LivaNova PLC (LIVN) Earnings Call Transcript & Summary

Welcome to the 2021 LivaNova Investor Day presentation. We're glad you've joined us. Please see the following cautionary note on forward-looking statements as well as notes on IP and non-GAAP financial measures. [Presentation]

Good morning, and good afternoon to our investors and analysts joining us from around the world. I'm Damien McDonald, and I have the honor to serve as the CEO of LivaNova. It's my pleasure to welcome you to the 2021 LivaNova Investor Day. I'm excited to share our financial outlook as well as some aspirational growth plans around our strategic portfolio initiatives. Today, you're going to hear from our business segment leaders, patients and key opinion leaders on our device and therapies that treat the head and the heart, and the continued innovation that moves us forward. We hope that you walk away from today's event with the same enthusiasm as we have for what lies ahead, not only today but over the next several years. Before we look ahead, allow me to take a moment to remind you of how far we've come. It's been 4 years since our last Investor Day event. And since then, a lot has changed, not only in the world around us, but also at LivaNova. Since our last Investor Day, we received FDA approval for the current generation SenTiva VNS Therapy System, which led to several quarters of strong growth in this business. Despite COVID-19's impact on nonemergent procedures since early 2000, we've continued to advance our commercial strategy to positively impact the underserved drug-resistant epilepsy population in comprehensive epileptic centers or CECs. We've also executed and integrated 2 acquisitions at TandemLife and ImThera. In 2018 TandemLife, our advanced circulatory support or ACS business, has delivered a 41% CAGR since the acquisition supported by the full commercial release of LifeSPARC, our next-generation pump and controller system. With ImThera, we added hypoglossal nerve stimulation to our portfolio of neuromodulation for the treatment of adult patients with moderate to severe obstructive sleep apnea or OSA. Since the acquisition, we've enhanced the system based on both patient and physician feedback, which you'll hear more about later today. On the other side of the ledger, we divested the Cardiac Rhythm Management and heart valves businesses in 2018 and 2021, respectively, demonstrating our commitment to regularly review and optimize our product portfolio. On the clinical side, we initiated 3 major randomized controlled studies that target medical conditions with significant unmet needs. Specifically, difficult-to-treat depression or DTD, heart failure and OSA. This group of strategic portfolio initiatives or SPIs, as we call them, is LivaNova's future with any one of these opportunities being significantly transformative. Our product pipeline is diverse and has multiple drivers for growth and margin expansion, ultimately driving cash generation. More recently, the COVID-19 pandemic presented operating challenges for both the global economy as well as LivaNova. Many markets around the world function unevenly or shut down for varying periods of time, a dynamic that continued through 2021. In response, we've undertaken several actions to shape our portfolio and structure the organization to ensure the company remains well positioned to serve our patients and drive shareholder value. Throughout this period, we've maintained over 3% CAGR on the top line, excluding heart valves, improved gross margin by 400% basis points, and significantly increased R&D investment to support our SPIs and the development of our next-generation HLM. The foundation of our core businesses being epilepsy, CP and ACS, support investments into our SPIs. That said, LivaNova is nearing a critical inflection point as we approach the data readouts for these initiatives. For those of you newer to the LivaNova story, I'd like to provide you with a high-level overview of who we are. We are a med tech innovator where our mission is to provide hope for patients and their families with the ultimate goal of improving quality of life. Today, LivaNova has a diverse portfolio of products with 55% of our sales in cardiovascular and 45% in neuromodulation. Headquartered in London, we serve patients in over 100 countries worldwide with approximately 3,000 employees, 10% of whom who are engineers scientists, medical professionals. I'm proud to say that throughout 2021, our talented employee base has demonstrated growth and collaboration, showing high trust and respect for each other, unified in our mission to transform the lives of patients and their families. Notwithstanding the critical developments over the last few years, our product portfolio remains focused on devices and therapies that treat the head and heart. For the head or neuromodulation, our VNS Therapy platform has been implanted in over 125,000 patients over the last 25 years. For the heart, our cardiovascular portfolio includes a broad range of cardiopulmonary and advanced circulatory support devices. We're treating a variety of disease states with these products that can be found in for rating rooms, primarily used in cardiac surgery. The markets we participate in are significant and growing, and we have a strong leadership position in many of them. Our innovative and differentiated products and therapies have very specific patient and physician benefits, providing us a strong foothold in several areas and creating significant barriers to entry for competitors. One of our primary objectives for today is to provide you with a detailed understanding of our commercial strategy, including our financial outlook, underpinning how we plan to create value in the next chapter of LivaNova's journey. Over the next 3 years, we see numerous opportunities to drive shareholder value by: one, executing on our core growth drivers; two, delivering on our extensive clinical product pipeline opportunities through the achievement of significant milestones; and three, improving profitability and cash generation. This is what we refer to as the strategic triangle, and execution in these 3 areas will ensure we are well positioned to realize the full value of our diverse portfolio and strengthen top and bottom line results for years to come. Today's financial remarks will triangulate back to these 3 areas of focus. In summary, I'd like to leave this part of the session with 3 key messages for today. First, we have a growing and highly profitable core business. Next, we have 3 exciting transformational pipeline opportunities that we'll start reading out in 2022. And finally, we are reinforcing our commitment to growth and operational efficiencies. As part of this commitment, today, we are announcing a new operating structure featuring 3 business segments, namely neuromodulation, cardiopulmonary and advanced circulatory support. This structure enables a greater accountability with full P&L ownership and improves our operating efficiency. Today, you'll hear from several members of our business leadership team. I'm really proud of this team that are here with us today, and I'm expecting a lot of really great questions from you. They each bring deep and varied experiences and a collective passion to our company. We'll kick off today's program with a presentation on each of our 3 core businesses, specifically epilepsy, cardiopulmonary and ACS, followed by a 15-minute Q&A session. We will then take a 10-minute break, and we'll resume with a session on each of our SPIs, specifically DTD, heart failure and OSA, followed by a second Q&A session. After this, our CFO, Alex Schvartzburg will provide you with our financial outlook. For analysts dialed in today, we kindly ask that you reserve the financial questions for our third and final Q&A session following Alex's remarks. And with that, it's my pleasure to introduce Chris Hartman, who is our General Manager of Epilepsy sales and marketing for North America. Epilepsy remains a significant opportunity where we have the ability to transform the lives of patients with drug-resistant epilepsy. Our progress in epilepsy is bolstered by our go-to-market initiative, which Chris will highlight in further detail. I'm excited to have Chris share what's ahead.

This is Chris Hartman, and I lead the North America commercial team for LivaNova's vagus nerve stimulation, or VNS franchise that is focused on the treatment of drug-resistant epilepsy, also known as DRE. I have been in the med tech space for over 25 years and consider our opportunity at LivaNova to be one 1 of the more exciting in my career. We are in a unique position to drive global growth with an established proven therapy in an underserved patient population. And today, I will outline key elements of this global epilepsy strategy. A key component of our plan is a focus on the pediatric DRE market. So I'd like to begin today's discussion with an example of how VNS therapy has impacted the life of one 9-year-old DRE patient and his family. [Presentation]

As Lindsay and Bennett shared, VNS can fill an important treatment gap when antiseizure medications, also known as ASMs alone are not affected or well tolerated. In fact, despite the addition of dozens of ASMs in the last 30 years, approximately 1/3 of all epilepsy patients remain drug-resistant and must explore other therapy pathways. One option is a ketogenic diet, which can be effective, but poses the challenge of patient adherence on -- to the diet regimen. Other alternatives include invasive surgical procedures, such as a resection or intracranial neuromod device implants. But depending on the patient, these may not be indicated or desired. That is where VNS Therapy can be an option for many patients. VNS Therapy is FDA indicated for adult and pediatric patients starting at age 4 and up. It's delivered as a 1- to 2-hour outpatient procedure. It's literally not brain surgery. And VNS Therapy is also proven with a safe, effective and reliable history that spans 25 years, and it's available globally in over 80 countries. As the leading provider of VNS Therapy for drug-resistant epilepsy, LivaNova is uniquely positioned to grow in this large and underserved market. Let's first start with a brief overview of LivaNova VNS Therapy. The VNS implant is an outpatient procedure that takes about 1 to 2 hours. Because the procedure is not intracranial surgery, it can be completed in both large comprehensive epilepsy centers, known as CECs, and community-based health systems. Clinically, VNS Therapy provides many benefits that improve outcomes for DRE patients. Some of these include a decrease in seizure frequency and severity, a decrease in health care utilization and associated costs, less side effects than drugs. And 2 additional key benefits are a reduction in sudden unexpected death in epilepsy, also known as SUDEP as well as increased mood, alertness and cognitive function in pediatric patients. Finally, because VNS is implanted, it is always with the patient so there are no adherence concerns as you would have with antiseizure medications or diet regimens. With that overview, let's turn to our key strategic focus of our technology road map. We have all seen how the COVID-19 pandemic has accelerated telehealth and remote patient management, trends that we believe are here to stay. LivaNova has responded by focusing our technology development, specifically on the creation of a digital network that connects patients, physicians and health systems. Within this secure network, clinicians will interface with LivaNova devices to collect and use data with the intent of delivering improved, consistent outcomes. Our strategy is built on 3 phases: first, establishing a digital foundation; then introducing a connected device; and finally, harnessing the data from this network to deliver patient-specific therapies. Earlier, I referenced that LivaNova has an established global commercial footprint with presence in approximately 80 countries. This gives us access to an estimated 12.5 million international DRE patients. While we will continue to optimize our global reach, we believe that we can accelerate our growth by driving deeper penetration in select markets. Our confidence stems from the success that we have experienced in the United Kingdom. We codified the U.K. approach, identified similar markets and are now executing in Germany, France, Brazil, China, Japan and a collection of Southeast Asia countries. We believe this approach of accelerated penetration in prime target markets, combined with continued steady growth elsewhere, will deliver strong international performance for the foreseeable future. Now turning to the United States. In the U.S., there are roughly 4 million epilepsy patients. Of these, about 2.7 million are successfully treated with available ASMs, leaving roughly 1.3 million patients diagnosed as drug-resistant. Within this subset of DRE patients, we estimate that roughly 600,000 would be eligible for VNS Therapy representing a significant opportunity for LivaNova. Our strategy in the United States focuses on 2 important stakeholder groups: first, providers, our health systems and clinicians; and second, our patients to include their caregivers. Let's start with providers. Our goal here is to build VNS Therapy treatment pathways in both comprehensive epilepsy centers and community health systems. This will allow us to improve patient access to care by driving physician advocacy and cultivating networks of health systems to deliver VNS Therapy. Now our focus on CECs began over 2 years ago with the creation of our go-to-market strategy. At that time, we recognize that the key to accelerating our growth will be driven by success with Level 3 and Level 4 CECs. These 250 centers treat the highest concentration of DRE patients and are home to many of the country's KOLs who are highly engaged in pioneering research and technology. Moreover, these centers are the primary teaching institutions for future physicians who could prescribe and implant VNS. Thus far, our multidisciplinary team approach has been successful in meeting the varied needs of these large comprehensive centers. In 2021, we have seen the revenue growth of the early go-to-market CEC teams outperform that of our core teams by roughly 10%, and the later GTM waves continue to gain momentum on a similar path. In light of this performance, we will add another 4 GTM teams in key U.S. markets, expanding the number of go-to-market teams from its current 12 to 16 in 2022. Now turning to our community health customers. We have an established core sales team of approximately 100 field-based professionals calling on over 550 hospitals. As we move into 2022, we also see an opportunity to expand that team by up to 10% to further drive growth in this important foundational customer base. Now shifting to our most important stakeholders, patients and caregivers. As we build VNS Therapy pathways in both CECs and community health systems, we want to guide patients to these centers so that they can discuss the appropriateness of VNS Therapy with their health care providers. These care journeys begin with general epilepsy awareness, and unfortunately, very little has been done in the last decade to help patients and caregivers on this front. To support their journey and to advance the conversation about epilepsy therapy, LivaNova has responded by investing heavily in digital tools and programs for patient education and awareness. We are especially excited about our Epsy app. Epsy is an unbranded site design to build a digital community for all epilepsy patients, not just DRE patients. It enables patients to establish a unique profile, to track activity and gain valuable insights, and in just 18 months, we have seen this community grow to more than 120,000 unique users. And while many Epsy users will never need VNS Therapy, we are confident that a good number in the Epsy community will be enlightened about VNS Therapy, and ultimately explore it as a possible solution. Beyond digital resources, LivaNova has dozens of skilled clinicians who assist patients and caregivers on their journey before and after receiving a VNS device. Our continued focus and investment in patient support has yielded a nearly 75% first reimplant rate, and that actually increases to 85% for subsequent reimplants. And overall, we have established a worldwide community of over 125,000 VNS patients. Now one of the more alarming characteristics of DRE is the devastating impact on children. The statistics on this slide emphasizes the magnitude of this global challenge. VNS Therapy is the only neuromodulation device with an FDA indication to treat patients as young as 4 years old in the United States, and from birth in our international markets. LivaNova is privileged to partner with talented pediatric epileptologists to change the outlook for these children with earlier evaluation and intervention with VNS Therapy. Today, we are joined by one of the true thought leaders in pediatric epileptology, Dr. Angus Wilfong. Dr. Wilfong is Professor and Chief of Pediatric Neurology at the Barrow Neurological Institute at Phoenix Children's Hospital. He is also a Professor of Child Health and Neurology at the University of Arizona College of Medicine. Dr. Wilfong will now share his insight and experience with VNS Therapy and its role in his practice. Dr. Wilfong?

Thanks so much, Chris. I'm a pediatric neurologist who has dedicated my life and career to helping families and their children live with epilepsy. Seizures are common. Many people don't realize that 1 in 10 people will have a seizure at some point during their life and 1 in 26 people will have recurrent seizures, which is what epilepsy is. Epilepsy often starts in the first years of life and its commonest in the first 2 years of life and then after the age of 70. So most of us on this call are enjoying the time in our life when we're least likely to start to have seizures. But seizures can start at any time. We always treat seizures with medication at the start. But unfortunately, medications don't always work. And if we look at everyone with epilepsy, we can only get the seizures under control about 60% to 70% of the time. So that means that 30% to 40% of children and of adults living with epilepsy are going to continue to have seizures, just like what happened with Bennett. So let's just think about these numbers for a minute. So that's 4 million people in the United States right now living with epilepsy. And despite their doctor's best efforts, they can only get 65% of them seizure-free. So that means that a full 1/3 of people are continuing to have seizures. So that's over 1 million people right now. Every year, there's 200,000 new diagnoses of epilepsy in the United States and 1/3 of those, 60,000 to 70,000, are going to have uncontrolled epilepsy. So we have about 1.3 million right now. And every year, we're adding 60,000 to 70,000 new patients with uncontrolled epilepsy. Most adults living with uncontrolled epilepsy had their seizures start in childhood just like Bennett. I see so many children like Bennett. His case is not unusual or unique, and their moms and dads are looking for help. They're frightened and they're scared. Seizures are terrifying. There's many different types of seizures, but the most frightening are generalized clonic seizures or convulsions, where children and adults fall to the ground, they turn blue. Many times, they bite their tongue or their cheek, they have blood coming out of their mouth, and this is incredibly dramatic for families and many families have PTSD because they thought their child was dying right in front of them. And imagine the frustration of medication trial after medication trial and not having the seizures come under control. Modern science has shown us that in children and adults who have failed to have their seizures come under control with 2 medication trials, the likelihood that medicines are ever going to work is vanishingly small. And despite the emergence of many new medications on the market, it hasn't reduced those numbers at all. So VNS Therapy is a standard of care for children that have treatment-resistant or drug-resistant epilepsy, meaning they fail 2 medications. Some children are candidates for potentially curative brain surgery, but those are few and far between. And in the United States and around the world, VNS Therapy is the second commonest treatment used to help gain control of these seizures. There are many important aspects of VNS Therapy, and I personally have referred over 800 children to receive this therapy. And I've seen many children, like Bennett, who have had a dramatic life-changing response. Overall, we expect a responder rate of VNS Therapy, meaning the percent reduction of 50%, of at least 75% of patients. So there's no medication that even comes close to the effectiveness of VNS Therapy after a couple of years of treatment. But besides that, VNS gives on-demand treatment. With a small magnet, families can activate the generator or patients can do it themselves and give an extra dose of stimulation. And 2/3 of the time, the magnet activation will stop a seizure. This is life changing. I can't tell you how important it is for a loved one to be able to stop a seizure right when it starts. And what's so wonderful about LivaNova is that they are investing in the future and coming out with new technologies and the latest VNS generators can give an automatic magnet activation and stop seizures even without anyone being present. So many moms and dads have their children sleep with them at night because they're afraid they're missing a seizure when they're asleep. But I can tell you how reassured they are with these latest models that the generator itself is going to recognize a seizure and be able to stop it when the child is sleep. This is such important therapy, and I can't tell you how this changes children's lives. Thank you for your time, and thank you for your attention, and thank you so much for this opportunity to share these important facts about epilepsy. Back to you, Chris.

Thank you so much, Dr. Wilfong. Well, as we have discussed today, drug-resistant epilepsy is a global challenge for millions of patients. LivaNova VNS Therapy can provide long-term solutions for both adult and pediatric DRE patients, while other therapy options may be limited. As a result, LivaNova is the global leader in neuromodulation devices for DRE. In fact, 9 out of every 10 neuromod devices implanted for DRE in the U.S. are from LivaNova. And we believe that we can build upon this leadership position and deliver growth by delivering technology focused on an interconnected device network; by strengthening our global leadership with deeper penetration of key customers and markets; by creating a unique patient and caregiver experience with digital outreach platforms and enhanced post-implant engagement; and by partnering with pediatric epileptologists, like Dr. Wilfong, to increase awareness and earlier adoption of VNS Therapy in children suffering from DRE. Thank you. And with that, I'll now turn it over to Rich Wintersteller, who will discuss our cardiopulmonary business.

Thank you, Chris. Good morning, good afternoon, everyone. As Chris mentioned, my name is Rich Wintersteller. I have the pleasure of leading the commercial efforts of our cardiopulmonary business in North America. I've been in the med device space for over 25 years, and with LivaNova for the past 5 years. I'm proud to lead our go-to-market approach and uphold our commitment to the cardiopulmonary market. We have a unique opportunity to evolve, innovate and expand our cardiopulmonary platform, while maintaining a leadership position in the global market. The intent of today's overview is really focused on 5 key areas. I'll provide an in-depth look at LivaNova's cardiopulmonary portfolio, and I'll highlight our legacy of innovation in this space for over 4 decades. We'll talk about how we view the market, and I'll outline the significant market opportunity that exists. Today, we'll also discuss our go-to-market structure and how our supply chain enables us to meet customer needs on a global basis, grow with the market and, of course, offer an attractive financial position. I'm excited today to provide you with more details about our next-generation HLM system and show you how we're advancing a new integrated approach of hardware and software that builds on the legacy of our current market-leading S5 platform. I'll outline some key features and benefits and discuss how we expect to convert and expand our large global installed base and build new recurring revenue streams. And last, I'll point out how we believe this continued innovation will allow us to maintain our global leadership position and continue to position us for long-term growth. So let's start by looking at our current comprehensive portfolio of CP products, and I'll orient you with the general purpose of each piece. The easiest way to think of our portfolio generally is that our products equip perfusionists and surgeons with a safe and reliable means to sustain life during critical open-heart procedures by maintaining blood flow and providing oxygenation to the blood during open heart procedures. Our key target customer and primary user of our products is the perfusionist. They are the individuals operating the heart-lung machine that ultimately keeps the patient alive once the heart and lungs are stopped during an open-heart on-pump procedure. What they do enables an optimal surgical field, which the surgeon can perform the necessary steps to complete a procedure. During a bypass procedure, the patient's life depends on the heart-lung machine and the perfusion tubing set or PTS. The HLM replaces the function of the patient's heart, and the PTS and our extensive disposable product line, replaces the function of the lungs during surgery. Both product categories must meet high quality and performance standards to ensure patient safety. These 2 components are critical for perfusionists to deliver quality care. They require best-in-class equipment and high-quality disposable products. LivaNova's portfolio uniquely provides a complete cardiopulmonary solution of offerings. Our portfolio includes an array of disposable devices such as oxygenators, cardioplegia devices and centrifugal arterial pumps. Oxygenators or oxys are high-performance disposables used in conjunction with the HLM. Our INSPIRE families of oxys is differentiated due to its ability to minimize coagulation and for its inflammatory response, which contributes to decreased blood transfusion and improved clinical outcomes. In addition to HLMs and oxygenators, we offer auto transfusion systems or ATS, which similarly includes both capital and disposable products. These devices collect blood from the patient's chest during surgery, then wash the blood via centrifugal process, which allows a patient to rely on their own red blood cells rather than donor blood bank cells. To round out our portfolio, we also offer full on-site technical service, cannula and perfusion tubing sets that enable on-pump cardiac procedures. LivaNova has a long and storied legacy of delivering on our commitment to perfusionists and their patients. Our global market-leading platform of products is founded on nearly 50 years of technology innovation dating back to the launch of the world's first HLM in 1973. Since then, our years of experience have led to continued innovation, leading to the creation of multigenerational HLM platforms. Our continued commitment to innovation with proven R&D excellence has positioned LivaNova into a leading CP franchise with a broad and uniquely differentiated offering. Allow me to further highlight here the uniqueness of LivaNova's ability to provide a complete perfusion solution. As you can see, our comprehensive, highly customizable solution is differentiated versus competition. Our broad geographic reach enables us to deliver our life-saving products to our customers with excellent service levels worldwide. Moving to procedures and market opportunity. First, let's consider the significant incidence of on-pump cardiac procedures. Of the estimated 1.8 million global cardiac surgery procedures performed annually, the vast majority, nearly 85% are on-pump procedures where the heart is completely stopped. Among the most frequent on-pump procedures or coronary artery bypass graft or CABG, heart valve repair and replacement, congenital heart defects and heart transplants. From a geographic perspective, the U.S. is currently the largest individual market, making up approximately 25% of total procedures, with the EU and China being second and third largest markets. Over the past several years, cardiopulmonary bypass disposable sales in the U.S. and Western Europe have largely been flat to low growth, when excluding the impact of COVID. While the growth in TAVR has led to a reduction in open-heart procedures in the developed markets, the overall growth in the global volume for on-pump procedures in emerging markets mask this rate, resulting in an overall flat to slightly favorable growth rate. As for the market opportunity, we estimate the total addressable market to be about $2 billion, with strong underlined fundamentals driving it. This large established market opportunity underscores the importance for us to advance the business by focusing on select geographies as well as increasing investment in new products to maintain and grow our leading global CP franchise. Today, LivaNova's cardiopulmonary platform has a global reach in over 100 countries, with direct presence in over 35 countries, and is sold via distributors in over 65 countries. Our global footprint has positioned us to capitalize on a total addressable market opportunity, as mentioned previously, of over $2 billion. LivaNova capitalizes on this market opportunity, in part through a robust intellectual property portfolio that is supported by more than 600 million granted patents and planned patent applications as well as through our strong regulatory capabilities. The market opportunities are also being leveraged by an experienced commercial team with focused call points and strong physician and perfusion relationships. Currently, LivaNova has the #1 share of global HLM installed base with over 7,000 systems delivered to customers around the world. Our recurring disposable revenue stream is fueled by nearly 500,000 of our adult oxygenators that are used annually in procedures around the world. Putting this all together, our portfolio of differentiated and proven technology, coupled with segment leadership, provides an attractive financial opportunity. Our CP business delivers approximately $500 million annually, of which 60% is recurring consumable revenue. Overall, the CP portfolio provides over 50% gross margins as well as strong operating margins in the mid-teens, with the ability to drive incremental operating leverage. As for our revenue profile by product. HLMs represent approximately 30% of our CP revenues and have gross margins in the range of 70% to 75%. In addition, service currently represents approximately 15% of HLM revenues. Moving on to our family of oxygenators. Our oxys currently represent approximately 50% of our CP revenues and have gross margins of approximately 50% to 55%. We offer a broad family of flow sizes and flexible designs to meet all adult patient oxygenation needs. Our ATS product represents 20% of our CP revenue and has gross margins of approximately 50% to 55%. The auto transfusion product line facilitates the collection, processing and reinfusion of the patient's own blood, as mentioned previously. In summary, Livanova's CP platform is differentiated in many respects and stands for high quality and reliability, complemented with service and support, which I'll highlight later. We've continued to innovate this platform to maintain our global leadership position in HLM. While we're on the topic of innovation, and while keeping in mind we're in an active presubmission phase and are limited in the amount of specifics we're able to share today in this broad group, it's my pleasure to be the first to introduce you to our next-generation HLM. [Presentation]

The ESSENZ perfusion system, rooted in the proud heritage of Sorin and Stockert, delivers to the market a new era of perfusion. LivaNova has put forth several years of significant effort to ensure a product design that both satisfies and excites our end users. We've listened to our customers, and we've leveraged a user-centric design to modernize the practice of perfusion. The system is based on a near 50-year legacy of proven safety and reliability, which is a differentiating factor that particularly resonates with the perfusionist. Our holistic approach to this offering is designed to satisfy our most basic and most advanced users alike. Our optimized solution ensures ease of use, familiarity and comfort for our users. Our new system retains many of the best in class features and functions of the S5 HLM, yet improves upon the technology in many areas. For example, the ESSENZ HLM feature the same safe and effective rollout pumps as the S5 but with smaller and lighter housing and better cable management. The perfusionist-centric design allows for improved ergonomics through the use of a single-panel cockpit where clinicians will interact with an intuitive graphical user interface that displays the right information in the right place at the right time. From a clinical management perspective, the ESSENZ patient perfusion monitor provides a uniform approach by displaying data with the same clear and intuitive visuals as the cockpit. LivaNova led the industry in emphasizing the clinical importance of goal-directed perfusion and directly influenced the first additions to the AMSC standards and guidelines. Goal-directed perfusion is a practice of real-time monitoring of the patient blood gas thresholds to provide optimal perfusion. The patient monitor is an essential component on all ESSENZ perfusion systems, providing every ESSENZ user the opportunity to implement decision support and goal-directed perfusion practices. With over 65% HLM global market share, LivaNova is uniquely positioned to replace thousands of S5 HLMs over the next 8 to 10 years. Our immediate plans are to replace the portion of our global installed base that is at the highest need of replacement. We estimate that by the time we launch our long-anticipated next-gen HLM, over 1/3 of our installed base of 7,000 units will be almost past their average lifetime use of approximately 10 years. We expect a staged rollout for our next-generation HLM. For the ESSENZ patient monitor, we've already received regulatory approvals, and we're currently in process of initiating our European limited commercial release and we'll follow that with a U.S. limited launch in early 2022. We strategically designed our regulatory pathway, giving us the opportunity to gain invaluable experience with the patient monitor ahead of the full system submission and approvals. We plan to follow the same limited launch strategy with the full ESSENZ system. This approach will give us the best possible opportunity for a successful launch. We anticipate a gradual ramp in capital sales beginning in late 2022 and into 2023 and 2024. Longer term, we see and expect to see an increase in top line growth in the form of recurring revenue in the areas of service and licensing contracts. Over the past several years, we have run a robust user-centric design process, gathering the input from perfusions worldwide. We use the market-leading S5 HLM as the basis for our collaborative design sessions, and very recently, had customers involved in testing of the final ESSENZ HLM. I'd love to share with you what they said. [Presentation]

One unique task we recently conducted in Berlin brings to life how we design the system to improve the user experience. Here, you can see a heat map of where the perfusionist eyes move when monitoring a patient on the S5 HLM. You can see the potential strain that could come from looking in so many places. In contrast, the eye tracking exercise on the Essenz HLM shows that the key information is more centralized in one place. This is just one example of the type of testing we're doing to validate the innovations we've designed into the system. When we think about our HLM upgrade cycle, we know that there's significant opportunity given the over 7,000 units tracked on our global installed base with a large number of units at or reaching their expected useful life of 10 years. It's also important to note that we're estimating an uptick in fleet replacements versus individual unit replacements as hospital perfusion teams prefer consistency across their HLM fleets. Additionally, while there are many supply chain labor shortages and logistical issues emerging in the wake of COVID-19-related disruptions, to date, the supply of raw materials and the production and distribution of finished products remain operational with no material constraints relating to COVID-19. We continue to monitor the landscape for any potential disruptions. We do expect a premium relative to our S5 platform based on new technology, improvements to data management and including patient data monitor. In addition, with the opportunity for ongoing revenue through service contracts for the equipment and software. In addition to the launch of Essenz, there are really 2 key factors that we feel enable our planned growth. First, our broad commercial infrastructure, which allows us to maintain and build deep customer relationships. And secondly, our global manufacturing footprint, which enables us to provide unparalleled service. We have strong global commercial capabilities with reach into well over 100 countries. We have an indirect sales presence in over 65 countries and direct sales presence in over 35 countries. This direct sales presence is established in all major markets, including the U.S., Canada, Western Europe and Japan. Throughout these markets, we have over 300 associates supporting commercial efforts, including direct sales reps calling on perfusionist, cardiac surgeons and other focus call points. This team has built strong relationships and our innovative heritage provides us with the future market access opportunities. In addition to our sales reps, we have field presence offering technical service and maintenance support to our products in the field. Finally, our changes to our go-to-market model in emerging markets over the last several years positioned us well to accelerate growth in these areas. Here, we're building new relationships with clinicians and unlocking customers' needs in new and innovative ways. Our global reach is also seen in our R&D, manufacturing and distribution network. We have R&D and manufacturing sets located in Mirandola, Munich and Arvada. We also have distribution sites located in Mirandola, Melbourne, Sao Paulo, Brazil and Arvada. The global reach is critical in providing rapid cost-effective delivery of customized, high-quality, life-sustaining technologies and service to customers worldwide. This international go-to-market strategy, along with the investment in innovation will continue to drive growth of LivaNova CP platform. Turning to our growth plan and strategic priorities. We're focused on specific avenues meant to accelerate growth of the CP business. First, we've already begun bringing new cardiopulmonary products to the market. Continued innovation is important in the CP space. This year is the start of a series of smaller product launches leading up to the Essenz launch. So far in 2021, we've launched INSPIRE 7, our middle-range oxygenator. In an effort to assist our customers with bridging to our next-generation heart-lung machine and proactively addressing any budget challenges in hospitals, we released 3 new acquisition models earlier this year. Additionally, we launched our S5 Pro package and be capped the blood gas monitoring device and also the new smaller footprint S5 hybrid. Our CP business is positioned to meet the needs of large and durable market and we expect to grow market share through traditional and new revenue streams, including software licensing and service. This is followed by a stream of innovation in both hardware and software releases for the Essenz system. We believe this strategy will continue to offer strong cash generation with the opportunity to improve margins. Now that you've seen our CP solution that provide full live support during open heart procedures, let's transition to Travis Deschamps and our Advanced Circulatory Support business.

Thanks, Rich, and hello, everyone. I'm so happy to be here kicking off the Advanced Circulatory Support portion of the program. I've been living and breathing the ACS business for the last 11 years, serving as the VP of Marketing and Chief Operating Officer of TandemLife before joining the LivaNova family with the acquisition in 2018. Since then, we've been executing our vision of life support simplified for critically ill patients and have nearly tripled our annual revenue in the process. The ACS team has grown dramatically in the past 3 years to meet accelerating demand driven by the differentiated value of our technology and increasing market awareness of its benefits. With our next-generation LifeSPARC platform now widely available, strong clinical evidence building and more than 50 incremental commercial employees added in field sales, clinical support, professional education and inside sales, we're now uniquely positioned to make these life-saving devices accessible to more patients in more places. Advanced Circulatory Support, or ACS, represents a subset of mechanical circulatory support options that go beyond the current standards of care to provide short-term stabilization of severely ill patients. These devices can generally be divided into 2 classes: ECMO or extracorporeal membrane oxygenation; and PVAD or percutaneous ventricular assist devices, with the primary difference being the inclusion or exclusion of oxygenation capability. In ECMO, a combination of medical devices, a pump, an oxygenator and one or more cannula are utilized to withdraw the oxygenated blood from the central venous circulation of the patient, pump it through a hollow fiber membrane supplied with oxygen and then return oxygenated blood to the patient's own circulation. Depending on how this external blood circuit is connected to the patient via the cannula, ECMO can be further divided into veno-arterial or VA ECMO which returns blood to the arterial system and veno-venous or VV ECMO, which returns blood to the venous system. In contrast, percutaneous ventricular assist devices provide short-term cardiac support without oxygenation. This class can be further divided into extracorporeal devices where the pumping mechanism is outside the body and intracorporeal devices where the pump resides inside the body. LivaNova ACS is focused on driving innovation and market adoption of both forms of ECMO and extracorporeal PVAD. The foundation of our ACS business is the LifeSPARC platform, which replaces our legacy Escort platform after a long track record of reliability and performance. Despite consistent sales growth in recent years, our outgoing technology did have some limitations that were barriers to broader adoption, including pump power and bearing design as well as controller size and complexity. The LifeSPARC pump offers 40% more power than our legacy platform, which translates to higher flow rates with the same cannula or the same flow rates with smaller cannula, either way, a dramatic improvement over the previous generation and on par with competitive ECMO devices. LifeSPARC also incorporates a brand-new bearing system that utilizes precision magnetics to lift, spin and stabilize the pump rotor. This eliminates the previous fluid bearing system, enabling even a novice user to quickly and safely prepare the circuit for patient connection, a process we like to call, the perfect prime, every time. Moving over to the LifeSPARC controller. This critical piece of the platform is now 1/3 of the size and weight of the legacy system and incorporates an industry-first removable handheld controller, enabling hospital caregivers to optimize patient mobility and transport, within or outside the hospital. The user interface has also been completely redesigned and optimized with a single LCD screen organizing all relevant data into a simple and familiar framework. With LifeSPARC, we're redefining simplicity in multiple ways, not only for health care professional users, but also for hospital administration. It's a single operating system for circulatory support that can be deployed across multiple hospital departments. The streamlined user interface minimizes initial learning curve and reduces ongoing training requirements for nursing staff and other patient caregivers. We build on the foundation of the singular unified platform with multiple differentiated cannula and oxygenators to provide physicians optionality to control and customize patient care. And by bundling the single-use disposable components of our system in the procedure kits, we're able to deliver a seamless customer experience that also aligns our own product line offerings to specific patient needs. We offer 4 distinct product lines with multiple sizes and variations within each mode of circulatory support. Yet all 4 of these product lines operate on the same versatile LifeSPARC platform and are clearly differentiated, with TandemLife for VA ECMO, Tandem lung for VVECMO, TandemHeart for left heart PVAD and ProtekDuo for rig heart PVAD. Relative to the competition, we're proud to say that LifeSPARC is the only ACS system offering all 4 modes of circulatory support in a single platform, while other companies require multiple different systems to provide the same capabilities. At LivaNova, we also go beyond the pump and oxygenator extending our innovation advantage to cannulation. LifeSPARC customers have access to exclusive cannulation options in each circulatory support category, including our ProtekDuo dual lumen veno-venous cannula and our ProtekSolo single-lumen transseptal and arterial cannula, which each offer unique features and benefits to their users. For all of these reasons, we believe LifeSPARC is the upgrade we need to bring advanced circulatory support to hospitals everywhere and better serve cardiac and respiratory failure patients in need. At LivaNova ACS, our mission is to save and improve the lives of critically ill patients through the development and delivery of simple and effective life support solutions. And we believe that by embracing simplicity in everything we do, we're uniquely positioned to make life-saving devices accessible to more patients in more places. Our relentless focus on simplicity is apparent in every design choice and technology pipeline decision we've made. And here, you can see a typical ECMO patient in circuit in all of its complexity. This is simply not a scalable approach for most hospitals. Compared to LifeSPARC with up to 90% less total circuit length neatly organized within the sterile field or even worn by the patient, the difference is clear. With LifeSPARC simplified, we reduce complexity so hospital caregivers can focus on the patient, not the circuit. Now I'm very pleased to introduce Dr. Amir Kaki, who is a renowned interventional cardiologist and the Director of Mechanical Circulatory Support at Ascension St. John Hospital in Detroit, Michigan. Dr. Kaki, welcome, and thank you for your willingness to share your experiences today with our LivaNova investors.

Thank you for having me. It's a pleasure.

So I wanted to start off and ask you of all the available options that are out there for Advanced Circulatory Support, what led you to choose LifeSPARC to bring into your program and develop it from there?

Yes. We originally started using LifeSPARC, the mechanical circuitry support device, for patients who had LV thrombus and they need a high-risk PCI or had cardiogenic shock, so the TandemHeart. We've graduated really to using the most commonly used platform right now is the TandemLung. Obviously, with the pandemic, we're using a lot more ECMO than what we have historically. And we found that the ProtekDuo and the LifeSPARC platform have really been the best strategy for our patients. We've modified it to use dual oxygenators in series. This platform has allowed us to treat a lot of patients successfully with COVID, let us -- allowed us to ambulate these patients, which has been really critical and has allowed us really to exacerbate patients while they're on ECMO, which is really a novel approach. And as it contributed to a survival rate that is much better than expected for patients with severe pulmonary COVID.

That's great. Are there any particular patients within that group that you think are particularly ideal candidates for circulatory support?

Yes. So any patients who have respiratory failure, who are unable to oxygenate are great candidates for the TandemLung platform. The ProtekDuo is definitely without question, the best-in-class as it relates to cannulation. It allows us to use the internal jugular vein. And for those that are nonmedical folks, it's an access point in the neck as opposed to 2 access points or one minimum access point and the femoral artery or the -- excuse me, femoral vein or artery in the groin. And this gives you a huge advantage because if you have a single cannula approach in the neck, these patients could sit up and bed. Once they're exacerbated, they could eat, they could talk, they could ambulate. And so the ProtekDuo really has been a game changer and has really driven this platform to be our primary choice because of those qualities that we just discussed.

Yes, makes sense. Speaking about the cath lab and your role as an interventional cardiologist, are there any particular benefits to treating patients in the cath lab that kind of historically might have otherwise been treated in a different hospital department?

Yes. So if you talk -- if you go back and looking at the history of ECMO, this has really been -- it was developed by surgeons and really done really the past 4 decades since it's an inception been dictated by cardiac surgeons and perfusionists in an OR environment. But what we find is that really, it's a very amenable to catheter-based procedures and catheter-based proceduralists like myself. I find that a cath lab environment is actually the best environment for cannulation for these patients. We could actually even do it in the ICU with the C-arm. And in emergent cases, we could do it at bedside in the emergency room. So given that this is really a catheter-based procedure, I anticipate tremendous growth in interventional cardiology and cath labs throughout this country as more interventional cardiologist to start to learn the skill and adopt this technology to better serve really the sickest, highest acuity patients that we see in our practice.

Yes, that's great. We have the same view of the future in that way. I'm wondering what sort of infrastructure you had in place at St. John or maybe things that you had to put in place to get the program ready to bring LifeSPARC in and sort of have a thriving program there?

Yes. So the way that the system is designed, it's very intuitive and is very easy, particularly if you use a single cannula with the Duo, the LifeSPARC with the pumps in their oxygenator. That's probably the easiest part of the procedure. What really require -- what you require to take care of these patients is a multidisciplinary approach beyond the cath lab or beyond wherever you cannulate these folks. So what we did at our hospital is, we have a team of certified ECMO specialists who are nurse practitioners. Other members of the team, obviously, are intensivist, critical care team, cardiologists, cardiac surgeons, vascular surgeons, infectious disease doctors, CCU nurses. So as you could imagine, taking care of an ECMO patient really requires a multidisciplined approach, and this is truly a team. I can't put people on ECMO alone, and I can't take care of equal patients alone. So to really do ECMO as an operator, the only way to do this is with multiple disciplines as we mentioned.

Yes. I think it's clearly not a one-person job and takes a lot of teamwork to make it happen and have a successful outcome for patients. Thinking a little bit about the barriers to more widespread adoption at other hospitals, what are some of the things that sort of need to be overcome either by a company like LivaNova or by other hospitals in order to have more widespread adoption of Advanced Circulatory Support?

Yes. So I think the biggest thing right now is awareness. And I think COVID has really changed our lives in a lot of ways. But if you look back, as we look at this pandemic, how what did we learn and how could we improve. People who've adopted this, I think it's going to be ever lasting and be able to treat lots of patients beyond the pandemic. It's really increased awareness, the pandemic has to this technology. Prior to this, even though we knew about this technology and had access to it, it wasn't something that we considered. And now on an everyday basis, at least at my institution, patients who are qualified or considered I'm notified on these patients. So awareness is going to be key. And then beyond increasing awareness, developing teams within the hospitals that could do all these things. And that's something that is very teachable and reproducible. And I can tell you from our experience, because we built our program from scratch, we started with 0 cases, myself and Dr. Schreiber, and are able now to have a robust program I would call it, in our adolescent age. We're beyond infancy, and we're cannulating about 70 patients a year with tremendous growth from year-to-year. The first year we did it, the hospital expected us to do between 4 and 6 cases. We exceeded that number. We did over 25 cases. And now we're on pace to do, like I said, over 70. So it's tremendous growth once you increased awareness and really teach a skill set that is really well honed in most advanced cardiac cath labs.

Incredible growth of the program and it's just amazing to think about that every one of those cases is really a patient that until very recently, if they showed up at St. John, may not have received that optimal level of therapy. So just a huge turnaround, a huge benefit, it sounds like at St. John. Have the LivaNova products, the ACS products lived up to your expectations from when you brought them in and contributed to those good outcomes for you?

Yes. To be very honest with you, the legacy LivaNova pump and oxygenators did not meet the standards compared to what we believe our patients needed. The new LifeSPARC system, I have to admit, has met and exceeded that standard, particularly with oxygenators and series in combination with the ProtekDuo. This is a really, really good approach and the outcomes speak for that. So to answer your question, we're very pleased with the current iteration and our patient outcomes can speak for that.

That's great. And I can assure you, we will continue to develop and improve our products continuously and long into the future. Is there anything else you'd like to share with LivaNova's investors about the ACS business or your view of the future of this part of the market?

Yes. A couple of things I think that just to reiterate the importance of increasing awareness, education to physicians and all members of the care team as it relates to ECMO, I think, is going to be key to see the sector grow. I think ultimately, patients who are most important will be the beneficiaries. And I also like to take a minute to thank and extend my gratitude to the members of my team who without we could not do these procedures and take care of the sick patients. There's too many of them to name, but particularly, I'd like to highlight my partner, Dr. Ted Schreiber and Karey Dutcheshen, who's our lead nurse practitioner. Between the 3 of us, we were the original people who started the program and every patient who gets on circuit is managed, touched by us every single day.

That is great. And Dr. Kaki with that, on behalf of all of the LivaNova investors listening and all of us in the ACS business, just want to thank you for sharing your insights and comments with us today. You're making really impressive things happen. You and your team at Ascension St. John, and we're really pleased to be a part of your success and how you've incorporated our products into the program, in particular all those patients that are benefiting from the combination of our efforts. So thanks again for your time today and everything you're doing out there.

Thank you. Thank you very much, and we look forward to continuing our collaboration with LivaNova to better serve all of our patients in our communities. So thank you so much for having me.

Turning back now to our role as a key growth driver for LivaNova, the good news is there are so many hospitals out there in need of new solutions for their patients. And COVID-19 has clearly shined a light on the lack of widespread at ACS respiratory support options in the U.S. In fact, the vast majority of 5,000 U.S. community hospitals who treat advanced respiratory failure today have only one tool at their disposal for the most severely ill patients, invasive mechanical ventilation. Unfortunately, this therapy has demonstrated lackluster results when applied to the COVID-19 patient population. Perhaps this shouldn't be a surprise since the core mechanism of action for mechanical ventilation has been mostly unchanged for the past 50 years, despite at least 4 distinct generations of devices. A new approach is long overdue and with early studies of LivaNova ACS products showing compelling results, we're excited to be an agent of change in this area of unmet need. Every great opportunity will ultimately attract multiple device solutions into the market. So it's important to not only compare our products to the current standard of care, but also to similar ACS technologies offered by our competitors. Along those lines, let's take a look at one recently released data set from the ELSO conference in October, with 17 centers reporting on a 435-patient experience, comparing various cannulation options for VV ECMO and COVID-19 respiratory failure. This data, while early, suggest positive results through the use of our ProtekDuo cannulation on patients with COVID-19. And it's very encouraging to LivaNova, and we look forward to finding out additional information about this study through a full publication. Moving on to market opportunities. We broadly segment these into 4 primary patient populations: cardiogenic shock, RV failure, respiratory failure and cardiac arrest. The fifth group designated here is high-risk PCI, also known as protected PCI, but we believe these patients are already well served by competing ACS technologies. And for that reason, it's not a primary focus for LivaNova ACS. Cardiogenic shock patients comprise about 50,000 annual hospital admissions, of which 30,000 are potential candidates for ACS technology. However, this is also the patient population into which ACS technology has historically been deployed most successfully with about 50% penetration already. Despite significant adoption of ACS here, mortality rates remain high and there's still significant potential for improved outcomes as the technology continues to advance. RV or right ventricular failure represents a small but significant market opportunity for ACS, driven by increased recognition of RV failure in a variety of patient cohorts. Looking forward to the next 5 years, we plan to invest in the development of the respiratory failure market opportunity, while laying the groundwork for longer-term success in cardiac arrest, both of which are still highly under-penetrated. Together, these patient populations comprise almost 1 million annual cases with 216,000 eligible patients, but only 9% or 21,000 patients are receiving ACS devices today. Shifting our focus to that next market target, the respiratory failure opportunity. With ACS device adoption at only 2% relative to the standard of care, this is clearly an exciting opportunity with significant revenue upside for the business. However, there are several barriers to entry that have historically slowed ACS adoption in this segment. First, only a small proportion of U.S. hospitals currently have an ECMO program, and most respiratory failure patients are managed in the ICU by a group of health care professionals outside of our typical call points in the operating room or the cath lab. These potential new users are also relatively unfamiliar or uncomfortable with large bore cannulation and the high blood flow rates typical in ECMO procedures today. Most of the devices used in ECMO are still overly complicated, and even though we've delivered life support simplified with LifeSPARC, there's still plenty of opportunity to further improve ease of use. Finally, while ECMO respiratory failure has been studied in past clinical trials, like CAESAR and EOLIA, no definitive evidence has been available to drive widespread adoption so far. We believe that overcoming these 5 barriers will be the key to winning market leadership in the respiratory failure market and beyond. And for that purpose, we've developed a comprehensive cross-functional strategic plan to guide our investment decisions over the next 5 years to ultimately drive 10 or more years of leadership and growth in Advanced Circulatory Support. Our plan is built on 4 fundamental value drivers, and let's start with product innovation. Here, we aim to maintain and grow our cannulation advantage, improve usability and mobility of the LifeSPARC platform even further, design a differentiated oxygen platform and leverage data, remote connectivity and decision support algorithms to better assist users at the point of care. In clinical evidence, we'll begin by launching a pilot randomized controlled clinical trial in severe ARDS, comparing ProtekDuo-based ECMO to invasive mechanical ventilation, the current standard of care. We will also be expanding our support for investigator-initiated research in cardiac arrest, participating in the Shock Working Group Registry and continuing our THEME Registry for post-market RV failure data. In commercial excellence, we've already grown the team from just 21 individuals when TandemLife was acquired in 2018 to more than 70 today, and we plan continued growth to more than 200 commercial staff by 2026, including field sales representatives, clinical consultants, marketers, professional education specialists and the leadership infrastructure to develop the entire team. We'll also continue to expand our inside sales organization, which proved incredibly valuable during the COVID-induced lockdowns in the past 18 months, both in driving customer awareness and uncovering new business opportunities for our field team. Finally, on the operational front, we'll be investing in additional manufacturing capacity in our Pittsburgh facility and improvements in value improvement engineering, product development transfer, designed for manufacturability and the quality management system. These improvements to operational capacity will ensure we have the ability to fully capitalize on the opportunities ahead. Given everything we've covered today, I hope you're as excited as I am about the growth opportunities ahead for ACS. And on behalf of the LivaNova team, thank you for your attention and the opportunity to introduce our business and the future of Advanced Circulatory Support. Now let's head over to our Houston office where Damien, Chris, Rich and I will take your questions.

Welcome to our first of 3 Q&A sessions where we have Damien McDonald, Chris Hartman, Rich Wintersteller and Travis Deschamps. Before opening the lines for Q&A, we wanted to provide an update on our SNIA litigation. Damien, I'll turn it over to you for a brief update.

Thanks, Lindsey. I thought what I'd do straight upfront, while we're queuing up the questions is just talk about SNIA. I know it's a topic that's fairly relevant. A lot of you have asked about this in the last few weeks. Let me just describe it like this. There's the who case and the how much case. On the who case, we continue to progress that through the Supreme Court system, and then we don't have any update on that. On the how-much case, there are a number of steps we've taken since that ruling was announced a couple of weeks ago. First, we filed a stay in the Appeals Court to put the ruling on hold while we pursue the outcome of the who case. Second, we intend to file a motion to appeal the decision to the Supreme Court. And then third, we're continuing to look at financing options in the case that the stay or the who case doesn't go in our favor. All 3 of those have different handicaps. All 3 of those have different timings, neither of which are very visible in the current environment. But I just thought you'd like to know we have filed the stay. We are working on the appeal, and we're concurrently working on the financing options. With that, Lindsey, why don't I throw it back to you? And I hope we've got some questions.

Thanks for that update, Damien. Operator, we're now ready to open the lines for questions. And our first question comes in from Rick Wise with Stifel.

Can you hear me, Damien? Damien, can you hear me?

Yes, we can. Rick and please...

Okay. Great. Great. Great. I'm going to start off on the neuromod business. And Chris, maybe you could help us think about 2 aspects of the business in a little more detail. I mean I would have liked to see last quarter stronger, more compelling new patient implants. I appreciate that COVID's been a factor. Maybe you can help us reflect on that and whether you're able to -- whether you're seeing any improvement in trends there sequentially. But in even more detail, I'm hoping you'll talk us through the sales team expansion both on the CE side and the community side. What do you expect -- what should we expect from that expansion? How quickly do you think those expanded teams can have an impact on the business? And maybe talk about how you're incenting these teams to deliver on -- and again, why not even move faster and more aggressively? I'll stop there.

Sure. Thanks a lot, Rick. So first, with regards to NPI, as you highlighted, Rick, we're all seeing the impact of COVID on new patients entering the system. Initially, that was mostly due to restraints on hospital capacity with facility access. And more recently, hospitals have come under pressure with staffing difficulties. So we're continuing to navigate through that. Both of those have a -- provide a bit of a headwind, if you will, against new patient identification. But we all know COVID didn't eradicate drug-resistant epilepsy. So those patients will still be there. I was just at the American Epilepsy Society meeting this weekend talking with a lot of thought leaders. And while they've seen a slowdown in their de novo implants their NPI, they're very optimistic that, that will rebound. And so we continue to stay front and center with those physicians, keep identifying those patients. One of the advantages we have, Rick, because of our large established patient base that we have today, that creates access for our reps to be front and center with the prescribers and the implanters. And so that affords us to have the opportunity to promote NPI while we're taking care of those end-of-service battery changes. So we're optimistic that we're going to continue to see an uplift in NPI in '22 and beyond. With regards to the sales force expansion, as I alluded to in the earlier comments, we've had tremendous success with the go-to-market strategy. We currently have 12 teams in place. We're going to add another 4 teams in 2022. We've already started recruiting for the first. So we're looking to get out of the gate strong with 3 additional go-to-market regions, and then we'll add a fourth at some point in 2022, a little bit later in the year. Additionally, we really intensified our analytical capability and assessing the market opportunity outside of the go-to-market regions. And we're identifying areas within our core team where we can add, as I said, up to probably an additional 10%. It might be a little less than that, Rick. But we do see opportunity to continue to expand there and increase our reach and frequency throughout the United States. And then internationally, we've identified some key strategic markets where we're really intensifying our focus there because we feel we can really increase penetration in some of those well-established markets and drive increased international growth. And then in terms of the incentives that we're putting in place, where we're very focused on driving new patient or de novo implants. And so a significant component of their variable compensation and incentives and goals are structured around NPI. We're actually increasing the proportion of their variable compensation associated with new business, de novo growth from 2021 to 2022. So there will be an intensified focus there. And then, of course, we also provide incentives and goals in place for revenue. So hopefully, that addressed all 3 of those questions.

That was great. Just one quick follow-up, Chris, if I could.

Sure.

Again, I hate to focus on the short term, but do you feel like to the extent that you can comment that you're seeing sort of encouraging sequential recovery trends. Any color would be welcome. But last for me on this, just we heard from the good doctor the importance of technology. Any color, anything you could share on your pipeline? Is it next-generation device in the offing? Is it soon? Is it far away? That would be great. Thank you, again.

Yes, you bet. So with regards to sequential performance, we're very encouraged by what we're seeing right now. Again, the advantage that we have with our established base of patients is a nice steady flow of end-of-service patients coming into the mix. And again, in my conversations this week and Rick, all of the physicians, and I talked about epileptologists as well as implanting neurosurgeons cited the fact that, our battery changes are very straightforward procedures. They're fast, they're predictable. And right now, hospitals are putting restrictions on elective procedures that require an inpatient admission. As you know, the nature of our device can be done in an outpatient setting. And so really the limitations or restrictions that we've seen on our ability to implant both end of service as well as de novo patients has hit some headwinds but it hasn't completely ground to a halt. And physicians recognize that and they're continuing to try and get those patients in. Additionally, with end-of-service patients, a lot of those patients weren't coming in for normal checkups during the pandemic. But now most practitioners are telling me that if a patient hasn't been in within the last year, they're purposely bringing them in for a physical visit to the clinic versus telehealth, and that will create an opportunity where that device can be interrogated. And we expect to see continuation of the EOS volume moving into '22 pretty strongly. So I would expect continued sequential growth on that front. And then with regards to the technology approach that we have, as I shared with you, one of the big ahas that we had with the COVID pandemic was the importance and the impact that we could have with really establishing a digital health ecosystem. And we had always talked about a Bluetooth-enabled device. But now we realize that if we establish a more comprehensive network that enables us not just to communicate with the device but also to extract data from that, to create a more comprehensive data solution that can lead to individualized, personalized programming as well as aggregate learnings that we can get from all of our implanted base, we're really going to be able to advance the platform in a positive way. So that all starts with kind of building a digital foundation. We spent much of the last year building that technical talent within our research and development team, bringing on board more software engineers, people that are familiar with building out digital ecosystems. And so we're putting that in place. We're working on establishing what that interface looks like with clinicians. We had testing underway at AES, where we interviewed a couple of dozen physicians on the interface and how that would work within their networks. That's all work that we want to be very thoughtful about before we just drop the next device into that ecosystem. So lots of work going into that. And again, because we're a global country, we have to be thoughtful about the regulations regarding security and engagement, not just in the United States but internationally as well. So plenty of work going on, on that front. Again, we'll get that network established. We're continuing to develop that next-generation device, which will fit into that. And then we're also starting to think about how does all that work together for us to extract information that really moves us towards a world of personalized medicine.

All right. Our next question comes in from Mike Matson with Needham.

Okay. Can you guys hear me?

Yes, Mike. We got you.

Okay. Great. So a question -- another question for Chris. You mentioned big success in the U.K. with the sales changes that you made there. and you talked about applying that in other countries. So can you just talk about what you did, what the model is and then how confident you are that, that will work in these other countries around the world?

Yes. Thanks a lot, Mike. The wonderful thing about what we're doing is we're really thinking globally about how we approach the business. So we've talked about our go-to-market approach. We're applying lessons from go-to-market globally as well as within North America. And really, what we've seen in the U.K. is, again, using data to identify the target markets and centers where we really feel we can move the needle with VNS Therapy. We're putting the appropriate resources around that, and they're going really deep into these accounts and these customers and establishing VNS as a true standard of care versus just having a world where you have centers or physicians that are dabbling in it. Once we have that advocacy built within the center, then we focus on the patient pathways. In other words, how do we change that patient path from kind of driving down a bumpy road to a super highway so that once that patient enters the system, they can move through it quickly and find their way to VNS Therapy. And then the last component of all that is, how do we create broader patient awareness such that patients are coming to their practitioners and asking about VNS Therapy. And so those are models that we've seen take root in -- or gain traction rather in the U.K. expanding that to France and Germany, China, Japan, some Southeast Asia countries and Brazil. Those are all healthy markets for us where we feel we can essentially run that same play and drive increased penetration. Right now, in all of those markets, our penetration rates are probably in the low to mid-single digits. And we feel that with that added focus, we can go deeper and improve penetration in really healthy markets in that international community.

Okay, thanks. And then I had a second one for Rich. Your market share in heart-lung machines is much higher than oxygenators. So do you have a plan to try to capture more of the oxygenator share? And then is there any feature in the new Essenz system that would kind of help enable that? And then just with the oxygenators, I guess I had never realized the much lower gross margins, do you really want to even capture more share of that part of the business?

Good question. Yes, we're working on all that. And certainly, we think about our PTS or CPB business often. And one of the unique advantages we see kind of coupled with the Essenz launch is that one of the unique secrecies of our launch plan is that it will require a new PTS pack to evaluate the Essenz perfusion system because of the positioning of the pump slightly different than our current setup. So it's going to allow our team to kind of refocus our time, effort and energy on CPB, talk specifically about the benefits that we think our product line has to offer, and we think it's going to be a nice synergy between selling of this new hardware and software coupled with what we think is the market-leading disposable play. Your second question was around -- what was the second piece?

Gross margin on the oxygenators.

Gross margin. Yes, 50% to 55%. We're always looking at ways to improve. Obviously, it's a very customized business. We look for opportunity to potentially streamline the portfolio where we can to hopefully improve margins. And then we've got all kinds of pricing mechanisms in place to improve our price approach in the marketplace. So we're working on it. Certainly work to do as you recognize, but I think we've got a good path going forward.

Our next question comes in from Adam Maeder with Piper Sandler.

And hopefully, you can hear me okay. The first one is for Rich and the heart-lung machine part of the business. So if I heard correctly, you have an installed base of 7,000 plus globally. I think you talked about 1/3 of those heart-lung machines pass through useful life. So the question is really, how do we think about the replacement curve and how quickly that will take place? Is that a '23 and '24 event? Do we get some benefit in 2022? Do we kind of straight line this across our models? Just any color there would be helpful.

Yes. As we look -- we're doing this. You heard this morning, limited commercial released in Q1 in Europe, late -- mid-to-late Q3 in the U.S. So we've got some work to do on the early phase of the launch. Don't expect much upside in 2022, but certainly would expect meaningful top line incremental growth starting in 2023. We've got a lot of history relative from the S3 to the S5 conversion. So I don't think it necessarily straight lines, but I think you can expect incremental -- significant incremental top line '22, '23, '24 as we think about replacing the 7,000 global installed base and then obviously starting to go after some of the competitive machines that are on the market as well.

The period in '18 and '19 when we were doing those S3 to S5s, that, I think, is a really good way to think about how to model the potential uptick in the conversion cycle. So we've always pointed people back to that S3 to S5 conversion.

That's really helpful color, guys. I appreciate that. And then on the second question, flipping over to epilepsy with Chris. I would love just to get some comments around how you're thinking about the competitive landscape, both in terms of competitive devices and drugs. And maybe just talk at a high level how you're feeling about the positioning of your VNS Therapy in this marketplace?

Yes. No, absolutely, Adam. Listen, I'm very optimistic and very excited about the position of VNS. As we take a look at the ASM market, as we shared in the data earlier, after dozens of new ASMs over 3 decades, we still have 1/3 of patients roughly who remain drug-resistant. And there have been 2 recent launches. As we take a look and analyze one of those, it seems to be falling back in line with that historic trend of being effective for a certain percentage of patients, but it's not the holy grail. The other major competitive, ASM was delayed a bit and launched due to COVID. So the early trial period is underway. So we have seen some lift in utilization of that and we're watching that carefully. But remember, we're an adjunctive therapy, so because a patient might be on one of those ASMs doesn't preclude them from also getting VNS. And with regards to other device competitors, again, conversations I had over the weekend with thought leaders at AES really actually have me pretty excited. We answered a question earlier from Rick about our future technology, docs love our current technology. With the SenTiva platform, one of the things that they highlighted to me is the ability for us to do scheduled programming. So one physician referred to it as an electroceutical. And as you know, one of the keys to getting optimal outcome out of VNS Therapy or any device for that matter is appropriate dosing, if you will, and increasing the output to reach therapeutic levels for those patients. Only LivaNova in our SenTiva platform has the ability to implant the device and then enable the physician to schedule the increased dosing so that, that patient gets to an optimal therapeutic outcome without ever having to come back into the clinic. And again, in this COVID environment, they're all coming to me and saying, Chris, this is a big deal. And where we may not have had full adoption of that scheduled programming capability prior to COVID almost to a T, Adam, physicians were telling me that 90% of their patients are leaving with scheduled programming on, scheduled dosing on. And that to us is a big advantage because that will only improve the realization of the value that VNS can deliver in terms of improved outcomes for these patients. So feeling very good about our position with the current slate of ASMs, very good about how we're positioned with device competitors. And again, keep in mind, we have a broader indication than any of our other device competitors. So that's why 9 out of every 10 devices in the United States right now has LivaNova stamped on the can.

That concludes our first Q&A session. With that, we will head into a brief 10-minute break, after which Damien will take us into our strategic pipeline initiative session.

Thanks very much, everyone. See you shortly. [Break] [Presentation] [Break]

Welcome back, and we hope you're enjoying our investor presentation so far. Travis is a little mifty. He didn't get to talk about ACS, but we're looking forward to more questions. We're going to shift gears now to our strategic portfolio initiatives and kick it off with difficult-to-treat depression, or DTD. It's almost impossible to read a news feed or turn on the television without seeing something about mental health issues highlighted as a major problem, especially during COVID-19. And one of the most important mental health disorders that affects approximately 26 million people in the U.S. is depression. It's also one of the leading causes of disability worldwide. People with depression struggle to live normal lives and have depressed mood, less interest or pleasure in most of activities, inability to sleep normally and, sadly, in the most severe cases, thoughts of suicide or attempted suicide. Before I turn it over to Jonathan Walker, the VP, General Manager and Worldwide Head of our DTD business, I'd like to introduce you to Dr. Michael Ettner. He's an emergency room physician from Coeur d'Alene in Idaho who has suffered depression for many years. Let's hear now how depression has impacted his life.

I would sit for days, if not weeks on end, in my chair. And I couldn't even read. I couldn't even read a novel. It's incapacitating. I'm an emergency room doctor here in Coeur d'Alene. I've had great parents, grew up in the area here and yet have severe depression for many years. It didn't matter what I achieved, honors in college, honors in medical school, top-rated residency at UCLA. I still felt very low about myself. And I remember talking to my wife at the time when I was profoundly depressed, and I said, I can't even go outside and sit in the sun and feel the breeze and enjoy it. I can't -- I'm not capable of enjoying life. About 5 years ago, things came to a peak. I was having a hard time doing my job, and that's the one thing I knew I had to do, especially in emergency medicine. I had to be sharp mentally. And I started accelerating the visits to a psychiatrist and going through every medication we could think of, some of which would -- had terrible side effects.

Hi, everyone. My name is Jonathan Walker, General Manager here at LivaNova, with an update on one of our important future growth drivers, the difficult-to-treat depression business. Dr. Ettner's story is common and is typical of the challenges that patients, families and caregivers face with depression and really highlights the need for new treatments options. In 2006, Professor John Rush, who's a Professor Emeritus of Duke University School of Medicine, he published a seminal paper called the STAR*D study, and that paper looked at the effectiveness and tolerability of standard treatment. I spoke with Professor Rush about the STAR*D study and its findings, which have profound implications for the usefulness of conventional therapy. Professor Rush, thank you for joining us today. Let me begin by asking you to describe why the STAR*D study was needed. And what questions was it designed to answer?

Sure. The -- at the time of the study design in the early -- mid-90s, the question that the field was confronted with is, basically, what do you do if the first treatment doesn't work? And secondarily, what do you do if that treatment doesn't work and so on? So most of the treatments that had been studied up to that time were all sort of initial treatments from people that had not had much prior treatment at all. And in placebo-controlled studies, lots of things worked, but we had no idea what drug to use, what treatment to use even after the first treatment fails, meaning does not create a remission. And that was the basis for everyone starting the study on a particular SSRI and then being randomized to various options in the second step. The options included actually four switch treatments, meaning they stopped the first and started the second, three different medications and a psychotherapy, or they could stay on the first treatment, maybe they got better, but they didn't get well, and they were tolerating it, and then we could add a second either one of two medications or psychotherapy. So that was the thrust. The hope was somewhere down the road. If we went through a few steps, we might find some sort of a pathway for certain people. Some might prefer or be best benefited if they went from step 2 with a, to step 3 with b, to step 4 with c, but that was a secondary aim. The primary aim is, what do you do if the first treatment or the subsequent treatments don't work?

And what were the key findings of the study?

So there were several key findings. One was the fact that with the first step and the second step, we had about a 28% to 33% remission rate. But with the third step and the fourth step, our remission rates were much lower, something on the order of 15%. Half is good. What that meant was after two steps, we're very close to perhaps spontaneous improvement. The second is that when we followed patients up after they had remitted or at least responded and then gotten into follow-up, we were really rather surprised to see that over half the patients in follow-up had a relapse. In fact, the more treatments that went through, the higher the relapse rate, meaning if they failed on three or four treatments, we're looking at 60% to 70% relapse rate over a year. And if they had taken the first two treatments, the relapse rates were still not insignificant, 40%, 55% from the first two steps. So we realized that we probably have two problems here. One problem is getting patients well to begin with. The more you invest in routine treatment, the less good it turns out to be. And the second problem is that even if they do get better, getting patients to stay better was a much bigger problem than we realized.

Given the findings, what do you think the implications are for the usefulness of conventional therapy?

Well, I think it really raises a question, at what point do you begin to say, I need to use something that's not ordinarily delivered, let's say, at least in primary care, perhaps even some psychiatric practices. So interventional type of psychiatry, so called, so devices, brain stimulation methodology or complex psychopharmacology. That's one. The second is that it's likely that there's a group of patients for which all of our treatments, taken together, still do not produce sustained remission no matter what you do. And that's not unlike the rest of medicine. As you know, we have congestive heart failure. We have all kinds of problems that we manage. We don't always put people into remission and send them packing saying things will just be great. We manage things a lot. And I think it emphasized the need to learn how to manage difficult-to-treat depressed patients.

Thank you, Professor Rush. The type of depression that doesn't respond to conventional treatment is often referred to as treatment-resistant depression or a more recent and emerging patient-centric term difficult-to-treat depression, or DTD. There are an estimated 2.7 million DTD patients in the United States who failed to respond adequately to conventional therapy. And as you heard from Professor Rush, these patients then become candidates for more specialized care with different treatment options that complement standard therapy. And typically, these fall into four different types: psychotherapy, otherwise known as talk therapy; electroconvulsive therapy, or ECT, which is used in approximately 50,000 patients a year; transcranial magnetic stimulation, or TMS therapy, which is used in an estimated 27,000 patients annually; and esketamine nasal spray, which is used in 13,000 patients. While these therapies are effective and well tolerated in some patients, none of these therapies are effective in all patients. And that's whether due to a lack of efficacy, challenges with side effects, the potential for abuse or not being applicable to both unipolar and bipolar patients. And that limits their usefulness as a chronic long-term treatment for patients with depression who struggle to get well and to stay well. And that's where we believe vagus nerve stimulation or VNS Therapy comes in. VNS Therapy was FDA-approved in 2005 on the back of two Phase III trials, the D02 and the D04 study. The 12-week D02 sham-controlled study showed a modest but not significant difference in favor of the active VNS Therapy group. The long-term 12-month follow-up open-label study where all the patients received active VNS Therapy showed 27% of patients achieved a clinical response. And that was over double that seen in the D04 study, which was a matched comparator arm of patients receiving conventional therapy alone. In the 2 years following the FDA approval, VNS Therapy was implanted in approximately 3,300 patients. And while these data were sufficient for FDA approval, they weren't sufficient to achieve widespread reimbursement. And in 2007, CMS issued a noncoverage determination. In 2017, a real-world evidence study referred to as the D23 study was published in the American Journal of Psychiatry. And the D23 study randomized 795 patients to receive either VNS Therapy plus treatment-as-usual, otherwise known as TAU, compared to TAU alone, and followed those patients for 5 years. This was the biggest observational study of an active treatment in difficult-to-treat depression ever performed. And the primary endpoint in this study was the cumulative response rate. And at the end of the 5-year follow-up period, 68% of patients in the VNS-plus-TAU arm had a clinical response compared with 41% of patients in the TAU-alone arm, a statistically significant difference. The study also looked at the rate of remission and showed that 43% of patients in the VNS-plus-TAU group achieved remission compared with 26% of patients who received no VNS Therapy, again, a statistically significant difference. And in this study, response was defined as a 50% reduction in the baseline score on the Montgomery-Asberg Depression Rating Scale or MADRS, and remission was defined as a near or complete resolution of depressive symptoms. The effectiveness of VNS Therapy was seen across different subgroups of patients, such as those with comorbid anxiety, patients with bipolar or unipolar depression and regardless of whether the patient had previously responded to ECT therapy. And importantly, VNS Therapy was well tolerated and improved patients' quality of life. The publication of the D23 study opened the opportunity to revisit the previous coverage decision with CMS. And in 2019, we finalized the design of the RECOVER study. In this study, CMS provided reimbursement for VNS Therapy under a coverage with evidence determination or CED. And to tell us more about the RECOVER study and how the design incorporates key learnings from those prior studies I just mentioned, I met with Professor Mark George, who's a distinguished University Professor of Psychiatry, Radiology and Neurosciences at the Medical University of South Carolina. Professor George is also a RECOVER study investigator. Professor George, I want to start by asking you, what got your institution first interested in participating in the RECOVER study?

Well, the RECOVER study is actually kind of a personal salvation for me. I have been interested in vagus nerve and vagus nerve stimulation for a very long time. We did some of the first implants in depressed patients with vagus nerve stimulation over a decade ago, partnering with Cyberonics, and we did the first pilot studies and then the double-blind studies that got -- led to FDA approval. And as you may know, we made some mistakes in those trials. I mean we -- that -- where the trial wasn't actually statistically significant, although there was a mathematical difference. And so we ended up with a situation where there was FDA approval but a failure of what we call Class I evidence of efficacy. And so insurance companies were slow to pick up and pay for it. Nevertheless, I inherited maybe 100 patients who had been participating in some of those trials, and I continued to see all those patients down through the years in my clinic. And many of them got very, very well. I would see them socially once a year. And so I would see a patient who had a terrible struggle with depression requiring admissions and ECT and [ MADD med ] changes. And now they were -- I'd say, once a year, they were still on medicines, but they were doing really well and gotten their life back. And then I closed the door, bring the next person in who didn't have VNS, and the story was terrible. And I knew that we had a treatment that likely really was important for these patients, and there was no avenue to move forward. And I would kind of get depressed about that, that the world hadn't really seized on how to get VNS out for the patients that need it. And so when I heard about the RECOVERY trial, I was just overjoyed that perhaps we now have a mechanism that will right the wrong and get this out of the general population. That's a long answer. I was really, really waiting for a trial like this.

And which patient does the RECOVER study include?

The people that we're enrolling in this trial and who is a good candidate for vagus nerve stimulation, so there are many, many people who are depressed in America, but typically, it's a single episode, and they respond to medications. And so VNS is not for those people. However, depression is so common that even the small percentage of people who have recurrent depression is a big number, a lot of people. And those are the patients that we're looking for. So we're looking for people who've had recurrent depression that is more than one episode and who have not responded adequately to medications or devices, ECT or TMS, some of the other things that we have, or who are so severely ill. When they get ill, suicidality is so great that they just really can't risk having another episode. And so it's those chronic recurrent treatment-resistant depressed patients that we are enrolling. And those are the people who lead lives of a real misery and fill up emergency room, psych hospitals, psychiatric practices because the chances of responding to a third medication, if you fail two beforehand, are very, very low. And that's where we need new options, and that's what VNS, cervical VNS implanted gives us.

And given everything you know about the VNS Therapy, how confident are you that the study will be positive?

So I'm a clinical psychiatrist and neurologist, so I treat patients, and I'm a clinician. So I know the disease. I know depression. And I have a lot of experience with VNS. And then I'm a scientist as well. And I do rigorous -- I'm an editor of a journal. So I do science all day long every day. And I have a scientific mind and a clinical mind. So your question of how confident am I that this trial will succeed, the clinician in me says, look, this thing before us, I know it works. I see it in my patients. And so it's really just our job to design a clinical trial in which we can see the reality that is there. And so clinically, I'd say, yes, this is -- there's -- I bet the bank on this one. If I had to put my own money down, which I don't, but this is going to work. The scientist in me knows that there can be changes that we don't anticipate. I mean there's a pandemic going on. Who knows? I mean there's so many things that I've seen down through my career that may influence results, where you can never say it's a slam dunk. But this is -- of all the trials that I've participated in, in my life, probably the most derisked in terms of knowing the disease, the selection criteria, knowing the endpoints, knowing the dose, this has all the elements that lead to good-quality clinical trial results that then result in payers paying and market acceptance.

And if the study is positive, how do you think it will change the opinions of psychiatrists around VNS Therapy and the adoption of this technology more broadly?

So this is a complex concept. So VNS is really not competitive with all of those other medications and devices that you named because all of those are actually geared to treat an acute depressive episode. So somebody who's down in a hole of depression, how do we get them up and back on their game? And to varying degrees, those work, and they do that. However, what happens when people have had recurrent depression is they will fall back into another depression. And so how do you stop them from relapsing? What do you do for maintenance? And vagus nerve stimulation is designed totally for maintenance. It's what you give to people who've had recurrent episodes to try to increase the amount of time they can stay well as well as to augment those other medications and devices. So VNS is not really competitive in any way with those but rather a companion and augmentor, a booster. And it's geared around managing the illness in a chronic way as opposed to an acute way. If you think about diabetes as a chronic model, you've got some things that you can give immediately that will bring down the blood sugar and get people out of a hyperglycemic crisis. Then you've got other approaches that will help you with long-term maintenance of the disease. And so VNS really is in that category of long-term maintenance as opposed to an acute treatment for an episode.

Professor George, thank you very much for your time today. Since our last RECOVER study update, we've continued to see an acceleration in our enrollment rate. As of the end of October, 86% of our target number of sites are activated. We've consented all of the unipolar patients needed to achieve 250 implants and just over half of the bipolar patients we need to achieve 150 implants. We've also implanted over 2/3 of the total number of patients in the study. I'm also pleased to announce that we're very close to achieving our first key milestone in the study, the 250th unipolar patient implanted. And that will trigger the initiation of the first interim analysis. And this milestone is important as unipolar patients account for an estimated 70% of the patient opportunity. And as a reminder, this is an adaptive design trial. And that means that an independent data analysis group will review the data for the unipolar subjects to determine whether we have a high probability of achieving a positive study outcome. And if the answer is yes, we will stop recruitment into the RCT phase of the study and successfully complete our interim analysis for the unipolar cohort. If not, we will continue to recruit into the study and reanalyze the data every 25 patients implanted. Now because most of the unipolar subjects have been recruited in the second half of 2021 and have been followed for an average of only 3 months, we believe that there is a low probability of success at the first interim analysis. And therefore, subsequent analyses will be needed. In parallel, we'll continue to enroll bipolar patients in the RCT until we reach a similar milestone of 150 patients implanted. Once we've stopped enrolling into the RCT, we'll then start a dialogue with CMS about the transition to the prospective longitudinal study or registry. And we estimate that to take place for the unipolar arm in late 2022 or early 2023, and that ensures continued access for Medicare patients prior to the study results. There will be separate transitions for the unipolar and the bipolar arms. As a reminder, the longitudinal part of the study has exactly the same protocol as a randomized controlled trial. However, in this study, all patients will receive active VNS Therapy. We're committed to providing an external communication upon achieving our key milestones of implanting 250 unipolar and 150 bipolar patients as well as when we ship to the registry. Now after the last patient has enrolled in the RCT trial and they've completed their 1 year of follow-up, we're going to analyze the data for each cohort and then write and publish the results in a peer-reviewed journal, and that's a requirement for reconsideration of coverage by CMS. And this will occur twice in the RCT, once for the unipolar cohort and again for the bipolar cohort. We're reiterating our previous estimate for this to be completed by early 2024, after which point, we expect CMS to revisit the national coverage determination or NCD. Again, as a reminder, while there are no mandated time lines for CMS to reconsider the NCD, we hope for a potential decision in 2024. So assuming a successful outcome for the RECOVER study, what do we think is the commercial opportunity for LivaNova? Well, as referenced earlier, 26 million patients suffer from MDD. Removing the patients that are undiagnosed and untreated and those that fail to respond to four or more conventional treatments, which, by the way, is aligned to our FDA indication, we estimate the total addressable market for VNS Therapy to be 2.7 million patients. Our sales forecast model is structured around three key assumptions: firstly, the successful completion and positive outcome from the RECOVER study; secondly, the speed and breadth of which we can gain reimbursement through CMS, commercial plans and veteran affairs or VA; and finally, our peak year share assumptions and time to peak. As you can see from this slide, in our model, we've removed those patients that seek no further treatment and those that opt for other neuromodulation therapies. Using uptake analogs in the depression space and quantitative market research data with psychiatrists and patients, we estimate, at peak, we will achieve reimbursement coverage for 50% of the target patients and a volume share of 11% at an average revenue of $27,000 per unit. And that will yield a peak year revenue of $1.2 billion. Our go-to-market model is focused on approximately 6,000 of what we call interventional psychiatrists who care for the majority of DTD patients. These psychiatrists are defined by their use of ECT, TMS or esketamine and will be our initial targets for commercialization. We have a small infrastructure in place today, both in the field and working centrally to educate our patients and physicians to accelerate the RECOVER study. These individuals are highly skilled and have deep backgrounds in the psychiatry space. To support this team, we've also established a highly targeted direct-to-patient-and-physician educational effort. And that's focused largely in the geographies around our RECOVER sites. Over the next 2 years, as we transition to commercialization, we'll incrementally invest at key milestones to expand this team and build out the sales, marketing, market access and medical affairs functions. And these key milestones are the achievement of a positive interim analysis for the unipolar cohort, positive study results and the subsequent publication and a positive CMS coverage determination. Our goal is that by the time we have CMS coverage, we have a go-to-market infrastructure in place and a good base of awareness and understanding of VNS Therapy within the psychiatry community and also among DTD patients. Based upon the significant unmet need in the market and the existing evidence supporting the efficacy and the safety of VNS Therapy and the expected outcome from the RECOVER study, we believe this will be a transformative opportunity for LivaNova. Equally, we're excited to provide the psychiatry community with yet another tool for them to transform the lives of DTD patients. So let's now go back to Dr. Ettner and hear the rest of his story and his journey with VNS Therapy.

About 3 years ago, I had this device placed. It was very smooth. The procedure from the start to finish in the hospital was quick. I had some care to do for a week or 2 at the side of my implantation. I went right back to work the next day and felt fine. I experienced a strange sensation in my throat, but it wasn't painful. It's never been painful. After VNS Therapy, and it didn't happen overnight, but over time, I saw the sky, the blueness of the sky, the color of the water, the -- I trout fish, I fly fish and there's multitude of greens and blues in the river. Those became apparent to me. I couldn't see them before. My family would say that I changed right apparently within a month. I'm not sure I noticed it that way. But I can tell you 3 years out that I am a different person than I was 3 years ago. My life now is exciting. I'm much more effective at work. My brain is much sharper for what I need to be sharp for. I have the ability to complete projects now, not just dream about them. I mean it's just no comparison to how I felt and how I function to how I feel and how I function now. I'm a great advocate of medications, but unfortunately, 3 out of the 10 patients are not going to respond well to that, and they need an option. And that's the option I was given, and I am exceptionally thankful, and that's why I'm sitting here.

It's real stories from real people that drive us to pursue a coverage reconsideration for our FDA-approved technology for the treatment of depression. So thank you for your time today. And with that, I'm going to turn it over to Larry DiCarlo to discuss our heart failure program.

Hi, everyone, and thank you for joining us today. I'm very pleased to have this opportunity to provide an update on one of the several strategic growth initiatives that can transform LivaNova by delivering innovations that address significant unmet needs and target large high-growth markets using technologies proven to be safe and reliable in our neuromodulation business. They're based on proven technologies with competitive advantages. Further, innovations that generate strong clinical evidence are reflected in published treatment guidelines and enable favorable market access conditions to facilitate rapid and durable adoption of our technology. Today, we will focus on the current status of the heart failure program. After I describe our product, the VITARIA system, a name that connotes breath of life, we will hear from two key opinion leaders, Dr. Konstam and Dr. Udelson. Both have been involved in the planning and conduct of our pivotal study, which is currently ongoing to evaluate the safety and effectiveness of Autonomic Regulation Therapy. To begin, we have made solid progress despite pandemic headwinds. After a short pause, enrollment pace in our pivotal clinical study recovered in late 2020 and into 2021, during which we achieved an important milestone. Earlier this year, we announced that the 300th patient has been randomized into the trial. The importance of that milestone will be apparent in a few minutes. Before we started the ANTHEM pivotal study, we conducted careful and thoughtful research looking at anatomy and integrated neurological, electrophysiological and functional cardiovascular behavior in normal and pathologic conditions involving severe cardiovascular disease. We utilized relevant model systems as well as pilot clinical study that we'll discuss shortly. This research approach led to key discoveries regarding central and peripheral neural network interactions that informed our therapeutic and clinical study design. Among these important findings, we focused attention on the gradual adjustment of nerve stimulation intensity, also called titration. We studied the components of neurostimulation and the patterns for cyclic delivery of stimulation rigorously and discovered them to be important determinants of effective neuromodulation both centrally and peripherally. During the titration that occurs after implantation, vagus nerve signaling is predominantly after it or to the brain at low stimulation intensities. As intensity increases, afferent signaling increases in the periphery. As the therapeutic zone is approached, the functional effects of afferent and efferent signaling are balanced. At this point, we encountered the neural fulcrum, a region on the titration curve that is defined by functional response to stimulation intensity. The discovery of this fundamental phenomenon has been very important to the success we have experienced in our pilot study. We are now using this discovery to guide VNS titration in each individual in the pivotal study. Neural fulcrum behavior represents a key biomarker of autonomic nervous system engagement during vagus nerve stimulation. It is assessed near the end of the titration period. Surface electrocardiogram signals are acquired in real time and are used to identify change in heart rate dynamics in response to stimulation. This change is used for selecting the appropriate stimulation parameters for each individual. The therapy that is delivered by the VITARIA system is called Autonomic Regulation Therapy or ART for short. The VITARIA system is comprised of a pulse generator and an insulated lead that provides a stable interface between the stimulation circuitry and the cervical vagus nerve. Adjustments in pulse generator operating characteristics are made using the computer programming system that is very similar to the one used to adjust stimulation via pacemaker. VITARIA is the only neuromodulation system that simultaneously engages both the central and peripheral neural networks. This unique method of neuromodulation sets us apart from other device-based heart failure therapies. We've created a brief animation to explain how the VITARIA system is used to deliver ART. Our goal is to blunt disease progression and to improve the lives of patients and their families who are struggling with the ill effects of chronic heart failure. [Presentation]

The VITARIA system has several key competitive advantages that differentiate its performance. First, the VITARIA implant procedure is relatively simple. No vascular access is required. The pulse generator volume is only 8 cubic centimeters, about 20% of the volume of the typical implantable cardioverter defibrillator and the same or smaller than a pacemaker. The neuromodulation effects enable the potential for robust and durable therapeutic effects. VITARIA is based on a proven neuromodulation technology with excellent reliability and longevity. It features an automated titration process to reduce patients' burden and to positively impact clinical workflow and resource utilization in the heart failure clinic. We and others have shown that appropriate selection of therapy intensity and cycle pattern have meaningful effects on response to therapy. We have discovered a biomarker for identifying autonomic engagement during VNS titration to individually tailor the selection of those parameters. I'll now turn to Dr. Udelson, Co-Chair of the ANTHEM Steering Committee, who will present the pilot clinical study results that led to our breakthrough device program designation and IDU approval by FDA.

Thanks so much, Dr. DiCarlo. It's a pleasure to be with you today to talk about the groundbreaking research results that informed our approach to the pivotal study design evaluating the VITARIA system. The ANTHEM heart failure pilot trial was motivated by the sobering fact that prognosis of heart failure patients remains poor despite utilization of new drugs and devices. Consequently, a pilot clinical study was undertaken to assess the safety, feasibility, tolerability and signals of longitudinal efficacy in a cohort of advanced heart failure patients with reduced left ventricular injection fraction who had symptoms despite taking medications stipulated in treatment guidelines. 60, 6-0, patients, were randomized to receive ART. Half of the patients received ART on the right vagus nerve, and the other half on the left vagus nerve since it was unknown at that time whether differences in clinical outcomes were associated with the stimulation site. The cohort was well treated with heart failure drugs, including at the time, beta blockers, ACE inhibitors or ARBs, aldosterone antagonists and loop diuretics. None of the patients had ICDs to protect against arrhythmia. Demographics were similar between groups, and both the implant procedure and chronic therapy were associated with an acceptable benefit risk profile throughout the initial phase of the study that persisted through long-term follow-up. The major findings related to the efficacy signals are shown here in this slide for patients followed through 12 months after the titration was completed. The heart's pumping function reflected in the left ventricular ejection fraction measured by echocardiogram improved from about 33% at baseline to nearly 40%, which is a clinically significant improvement. Similarly, the New York heart class distribution of the cohort improved. None of the patients remained in Class III after 12 months. Quality of life reported by patients improved substantially, and integrated cardiovascular performance reflected in a standardized test that measures the distance in meters, walk during 6 minutes also improve. Although not shown here, the improvements in 6-minute walk distance and other parameters was greater for patients receiving right-sided stimulation compared to left. And finally, the spontaneous variability in the 24-hour heart rate was higher after chronic therapy compared to baseline, suggesting that the cardiovascular system was less affected by sympathetic nervous system dominance. I'd like to emphasize that improvements in the individual parameters are good, but perhaps more importantly, the concordance and consistency among all of the results suggest a robust and durable therapeutic effect, which we thought worthy of further study in a randomized controlled pivotal study. The results and interpretation of those results from the ANTHEM pilot study demonstrated that a specific form of ART was feasible and well tolerated and effective in patients with heart failure and reduced ejection fraction. Unexpected adverse events were not observed. The pilot study was extended, and patients were followed out to 42 months, and those results suggested that the benefits of ART appear durable out to nearly 4 years. With these early clinical results and strong preclinical evidence supporting a growing understanding of the mechanism of action, LivaNova moved forward in the clinical evidence generation continuum to a randomized controlled study in order to evaluate the effects of ART on morbidity and mortality outcomes in a pivotal trial. Back to you, Dr. DiCarlo.

Thank you, Dr. Udelson. We are fortunate to have with us today Dr. Marvin Konstam, Chair of the Steering Committee and Chief Investigator of the ANTHEM pivotal study.

Thanks, Dr. DiCarlo. It's a great pleasure to participate in this event today to help frame the unmet need related to chronic heart failure. I'll talk about the scope of heart failure, therapeutic rationale for use of VNS to deliver ART and its synergy with guideline-directed drug therapy as well as make a few comments about the study design and execution. Despite use of many classes of drugs, symptoms often worsen over time, and patients with heart failure are exposed to excess mortality compared to age-matched cohorts without heart failure. The beneficial effects of ART are synergistic to drug therapies for heart failure and reinforce the effects different classes of drugs -- of different classes of drugs shown here. The rationale for use of art in heart failure is rooted in the neurophysiology of cardiovascular system regulation, a research field that has been active for more than 50 years. After the hardest damage and cardiac output is reduced, the body's neural systems attempt to compensate for inadequate blood supply, driving physiology more appropriate for hemorrhagic shock. These changes result in autonomic dysregulation, a condition with many adverse effects shown here. The therapy delivered by VITARIA works to attenuate these processes as we saw in the animation earlier. The adaptive sample sizing built into the ANTHEM pivotal study benefits patients by minimizing the number of patients required in order to reach scientifically valid conclusions. You can refer to this paper for many important details, which we won't have time to cover today. Investigators identify advanced heart failure patients with a left ventricular ejection fraction less than or equal to 35% on stable guideline-directed drug therapy with New York Heart Association Class II or III and NT-proBNP levels greater than 800 nanograms per ml. Once they provide informed consent, they undergo final screening based on standardized assessments of LVEF and biomarker levels measured by independent core laboratories. Patients who pass screening are randomized into either the control group or the active therapy group. Both groups continue to receive guideline-directed medical therapy throughout the trial. The long-term morbidity and mortality assessment will evaluate a primary endpoint of reduction in the combined -- combination of cardiovascular death or heart failure hospitalization. A Bayesian adaptive design will determine the appropriate sample size subsequent to prespecified interim analyses occurring during the trial. The FDA's Breakthrough Devices Program encourages novel study designs that could result in earlier access to important medical technology in areas where improved outcomes are deemed necessary. Heart failure is one of those areas. In connection with the Breakthrough Devices Program designation, the ANTHEM pivotal study provides for interim assessments of heart failure symptoms and function while the longer-term morbidity and mortality portion of the study continues on to completion. The first interim analysis for symptomatic heart failure improvement requires 400 randomized subjects, including 300 completing 9 months after randomization. The 300th patient was randomized this past April, and the 400th patient should be randomized in early 2022. Interim analyses will consist of two risk-related conditions: freedom from system and procedure-related serious adverse events and predictive probability of achieving morbidity and mortality endpoint. If these conditions are satisfied, then three coprimary efficacy endpoints will be statistically assessed. The 6-minute walk test, quality of life measured by the Kansas City Cardiomyopathy Questionnaire and left ventricular ejection fraction measured by the core laboratory. These five prespecified conditions provide a high level of assurance of clinical benefit and a favorable benefit risk profile. That's a fair amount of information. However, the design manuscript provides further detail describing the entire study and the prespecified analyses. We're looking forward to seeing these results. Developing new therapies for heart failure isn't easy, but if successful, the patient benefits could be substantial. The ANTHEM pivotal trials build upon an extensive understanding of the nature and consequences of autonomic dysfunction in heart failure, deep insight into the selection of parameters for VNS to safely achieve therapeutic autonomic engagement and strong pilot data pointing to favorable clinical effect of the VITARIA system. I believe that those elements, combined with a highly innovative trial designed in collaboration with the FDA and a strong, highly experienced LivaNova team, yield a high probability of demonstrating a much needed incremental clinical benefit. If so, we will have provided a major advance, offering patients with heart failure improved survival and quality of life. Thanks for your attention, and I'll hand it back to you, Larry.

Thanks, Dr. Konstam. In the minutes we have remaining, I wanted to review our estimates of the addressable market and make some general comments regarding commercialization after PMA approval. We estimate that over 3 million people in the United States have heart failure with systolic dysfunction of the left ventricle, leading to reduced left ventricular ejection fraction. Of these more than 3 million individuals, about 1 million have heart failure that may be too severe, New York Heart Association Class IV, or are not sufficiently severe, New York Heart Association Class I, to be indicated for ART, leaving 2.3 million individuals. If we exclude a left ventricular ejection fraction of more than 35% and a high preponderance of severe comorbidities, such as advanced diabetes, severe valve disorders, chronic obstructive pulmonary disease and kidney dysfunction that will probably limit their candidacy for ART, at least initially, that will leave an initial cohort of heart failure patients in the U.S. of approximately 300,000 individuals and will grow based on a 10% annual incidence and the natural evolution of heart failure despite treatment according to established guidelines. After PMA approval and broad market launch, our competitive advantage will, even with modest adoption, create access to a multibillion-dollar market opportunity. Finally, LivaNova has been and is the world's leader in neuromodulation technologies involved in the vagus nerve. Our clinical experience is unparalleled with regard to vagus nerve stimulation. We remain optimistic about the future of LivaNova and believe that investment in the strategic initiative may indeed be a catalyst for future growth. It's been a pleasure to be here today, and I'll turn it over now to John Webb, the VP of Obstructive Sleep Apnea program.

Thank you for the introduction, and hello, everyone. My name is John Webb, and I am the Vice President of Sleep Apnea at LivaNova. It's my pleasure to introduce you to some exciting and recent developments in our OSA therapy. OSA, or obstructive sleep apnea, is a debilitating disorder that impacts over 1 billion people worldwide. OSA is observed as a repeated and involuntary stopping of breathing during sleep, which is most often caused by tongue and/or pharyngeal wall collapse. OSA severity is most often defined by the Apnea Hypopnea Index or AHI, which captures the number of apneas, a cessation of breathing, and hypopneas, which are the number of partial airway blockages indexed over a period of time. AHI is often recorded during the sleep session, known as a polysomnogram, PSG. A patient will be diagnosed with mild AHI during this PSG when they experience an AHI between 5 and 15. Moderate OSA is diagnosed when that AHI level is between 15 and 30 and severe OSA when AHI is greater than 30. Given the lack of oxygen and recuperative sleep OSA sufferers may experience, multiple comorbidities have been associated with the long-term effect of OSA. These include, but are not limited to, depression, congestive heart failure and obesity. As previously stated, over 1 billion people globally suffer from OSA, and 54 million sufferers are in the United States alone. The cost of managing untreated OSA exceeds $65 billion per year, and the cost to the U.S. economy is over $100 billion per year, which includes indirect costs, such as missed days of work and decreased productivity levels. Currently, the most commonly used and often first line of treatment is CPAP, continuous positive airway pressure. Unfortunately, given the nature of the technology, which requires equipment to be attached to a patient's face during sleep, up to roughly 50% of patients who are prescribed CPAP cannot or will not tolerate it. Previously, for those patients who could not tolerate CPAP, few options existed but included surgical treatments, such as UPPP and MMA, which involved cutting into and removing soft tissue and/or bone. These procedures can have a long recovery period and have shown moderate efficacy. However, recently, hypoglossal nerve stimulation, which stimulates the nerve to either shape the airway and/or move the tongue was launched in 2014 and has shown both to have higher efficacy and a reduced invasiveness when compared to many of these surgeries. It provides a viable solution for those with mild to severe OSA who cannot tolerate PAP therapy. As mentioned, over 54 million patients in the United States alone suffer from obstructive sleep apnea. Of those, close to half are moderate to severe, and roughly 2.3 million of them are noncompliant to CPAP. When considering other factors of this population to include, excluding factors such as high BMI, greater than 35, roughly 1 million patients in the U.S. today will be eligible and good candidates for hypoglossal nerve stimulation. LivaNova's science and technology journey begins in 2004. Recognizing the potential and synergies with its core business, LivaNova began investing in and nurturing the technology leading to its CE mark in 2012 and its ultimate integration in 2018. After the integration, LivaNova has spent the past 3 years learning from the 300-plus implanted patients and 50 implanting physicians and planning for our next, IDE trial, Osprey. During this period, we also enhanced the aura6000 system based upon both patient and physician feedback. Enhancements include an optional longer lead, a simpler controller interface and an increase in systems and component durability. Our therapy system, the aura6000 consists of an implantable pulse generator, which has a rechargeable battery lasting up to 15 years, a single hypoglossal lead and a customizable controller that is used for charging and setting therapy values that are most comfortable to the patient's sleep. The lead has 6 customizable electrodes, which is crucial for allowing proximal lead placement and for stimulating and activating additional muscle fibers to shape the tongue based upon the type of observed obstruction. This is important for several reasons, which include, but are not limited to reducing tongue shaping and for greater applicability to select patients. The aura6000 rechargeable lithium ion battery lasts up to 15 years given proper use condition. The battery charges quickly, taking less than an hour to fully charge, and provides therapy for up to 3 days. OSA therapy with the aura6000 is differentiated in several ways. First, the rechargeable implant is smaller than other commercially available devices, and the battery can last up to 15 years. Second, data suggests applicability for patients with complete concentric collapse and a BMI up to 35. These groups can represent up to 30% of moderate to severe OSA sufferers. Additionally, given the applicability on CCC patients, physicians and patients may be able to avoid an additional drug-induced sleep endoscopy, or DISE, visit based upon their hospital's protocol. Lastly, the therapy does not require the implantation of a sensing lead, which further increases invasiveness. Currently, there are 3 manufacturers of hypoglossal nerve stimulators on the market. All companies have a CE mark for their therapies. The products differ in applicable patient population, invasiveness and methods of stimulation. Recently, we have obtained FDA approval for our IDE and pivotal trial, OSPREY. The trial is now active and is recruiting patients across our 20 sites. The trial seeks to confirm results from our THN3 RCT, and we designed the trial to be a prospective multicenter RCT, which is currently missing within the current HGNS literature. We plan to assess efficacy versus control by assessing AHI response rates as compared to the control group at month 7 in up to 150 patients. Patients will be followed and assessed up to 12 months. Secondary endpoints will include quality of life factors such as improvements in oxygen desaturation and the Epworth Sleepiness Scale. We look forward to future communications as publications on both THN3 and the OSPREY manuscript become available. As we look at our time line, I would like to highlight that we received IDE approval earlier this year. And as mentioned, we are currently enrolling patients. We anticipate our first implant prior to the end of the year. Enrollment will continue through the second quarter of 2023, and we're targeting commercialization in 2024. At this time, it is my pleasure to introduce you to Dr. Atul Malhotra, the primary investigator of the OSPREY trial.

My name is Atul Malhotra. I'm a pulmonary critical care management physician scientist at UC California San Diego. I'm really proud to be the PI of the OSPREY study where we're studying a randomized trial, the efficacy of hypoglossal neurostimulation for sleep apnea. As you may know, sleep apnea has affected up to 1 billion people worldwide. Even though CPAP is pretty good for treatment of sleep apnea, it's not great in the sense that not all patients tolerate it. So we're always looking for alternative therapies. There are other nerve simulators that are out there. But some of them are working at a very narrow range of patients, and some of them haven't been studied in randomized studies. And what we're particularly excited about here is we're doing a randomized trial where patients get either treatment or no treatment in a randomized way. Some of the previous studies were just observational. They just look over time to see what happens to treatment. And there's also things like diet, exercise, whatnot, that can change over time. In a randomized study, you got a better sense of what's actually working and what's the mechanism of the improvement. So we're excited about that aspect of it. We have a well-designed study. It's using something called a goldilocks design. That's an adaptive trial design where we -- it's not too sweet, not too bitter. It's just right in terms of the sample size. We're able to adjust the sample size, best adaptive design, which should help us really find definitive answers in a very efficient way. We won't rule away too many people or rule too few. We'll hopefully get it just right. And as I said, the inclusion criteria is fairly broad. So the body mass index could be up to 35 kilograms per meter squares. And so our inclusion criteria should fit the majority of patients that I see in the clinic as opposed to some of the treatments which are only available for a very narrow sliver of the sleep apnea population. So we should have a fairly definitive answer as soon there's a trial complete. So we're excited to have this trial underway and can't wait for the results.

Thank you, Dr. Malhotra. Let's head back to our Houston office where Damien, Jonathan, Larry and I will take you through your questions. Thank you.

Welcome to our second Q&A session where we have Damien, Jonathan Walker, Dr. Larry DiCarlo and John Webb. And our first question comes in from Anthony Petrone with Jefferies.

Great. Can you hear me?

Yes, Anthony, great.

Excellent. So first question will be for Jonathan on DTD. Good updates here. I guess maybe just to be a little bit clear on timing for the initial interim analysis readout on the unipolar arm, it sounds like it's certainly in 2022, but maybe to get more clarity on specifics on timing? And then within that on, what is the expectation for total the number of unipolar patients in the -- at the interim analysis? And what would be the average implant duration in that initial cohort? And I have a couple of follow-ups.

Sure. Thanks for the question. So let me take the interim analysis first and explain really how this is going to work. So per protocol, once we have our 250th patient implanted, we can begin the interim analysis. So when we have that complete data set, we then send it up to it some external consultants who look at -- an analytical team, and they come back and whether or not we've actually hit the interim analysis. At that point, what we have our 250th implant, which is likely to be early in the first quarter next year, we'll probably have about 4 to 5 months of follow-up data per subject. And the reason for that is that a lot of our implants have actually taken part -- place during the second half of this year. So it's unlikely at that first interim analysis that we'll actually have a positive outcome. We just simply won't have had enough patients exposed to VNS therapy, if you think that VNS therapy takes about 3 to 6 months to see a separation from the treatment-as-usual arm. So then every 25 patients after that 250th patient, we'll then start the second analysis, and then we'll continue until the external data group tell us when we've actually hit the 95% positive predictive value. And we anticipate that, that will happen sometime in the first quarter or early second quarter of next year. Does that answer the question?

That is helpful. And then just some of the follow-ups as we look forward potentially learning more about the data as it comes to fruition. When you look at RECOVER, there's a number of primary endpoints, rate of response, time to first response duration and you also have rate and duration of remission. So maybe just to clear up here, what is the most clinically relevant endpoint for this patient cohort and if we could just set some benchmarks for success on some of these end points.

So when a clinician thinks about a therapy in difficult-to-treat depression, there's a number of things that they're really interested in. The first is the percentage of patients who have any response. That's very similar to our D23 data where we showed it was a cumulative time to first -- sorry, it's a cumulative number of first-time responders. So in other words, a patient responds, you count them as a responder and then you add up those number of patients that respond. So that's one important metric. The second is how long the patients stay in response. So are they just in response for 1 month? Or are they in response for multiple months? So in the RECOVER study, our primary endpoint is actually the rate of response. So what that takes into account is the number first-time responders plus how long they stay in response. And that really is the most clinically meaningful endpoint, not for psychiatrists but also for payers. So I think that's the one that I think everyone is be focused on.

And last for me, and I'll get back in queue. For Larry on Victoria. 400 patient will be enrolled in 2022. So is it safe to assume the interim readout will be at some point in the second half of 2022? And then just to round out the TAM figures there, should we assume that pricing is more pacemaker and ICD like? Or is it similar to the core neuromodulation business?

Yes. Thank you for your questions. Yes, the first interim analysis will occur when there have been patients randomized and 300 of those patients have completed at least 9 months of time since randomization. We anticipate that the interim analysis will be completed sometime in the first or second quarter, possibly third quarter of 2022 depending upon enrollment rates. With regard to pricing, this is something that's still in discussion. We believe that it's something that could be leveraged off of our existing epilepsy and other platforms, which are all delivering via the vagus nerve.

The next question comes in from Mike Polark with Baird.

Jonathan, in your slide, I wanted to drill in on some of the commercial tidbits. $1.2 billion of peak sales for NDPD. Obviously, a big number. Obviously, aspirational. It's still a number you're mentioning. I assume you don't get there lightly. So can you help us a little bit more on the slope of the ramp from here to there? Is that a decade to get there? Is that 5 years? Is it 20 years? How do you envision the trajectory of revenue assuming obviously positive clinical data was that significant long-term target?

Actually, if this is okay, we're going to cover that during our financial section, which is in the next section. So if you could just come back and hold that question until then, we'll be covering that data then.

Okay. Should I ask on -- in the theoretical 2023 to, call it, 2025 period where it's assumed depression RECOVER study is successful, Medicare approved registry, what does the non-Medicare opportunity look like in those years? Is it de minimis because you're still working through the -- closing out the study, publishing the data, working with Medicare on a coverage decision? Or do you imagine a scenario where the non-Medicare payers, given how long BNS for depression has been in the market and given the extent of your evidence base that there's a significant non-Medicare opportunity in that -- during that time frame?

Yes. I think that's a great question. Well, obviously, the commercial opportunity is about 40% of the overall opportunity for this marketplace. The rest is Medicare, Medicare Advantage, Medicaid and VA. And we're actually -- we do have a mechanism to actually get individual patients coverage covered now through our patient assistance program. And we have about 60%, 65% success rate today, but it's a very long path. We have to often go to appeals. We don't see that changing until we have a positive outlook the RECOVER study. And we can actually take what we call a Level 1 evidence, which is a large sham-controlled long-term clinical trial to commercial payers. After which point, within the first 12 to 18 months after the RECOVER study, we expect achieve about 70% of covered lives. So not -- we don't see a lot of shift we have a positive RECOVER study and thereafter with this Level 1 evidence, we're able -- we intend to start engaging our commercial payers and actually see that coverage lifted.

Next question comes in from Phil Cooper from Goldman Sachs.

Can you guys hear me okay?

Yes, Phil, we've got you.

Super. Great detail on the depression side. I was hoping to follow up on the HF side or some of the same details. So I'm wondering if you'd be willing to provide sort of a timing outlook or a patient enrollment outlook for your projected success on the embedded study on the HF side.

So for the embedded study on the HF side, I believe the guidance that we've given previously that the interim analysis will read out sometime in the first half of '22, possibly the second half of 2022, and that guidance has not changed.

Sorry, just to follow on there. You've given detail on the depression side, but you don't think your initial interim read at 250 is likely to be successful. Do you all have a similar comment on your initial interim read at 400 patients on the HF side?

No, we have no reason to believe that we -- what we have reason to believe that we will be based upon precedent trials and precedent work that we've done. We have not seen any of the data from this trial, obviously. But we have no particular reason to believe that success is going to be elusive here.

Okay. All right. That's great. And then kind of the longer-term picture on the full morbidity and mortality study. Just hoping you can speak broadly to the importance of that PMA supplement, what impact that will have, if it's on label or -- and/or on the reimbursement environment for the procedure?

Yes. So our current understanding from both regulators and payers is that a therapy is value to patients if it could improve their symptoms and function and is of additional value of it can improve their longevity. So we believe that we're going to have a winning product based upon one or both of those scenarios.

That's very helpful. Just quick follow-up on the depression side. I was interested if you've heard from CMS about the viability of getting an NCD change for just the unipolar? Or do you need the completion of both the uni and bipolar arms for potential reconsideration of NCD?

Yes. The 2 arms are separate from each other. So we will have separate interim analyses. We'll have separate publications. And then we'll have separate considerations the national coverage determination. So during that whole process, we'll be engaging with CMS in a regular dialogue as we move forward.

Our next question comes in from Matt Taylor with UBS.

Great. Can you hear me okay?

Yes, we've got you.

Good. Good. Okay. So I do want to ask if could put out some of those longer-term assumptions on depression. So maybe I can just ask specifically about the ASP assumption, I think it's 27 in the slide, which is a little bit above what we've been using. And I was hoping you could give us some feedback on your confidence in being able to get in that area and what the range of outcomes could be and what that is really dependent on?

Sure. That's a great question. The ASP, obviously, is an average blended price of our commercial price, our list price and also the discounted price, the rebated price that we're actually giving to overcome some of the reimbursement hurdles on the Medicare side. And so it's really a blend of our 2 prices. Our commercial price is closer to $36,000. Our Medicare price is closer -- or rebated prices close to $25,000. So $27,000 is actually -- an actual ASP that we have today. Moving forward, we expect that ASP to rise by, in our modeling at least, by about 3% per annum, if that's helpful.

Great. No, that's good. That helps. Maybe I'll just test the other key assumption there. I think you talked about an 11% penetration. I think if I got this slide right, and I was hoping you could talk about some of the key things, the analogs that you mentioned or other assumptions that lead to the 11% penetration.

Sure. Yes. So we've triangulated the past history of VNS therapy. So if you go back to 2205, in the first -- well, the 18 months that we were in the market, we had about 3,300 patients that were actually implanted. We had another 700 patients that were waiting to be implanted. And we had about 16,000 prescriptions that were actually written during that period of time. So that's kind of one benchmark that we're using. We're also -- we also conducted some quantitative research with psychiatrists where we expose them to the product profile of DNS therapy and difficult-to-treat depression, described to them the RECOVER study and the patient population that we would be considering and asked them to estimate what the -- and these were a group of psychiatrists that haven't necessarily used VNS therapy. Some of them were users in the past. Some of them were nonusers. And about 14% was actually our estimated penetration amongst that in that piece of research. We also know that physicians tend to overestimate their usage, and so we discounted that back to 11%, which is how we kind of triangulated that 11%.

Our next question comes in from Mike Matson with Needham.

Yes. So there does seem a fair bit of skim among the investment community about the heart failure trial, so partly because I think there were 2 prior attempts at this with other with VNS, with other trials. So can you maybe just talk a little bit about why you think your trial is different, your product is different, why this is likely to succeed, whereas other ones have failed in the past?

Yes, I'm happy to do that. I'd also point out that we have a publication that's in the reference material that we've provided from past investor meetings that really summarizes those 3 trials compares and contrast the technologies and the approaches that we're using. We hope that you'll find that helpful and useful in addressing this particular question. But the short answer is that if one were to look at all 3 of those trials, basically, they've constituted what would in the drug world, a dose-ranging presentation. So in one of those trials, a very low frequency of stimulation was used. And another of those trials are very high rate of stimulation was used. And in the third trial, the stimulation rate was in between those 2 and at the natural frequency of the vagus nerve. That was the ANTHEM-HF pilot study. We believe that we've done our homework. We believe that and very well, not only the differences in the technologies, but also the implications of using those stimulation frequencies and what that meant to responses in patients that participated in those trials, and the additional information in that publication. Long story short, we had a greater magnitude of response in heart rate variability, ejection fraction, quality of life and 6-minute walk distance than we're seeing in the treatment arms of the other 2 studies. And we believe this is intrinsically related to the stimulation frequency that was delivered to those patients.

That concludes our second Q&A session. With that, Damien, I'll turn it over to you to tee up the financial update.

Great. Thanks, Lindsey, and thanks, guys, for the color and great work. As I mentioned during my opening remarks, LivaNova has evolved greatly since the Investor Day we hosted back in 2017. We've transformed the organization structure, redefined the product portfolio and improved the way we execute and drive financial discipline. Given the evolution, including the exciting transformational SPIs, what lays ahead, we wanted to provide you with a comprehensive financial update. And with that, I'll turn it to Alex, our CFO.

Thank you, Damien. Hello, everyone, and thank you for joining us today. As Damien mentioned, a lot has changed since the Investor Day hosted in 2017. Therefore, I'm excited provide you with a full financial update here today. Before turning to long-term financial outlook, I wanted to first reaffirm our 2021 guidance that was issued on November 3. As a reminder, full year 2021, we continue to anticipate sales growth between 8% and 11% and between 15% and 18% when excluding the heart valve business that was divested and deconsolidated effective June 1. Adjusted diluted earnings per share from continuing operations is expected to be in the range of $2 and $2.10 assuming adjusted diluted weighted average shares outstanding of 51.5 million for the full year. Adjusted free cash flow from operations is expected to be between $55 million and $75 million. During Q4, we continued to well. And against the residual backdrop of COVID-19, I'm happy to report that run rate trends have progressed in line with expectations. As part of our goal to drive greater accountability and execute I would like to highlight that effective in the fourth quarter, we adjusted our reporting from 2 to 3 segments. These reportable segments will now be: Neuromodulation; Cardiopulmonary, or CP; and Advanced Circulatory Support, or ACS. The change to segregate the cardiovascular segment into CP and ACS reflects the way we internally manage, evaluate performance and how allocate resources. In addition, this new methodology provides greater transparency around growth and margin profiles. We will recast historical results into the 3 segment format in our 2021, 10-K. As reflected in today's agenda and throughout today's business unit presentations, LivaNova is a unique portfolio comprised of 3 strategic core businesses and 3 strategic portfolio initiatives or SPIs. Throughout my presentation, I will make reference to the core business that we define in terms of our epilepsy business, which is in the Neuromodulation segment, as well as our CP and ACS segments. This will enable you to see the growth outlook, margin profiles and diluted adjusted EPS, excluding the impact of SPIs. We will present the outlook for LivaNova on a consolidated basis, including the impact of SPIs, which will be referenced as core plus SPIs. This slide outlines our core businesses as well as SPIs. We believe that it is critical to understand the financial profile, including and excluding the impact of SPIs given the significant investments that is required in these transformative pipeline programs. This slide also reflects our estimate of market sizes in 2021 along with the respective market growth rates. I would like to point out that the markets for these SPIs are in their early stages. We estimated that these 2021 markets by using a very narrow definition. And for Neuromodulation only, including the market for implantable neuromodulation devices, we believe these markets reflect a starting point and that each one of these could be as big or bigger than the epilepsy business in the future. With that as the backdrop, let's first discuss our financial outlook by segment. Note that all compound annual growth rate ranges are stated a 3-year basis anchored on the midpoint for 2021 full year guidance that was issued on November 3 and reaffirmed here today. The margins are reflective of our 2024 targets. Starting with the Neuromodulation, we anticipate 9% to 13% CAGR, including 7% to 9% growth in epilepsy, plus approximately $50 million to $75 million in annual contribution from SPIs in 2024. The SPI revenue contribution is primarily driven by DTD. Our Neuromodulation segment delivers compelling gross margins approximately 85% to 90%, which we believe will continue in 2024. Operating margins are expected to between 25% and 30% when including the significant investment in SPIs. For just epilepsy, the operating margin is targeted to be well over 40%. Moving to CP. We expect above-market sales CAGR of 5% to 7% post the launch of the ESSENCE platform. We anticipate the modest revenue from this launch beginning in the fourth quarter of next year with a gradual acceleration starting in 2023 and lasting for several years thereafter. In CP, we forecast gross margins of 50% to 55% and adjusted operating margins of 18% to 23%. In ACS, we anticipate above-market growth, resulting in a 20% to 25% CAGR with gross margin of 70% to 75%. As Travis mentioned during his review, we're in the early stages of this business, and we'll continue to invest in building necessary commercial infrastructure as well as the new product and indication expansion innovation over the next several years. Therefore, we do not expect accretive operating margin during the '21 to '24 time frame. Now that we've discussed the details by segment, let's roll this up into core and core plus SPIs. In aggregate, including the estimated $50 million to $75 million of revenue contribution from SPIs, we estimate that sales CAGR of 7% to 10% on a 3-year basis or 8% to 11% when excluding the 2021 revenues from the heart valve business recognized prior to divestiture. Excluding the impact of SPIs, sales CAGR is 5% to 8% or 6% to 9%, excluding heart valves. We project gross margin from our core business the low 70s. Gross margin will expand into the mid-70s by 2024, driven by the contribution from SPIs. We're targeting operating margins of 17% to 22% of for LivaNova on a total consolidated basis. Again, this margin profile reflects the significant investment in R&D and commercialization of SPIs. Excluding SPIs, we expect margins to be 25% to 30% by 2024. Adjusted operating margins assume approximately $55 million of annual corporate shared service expenses that are not allocated to a segment. Lastly, we anticipate diluted adjusted EPS CAGR for total LivaNova of approximately 20% on a 3-year basis. Diluted adjusted EPS assumes annual adjusted interest expense of $11 million to $12 million, and adjusted income tax rate range of 15% to 20% and adjusted diluted weighted average shares outstanding of approximately 54 million for the full year of 2024. As discussed earlier today, we have 3 separate clinical initiatives targeting what we expect to be significant market opportunities. As for the longer-term outlook for these SPIs, starting with DTD, we project annual DTD sales of $150 million to $200 million at 4 years following transition to registry upon favorable CMS noncoverage consideration decision. As Jonathan mentioned earlier today, a transition to registry is expected in late 2022 or early 2023, and we expect CMS to revisit the national coverage determination during 2024. Moving to OSA. We project annual OSA of $175 million to $225 million at 4 years following FDA approval. We intend to seek FDA approval in mid-2024. As for heart failure, we project annual sales of $100 million to $150 million at 4 years following primary endpoint FDA approval. As a reminder, our heart failure study is an embedded study with 2 phases. Moving to cash generation and capital allocation priorities. We expect that through a disciplined approach, we will generate cumulative free cash flow of $400 million to $500 million from 2021 to 2024. We are targeting a free cash flow conversion ratio of over 80% by 2024. We intend to begin including this key metric in future earnings materials. Turning to capital allocation priorities. Our focus will be on 4 specific areas. First, we intend to prioritize R&D investments to continue executing on our SPIs. Any one of these SPIs are transformational to our long-term outlook. Second, we expect to invest in building out the commercial organization, placing initial priority on the ACS sales force expansion, as Travis mentioned earlier. This will be followed by DTD, OSA and heart failure as we achieve key clinical milestones. Third, we plan to repay or refinance our convertible note maturing in 2025. And finally, we expect to pursue strategic tuck-in M&A opportunities with our portfolio and provide long-term growth and shareholder value. Before turning to our third and final Q&A session, I would like to emphasize the following key points. We see stable growth opportunity in epilepsy through execution of the go-to-market and development of an integrated digital technology platform. CP growth will be driven by the launch of the next-generation HLM platform, ESSENCE, capitalizing on our market-leading position with a install base ready for another upgrade cycle. We anticipate above-market growth in ACS with continued sales force expansion. SPIs are expected to provide incremental annual of $50 million to $75 million by 2024 with the potential for a significant ramp from that level. Core business and SPI growth drivers will deliver gross margin expansion from the low to mid-70s with annual adjusted operating margin expansion of 50-plus basis points as we scale the SPIs. We will continue to drive meaningful cash generation, and we'll take approach in deploying capital. In closing, I hope that today's financial presentation provides clarity into our core businesses of epilepsy, CP and ACS and the transformative SPI opportunities ahead of us. And with that, thank you for your time today, and we'll head into our last Q&A session.

Welcome to our final Q&A session, where I'm joined by Damien, Alex and Matthew Dodds. And our first question comes in from Rick Wise with Stifel.

A couple of financial questions. Thank you, Alex, for that really excellent, clear laying out the all the drivers, and it's really great to see. Let me start with the operating margin. That 25% to 30% range by 2024, maybe just help us think through the low end and the high end of that. It's sort of a simple minded question a little bit. But is it volume or timing or what happens to get you to the low end or the high end just talk through that and expand on that a little bit?

Sure, Ray. Thanks for your question. So on the Low end, we expect the SPI contribution really drive that margin profile. As we see the scaling of revenues, we anticipate continuing to invest behind sales force expansion and commercialization efforts to drive those businesses. That's both in the U.S. and outside the U.S. So the way to think about the margin profile, it's a question of how quickly we scale the businesses.

And Damien, this might be a question for you as well. But I know over the last few years, it's not very visible to us. You've had a number of or behind the scenes, I'll call it, renovation or upgrade projects going on throughout the company systems, infrastructure, a great deal going on. Are those largely completed? And can we -- adding to our confidence can we feel like with a lot of that done is more leverage in the P&L. Or maybe more possibly, are there other projects that could drive margin more expansively as well.

Yes. I think this is one of the great opportunities we have in the core business. A lot of, as you said, the renovation was going on in the last 5 years. I mean settling the 3T litigation was a big burn. The warning letter in Munich was a big burn. The IT infrastructure was a big burn. A lot of those things have come to the end of their cycle. And so now we're able to focus and use those resources in terms of growth. One of the other things, I think, that's starting to take hold and this is always part of the to change introducing a business system like a lean business system that the LivaNova business is it takes a while to get the flywheel going. But more and more, we're seeing the application of the LivaNova business system in the operating plants, I mean, in accounts payables and receivables, and you see that starting to read through. And this is where we think the leverage starts to occur at the plant level, in the back-office functions. And we're really excited about what this can mean now in terms of starting to leverage the P&L.

Good. And just last, can you talk -- any color, any early thinking, any help you can give us on '22 and the outlook in the setup? And are you sort of comfortable as best you know, given all the uncertainties that The Street is approximately roughly thinking in the right way about '22? Any commentary there?

Look, I think The Street seems to be headed in the right direction. We're going to give guidance in our Q4 report out in February. But I think The Street directionally is heading in the right way.

The next question comes in from Adam Maeder from Piper Sandler.

First one is on the epilepsy guidance, the CAGR, 7% to 9% through '21 through '24. Just wanted to unpack that a little bit more in kind of get your take in terms of what's assumed for NPIs versus replacements as well as how you're thinking about kind of the geographic mix? Curious if international is expecting accretive to worldwide? Just any color on those dynamics would be helpful. And then a follow-up.

Thanks for your question, Adam. Yes, you do have to unpack the geographic components. In the U.S., NPIs are expected to grow in kind of the low to mid-single digits. So conservatively speaking, that's kind of the way we're modeling it. We expect to continue to take sort of minimal price on an annual basis. And end of service, once we get through the backlog is not going to be a meaningful growth driver for the U.S. Now looking at it from an international perspective, we do expect accretive growth outside the U.S. So that's the piece that really takes us to that 7% to 9% CAGR.

Okay. That's very clear, Alex. And then for the follow-up, I'll stick with neuromodulation. And you've outlined the 9% to 13% CAGR epilepsy plus SPI, pretty impressive. You talked about the, I think, $50 million to $75 million coming from SPIs in '24. The question is around, I guess, the RECOVER study. And is that $50 million to $75 million revenue contribution, is that coming from the RECOVER study? Is it coming from flipping of the NCD, just trying to kind of better understand that dynamic. I think you receive revenue for the devices in the RECOVER trial, but wanted to confirm that as well.

So Adam, we generated approximately $10 million today from the RECOVER study. As we get into the 2023, 2024 time frame, that's when we're going to start to see sort of the commercialization element read through. So that's kind of the early stages of commercialization.

Our next question comes in from Anthony Petrone from Jefferies.

And just in terms of the operating margin targets through 2024, you also referenced 50 basis points of annual expansion, but it seems that in the longer-term horizon. So maybe just the progression of adjusted operating margin from 2021 level through to the midpoint of that 17% to 22% target out to 2024 actually be thinking about layering that in. That would be question one. And then just on the long-term contribution outlook for the SPIs. Overall, just relative to the TAM opportunities, they do seem to be somewhat conservative. So what level of conservatism is in there versus, let's say, an outlook for a slow ramp for one reason or another, whether it be reimbursement, competition, et cetera?

Okay. Thanks for your question, Anthony. So on the margin profile, the way we modeled it is the 50 basis point margin expansion will actually occur during the strapline horizon. So this is over the next several years, we're going to continue to drive margin expansion while we invest in SPIs. As I've said all along, continue to redeploy funding to these high return opportunities, and that will materialize in the margin expansion. In terms of our level of conservatism, I think you guys have gotten to know me by now over 12 months. I tend to be conservative. So I would -- I'm going to continue with that methodology in terms of forecasting these transformational opportunities. Certainly, the opportunities are great, and we're excited about them. But I'd like to -- well, I'd like to think that we can underpromise and overdeliver. The models and analog?

Yes. Yes, I would say from part of the -- this is a time element. If you look at depression, as Jonathan said, we're talking about a 4-year horizon, which starts at registry. But also when we get final NCD, that is much more important to the ramp. And then for really comes down to how big that market is 4 years after approval. Our hope is it's actually a lot bigger. We've taken a share of what we think the total market will be. So that could be conservative. And then for heart failure, as you also heard earlier, when we get the functional endpoints, again, that will some potential for revenue. But it's when we get the final primary endpoint of mortality morbidity, that's when we really see it crank up. And it's really -- that's really at the cusp of that 4-year period. So that's where some of the conservatism comes in as well. On a 4-year basis, we're still relatively early in those cycles.

The next question comes in from Mike Polark with Baird.

Just one. I think it's a math question. Trying to -- a lot of good numbers for all the insights. Epilepsy CAGR, so setting aside the SPI, just the core epilepsy CAGR through '24, 7 to 9 CP 5 to 7 ATS 20 to 25 and then that rolls up for a core CAGR of 5 to 8 The 5 to 8 just seems low mathematically. So what am I investing?

You're probably missing the depression component that's currently in our numbers.

Okay. All right. I'll run it that way. That's it. Thank you.

Our next question comes in from Cooper from Goldman Sachs. We'll move on to our next question from Matt Taylor at UBS. Matt, go ahead. We can move along in our queue. Our next is coming in from Mike Matson with Needham.

Can you guys hear me?

Yes.

Yes. We got you.

Yes. Okay. So on the chart that you put up with the long-term guidance, it's not up right now, but from what I remember, there was an A for the EPS CAGR, excluding the SPIs. I apologize if you explained that, but what would it be excluding SPIs? And your just overall view expect the SPIs to be accretive to your EPS during the specified time frame? In other words, you're excluding that from revenue, but it's also looking like it's adding some expenses. You're investing kind of ahead of that revenue, so should that be a net positive to earnings during that time frame?

So Mike, the way to think about it, we don't report EPS on sort of the segregated basis. So we're committed to the SPIs. We're going to continue to invest in those elements. And so that's why we showed an NA under kind of the core. So our EPS is always on a consolidated basis.

Okay. All right. And then just with regard to the DCD revenue, why wouldn't that be massively accretive just given the gross margins on that? I mean I understand you're having to invest out of sales force and things like that. But even assuming some kind of sales commissions and whatnot, it just seems like a lot all potentially to the bottom line there.

It's really a question of market development, right? And I think we're going to have to -- we're going to have some really positive results from a clinical trial, but we're going to have to educate the psychiatry community and invest behind market development. So it's not -- it's it goes beyond sort of the sales force expansion, and it's going to be an element of marketing. There's going to be an element of, frankly, building out our capacity to drive these volumes. Yes.

I encourage you just look at some of the analogs in the space and their launch cycle and what happens in that first 5 years. I mean again, we'd all like it to be accretive immediately. But I think what you want us to do is invest heavily upfront.

We have one more question that comes in from Matt Taylor from UBS.

So I actually wanted to ask you one about the cardiopulmonary assumption of 5% to 7% over the planning period. So it's really 2 questions. I mean one is, could you frame the phasing of that? Because obviously, a lot of it will depend on the new product cycle. So can you maybe talk about how think about that in '22, how back-end loaded that is? And the second part of the question is just I know had some success with the last product cycle, really on to meet some of those [indiscernible] even though the business system techniques to get folks to focus on that and good results in '17 and '18. But that market, as you pointed out, is pretty low growth. So just talk about your confidence in growing your 5% to 7% in a low-growth market versus same period of time.

Sure. So from a consumables perspective, we expect low single-digit growth. The step up to 5% to 8% is really centered on the ESSENCE launch. The launch will occur in the back half of next year, and we expect a significant pickup in 2023, 2024 and beyond. Our success story around utilizing funnel management, leaving over business systems to drive placements, kind of speaks for itself in '17, '18, '19. I just referenced the placements that we saw during that cycle. We expect to do as well, if not better, with Essence. We think it's a compelling technology. And obviously, we shared the feedback we're getting from the customer, the customer feedback that we've seen.

And we have the commercial capacity in place. So we don't really need to build out that as we talked about in the highlighting our footprint. And we've also been carrying a lot of costs in Munich while we've been waiting for this. One of the things we did through the step down in volumes is we retained all of our people, and we've reported extensively on the manufacturing variances that we've been carrying for that. So not only the top line, but as it reads through the P&L, we expect this to be a really important contribution for the whole company.

And also remember that the ESSENCE launch is in phases in different geographies, right? So we're going to launch in Europe and U.S. at the end of next year. We have developing markets that will start ramping up kind of later towards the end of the start plan cycle. So that's why we see this continuous growth opportunity and really believe in it.

That concludes today's Q&A. Thank you, everyone, for your questions. And with that, I'll turn it back to you, Damien, for closing remarks.

Thanks, Lindsey, and thanks, guys for that. And thanks to everyone for engaging actively in today's event. Today, we shared a comprehensive update, including growth plans for our 3 strategic core businesses as well as 3 strategic portfolio initiatives. To recap and for the takeaways. First, our core businesses are positioned to provide stable and above-market growth, specifically stable growth in epilepsy behind our go-to-market strategy and the digital networking, above-market growth in the launch of ESSENCE and above-market growth in ACS with the sales force expansion to drive the life park adoption and account penetration. Second, our SBI target significant transformative market opportunities the DCD heart failure trials expand upon our VNS therapy platform that's already had over 125,000 patients implanted globally. In addition, our OSPREY RCT is progressing with the applied learnings from over 300 patients implanted. In summary, I'd like to leave this part of the session with the 3 key messages that I started with today. First, we have a growing and highly profitable core business. Next, we have 3 exciting transformational pipeline opportunities will start reading out in 2022. And finally, we are reinforcing growth, operational efficiency through the reorganization that we described today. Our global LivaNova family is committed to executing on the plans shared here today and broadening our legacy of impactful transformative innovation, relentlessly dedicated to these plans so we can continue to provide hope for patients such as [ Bennet ] or Dr. Edna and their families. I want to thank all of our presenters today and many of the team members that help prepare for this event, Lindsey, Brianna. We hope you found today's presentation informative. And as a reminder, the replay of our Investor Day, along with the accompanying slide deck, will be available on our website investor.livanova.com. On behalf of LivaNova, our Board of Directors who are desperately passionate and engaged and our 3,000 employees around the world who are united in this mission, I'd like to express my sincere appreciation for your time today and the continued interest and support in our journey. Should you have any questions, feel free to reach out to our Investor Relations team. And with that, I hope you enjoy the rest of your day.