December 20 2007: 3:43 PM EST
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A novel, high-tech way to treat obesity

Cyberonics is teaming up with Johnson & Johnson to create a new way to fight fat: What if people's nervous systems told them that they aren't hungry?

By John Simons, writer

Drug companies are seeking a safe, reliable way to fight obesity without unpleasant side effects.

(Fortune) -- Houston-based health-tech hybrid Cyberonics is having a big week.

On Tuesday, the company unveiled a deal in which it will license patent rights for a nerve stimulation device to Johnson & Johnson (JNJ, Fortune 500). The device, developed by Cyberonics' founders in the late 1980s, has several uses, but Johnson & Johnson's subsidiary plans to develop the so-called vagus nerve stimulator as a way to combat obesity.

Obesity is the Holy Grail for modern healthcare companies. Some two-thirds of Americans are overweight, and fat is also a global epidemic. This year, the World Health Organization said it expects the number of obese adults worldwide to grow from 400 million today to roughly 700 million by 2015.

For some, being overweight is mostly a vanity issue, but it can lead to real health problems such as diabetes, heart failure, and high blood pressure. To date, a variety of methods have been used to fight fat; Cyberonics' "neural modulation therapy" sounds like science fiction, but it has established a track record in recent years.

How does it work? The company markets the Vagus Nerve Stimulation device (VNS), a pocket watch-sized transmitter which, when surgically implanted into a patient's upper chest, sends impulses to the vagus nerve endings along the neck. It has multiple uses: In 1997, the Food and Drug Administration approved the device for treatment of epilepsy after the company showed VNS could reduce the frequency of seizures. In 2005, the FDA approved VNS for treatment of severe and recurrent depression for patients who don't respond to medication. (Some 20% of depression sufferers aren't helped by antidepressants and other drugs.)

Since 1997, Cyberonics (CYBX) has sold 46,000 VNS units worldwide. The device and its surgery cost patients $25,000. Cyberonics is currently testing its device as a possible treatment for Alzheimer's disease, anxiety disorders, migraines, and bulimia.

The vagus nerve is a primary pathway between the brain, the stomach, and abdomen. In preliminary animal studies, researchers have found that vagus nerve stimulation can affect appetite and can be used to induce a sense of fullness in obese patients. Johnson & Johnson will conduct broader animal and human studies of the link between vagus nerve stimulation and appetite. It could take as much as five to seven years before the company is ready to submit a final product for FDA approval.

It's a novel approcach to a problem that healthcare companies have been racing to address. Drug companies have tried for years to fashion elegant treatments for obesity. Wyeth (WYE, Fortune 500) was famously forced to take fenfluramine (or fen-phen) off the market in 1997 after several patients developed heart complications. The resulting product liability lawsuits cost the company $15 billion.

But even the weight-loss therapies currently on the market, such as Roche's Xenical and Abbott's Meridia, contain disquieting side-effects like excessive gas and anal leakage. This year, Sanofi-Aventis tried and failed to gain FDA approval for its weight-loss drug rimonabant. Merck has said it is working on a similar drug. And in late August, Pfizer (PFE, Fortune 500) and Bristol-Myer announced they would collaborate on research into metabolic disorders including obesity and diabetes.

Johnson & Johnson, with its expertise in both drugs and medical devices is taking a different tack with its newly acquired Cyberonics patents. The company agreed to make an upfront payment of $9.5 million, with a promise that Cyberonics would receive royalties on sales of products that result from its patents.

Cyberonics CEO Dan Moore told Fortune he believes the Johnson & Johnson deal proves that a "third way" is gaining acceptance in healthcare. "Chemicals - or drugs - have done wonderful things in our lives. And mechanical devices like stents have done amazing things. In the next ten years, we will learn a lot about what can happen when you stimulate the electrical systems of the body. I'm a believer in this third platform of neural modulation."

For all its clinical success, Cyberonics remains a bit shaky as a business. The company is not profitable, and has a relatively modest market capitalization of $345 million. In its 2007 fiscal year (which ended last April), the company grew sales by 6% to $131 million. Cyberonics chief financial officer, Greg Browne says he expects sales to be lower in FY 2008 due to Medicare's decision last May not to reimburse depression patients for the VNS device and surgery.

Even so, Browne believes Cyberonics can achieve a breakeven point by next spring. And they keep on finding new applications: On Wednesday, Cyberonics said it acquired the rights to two new patents pertaining to vagus nerve stimulation and the treatment of stroke and traumatic brain injury.  To top of page