LivaNova Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 13 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the LivaNova Plc Second Quarter of 2023 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask a question by pressing star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr.

Operator

Matthew Dodds, LivaNova's Senior Vice President of Corporate Development and IT. Please go ahead, sir.

Speaker 1

Thank you, Emily, and welcome to our conference call and webcast discussing LivaNova's financial results for the Q2 of 2023. Joining me on today's call are Bill Cozzi, our Chair of the Board of Directors and Interim Chief Executive Officer, Alex Schwartzberg, our Chief Financial Officer Stephanie Bolton, President of Global Epilepsy And Brianna Gotland, Director of Investor Relations. Before we begin, I would like to remind you that the discussions during this call We'll include forward looking statements. Factors that could cause actual results to differ materially are discussed in the company's most filings and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any forward looking statement.

Speaker 1

Also, the discussions will include certain non GAAP financial measures with respect to our performance, including but not limited to sales results, which will all be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures Can be found in today's press release, which is available on our website. We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the Investors section of our website under News, Events and Presentations at investor.

Speaker 1

Livanova.com. With that, I will now turn the call over to Bill.

Speaker 2

Thank you, Matt, and thank you, everyone, for joining us. Welcome to LivaNova's conference call for the Q2 of 2023. Before discussing results for the quarter, I'd like to recount some first hand observations, introduce Stephanie Bolton and provide a brief update on the CEO search. Since taking on the role of Interim CEO in April, I've been firmly focused on our patients, performance and execution. I've engaged with many of our global customers and colleagues.

Speaker 2

That ongoing customer focus, commitment to quarterly results And shaping our 2024 strategic plan will remain as top priorities. In May, We named Stephanie Bolton as LivaNova's President of Global Epilepsy. The assignment of global responsibility For this key business aligns well with our commitments to leveraging an integrated worldwide business strategy with a continued focus on local execution. Steph has a 12 year record of achievement at LivaNova. She started as a territory manager before taking on leadership roles In epilepsy and cardiopulmonary.

Speaker 2

Most recently, Steph served as President of International, where she led both businesses to commercial success. We're excited to have Steph's commitment to company performance and passion for helping epilepsy patients. Steph, we look forward to your participation in the Q and A. Now allow me to provide a brief update on the CEO search. The Board and I are currently in the process of reviewing our first slate of potential candidates.

Speaker 2

Our process of slate review, interview selection and board assessment remains on track. We're committed to selecting the right individual to lead our team. For the remainder of the call, I will discuss our 2nd quarter results And then turn to our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results and updates to 2023 guidance. I'll wrap up with closing remarks before moving on to Q and A.

Speaker 2

In the quarter, we achieved 16% revenue growth marked by strength in the cardiopulmonary and neuromodulation businesses Across all regions. We were encouraged by the continued strong performance in the Rest of World and Europe regions, And we're particularly pleased with the U. S. Commercial execution, which drove strong double digit revenue growth And helped improve profitability in the quarter. Now turning to segment results.

Speaker 2

For the Cardiopulmonary segment, Revenue was $151,000,000 in the quarter, an increase of 21% versus the Q2 of 2022. Oxygenator revenue grew in the mid teens led by the U. S. Driven by higher demand and steady supply chain execution. Heart lung machine revenue increased more than 30%, primarily driven by S5 placements in the Rest of World region And initial Essence installations in Europe and the U.

Speaker 2

S. The commercial rollout of Essence is progressing, And we're encouraged by early customer feedback. Following the clearance of our blood gas monitoring software integration later in the year, We still anticipate increased contribution. We now expect cardiopulmonary revenue to grow 11% to 13% for the full year 2023. Our revised forecast incorporates the strong first half performance in auctionators and HLMs.

Speaker 2

As previously stated, we continue to expect a ramp in Essence revenue through the second half of the year With much of that coming after our next wave of software launches. Alex will comment on some underlying factors that impacted The second quarter results in cardiopulmonary. Epilepsy revenue increased 14% versus Q2 of 2022 with strength across all three regions, including growth in both new and replacement implants On a year over year and sequential basis, U. S. Epilepsy revenue increased 15% year over year driven by higher total implants, Realized price and favorable product mix.

Speaker 2

Notably, we achieved 838 New patient implants in the quarter, representing 13% growth versus the prior year and achieved 947 replacements, representing 8% growth versus the prior year. Epilepsy revenue in Europe grew 10% versus prior year, led by the Nordics and the U. K. The Rest of World region Achieved 15% growth led by Turkey and China. For the full year 2023, We now expect global epilepsy revenue to grow 6% to 8%.

Speaker 2

Our revised forecast incorporates the strong first half performance in replacement implants. Alex will comment on some underlying factors That impacted the strong second quarter result in epilepsy. ACS revenue was $9,000,000 in the quarter, An increase of about 1% versus the Q2 of 2022, reflecting growth in cardiac case volumes And partially offset by respiratory case declines and product mix. For 2023, we now expect ACS to be flat year over year. Turning now to the strategic portfolio initiatives.

Speaker 2

DTD revenue For the Q2 was $1,000,000 For 2023, we now anticipate DTD revenue of approximately $6,000,000 to $8,000,000 Primarily from the RECOVER study. The RECOVER study continues to advance. Enrollment for the unipolar Cohort of the study has been completed, and we await the results of the 12 month follow-up. As a reminder, We randomized the 500th unipolar patient into the trial in March and subsequently completed all implants in May. Upon receipt of the 12 month follow-up data for the 500 unipolar patients in June of 2024, We will conduct a final analysis and expect the publication of the study results by late 2024.

Speaker 2

The bipolar cohort is similar to the unipolar cohort in that the randomized controlled study is designed with frequent interim analysis that will assess if predictive probability of success or futility was reached Or if the study should continue enrolling. In June, the interim analysis for the 150th patient in the bipolar cohort This milestone was achieved faster than previously communicated, and we were pleased with the We had in refocusing our recruitment efforts from unipolar to bipolar patients. Moving to OSA. The OSPREY trial continues to progress. And as of earlier this month, all 25 study sites are actively recruiting patients.

Speaker 2

In heart failure, the close out of the ANTHEM clinical study is progressing as expected. We fully defined most of the accelerated costs In 2023, the majority of which occurred in the first half of the year, we continue to expect the overall R and D spend Related to heart failure this year to be approximately $24,000,000 With that, I will turn the call over to Alex.

Speaker 3

Thanks, Phil. During my portion of the call, I'll share a brief recap of the 2nd quarter results And provide commentary on 2023 guidance. Turning to results. Revenue in the quarter was $294,000,000 an increase of 16% versus 2022. In the quarter and first half, we observed favorable comparisons.

Speaker 3

In addition, growth was impacted Pricing programs implemented in the second half of twenty twenty two, higher than expected U. S. Epilepsy replacements And tailwinds from oxygenator share gains due to competitor supply chain challenges. Accordingly, We cannot expect the revenue growth in the second half of twenty twenty three will reflect the growth experienced in the first half of the year. Foreign exchange in the quarter had an unfavorable year over year impact of approximately $2,000,000 or 1% of revenue.

Speaker 3

Adjusted gross margin as a percent of net revenue was 72% compared to 69% in the Q2 of 2022. Adjusted gross margin was impacted by favorable realized price, higher volume, which drove positive fixed overhead absorption, As well as lower inbound freight costs, which offsets component cost inflation. Adjusted R and D expense in the Q2 was $48,000,000 compared to $42,000,000 in the Q2 of 2022. R and D as a percent of net revenue was 16% in line with the Q2 of 2022. The year over year increase on a dollar basis was driven by continued investments in our strategic portfolio initiatives And costs associated with closing out the ANTHEM trial.

Speaker 3

Adjusted SG and A expense for the Q2 was $113,000,000 Compared to $101,000,000 in the Q2 of 2022. SG and A as a percent of net revenue was 39%, Down from 40% in the Q2 of 2022. The year over year increase on a dollar basis was driven by higher sales and marketing expenses. These include Essence launch expenses and variable costs such as freight and commissions associated with increased revenues. Adjusted operating income was $49,000,000 compared to $33,000,000 in the Q2 of last year.

Speaker 3

Adjusted operating income margin was 17% compared to 13% in the Q2 of 2022. Adjusted operating income was driven by improved gross margins and operating expense leverage. Adjusted effective tax rate in the quarter was 10% versus 5% in the Q2 of 2022. The higher tax rate is primarily attributable to changes in geographic mix. Adjusted diluted earnings per share was $0.78 compared to $0.53 in the Q2 of 2022.

Speaker 3

Our cash balance at June 30 was $223,000,000 up from $214,000,000 at year end 2022. Total debt at June 30 was $587,000,000

Speaker 4

up from

Speaker 3

$542,000,000 at year end 2022. The increase in total debt was driven by a delayed draw of $50,000,000 on the Term Loan A facility that we put in place In July of 2022. Net debt, including restricted cash at June 30th was $101,000,000 Adjusted free cash flow for the quarter was negative $10,000,000 up from negative $14,000,000 in the prior As a reminder, LivaNova pays its short term incentive bonuses in the Q2. The year over year improvement Was driven by operating income offset by higher HLM inventories. Capital investments were $13,000,000 In the first half compared to $11,000,000 in the first half of twenty twenty two.

Speaker 3

Now turning to our revised 2023 guidance. As Bill mentioned, based on our performance during the first half, we're increasing our full year 2023 guidance. We now expect 2023 revenue growth on a constant currency basis between 8% 10% And continue to assume approximately a 1% tailwind from exchange rates. We now expect Adjusted diluted earnings per share in the range of $2.55

Speaker 2

2.75

Speaker 3

With adjusted diluted weighted average shares outstanding to be 54,000,000 for the full year. Adjusted free cash flow is now expected to be in the range of $85,000,000 to $105,000,000 In summary, I'm encouraged by the first half execution contributing to financial performance. Continued emphasis Our new patient acquisition in epilepsy, maintaining our cardiopulmonary market position as well as price and expense discipline Our key factors to delivering margin expansion. With these factors in mind, we remain positioned to drive modest Operating leverage by year end. And with that, I'll turn the call back over to Bill.

Speaker 2

Thank you, Alex. As a company, we've demonstrated progress across the portfolio through the first half of twenty twenty three and are well positioned to deliver on our full year guidance, Pipeline commitments and operating leverage by year end. This would not be possible without the hard work And commitment of our employees across the globe. I'll certainly take this moment to thank them for their continued focus on our patience, Performance and execution. These three areas underpin our dedication to serving patients worldwide, Focus on long term innovation and shareholder value creation.

Speaker 2

With that Emily, we are now ready to open the call for questions.

Operator

Thank Our first question comes from the line of Rick Wise with Stifel. Rick, your line is now open.

Speaker 5

Thank you. Good morning, Bill.

Speaker 6

Good morning,

Speaker 5

Rick. Just starting off, maybe good morning to you. Nice to see the quarter and your comments are very clear about some of the factors, Favorable comps price and the better than expected replacement. I'm hoping you can dig into The latter 2

Speaker 2

a little bit. Can you give us

Speaker 5

a sense of the price benefit in the second quarter growth? Is that fully done now? Is there any benefit likely or possible or included in the second half? And at the same time as part of this, maybe you could talk about the or Stephanie could Talk about the better than expected replacement volumes and what created that and why wouldn't we assume that continues into the second half?

Speaker 2

Sure. Let me take the front end, Rick, and I will then pass to Steph on the end of service volumes. As you well know, it's a pretty complex analysis and recognition of these underlying factors. But for sure price, End of service revenues and oxygenators as kind of a cluster of products as best we can tell Clearly contributed somewhere in the 6% or so range and that's in about 6%. We recognize that our oxygenator competitors who we anticipated coming back to the market in the second quarter Did not happen.

Speaker 2

We do know for sure that they're right now shipping product and having just been with a customer here in London on Monday, I know for a fact That they are shipping products. So that's one factor we got our eye on. Alex mentioned that most of the price activity was kicked off in the Q3 of last year. So we started to get some of those benefits in 3rd Q4 of last year. So we don't see a big Carrie, over there.

Speaker 2

Now if I could, Steph, may I ask you to comment on Rick's question related to end of service revenues?

Speaker 4

Sure. Rick, it's good to hear you. We continue to believe that we're seeing an increased benefit in the programs that we've had in place and Those programs have really been driving to help physicians identify end of service devices and ensure that All important continuity of care for patients. Moreover, sort of casting our mind back, we We entered the market in 2017 with Scentiva and Scentiva includes a key feature called scheduled programming and that enables patients To reach an optimal therapy quicker, in fact we see patients reaching an optimal therapy in 6 months versus 12 months. That in itself drives a higher replacement rate.

Speaker 4

And as a continuation to that, we are starting to see the 1st wave of replacements from those patients who were initially So if I come to your second part of your question, which is, why do we potentially see that slowing in the second half So we're continuing to monitor this, and we're continuing to monitor the impact of SenTiva on our end of service rate. The current forecast that we have is based on our latest data, which takes into consideration our revised expectations. I'll probably have a better answer for you as we move through the coming quarters. In fact, you can come back to me in Q1 next year. Thank you.

Speaker 5

Okay. And just thank you. As a follow-up and sort of on Bill, in the same kind of sense, the epilepsy business I'm sorry, the neuromod business did Very well. Maybe talk about growth, NPI growth, the mix of NPI versus replacement and just what's happening in the sales side that's driving that, Again, particularly thinking about looking ahead from second quarter trends.

Speaker 2

Yes, very good question. Steph has spent the bulk of her time since starting in this new role on that. So I'm going to push it Steph, would you mind?

Speaker 4

Sure, sure. Rick, we're really pleased about the results we've seen this quarter, as I know of the epilepsy team. Our focus is firmly on NPI and the team are working tirelessly with our physician base to identify the right patient At the right point of their treatment journey and creating that all important urgency to treat, my focus has been on implementing Clear operating mechanism, focusing not just what we're doing, but how we're doing it and being consistent And disciplined about it and that's what will set us up for the future. An example of this is the clear commitment The collaboration that we have between our sales organization and our case management group. Another clear contributing Q2 results were fewer surgeries being rescheduled at the end of the quarter due to those improved workflows that we've put in place

Speaker 1

And then just quickly, Rick, Bill gave the NPI and EOS numbers this quarter. It's 30seventy NPI to EOS, which is pretty consistent with the most recent quarters.

Speaker 5

Got you. Thanks, Matt.

Operator

Our next question comes from the line of Matt Taylor with Jefferies. Matt, please go ahead. Your line is now open.

Speaker 7

Hi and thanks for taking the question. Congrats on a good quarter. So I wanted to ask you maybe a little bit about the other side of the house and Sure. And talk a little bit about the CP trend. I guess what I was curious about was you did call out some of the contributions from The Essence launch in the rest of world and Europe getting some initial orders there.

Speaker 7

So I was hoping you could help us think a little bit more about the funnel there and how that Could Ram and just give us some more color on how the launch has gone so far and what to expect in some of the coming quarters?

Speaker 2

Sure. We're in commercial launch mode. As you know, all Essence activity is focused on Europe or the U. S, there is no Essence efforts going on outside those areas. And so all the revenues you heard about earlier, Rest of World were S5, And they were quite healthy too.

Speaker 2

Our pipeline is building. When I use the term commercial launch, remember that we are Creating many, many evaluations, nobody will purchase an essence until they have personally tried it In their cardiac surgical suite, we have a nice load of those activities underway right now. We have a number of activities in major institutions, both in the EU and in the U. S. We are Quick to recognize that the software upgrades that are continuing to roll out are important to many of our bigger customers.

Speaker 2

And the reason I keep mentioning The bigger customers, okay. Remember that they won't buy 1 or 2 machines. Their cardiac care facilities tend to be much larger. We've got Evaluation is going on right now and some institutions that could buy as many as 10 to 12 in a single purchase order. So that's going to take some time and they're going to want to test the upgrades.

Speaker 2

But we did get some nice signals, if you would, From the efforts that we made in the quarter, the 30% HLM growth overall encouraged us. And though Essence was a Small part of that in the U. S, we actually had a modest decline in S5. So It was Essence that perked us up in the U. S.

Speaker 2

And we also had some good penetration in the Europe very early stage. There's no question that we expect the Q4 to be the more critical quarter in terms of the ramp starting to take off. And our forecasting as well as our production alignment are really teed up For that window of 4Q and leading into 2024.

Speaker 7

Got it. Thanks for clarifying that. Maybe I just ask one follow-up. I just wanted to know, is there anything to call out in the quarter that was a I think last quarter you called out some minor inventory stocking benefit and I know some of your We've had some supply issues. Is there anything that you would call out that helped this quarter?

Speaker 2

Yes. The call out we didn't get it But there's 3 things that we noted. I mean, I hey, let me tell you, do I wish we were a 16% growth company? Yes, of course, I do. But we know that we had this year on year favorability of price, which started in the Q3 of last year.

Speaker 2

We know that we had end of service epilepsy sales that were much better than anticipated And the oxygenator volume continued to really support cardiopulmonary. Those three things Collectively. And by the way, this math is not perfect. We do the best we can within a complex P and L to identify that. But think about those three things being somewhere around 6% impact on the quarter.

Speaker 2

Know that the price will not carry out Until the second half of the year. Steph, very, very direct on the EOS, we got our eyes on that. We got a pleasant surprise this quarter. We've got to watch that for a couple of quarters, see what happens there. Oxygenators, our competitors are back and their product is hitting the dock.

Speaker 3

Matt, I just want to clarify something. So We'll continue to see price carry forward into the second half of the year, but it's the comparative relative to when we started to Implement our pricing programs, which were in Q3 of last year. So we're getting the favorable comp in the first half.

Speaker 7

Great. Thanks for all that clarity.

Speaker 8

I appreciate it and congrats again.

Speaker 4

Okay. Thanks.

Operator

Our next question comes from Michael Pollock with Wolfe Research. Michael, please go ahead. Your line is now open.

Speaker 6

Hi, good morning. Thank you. I have one on epilepsy and then one for Bill, big picture. On epilepsy in the U. S.

Speaker 6

NPI 838, can you remind us What was that number in like the Q2 of 2019? I just I'm interested in where we are relative to pre COVID baseline. And The strategic question on epilepsy is over the last 9 months you had mentioned some key changes to obviously leadership and The sales team, some of which were described as involuntary, as you sit here today and look at execution and team in the field, Is it heads down, block and tackle and you're pleased with the team currently or Would you anticipate more changes over the next day, 6 to 12 months, Stephanie, as you kind of settled in your new role?

Speaker 2

Let's switch the first one and let me make sure I got the question right. You're interested in 2Q 2019 NPI placements?

Speaker 6

Correct. Yes, U. S.

Speaker 2

Steph, by chance do we have to do we have that in the room or I'm not sure. I don't have it.

Speaker 6

Or are you do you think you're above or below or in line with pre COVID baseline? I guess that's the question.

Speaker 2

You know what, we're just let us promise to get back to you. I'll hook up with Brianna when we're done and we will get you an answer to that question. Let me commit to that. Is that okay? Because we just don't have that number here in front of us.

Speaker 2

Just to give you some other context real quick, though Trying to get a view on things. Remember that 22 NPIs year on year to 2021 were down 6%. And we're encouraged by what we've seen thus far In the first half of the year. Steph, anything else to add or?

Speaker 4

Yes. I think Michael, I'd like to address some of your other points as well about Some of the talent that we brought into the organization. I'd also like to talk a little bit about The culture that I've seen coming in, a culture of a hugely passionate and committed team. So You'll excuse me for the early days of this. So I started in this role 12th May.

Speaker 4

It will always be etched on my brain. I've spent Over half my professional life working with this amazing therapy and advancing the adoption of it. So This is a wonderful opportunity for me. And I have to say the team that I'm now leading, have been incredibly welcoming and The culture is one of wanting to win, wanting to execute and do as well as they can, and we are Sure, benefiting from some of those talent upgrades that we've seen in the recent months and year.

Speaker 6

Helpful. The bigger picture one for you Bill is just as you've gotten closer to the business in this new role, What surprised you most in this first kind of 90 days?

Speaker 2

In terms of surprises, I guess there's a pleasant surprise here. We had the opportunity To take advantage of a couple of tailwinds, every once in a while you get a tailwind. And the important thing for the organization Is to see that tailwind coming and to react. My one of my favorites to your good question Is the way our plant in Mirandola, Italy is running flat out, making every oxygenator that they possibly can remember These are going into cardiac surgical suites and this product is instrumental to people's health and lives being saved. So that's been one nice surprise.

Speaker 2

I've been equally impressed with the effort of Steph's team And the discipline that is now starting to be displayed and this is how we approach our physicians, this is also How we collaborate with physician patient complexity, which is a hard thing for in the revenue production of this product. Those two things right now are probably at the top of the list and I really did want to thank you for the question because we certainly wanted the chance To recognize our Miranda La team because you talk about heads down, you'd have to see this to see the effort that they've made 6, 7, 8 months running now to get that type of remember, you guys know CP well. It's a 5% grower. They've done well. And so I give them all credit for seeing the tailwind and taking advantage.

Speaker 6

Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Adam Maeder with Piper Sandler. Adam, please go ahead. Your line is now open.

Speaker 9

Hi, good morning everyone. Thank you for taking the questions and congrats on the nice quarter. Hey, thanks. A couple from me. Wanted to start on the Adjusted EPS guidance, obviously, a big beat here in Q2.

Speaker 9

You took up the full year EPS guide by $0.05 I believe. So maybe just kind of reconcile that for us and talk about the key considerations or puts and takes and then I have a follow-up. Thanks.

Speaker 10

Sure. So

Speaker 3

I think we feel really good about the first half, but ultimately it comes down to the revenue component. We overachieved for the first half. We do expect volumes to be impacted In the second half, particularly on the cardiopulmonary side with the oxygenator business as we expect So we saw the significant improvement in gross margin in In the first second quarter first half, but we expect to We're not going to enjoy the same level of benefit that we had in the first half. I think that as we look at the investments That we have to make to drive productivity and As well as improve some of our innovation on the core business, we're going to make those investments in the second half. So that will have a bit of an impact On our expenses as well.

Speaker 3

But we've largely de risked The year and that's why we feel good about where we're guiding.

Speaker 9

Okay. Appreciate the color there, Alex. Thank you for that. And for the follow-up, wanted to ask about the RECOVER trial and Specifically the bipolar cohort, you guys had 150 patients randomized I believe in mid Talk about pace of enrollment going forward, when should we start to see interim looks there? And then maybe level set Expectations for The Street, should we expect this cohort to run to the full 500 patients or Do you think we can potentially transition to registry earlier?

Speaker 9

Thanks for taking the questions.

Speaker 1

Sure, Adam. It's Matt. So For bipolar, the interim looks obviously started earlier at 150. Part of that as we assume that the average Follow-up would be a little longer when we got there. But also as you've seen from all the prior data, the bipolar group generally performs a bit better than unipolar.

Speaker 1

So we're expecting there's only about a third of the patients are bipolar, 2 thirds are unipolar. So we do expect it will enroll slower. Our current estimate is about 25 a quarter. So The interim looks this time are going to occur more around the lines of quarterly. And as Bill told you earlier, same as unipolar, it's either going to be Stop early, transition to the Kind of the prospective reimbursement or futility or keep going.

Speaker 1

So no different there. I would say overall our working assumption is the full 500. That will if you look at the 25 a quarter, it will take a while. But as you can see from the public paper that's been published in the past, there are estimates on when the trial potentially could complete.

Speaker 9

Thanks, Matt. That's helpful.

Operator

Our next question comes from Mike Matson with Needham and Co. Mike, please go ahead. Your line is now open.

Speaker 11

Yes, thanks. Just a couple more on Essence. So I guess I was wondering what you're seeing with regard to the Essence Customers either ones who are just trialing it or actually purchased it, how many of those are Kind of upgrades from the S5 versus older units. In other words, do you think this is driving earlier upgrades than what you would have seen in the past?

Speaker 2

Well, we had commented I think in the last call that we had over 7,000 machines that were out there That we're over 10 years old. And so there's been an admitted focus on our part to get back into those accounts. And by the way, no surprise, All of those accounts have some degree of interest. Now as I mentioned a little bit earlier in rest of world, They're more interested in S5 and the availability of essence is just not there right now. We've got our first Kind of replacement focus on the EU and the U.

Speaker 2

S. The sales force goes through just like I mentioned Pretty extensive trial period. We don't have any customers who aren't going to try this on any less And 4 or 5 patients before they'll give us a thumbs up on going forward. And that's where we're at right now In many, many accounts in both geographies.

Speaker 11

Okay, got it. And then I know or I believe Essence is priced at a premium to the 2.5. So is this going to be kind of immediately accretive So gross margin or is it I know sometimes with these new product launches, especially with something as complicated as this, the volumes The production volumes kind of have to ramp up before you start to get a end up with a better gross margin on it than your older product?

Speaker 2

Yes, yes, good question. I think Alex is going to remember this question because I've asked him many times, but let me have him go ahead.

Speaker 3

The gross margin currently on Essence is comparable to the S5. But as we scale the volumes And really start to impact absorption and component cost, The gross margin will improve. So the cost base is higher relative to the premium we're charging for Essence. As we start to ramp the Essence volume relative to the oxygenator mix, it Should have a positive impact on the overall mix of our gross margin profile for the company.

Speaker 8

Okay. Got it. Thank you.

Operator

Our next question comes from Matt Miksic with Barclays. Please go ahead. Your line is now open.

Speaker 8

Hey, thanks and congrats on a really strong quarter here. Thanks.

Speaker 6

A

Speaker 8

couple of follow-up questions, one on epilepsy. You're very welcome, Bill. And one on just kind of your margin and investments going forward. So On epilepsy, just to understand, the programs that were put in place that sort of drove this identification of end of service patients, It sounds like that was part of the positives here in the second quarter. Just maybe some sense of how long that continues to sort of drive those through.

Speaker 8

And then on NPIs, just sounds like that the efforts you put in place there to lift that number Have not yet kind of yet to sort of show a meaningful impact, some impact, but is that a fair statement? And then if so, when do we sort of see that a more significant lift if that's what's to come? And then as I mentioned, I want to follow-up.

Speaker 6

Steph, please.

Speaker 4

Yes. Thanks, Matt, for the question. So if we look specifically at the programs that we've Had in place and have been building on since I would say the back end of last year. So we have the battery life Follow-up program that we're working through and we also have the physician portal that we've rolled out to allow our customers to get a full end to end view, A full cohort, if you like, of their implanted patient database. So we'll continue to see that Ramp up throughout this year and obviously as we move into the future.

Speaker 4

So it's early days and I'm looking forward to coming back with some more Specifics of what that uplift looks like. But at the moment, what the feedback that we get from our customers is that this is very much appreciated. And then when I look forward to NPI, so NPI is all about how we do this in terms of And the rigor that we have in our operating mechanism, and I've seen this already start to read out. The daily, the weekly, The monthly will all lead to the quarterly. And so that really is what we're spending our efforts on is establishing that operating mechanism and ensuring that we start

Speaker 8

Perfect. Thanks. And then Maybe on sort of leverage and sort of investment, reinvestment, if there is to be reinvestment Drop through of the $24,000,000 from the heart failure study. So I think you talked about modest leverage By year end, if maybe you could highlight what some of the puts and takes there are in gross margin and OpEx? And And how are you thinking currently about that the roll off of that clinical program and where that spend goes, The reinvestment or just to further leverage?

Speaker 8

Thanks.

Speaker 3

Thanks for your question, Matt. We did target modest leverage for the year. I mean, when we started this year, we said we're going to deliver modest leverage To our P and L, that remains the goal. Now given the better performance that we're seeing in the first half and how we're projecting The rest of the year. We're taking the opportunity to make some incremental investments in our core business to strengthen Our manufacturing capabilities as well as our IT capabilities, we're also Looking at reinvigorating the innovation programs within epilepsy As well as cardiopulmonary.

Speaker 3

So those are some of the incremental investments we were taking the opportunity to put back in the business To drive future growth and value creation, not coming off our goal to deliver modest leverage. Now your follow-up question on The heart failure program, as I said before, we have about $24,000,000 of Investment plan for this year, about 70% of that occurred in the first half of the year. So we're still on track with the closeout of the program. I feel good about where we are at this point.

Speaker 2

And we will address that heart failure 2024 question as we work through our strat plan and budget And more to come on that over the next couple of quarters. We've got 2 things to do. Number 1, we got to figure out what do we have to still maintain in 2024 specifically to support heart failure. These things are quite never done, done And we want to make sure we've got both eyes on that as we plan 2024. And then we want to take a look at the programs that Alex was Mentioning and the timing of benefit to those as we move into the year.

Speaker 2

But trust me, the heart failure Topic is on our planning and budget agenda and we will not miss it in the next couple of quarters and to be more definitive to your question.

Speaker 8

Thanks so much. Hey, thanks.

Operator

Our next question comes from Anthony Petrone with Mizuho Group. Anthony, please go ahead. Your line is now open.

Speaker 10

Thanks. Congrats on a quarter here and 2 operational and then 1 on the RECOVER trial. Just thinking on cardiopulmonary, You're welcome, Bill. Just on the 7,000 machines 10 years or older, just curious how many of those have actually turned over to Essence, What the economics are around an upgrade as opposed to a new sale and when you think about your competitors being out of the market here for A few quarters, how much share and new sites has LivaNova gained? And then I'll have one on epilepsy.

Speaker 10

Thanks.

Speaker 2

Let me take the share question first. We're trying to chase that down. The answer is we don't know exactly how much share we have gained because a lot of these orders that we're getting are Substitute orders and account gets some from somebody else, they don't get them, we go back in with another order. But it's quite clear from a market that even with Little upturn, a market that was historically growing at 1% is right now, a little more favorable than that. And so that market is probably at 2%.

Speaker 2

We don't have a hard estimate on the share gain. I would probably say it's somewhere in the 2% range of share gain, but I got to tell you that 1% to 3% with 2% is the midpoint. There's no external data On oxygenators or the disposables, the tubing sets. So we can't really give you a hard Fact. On that one, we just know what we're making and moving out the door.

Speaker 2

And Alex, you had

Speaker 3

a Yes. So just to clarify the Full base, Anthony. So 7,000 units out there. We believe that about 40% of those units are Over a sort of the 10 year useful life cycle. So that's kind of the immediate focus.

Speaker 3

That's what we're going after.

Speaker 10

And then operational on epilepsy, mix right now 30% MPI, 70% End of stage replacement patients, where do you think that mix can go over the next 2 years? And let's say NPIs get to, I don't know, 50% mix, can epilepsy be a sustainable low double digit grower?

Speaker 2

Let me ask Steph to come, but I'd like to open up first. We are doing a significant amount of Strategic planning work for the 24 to 26 business plan on that topic. And let me just throw a couple of big questions at you. You've heard these before, But number 1, we've got to understand more deeply, there's 22,000 or more DRE patients coming in every year. Only 8,000 of those people are getting treated.

Speaker 2

So there's some really heavy lifting being done by Steph and her team to say what is going on here, How can it be that these people aren't getting treated? And she's leading a team to really address that. Within that exercise, I'm going to suggest that please comment. Therein lies the answer to this question. Right now today, Tell me, I don't have a view yet on where that can go.

Speaker 2

And so I think a very good question. We're probably a little too early for us To guesstimate or estimate even today, but jump in here please.

Speaker 4

Anthony, I think it's a really good question and one I'm asking the team during our Strategic planning process at the moment as we look towards the future. The one thing that we do know about this patient Population is that when we think about drug resistant epilepsy, it continues to be 30% of this population. So when we look at the treated incidence pool Every year, we are not getting close to treating that incidence on a yearly basis, let alone the overarching prevalence within the market. So that's where we're sharpening our pencils is to understand how we can ensure that more patients come through the right pathway To access the right treatment and we are absolutely one of those treatment options. So it's probably a long winded answer To your question, but it's a well timed question and these are things that we're challenging ourselves currently during our strategic planning process.

Speaker 2

Let me add just a little color and Steph if you want to just so you know some of the work that's going on. Number 1, Steph and team are heavily engaged With multiple key opinion leaders that are out there, these are both epileptologists and surgeons. These are some of the people that I'm spending time with too. Number 2, she has a kind of reenergized department in the area of reimbursement And Healthcare Economics and a team is in place now to deeply analyze how those factors. So we are taking a multi kind of assignment here and really tried to break it down as we move to strat plan.

Speaker 2

It would be, obviously our hope that within that Broad base of work, we're going to find additional insights that take us up the higher performance path, not today though.

Speaker 10

That's very helpful. I'll hop back in. Thank you.

Speaker 2

Sure. Thanks.

Operator

Our next question comes from David Rescott with Baird. Please go ahead, David. Your line is now open.

Speaker 12

Hi. Thanks for taking the questions and congrats on the strong quarter. Maybe first on epilepsy and just diving a little bit more into some of the prior questions. I think broadly across Mentiq, we I've heard about maybe some of these elevated inpatient hospital admission levels and maybe the benefits for epilepsy epilepsy a little bit Further downstream, but you've also made some of the changes or investments on the sales force side. So I'm wondering if you'd be able to maybe parse out at least What the relative contribution in the quarter or the first half of the year at least have been maybe from that broader kind of Recovery or backlog versus the Salesforce investments.

Speaker 12

And then I guess just based on that response, if it is maybe more Salesforce driven, Is that something that does or potentially could accelerate in Q3 and into the back half of the year?

Speaker 4

I think David, if we could take that in 2 parts, I'll let Matt answer in regards to utilization. I'll answer first in terms of sales force execution. So something that we've spoken about at length in the past is our go to market So I'd like to make a few comments about that, if I may. So we have overall 19 designated go to market territories. And we see the performance of that group in line with our base business.

Speaker 4

However, we have 4 open territories. And so part of my job I think coming into this is to dig into this to look at the strategy. And about 15 fully staffed Go to market territories, we see an outperformance both in the quarter and also in H1. So we continue to be committed to that strategy. And we're also going to be having 2 more operational territories in Q3.

Speaker 4

So I think we can For sure say that our strategy around working with our customer base with this current sort of direction of travel is the right one. Matt, can I hand to you for the overarching?

Speaker 1

Sure. For epilepsy surgery, a couple of things I'd say. We track now the EMU capacity. In the second quarter, it was about 85%. That was similar to what we told you in the Q1 and that was up from the Q4.

Speaker 1

There's a 6 month lag, so that's encouraging, but it didn't improve From the last quarter. And then I'd say in terms of overall neurosurgeries, which is where we primarily have our implants, I'd say anecdotally slightly better, but nothing stood out as being like a meaningful change in capacity For OR scheduling in the quarter.

Speaker 4

Thank you, David.

Speaker 6

Okay, great.

Operator

Our next question comes from Michael Pollock with Wolfe Research. Michael, please go ahead. Your line is now open.

Speaker 6

Thank you for taking the follow-up. We get an update on Italy, please? Any change to timing about from the European Court of Justice and expectations for, say, mid next year, for the Supreme Court to weigh in?

Speaker 2

Yes. Here's the latest that what we've got. While the timing of the decisions by ECJ and And then subsequently, remember that goes back to the Italian Supreme Court. It's just it's uncertain. We don't have specific information to share.

Speaker 2

We do not anticipate nor should we anticipate any final decision until at least 2024. We're still carrying the cash burn. To finish off the question, it's on SNEAA, it's about $15,000,000 to 20 $1,000,000 a year, that's all inclusive legal fees and cost of guarantee. So we have our eyes on it. We continually pay attention.

Speaker 2

Our General Counsel is highly focused on this particular activity. And All we can offer you right now is that we are going to obviously we're going to keep you informed.

Speaker 6

Thank you.

Speaker 2

Yes, thanks.

Operator

Our next question is a follow-up from Anthony Petrone with Mizuho Group. Anthony, please go ahead. Your line is open.

Speaker 10

Thanks. Appreciate that. Just had a follow-up on RECOVER Just as it relates to unipolar and the duration of treatment effect and just looking to Sort of clarify a few points there. So obviously, we have a 12 month endpoint on improvement in Modris scores. But when you look at the enrollment cycle, it dates back to 2020, 2021.

Speaker 10

So in theory, there are patients in there that have You've been on treatment 24 months, potentially longer than that. So what has been the overall dropout of the study? And when we look at just the average treatment duration of the patients enrolled today, where does it sit? And probably the better question will be where does where will it sit? It'll come March 2024 next year Ahead of the final readout.

Speaker 10

Thank you very much.

Speaker 1

Sure, Anthony. So if you just look at Yes. The overall numbers, the dropout rate, the published paper, we showed scenarios between a 20% dropout, 10% dropout. We said in the past nothing's changed. We're well below the 20.

Speaker 1

So nothing to read into there in terms of any issue with dropouts. In terms of percent completion, that number, it's really based Don, I'd look at it as scores. You look at the number of patients that have been implanted, each one gets 10 scores. It's a matter of what percentage of Scores we have and as you can imagine since we're now in the final follow-up that percentage has gotten quite high. So there we still we're blinded and won't see the data until May of 2024.

Speaker 1

But in terms of overall scoring, we're pretty far along. And I think to your point, full dataset In May of 24, we'll analyze everything. There's 13 total endpoints. Time and response is the primary.

Operator

Our next question is a follow-up from David Rescott with Baird. David, please go ahead. Your line is open.

Speaker 12

Hey, Agai. I think my follow-up question might have got cut off, so I'll ask it again. But just It was on kind of the bigger picture. When you think about the overall portfolio and CP and neuromod kind of have these Durable growth drivers here, newer market opportunities with OSA DTD longer term and then there are some Segments that are a little bit profit dilutive. So I guess kind of thinking about this near and longer term view and how you think the Portfolio of the company shapes up over time, I mean, how do you think about prioritizing maybe those investments at least relative to these 3 or 4 different kind of potential drivers or shifts within the portfolio overall?

Speaker 12

Thank you.

Speaker 2

Sure. Let me take a shot at that. As you said, the SPIs were fully committed to, they're fully funded And with the open understanding that heart failure has stopped, DTD and OSA continue to go forward. What Alex mentioned and it's worth maybe restating is that we know that we want to create some iterative And impactful innovation within the core product portfolio of both CP And epilepsy. And we are starting to build out that capability on both sides.

Speaker 2

You might recall at the last meeting I had mentioned, let's take epilepsy as an example, we talked about a 2 day technology strategy and planning being to be held in Houston. Steph and her team and several of the senior managers were there. And the purpose of that was to start to further develop Kind of view with that core product innovation portfolio for the epilepsy business. We've got that activity going on in the strat planning process across the company. That's being backed up by the modest investment that Alex mentioned so that we can get that work started in 2023.

Speaker 2

That's where our head is. And in terms of a fundamental strategy to ensure, Number 1, high customer acceptance, improved and better products, that's where we'll continue to go and that's on both sides.

Operator

Those are all the questions we have time for today. So I'll turn the call back to Bill Cozzi for closing remarks.

Speaker 2

Thank you, everyone, for joining today's call. On behalf of the entire team, we really appreciate your support and interest in LivaNova, and we'll look forward to speaking more. Thanks.

Operator

Thank you everyone for joining us today. This concludes our call. You may now disconnect your lines.

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Key Takeaways

  • LivaNova reported 16% revenue growth in Q2 2023 to $294 million, driven by strong cardiopulmonary and neuromodulation performance across all regions.
  • The cardiopulmonary segment delivered 21% sales growth to $151 million, led by mid-teens oxygenator growth and over 30% heart–lung machine growth, and full-year guidance was raised to 11–13% constant-currency growth.
  • Global epilepsy revenue rose 14% with 838 new patient implants (+13% YoY) and 947 replacements (+8% YoY), leading to an updated 2023 growth outlook of 6–8%.
  • The ASC segment was flat year-over-year, and strategic initiatives advanced with completion of 500 unipolar enrollments in the RECOVER DTD study and full site activation in the OSPREY OSA trial, while heart failure R&D spend remains ~$24 million for 2023.
  • Full-year guidance was raised to 8–10% constant-currency revenue growth, adjusted EPS of $2.55–2.75, and free cash flow of $85–105 million, reflecting strong first-half execution.
A.I. generated. May contain errors.
Earnings Conference Call
LivaNova Q2 2023
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