Friday, June 09, 2006

Now Cyberonic's Executives' Stock Options Questioned

Last year, we posted about the curious goings-on during the US Food and Drug Administration (FDA) evaluation of a device made by Cyberonics touted as a treatment for severe, refractory depression. The implanted electrical vagus nerve stimulator is invasive end expensive. A single, unpublished randomized controlled trial failed to show that it had statistically significant benefit, that is, that any apparent differences in improvement rates in treated and untreated patients were not do to chance alone. Were the benefits real, they would only affect a small number of patients. Nonetheless, the FDA advisory panel seemed more swayed by patient's testimonial evidence.

We then posted about an ongoing investigation by the US Senate Finance Committee that showed how an FDA official approved the device against the advice of staff scientists, who emphasized the device's known adverse effects versus uncertainty about any benefits.

Now, Cyberonics is back in the news again. Yesterday, the Associated Press, and today, the New York Times reported questions about Cyberonics awarded stock options to its top executives. According to the Times,

[Stock analyst Amit] Hazan, who said he was surveying all the companies he follows for potential backdating issues, focused on Cyberonics options that were granted at a special board meeting on the evening of June 15, 2004. That was only hours after a Food and Drug Administration advisory panel recommended that the agency approve Cyberonics's request to market its implantable nerve stimulator as a treatment for severe chronic depression.

Mr. Cummins received options on 150,000 shares at an exercise price of $19.58, the closing price the day before the F.D.A. panel's recommendation. The chief medical officer, Dr. Richard L. Rudolph, and the vice president for regulatory affairs, Alan D. Totah, who played pivotal roles in winning the panel's backing, each received options on 10,000 shares at that price.

The shares soared when trading resumed the next day, June 16, closing at $34.81, as investors bet that Cyberonics might soon be selling a new approach to treating the most severe forms of depression, a condition that affects millions of Americans annually.

'The board acted on an event before investors were able to do so,' Mr. Hazan said yesterday in an interview. 'It's a perfect example of an abusive option. Options are supposed to be an incentive to align executives' interests with shareholders. This was just a reward.'

Mr. Hazan said that because the options were priced below what would become the market value the instant that trading resumed, they should have been accounted for as compensation in that quarter. Because the company did not do so, it might have to restate its earnings for that fiscal year, he said.

Today, Reuters reported that "the chief financial officer of Cyberonics ... denied allegations that certain stock options were timed to create a windfall for executives.... CFO Pam Westbrook said the allegations were 'inaccurate and without merit' and that the company fully followed securities laws in granting the options."

Now that we have been publishing Health Care Renewal for a while, it's fascinating to see how organizations that appear on the blog for one particular management problem often show up again, and sometimes again and again for other management problems. So now, not only should physicians be skeptical about the evidence on which proponents of Cyberonics' vagus nerve stimulator base their advocacy, but also stock holders should be skeptical about the priorities of the company's top leaders.

ADDENDUM (June 12, 2006): The US Securities and Exchange Commission (SEC) is now investigating Cyberonics' stock option grants to executives (see Reuters).

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