Is Cyberonics the next Ackman-Like Short Seller Drama?

If it sounds like Deja-Vu, it may well be. The Bill Ackman versus Herbalife HLF battle and recent charges against Cyberonics CYBX leveled by a group called Infitialis on TheStreetSweeper blog yesterday.

Ackman, a well-known hedge fund manager, has famously charged Herbalife with being an illegal pyramid scheme and publicly stated that he hopes to short the stock to zero. According to a disclaimer posted with the Infitialis report, prior to publication, Both TheStreetSweeper and Infitialis established a short position in Cyberonics.

Never heard of Infitialis? According to the report, the group identifies themselves as a research collective that uncovers Wall Street fraud. According to their stated past results, their reports caused a 22 to 99 percent drop in the mentioned stock. Most are OTC or pink sheet stocks.

The group calls their Cyberonics report, “our highest conviction and most asymmetric expose yet.”

In a detailed report, Infitialis claims that Cyberonics’ main product, an implanted device designed to treat epilepsy and depression by a process called Vagus Nerve Stimulation or VNS, is only effective in a small number of cases.

The report cites FDA clinical trials on the device that limit Cyberonics’ VNS treatment to only the rarest cases of epilepsy and depression. According to Infitialis, this represents a much smaller market opportunity than indicated by Cyberonics and Wall Street analysts.

The report cites 11 research papers that cast doubt on the effectiveness of VNS. One paper by the Utah Department of Health stated, "Studies have yielded inconclusive results regarding short and long-term efficacy..."

Infitialis goes on to point out that the patent covering VNS treatment for epilepsy expired in July 2011. At least two other companies have begun the process of creating and marketing VNS devices.

This, along with descriptions of a poorly trained sales staff, are all part of a “bad business model” charge that suggests Cyberonics is not the high growth high margin medical company it advertises itself to be.

Finally, Infitialis details what it claims are whistleblower allegations filed January 16, 2013 in Massachusetts federal court. Among the charges filed by, former employee, Andrew Hagarty, are accusations that Cyberonics employees coerce surgeons to prematurely schedule battery replacements as part of a directive to accelerate battery replacement revenue by upper management.

According to the Wall Street Journal, Cyberonics responded by saying TheStreetSweeper report discusses information that has long been in the public domain and doesn’t “accurately characterize the benefit that VNS therapy provides patients and the opportunities for the company.” The company denied knowledge of the recent whistleblower lawsuit brought by Hagarty following his termination. Cyberonics concluded by saying it can’t comment on active litigation but intends to defend vigorously the original lawsuit.

The Wall Street Journal reported that Dougherty & Co. analyst, Deepak Chaulagai stated that TheStreetSweeper report contained “wildly misleading” quotes and other inaccuracies about VNS therapy, but wouldn’t comment on the lawsuit in particular.

More than 5.6 million shares of Cyberonics stock were traded yesterday, compared with normal average daily volume of around 300,000. The stock is up 36 percent in the last 12 months.

Shares of Cyberonics closed Wednesday at $43.98, down 8.5 percent.