Cyberonics Inc.'s (CYBX) growth expectation has been reduced from the unsuccessful attempt at gaining national reimbursement coverage for the depression indication. The company is looking for a financial partner for the execution of its depression strategy. The future of Cyberonics rests on its only product, the VNS Therapy System, approved for the treatment of epilepsy.

The company's near term focus is on the use of the VNS Therapy System for two indications: epilepsy and depression. The device has the potential to treat other neurological disorders, such as Alzheimer's disease, anxiety, chronic migraine headaches, and bulimia. Research and development efforts of Cyberonics include seeking other VNS indications with/without partners.

The VNS Therapy System is in a position to meet increased demand that currently exists in the global epilepsy market. Its growth opportunities are likely to go up, with about 125,000 new epilepsy cases in the U.S., and about 210,000 new cases in Europe and Japan likely to be diagnosed each year.

We note that the company's reimbursement objectives are not expected to be achieved in the near term. Although the outlook for the epilepsy market still remains positive, most of the huge growth potential was expected from the depression market, which is significantly larger than the refractory epilepsy market.

At its current price of $21.94 per share, CYBX is trading at 4.3x our fiscal year 2009 revenue estimate of $137 million, which is at a premium to the group average multiple of roughly 3.5x. In addition to reduced growth, execution risk related to CYBX's growth plan may limit multiple expansion. Our target price is based on a price-to-revenue multiple of roughly 4.5x FY09 revenue estimate.