A Medical Device Daily

Cyberonics (Houston) is being investigated by the SEC to see whether the company has allowed executives to backdate stock-purchase options to secure the lowest possible market price and maximize their potential profits.

Cyberonics is one of several companies nationwide that are being questioned about stock-option dating.

The company, which makes the Vagus Nerve Stimulation (VNS) therapy, used in the treatment of epilepsy and treatment-resistant depression, said in a SEC filing that it has issued annual equity grants, including stock options, as a way to compensate its executives for building shareholder value. It added that the June 15, 2004, option grants reported in the media were disclosed in timely filings with the SEC, which vest over a five-year period.

“None of the options subject to the grants have been exercised and none of the underlying shares have been sold,” the company said in the filing.

The scrutiny on the company's activities came about because of an analyst report last week that allegedly found “unusual activity” in regard to past stock options granted to executive officers (Medical Device Daily, June 12, 2006).

SunTrust Robinson Humphrey (New York) analyst Amit Hazan wrote in a note that he analyzed all the companies he covers and found that Cyberonics granted options to three executives, including CEO Skip Cummins, on June 15, 2004, while the stock was halted just after an FDA panel recommended approval of the company's pacemaker-like medical device, VNS therapy, to treat major treatment-resistant depression (MDD, June 17, 2004). The device did not actually earn an FDA approval until July of the following year.

According to Hazan, the options were granted after a U.S. medical advisory panel recommended approval of the Cyberonics device for depression, but before Cyberonics shareholders got to trade on the news.

The following day, the company's stock soared 78%, reaping Cummins “an overnight paper profit” of about $2.3 million.

At that time, Cummins received 150,000 shares at a price of $19.58 a share, the closing price before the FDA panel's recommendation. Those same shares closed at $34.81 the following day. Aside from Cummins, two company officers who played a pivotal role in winning VNS panel backing – Chief Medical Officer Dr. Richard Randolph and Vice President for Regulatory Affairs Alan Totah – each received 10,000 shares at the same price, giving them a $150,000 windfall the following day.

While Cyberonics called the allegations “inaccurate and without merit,” it said it is cooperating with the SEC as the company reviews its prior options grants and practices.