LivaNova PLC (LIVN) Earnings Call Transcript & Summary

Great. Good morning. Thanks for joining us for our next session here at the UBS Virtual Global Healthcare Conference. I'm Matt Taylor, UBS' U.S. medical supplies and devices analyst, and I'm really pleased to be joined by management from LivaNova. So today, we're going to have on the line, Damien McDonald, the CEO. We also got Thad Huston, CFO; and Melissa Farina who leads the IR function at the company. So a lot of opportunity to get insights from assortment of members of the management team. And as everybody knows with these sessions, it will be about a 40-minute Q&A, fireside chat. And if you want to submit questions, you can either e-mail me or push them through the webcast application.

So maybe just to get started, I'll kick it over with a bigger picture question and ask you guys to talk a little bit about the trends that have been driving your business, let's say, pre-COVID first. Can you talk about some of the areas of the business that have been growth drivers for you and some of the product lines that you're most excited about it? And then we'll get into sort of what's happened with this disruption.

Well, Matt, first of all, thanks for having us and still being able to go ahead with the conference virtually, nicely done. I've got a few of the team here with me. So we'll bounce around on this. But look, what we're very excited about. I think coming into late Q1, we were seeing some very positive trends in the 3 growth drivers. Epilepsy was running well, right to plan for our first quarter, which was terrific, right up until the last couple of weeks of the quarter. We were seeing international, very strong. And we saw early signs of COVID there, but international was still going well. And particularly, the TandemLife business, ACS. So all 3 of our primary growth drivers were really running well as we were heading into the end of Q1.

Got it. Okay. And on the call, and maybe we'll start to talk about the outlook. You actually gave guidance. A lot of companies did not do that, you gave a wider range. I was hoping you could talk about that decision and then some of the key factors that you thought about as you gave that range for the year?

Yes. That was a big decision for us and -- but we thought it was important. Look, we're a public company, and we thought it was important to provide as much transparency as possible. It was our best estimate of how we viewed things going out. But we also knew we'd be answering a lot of questions with investors in the sell-side about what we expected for the rest of the year. And we thought the best way from a regulatory disclosure point of view was to explain the rationale behind our forecast and be a bit transparent. I think the Reg FD world is a really fine line, and we wanted to err on the side of transparency. So that's really what led us to releasing the guidance that we did. We thought it was important. Upsides and downsides. I think like everyone, you probably had a bunch of people talk about these sorts of things. We don't assume that we've got a second wave of infection in the fall or winter so that's not included in our forecast. Things that I think are also important for us are the timing and the regional restarts of elective surgery. I mean we are monitoring our business weekly with each of the regions, very granular discussions. Hospital access, I think is an important factor and how hospitals reengage with the industry. I will say I'm really pleased that there was a press release yesterday from the AHA, AORN and AdvaMed about how health care facilities and medical industry reengaged. I think that's going to be useful because right at the moment, it's very bespoke. Where surgical capacity comes back on, we are essentially -- some of our primary growth drivers like Neuromodulation in epilepsy, we're an outpatient procedure. So we think we have a real opportunity to help people get back into the system and still not put a burden on the main hospital. And I think if you look at our business in cardiopulmonary, you've got the uncertainty around capital budgets. A heart-lung machine is less than a lot of other capital but nevertheless, I'm sure we're going to be having very robust discussions around HLMs, but I think they are the factors that you can think about.

Okay. And then maybe you could talk a little bit about any of the recent trends that you've seen. There's obviously a lot of heterogeneity. But can you give us any color on what you're seeing with your global business in different geographies or different areas?

That's a great word, heterogeneity. That's definitely a great way to describe what we're seeing. Look, I think there are very significant differences regionally. We are seeing some interesting rebound in China, although China is a small part of our revenue stream that we're seeing China starting to return to normal, and that's doing well in Europe. We see Northern Europe, Germany and the North coming online faster than the south. Although even in the south, there's vast differences between Northern Italy and Southern Italy. So we're seeing green shoots in Europe. In U.S. is where we saw the largest decline in our elective procedures in the second quarter. And again, very much a state-by-state, hospital-by-hospital build up there, but in some states and hospitals, we've seen a very solid end of service business, for example. In others, we're still waiting to restart. So I think little by little, we're starting to see green shoots, but it's still early, and there's a lot of heterogeneity, as you say.

Okay. Okay. All right. So maybe one more sort of on this transition topic. I was wondering if you could help us understand how the funnel of patients gets refilled in some of the different businesses. Maybe focus on neuromod because that's where you have a really important growth driver and one where you're doing some of the driving with advertising, with connection, with customers and patients. What kind of visibility do you have there? And what efforts are you making to reach out to those patients?

Yes. That's a good question. So I'll just focus on that. So Neuromod is -- I'll talk particularly about the U.S. first. The business is weighted end of service versus NPI, so there's a majority of our procedures are the end of service. And we've seen a more solid end of service than NPI. And I think that's important. We've had a lot of opinion leaders, a lot of our customers, clinicians saying that an end of service is not an elective, this is a must do. And so the end of service has been more robust. And we've started filling that pipeline. Similarly, as we've been out in using our case management group to talk to patients, we are encouraging people to step back in. Again, I think a really big plus is that we're an outpatient procedure. It's 35, 45 minutes for replacement. It's maybe an hour for a new implant. So we have, I think, an opportunity to help people be treated but not exposed to the broader system for long. We also, I think, importantly, we have a device that can be titrated without multiple visits to the hospital. The SenTiva product has an auto titration device that allows patients to be titrated up over a series of weeks, without having to come back every 2 weeks. So I think our value proposition has been strong as we've started to talk to people about reentering the pipeline. So I think a piece of work there that is ongoing. But nevertheless, we're starting to see the green shoots. Internationally, I mean, one of the things that I think was important a couple of weeks back is that Germany and the U.K. were definitive that end of service, battery replacements for devices like this were not elective. And that enabled us to start rebuilding the pipeline in there a little quicker so green shoots.

Okay. Great. Let me transition. I want to talk a little bit about the pipeline and especially because you press released today that there was a new study showing significant positive impact of VNS Therapy for patients with treatment-resistant bipolar depression, and obviously you've got the RECOVER trial that's ongoing. So I was hoping we could spend a few minutes talking about this because it's an important pipeline program for the company. Can you talk first about the study, what you saw there and the importance of this data?

Sure. Yes. I think this is really exciting for not just us but importantly, for patients with bipolar depression. It's fabulous to be able to have such a long-term study show incredible benefits. So the study is a large follow-up. There were -- back when we talked about the Aaronson paper originally with the work predominantly on the unipolar population, we said that over a period of over several years, these patients were tracked. And then, we were able to use that data set to really mine for the unipolar patients. What we haven't talked about as much is the bipolar patients. And this study shows that there is a significant difference in response between treatment as usual with a cocktail of drugs and VNS. So the treatment is usual group, 39% response; the VNS pool is 63% response. And that's important. But what's as important is the patients responded faster. That was a more durable response and that importantly, there was a reduction in suicidality, which is a very big part of the bipolar population. So we're excited because I think it helps support the narrative and candidly, why we're investing so much in the depression thesis.

Okay. Great. And then maybe you could just also dovetail that into RECOVER. Talk about the current state of that, your expectations for that to resume and get to a point where we can actually start talking about the data.

Sure. Well, there's -- the 2 arms, the unipolar and the bipolar arm. We said in the earnings call that what we expect is a 2-quarter delay in getting to our 250th patient, which is when we can start really looking at the data. And so we now forecast that will happen around mid-2021. And that the overall time line shift by 2 quarters. So we're working towards a shift to the registry by late '22. Now what are we doing in the meantime? We obviously are not enrolling patients. But what we are doing is making sure our site activation activities continue rapidly, and that's what the team is very much focused on as well as working to fill the funnel of potential patients who can get into the inclusion/exclusion workup. And so the team's been very active in those 2 states to make sure we continue to work on patient funnels and the site activation. But we are, again, very, very bullish about this and continue to believe this is a really important part of the long-term growth profile of LivaNova.

Got you. Got you. Okay. And then final one, I'll ask on this. I mean you talked about the Aaronson's paper. This adds to the body of evidence there. I mean do you think this is an important tipping point for some physicians? Or would you describe it as more additive? And maybe just talk about the total body of evidence that you have now, including this, to support the structure and goals of your trial.

Well, that's a great question. We really believe this is beyond additive. I mean it's a strong signal that this works even in the very refractory patient sets. Bipolar is a difficult disease to treat. These patients are enormously -- having enormous disability and being able to show that there's such a long-term benefit is, I think, really important. This is still early days in our move here. I think -- I hope what people see is this is an increasingly important part of their armamentarium. I hope this signals to people that they should be considering patients more aggressively for the trial, and this is going to be an important part of our conversation over the next 12 weeks as we look to reopen the sites and get recruiting again. That here is an opportunity to really make a difference. Even the SAM-controlled parts of the study, these patients definitively get the product that turned on at 12 months. So we think this is a really important signal.

Got you. Okay. All right. Let's transition and talk about some other areas of your business. I'll start with cardiopulmonary. You touched on it before with some leverage to capital there. Could you dive into that a little bit further, talk about the late-stage replacement cycle that you're in for the heart and lung machines? How that could be impacted in the short-term? And then, maybe cover the product refreshes that you're working on there, and any detail that you can provide?

Yes. I think -- so we always expected the biggest impact to be in Q2. And we're certainly seeing that in terms of how sales are following through. And we expect that will gradually ramp out. The thing for us is the nonemergent surgeries will bounce back quicker like the valve repair or replacement or coronary bypass procedure will cover -- recover more quickly than electives. So I think that will support things like the oxygenators for those procedures. For HLMs, we forecast a slower recovery based on what we believe will be challenging capital budgets. As I said, they're not that expensive relatively. But I think capital overall is going to be challenged at all levels. And so I think for us, and we forecast that in our guidance that the HLM would recover slowly. Now just to put it in context in our cardiopulmonary business. If you break it up, it's a roughly 30% HLMs, 50% oxygenators and the remaining 20% is sort of ATS and cannula. So we took that into account in, again, our best estimate in our guidance. ACS, on the other hand, we continue to see really strong demand. We forecast originally 20% growth for the full year, but we're now looking at more like 30%. We really like the tailwind of the market here. This is going to be really interesting. All geographies, I think, reassess their stance on respiratory distress syndromes and how to deal with that. We think the ECMO business is going to have a tailwind that will support the release of LifeSPARC in the second half.

Got it. Yes. Yes, so let's talk about that again for a minute. So you mentioned the 30% growth. How does the rollout of LifeSPARC contribute to that? And can you just touch on the enhanced features that LifeSPARC offers?

Yes. So the forecast we put out includes the LifeSPARC launch. We've been constrained by not having controllers of the old model available. So we've been in just an account penetration mode for the last 6-plus months. With the release of LifeSPARC, we'll be able to start acquiring new accounts. And we know we're significantly underpenetrated there. I mean the other players in the market, I think, have released significant amounts of data about the number of accounts they're in. We know that we're in significantly less. So we think we've got a great opportunity here. What's important about LifeSPARC is it's completely new technology in terms of the controller, the ability to be mobile and have a patient that's ambulatory, I think, is really key here. These patients need to be ambulatory as soon as possible. And we've got a device that allows that to occur. We have a product, the pump has a new technology that causes less problems for the blood flow as the pump is working. And importantly, I think the flow rates are significantly better for our product versus some of the other offerings. So I think overall, we're going to have a quiet mobile pump that allows patients to be ambulatory.

Got it. Got it. And then going back to HLM, the second question I had on that one was, in the past, you've talked about the refresh for it, being a little bit vague for competitive reasons, I think. But can you just talk at a high level about what future versions of that system could offer generally your philosophy about refreshing those?

Yes. I think the way we were talking about this is we're probably going to delay the program by 6-plus months. It's going to be largely related to the fact that we have third-party suppliers and partners who are delayed in their ability to deliver things. So our next-generation fully launches in 2022. What we're looking to do in the meantime is continue our S3 to S5 upgrades, which have been successful in the last 24 months; looking to continue our expansion in the rest of world region with new accounts, where again, which has been a major driver and also, with competitive wins. The other aspect that we're exploring, given the COVID delays is whether we break the upgrade into components and can start the upgrade cycle in components, thinking about data management and the main system separately. So I think more work to be done there. But again, we remain bullish about the importance of this program and our ability to have this as a long-term driver for us.

And then just to round this out, can you talk about the trends in the oxygenator portion of the business? I know you have been getting some pull-through there. Is that continuing? And what kind of disruption are you seeing in that because of COVID?

Yes. So well, apart from the elective procedure and the way procedures have dropped overall, so that's sort of ex-COVID. We, again, had seen above-market growth in this business. The thing that was constraining us, and we talked about this a little while back was the component supply. We believe this is not unique to us, but oxygenated components in general. So we'd like to get this back to an above-market trajectory, and I believe we will. We've seen significant improvements in our on-time delivery and our capacity over the last 6 months. And I give a big shout out to my logistics and procurement teams who have worked well with our suppliers and the manufacturing facilities to keep this going through the crisis. It's been a remarkable effort by our teams.

Yes. I'd just add, it has been really remarkable that despite the COVID crisis that we continue to have adequate supply for our products and even in spots like Italy, our employees have done a fantastic job of keeping the lights on and keeping supply going.

Yes, it really has been. Have you had to do anything extraordinary there to maintain that? Or is that just been the natural resilience of the supply chain?

I think it's enormously related to our teams. We started to see the impact, I think before a lot of people, because 2 of our major facilities are in Northern Italy. And what we learned there early, we were able to translate and replicate around to all our other plants. We've had incredibly, given that we are near the epicenter of the outbreak in Europe, very few infections. The last one where we had a symptomatic person from detection to reopening, that part of the facility was 17 hours. And we, again, are hugely grateful to our employees who've worked through this. We've made changes in how people work obviously. We've made changes into our capacity planning. We've taken advantage of programs that have been offered, that makes sense for our workforce in a particular geography. And all of those things, I think, have really made sure that we've kept all of our employees safe, but at the same time, keeping our supply chain going. And we've seen actually an improvement in our on-time delivery through the crisis.

Got it. Okay. So a few other things I wanted to cover with the time that we have remaining here. I mean one was if we could just touch on the pipeline again and talk about, I guess, firstly, the ANTHEM-HF trial, and you've had some data presented, I guess, the last couple of ACCs. Can you talk about the data that you've seen so far, what you're encouraged by? I would also love to hear some thoughts about the rationale behind using autonomic regulation as a treatment for heart failure just because I do get that question a lot from investors. So maybe you could -- maybe you could talk about that, too.

Yes. And this is where you get Bruce and the team with their 400 slide-so decks. They have enormous capability, and I really love this team and how enthusiastic they are about this therapy and this disease state. So we've been looking at this obviously for a very long time, but it was really the post-merger structure of the company that allowed us to fully fund the ANTHEM trial. And then I think, importantly, the unmet need here is so great. And I think the fact that our technology is safe and has been implanted in over 100,000 patients, got us to the point with the FDA where we got expedited access pathway for the study. And I think that was based on: a, the safety and manufacturability; but also, the fact that the pilot study had such great results. We presented 3 posters at ACC in March 2019. And that really got to the long-term follow-up, the 30 and 42 months. Then we had 2 additional papers presented at ACC this year, really looked at the rationale for this study and showing the long-term benefits. So what's the rationale? So think about this, that we know that chronic heart failure is associated with a dysregulation of the autonomic nervous system. And it's a balance between the parasympathetic and the sympathetic system. And what happens in chronic heart failure is that balance gets out of whack. And once it starts being imbalanced, you get the heart failure progression. What the autonomic regulation here does with our device is it increases the parasympathetic activity, which basically decelerates the heart function and brings the balance back in, into a more normal state. So you get this cardiovascular activities to get rebalanced because of the parasympathetic activity increasing. And again, I think we've got a large patient cohort where this is applicable. And again, the ANTHEM pilot study showed great results and we're really excited about being able to push this to its conclusion of the first 300 patients, which will look at the secondary end points of the embedded end points. And then the longer-term end points, which are mortality and hospitalization.

Great, great. And then just to dovetail on that. Why don't you talk a little bit about the market opportunity that you see and how this could compare to some of the other therapies that are out there for heart failure?

Yes. So I like this -- again, we like large, relatively uncontested markets with huge unmet need. And back to this device. We know how to make it so we've established safety and manufacturability. This is really about the therapeutic application in heart failure. And we think that there's a large patient population where this will be applicable, let's call it, roughly $3.5 million in the total U.S. population. You then scale down because you want the Class II, Class III patient set, the ones that are eligible for VNS because their ejection fraction is greater than 35%. That sort of gets you to like 1.5 million patients. And then there are subsets of that depending on co-morbidities. So we think that there is a huge population to support here. To put it in context. Of those 1.5 million patients, our current epilepsy business is based on 5,000 new patients a year. So -- and I think everyone's aware that this is a -- the gross margins on this are very, very high. So we think from a revenue opportunity, there's a large patient set. From a gross margin opportunity, this is enormously important for what we think is the long-term value creation for the company.

Got you. Okay. All right...

I'll just add to that. I mean one of the things that's really great about also just having this as a platform for us with VNS therapy is we can leverage our manufacturing capability, we can manufacture -- or leverage our overall management structures. But then, yes, we would have to invest in a new call point but we can take all this large patient pool and data, and safety information, and just develop another indication.

That's a great point. How do you think -- just on the gross margins obviously that could depend on reimbursement. Could you talk about the pathway there, assuming that you do have good results from the trial?

Well, I think, again, looking at our profile, we're tracking pre-COVID at around 70%. When we started our journey with all of you, we were at 63%, we got to 70% just prior to COVID. And we believe that there's still significant runway to north of 70%, and I think we've talked about benchmarking 75% plus. And if you look at all of the things we're focusing on here, the Neuromod expansion in the therapeutic areas, the TandemLife portfolio, all of those things are at greater than our fleet average. So we think in terms of gross margin and financial health, these are very, very important growth drivers for us.

Well, what -- sorry, I mean what about for the ANTHEM specifically? I guess, I was wondering I mean obviously that delivers significant benefits. You'd have a strong argument for that. But what do you think the pathway would be for reimbursing that as a new therapy?

Well, there's 2 states. One is you've -- you can use the existing code or the alternative is to seek a new code specifically. Honestly, we're still a little way away from needing to make that call. I mean we've got decisions to make around filing and going commercial after the first stage versus waiting for the end -- the primary end points. And again, there's an analog for that. That's what the COPD devices did early. They released on the secondary end points and then continued to work towards the primary. So those are really important commercial decisions we're going to make in the next year or so. But we believe that the reimbursement profile for this will be very positive.

Got it. Got it. Okay. All right. So let's talk a little bit more about margins and the balance sheet. We covered gross margin to some degree and I guess, I'll start with -- you mentioned on the call that you were looking at potentially doing some kind of arrays, could include debt and equity-linked things. So maybe we could talk about the current strength of the balance sheet. What you're thinking behind doing a raise and what you're looking to use the capital for?

Thad, you want to take that?

Absolutely. We've had a strong balance sheet. And as you all know, we have been dealing with or addressing the 3T liability. And again, that caused our debt levels to go a bit higher. So the first step for us was to amend the covenants, which we did, which will run through the next year and gives us, I think, enough room for the next 15 months. We also had $126 million in cash at the end of the quarter. And we added a $24 million facility from Barclays. Like a lot of companies in the medical device space though, we have been looking at options to just further improve our liquidity. We have, and we highlighted that we were evaluating just different strategic financing alternatives to fund the short and medium-term, long-term capital needs. And we were looking at all different instruments. And again, we've really appreciated the feedback from investors since we announced that in Q1. And I think we have a very clear plan now in place to start to get some of these facilities in place. And a lot of that will help us, again, minimize the covenant restrictions that we would have in 2021, but also provide liquidity and certainty during an uncertain time.

Got it. Got it. And what about other opportunities for capital allocation going forward? I know at this point, you want to be prudent, but assuming we do see recovery, can you talk about your priorities, let's say, in '21 and '22?

Yes. I think we definitely want to be prudent during this time, and things start to really improve and ramp back up. We have been very focused on the 3 priorities that Damien mentioned at the beginning of the call, getting epilepsy up and running to the growth rates that we expect, investing behind TandemLife and ACS. We think that's a tremendous opportunity as well as the global expansion opportunities. And so we've been investing in all those as well as investing in our pipeline. So we're not necessarily looking to add another big deal at this point, just given obviously the focus and I think the exciting pipeline opportunities that we already have. But we definitely will come out of this stronger than we were before.

Got you. The last pipeline opportunity that we haven't talked about, is I was wondering if you could give us an update on the sleep apnea program that you have and when that could actually get going?

Yes. I think, again, that's another important way for us is to get that into the market. We've concluded the THN3, the pivotal there. The results aren't exactly where we want them. In the previous group that we're running at, I think, didn't have as robust a process for titration and patient inclusion that we anticipated. So we've got work to do there, and we've talked about those rigidities before. So we'd like to get a conversation with the FDA completed, so we can figure out what a confirmatory trial looks like. I mean we really believe in this market, we think sleep apnea is an incredible opportunity. We think we've got a great device. And more importantly, a broader base of technology to continue to invent into that market. So we would love to be able to get a trial kicked off and do a short confirmatory trial starting at the end of this year. So largely dependent on our ability to move that forward with the FDA. But I think importantly, we've talked a lot about pipeline. We think that there are a lot of value-creation opportunities. I mean in the near term, I mean, we've taken significant cost and cash actions to ensure we're strong now. But also, we've tried to retain the context of the long-term growth drivers and the value creation opportunities. And I appreciate we've had a lot of chance to talk about that. And our intent is that coming out of this that we're a stronger and better LivaNova.

Great. Yes, thanks, both for the thoughts on that. And talking about coming out stronger. I guess I was looking to understand some of the silver linings from this. Are there aspects of your business that you think will change, in terms of how you go to market, how you reach customers? And are you seeing any opportunities with regards to different ways of doing business or changing your footprint that could actually lead to productivity improvements or margin improvements in the future?

Well, I think this is -- never let a good crisis go to waste, right? And this will ultimately allow us to drive more change, continue our transformation. I think we've talked to you all about this journey we're on about transforming the company. We're continuing to focus our implementation of the LivaNova business system. I think we've done some really interesting things over the last 6 to 8 weeks around how we engage with physicians and patients. We've developed and executed plans around how we hold virtual events, how we reschedule, cancel procedures, how we refill patient funnels. We know we've done a ton of training for our commercial team so that when they are back to full productivity in the field, that they're able to be stronger around product and procedure. And I think these things are going to show how you can be effective without having people sitting on airplanes or having to congregate, and this is going to be important for us. And I think I've really been impressed by both the customer engagement and the thousands of people that we've run programs with over the last 8 weeks, but also the commercial team engagement. And again, I'll give a big shout out to them and their commitment to our customers and patients because without that, we'd be in a very different place. So I think this is going to be a really useful opportunity for us to ensure we're thinking differently about how we go to market.

Yes. I would just add as well, we've been really incredibly focused on, again, being very thoughtful about investing in the short-term and long-term, but also making sure that we're prioritizing or spending appropriately on the things that really drive incremental long-term value as well as just an increased focus on just cash and cash conversion, and obviously really thoughtful working capital. We've been focused on it. But again, the whole organization, given the situation, is just really ramped it up.

Great. Well, I think that's a good place to stop the session. We're out of time, and we covered a lot of topics and got some great details from me. So I really appreciate you joining us and given all the investors on the line and update, I know they appreciate it, too, and wish you all the best of luck as you move forward through some challenging times.

Well, Matt, thanks for hosting us and for all of you that made time, we appreciate it. And look forward to the follow-up calls. Matt, good luck with the rest of the conference.

Thanks, Damien. Thanks, Thad.

All right, thank you.

Thanks. Cheers. Take care, guys.

All right.

Thank you.

Thanks. Bye.