fire both internally and externally.

A group of Cyberonics shareholders, led by hedge fund Metropolitan Capital Advisors, has been clamoring for changes on the company’s board since September, including the nomination of three new directors, citing a “series of bad decisions” by the company’s management and board.

The company also received several delisting notices from the Nasdaq, citing non-compliance with standards due to a failure to file financial results for the quarter ended July 28. The delay in filing reports with the Securities and Exchange Commission was the result of an investigation by the commission into the company’s stock option practices, primarily related to Cummins options. Also, the U.S. Attorney’s Office for the Southern District of New York has subpoenaed the company.

Additionally, the group Public Citizen (Washington) has continued its criticism of the company’s claims for the benefits of VNS therapy to treat treatment-resistant depression (TRD). The organization has gone so far as to say that the approval of the company’s system for treatment of TRD should be revoked (Medical Device Daily, Sept. 8, 2006).

Even after winning FDA approval of VNS for the broad application to treat TRD, the company has struggled to win private and CMS reimbursement of the system, though it is currently reimbursed for use in the treatment of epilepsy. The TRD application was finally approved by the FDA in July 2005 (MDD, July 19, 2005) after a nearly seven-year struggle.

As part of what it said are its efforts to remain “at the forefront of best practices in corporate governance,” the board also voted to separate the roles of CEO and chairman and elected Tony Coelho, a director of the company since 1997, to the position of non-executive chairman.

Last week, the company reported that Hugh Morrison had been appointed as a director of the company. With Morrison’s appointment, Cyberonics said its board is now comprised of eight directors.

While it appeared increasingly likely that a change would have to be made at the executive leadership level and that Cummins and Westbrook were likely candidates for some of those changes, the company said all the right things as the two executives exited.

“We thank Skip for his vision and unwavering commitment to patients with epilepsy and treatment-resistant depression,” said Coelho. “Skip helped to establish a deep bench of individuals with the management and financial expertise needed to ensure a smooth transition.”

“We also wish to thank Pam for her service to the company,” said Coelho. “We have benefited from Pam’s business acumen and appreciate the effort she put into building the company’s strong finance organization.”

The company reported that it has also taken significant actions to enhance its processes and procedures relating to stock option plan administration and accounting for and disclosure of stock option grants, including a policy which limits the granting of options to specific limited time periods during the year.

The company also reported that its board has set a record date of Dec. 18 for its annual meeting of stockholders.

Last week, Cyberonics shares jumped following news that billionaire investor Carl Icahn had taken a stake in the company. Icahn purchased 606,688 shares in the company, according to a filing with the SEC released on Nov. 14.

The news of Icahn’s share stake, coupled with the resignations of Cummins and Westbrook, caused the company’s stock to soar nearly 12% to $24.17.