By Rachel Barron and Marisa Taylor

Troubled depression device-maker Cyberonics appears to have dodged a bullet after a key advisory panel at the U.S. Food and Drug Administration determined that a rival company’s device was ineffective at treating severe depression.

The FDA’s Neurological Devices Panel decision on Monday dealt a severe blow to Neuronetics’ NeuroStar TMS System, a non-invasive device that stimulates the brain to alleviate severe depression. Panel chairman Thomas Brott said trial results for the new device were “marginal, borderline, [and] questionable.”

Although the FDA is not bound to follow the panel’s decision, the agency often does, meaning it appears unlikely that privately-held Neuronetics would receive approval to market its device. That cheered Cyberonics investors, who worried that Neuronetics could have emerged as a formidable competitor.

Houston-based Cyberonics has developed pacemaker-like device that is implanted in the chest and is believed to relieve depression by sending mild electrical pulses to stimulate the vagus nerve in the neck. The company has been beset by doubts about its products efficacy, as well as a public boardroom battle.

After the FDA panel scrutinized the NeuroStar, shares of Cyberonics shot up more than three percent, closing at $20.93 on Monday.

Neuronetics remained optimistic about its NeuroStar device, saying that it looks forward to conducting further trials and answering any questions that the FDA might have.

Cyberonics’ implant was granted FDA approval in July of 2005, but its effectiveness has come under heavy scrutiny. Trial data has suggested the device works for about 30 percent of patients who use it. The Cyberonics device is the only implantable device on the U.S. market for people whose depression has resisted typical treatments with anti-depressants.

With Neuronetics making an attempt to enter the depression device space, and with a non-invasive technology to boot, analysts speculated that the FDA’s approval of

Some analysts believed that Cyberonics entry into the depression device market 18 months ago would have paved the way for Neuronetics to follow, but Dr. Alexander Arrow, an analyst for Lazard Capital Markets, says that the opposite occurred, and that many physicians now suggest the Cyberonics approval was a mistake. “The panel has taken a ‘not-again’ attitude, a kind of indictment of both companies’ data sets,” he wrote in a recent research note.

And while Friday’s panel discussion might have eliminated Neuronetics from serious competition with Cyberonics, the latter company has been facing internal strife and management upheaval.

On Monday, Cyberonics announced that three contested board members resigned from the helm of the company. Hugh Morrison, a current board member, was appointed as chairman, a change that observers said would enable the company to start moving beyond its management troubles.

Alfred Novak, Arthur Rosenthal, and Jeffrey Schwartz, all nominees from the shareholder group led by Metropolitan Capital, have been appointed to replace Tony Coelho, Kevin Moore, and Stanley Appel.

Up until now, the company has struggled questions of inappropriate backdating of stock options, the arrival of Carl Icahn as an investor to shake up management, and the inevitable fallout that has included the resignation of the company’s CEO (see Cyberonics Denies Impropriety,  Cyberonics Board Fight Continues, Corporate Raider Takes Cyberonics Stake, and Cyberonics CEO Resigns).