LivaNova PLC (LIVN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the LivaNova PLC Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Matthew Dodds, LivaNova's Senior Vice President of Corporate Development. Please go ahead, sir.

Thank you, Emily, and welcome to our conference call and webcast discussing LivaNova's financial results for the fourth quarter and full year of 2022. Joining me on today's call are Damien McDonald, our Chief Executive Officer; Alex Shvartsburg, our Chief Financial Officer; and Briana Gotlin, Director of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the SEC including today's press release that is available on our website. We do not undertake to update any forward-looking statement. Also, the discussions will include certain non-GAAP financial measures with respect to our performance including, but not limited to, sales results, which will all be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the Investors section of our website under News, Events & Presentations at investor.livanova.com. With that, I will now turn the call over to Damien.

Thank you, Matt, and thank you, everyone, for joining us. Welcome to our conference call for the fourth quarter and full year of 2022. I'll discuss our fourth quarter and full year results, provide 2023 revenue guidance and review our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results and 2023 guidance. I'll wrap up with closing remarks before moving on to Q&A. In the quarter, we achieved 6% revenue growth. This was driven by the Cardiopulmonary and Neuromodulation businesses across all regions. Advanced Circulatory Support remained unfavorably impacted by a significant decline in severe COVID cases. I'm proud of our team for continuing to move the business forward against macro challenges, including inflation and supply chain complexities. Now turning to segment results. For the Cardiopulmonary segment, revenue was $137 million in the quarter, an increase of 9% versus the fourth quarter of 2021. Oxygenator revenue grew low double digit driven by continued procedure volume recovery across all regions. Heart-lung machine revenue increased mid-single digits led by growth in the Rest of World region. Cardiopulmonary revenue for the full year was $500 million and grew 11%. We expect the Cardiopulmonary revenue to grow 3% to 5% for the full year 2023. Our forecast includes the staged rollout of the next-generation HLM Essenz. In February, we initiated our limited commercial release in select centers throughout Europe following successful clinical cases in 2 major hospitals in Q4. Looking ahead, we anticipate a gradual ramp in Essenz sales throughout the year. Epilepsy revenue increased 7% versus the fourth quarter of 2021 with growth across all 3 regions. This performance was primarily driven by replacement implants in the U.S. and double-digit growth outside the U.S. for both new and replacement implants. U.S. epilepsy revenue increased 4% year-over-year. Similar to last quarter, total implant growth was driven by replacements. In the U.S. we are continuing to advance our go-to-market commercial strategy in comprehensive epilepsy centers, which included 15 dedicated teams. These teams accounted for approximately 21% of U.S. implants in the quarter as compared to 22% on a same account basis during the prior year. Epilepsy revenue in Europe grew 18% versus prior year led by the U.S. -- U.K. and Nordics. The Rest of World region achieved 18% growth led by Brazil. For the full year, epilepsy revenue increased 7%. For the full year 2023, we expect global epilepsy revenue to grow 3% to 5%. ACS revenue was $10 million in the quarter representing a decrease of 30% from the fourth quarter of 2021. Results continued to be impacted by the year-over-year reduction in severe COVID cases and in part by product mix, which was partially offset by growth in non-COVID cases. Our field data suggests ACS case volumes related to COVID declined more than 90% year-over-year as fewer hospitalized patients progressed to a severity that required ECMO therapy. However, ACS non-COVID cases increased more than 20% versus 4Q '21 driven by an easing of hospital capacity constraints. ACS revenue for the full year was $39 million representing a decline of 29%. For 2023, we expect ACS to grow 4% to 6%. Our forecast includes a return to growth once we anniversary the COVID impact after the first quarter. Turning now to the strategic portfolio initiatives. DTD revenue for the fourth quarter was $3 million and for the full year was $8 million. For 2023, we anticipate DTD revenue of approximately $8 million to $10 million primarily from the RECOVER study. The RECOVER study continues to advance. The randomized controlled study is designed with frequent interim analyses that will assess if predictive probability of success has been reached or if the study should continue enrolling. Our interim analysis for the 450th patient in the unipolar cohort was recently completed and confirmed the study's continuation. The next interim look is at 475 patients, at which point we can either transition to the prospective longitudinal study or complete enrollment to 500 patients for the unipolar cohort. Earlier this week Dr. Conway, the principal investigator for the RECOVER study, delivered a poster presentation at the fifth International Brainstem Conference detailing the baseline unipolar demographic data for the RECOVER study participants collected so far. The majority of these patients are severely depressed and are highly treatment resistant having failed more aggressive treatments such as ECT, TMS and Ketamine. In heart failure, we enrolled the 500 patients in the ANTHEM-HFrEF U.S. pivotal trial last quarter, which triggered the second interim analysis. The analysis determined that the U.S. FDA early filing conditions were not met and the DSMC recommended that enrollment continue in accordance with the current study protocol. However, our further evaluation of the study data has not revealed a sufficiently positive impact on functional or mortality endpoints and it is unlikely that the study will demonstrate such an impact. As a result; we are stopping enrollment, beginning the process to close the clinical study and winding down the heart failure program. It's important to note that the decision to stop enrolling was not associated with any safety concerns. We'd like to thank the patients who participated in the trial and also thank the investigators, study committees and employees for their commitment to this program. Moving to OSA. The OSPREY trial continues to progress. In January we received approval from the FDA to include an additional 5 sites, 1 of which has already been activated. We still assume FDA approval in 2024. And with that, I'll turn the call over to Alex.

Thanks, Damien. During my portion of the call, I'll share a brief recap of the fourth quarter results and provide commentary on 2023 guidance. Turning to results. Revenue in the quarter was $275 million, an increase of 6% versus 2021. Foreign exchange had an unfavorable year-over-year impact of approximately $12 million or 4% of revenue. Adjusted gross margin as a percent of net revenue was 69% compared to 70% in the fourth quarter of 2021. Adjusted gross margin was unfavorably impacted by inflationary pressures, supply chain challenges and product mix partially offset by pricing improvements. Adjusted R&D expense in the fourth quarter was $43 million compared to $41 million in the fourth quarter of 2021. R&D as a percent of net revenue was 16% versus 15% in the fourth quarter of 2021. While sequentially flat, the year-over-year increase was driven by continued investment in our strategic portfolio initiatives. Adjusted SG&A expense for the fourth quarter was $100 million compared to $107 million in the fourth quarter of 2021. SG&A as a percent of net revenue was 36%, down from 40% for the fourth quarter of 2021. Adjusted operating income was $47 million compared to $40 million in the fourth quarter of last year. Adjusted operating income margin was 17% compared to 15% in the fourth quarter of 2021. Adjusted effective tax rate in the quarter was negative 3% compared to 14% in the fourth quarter of 2021. The lower tax rate is primarily attributable to full year changes in geographic income mix. Adjusted diluted earnings per share was $0.81 compared to $0.57 in the fourth quarter of 2021. Adjusted diluted earnings per share for the full year was $2.39. Our cash balance at December 31, 2022, was $214 million, up from $208 million at year-end 2021. Total debt at year-end 2022 was $542 million versus $240 million at year-end 2021. The increase primarily relates to the $300 million term loan facility that we executed in July. Net debt, including restricted cash at year-end, was $85 million. Adjusted free cash flow for the quarter was $31 million and was $75 million for the full year. Free cash flow generation was unfavorably impacted by inventory build and inflationary pressures partially offset by improvements in working capital. The free cash flow conversion ratio was 58%. Capital investments were $27 million during 2022 compared to $26 million in the prior year. Now turning to 2023 guidance. We forecast 2023 revenue growth on a constant currency basis between 3% and 5% and assume approximately a 1% tailwind from exchange rates. We are projecting adjusted diluted earnings per share in the range of $2.45 and $2.65 with adjusted weighted average shares outstanding to be 54 million for the full year. Adjusted free cash flow is expected to be in the range of $80 million to $100 million. We forecast capital spending in the range of approximately $35 million to $40 million. With that, I'll turn the call back over to Damien.

Thank you, Alex. Our 2022 performance was balanced by our diverse portfolio. While some macro challenges may linger, our pipeline remains robust and positions us well for the year ahead. We remain committed to delivering differentiated products and therapies to patients and physicians. In the year ahead, we will continue to use the strategic triangle of our guide for goal setting and execution. With quality at the center, we remain focused on 3 key areas: growth, pipeline and profitability. We believe this focus underpinned by the LivaNova business system positions us to create value for all stakeholders. And with that, Emily, we're open to questions.

[Operator Instructions] Our first question comes from the line of Rick Wise with Stifel.

Maybe they are sort of related questions in a way. But let's start off with the guidance and maybe help us better understand your thinking in providing the guide both from how conservative is it actually or optimistic relative to what you're seeing? But maybe more specifically, the top line guide is well below the long-term aspirational goals you laid out back in December of '21 at the Analyst Day. How are you thinking about, how would you have us think about it; the guide, the outlook, your long-term aspirations? And then I'll have a follow-up related to that.

I think at the Investor Day we laid out 5% to 8% and we thought we'd ramp over time. I will say I think 2022 was a stronger year than we anticipated in our ramp and there are lots of reasons for that and we could cover that. I think '22 was right in the middle of that range. For '23, we're just looking at things like the transition year for the end of service to NPI drive up the Essenz transition and let's be honest, the ACS plan is behind after the COVID disruption. But we're confident that that's going to get back to a growth trajectory. So the CP market we think is stabilized and back to '20 pre-COVID levels. And I think that normally that market grows 3% to 5% and we're expecting to be in that range with this portfolio as we transition to the Essenz. So I like the way we're approaching this year. Do we think there's upside? Yes, we do if oxygenators and the Rest of World HLMs continue to run like they have been, if the neuromod NPIs ramp, if the non-COVID case ramp in ACS takes off as we ultimately hope it will. So we think this is prudent guidance and gives us a chance to deliver on our promises.

Good. And separate but also related, can you talk about the heart failure trial shutdown, the ANTHEM-HFrEF shutdown? What could the R&D savings be from winding it down and the cash implications? What's that savings contributing to the EPS outlook, Damien?

Yes, this is a great question. And as you might expect, we're disappointed that we're ending this program after a long commitment. But as we saw, the 500-patient interim analysis didn't give us the signal for the early FDA filing and while the DSMC, their protocol following the analysis is to recommend 1 or 3 options and they recommended continuing to enroll. But we just took a look under the hood and the further analysis was not revealing a sufficiently strong positive impact on the functional or the primary composite endpoint and it was pretty unlikely that the full study would demonstrate that impact. We're really early in the cycle of this close-down and so we're going to assume that it takes us some time to work through the process. We're going to work with the FDA and the investigators to ensure that we have the right process for patients. And in terms of math, on average we spent about $30 million a year on this program and as we work through the process, we'll establish how much of that is in which bucket.

Okay. No early color maybe even looking out a year about what annual savings could be?

Rick, this is Alex. As Damien said, our burn rate was approximately $30 million a year. We could see by 2024 we should start to recoup and perhaps even earlier sometime this year as we figure out how to winddown the program.

The next question comes from Michael Polark with Wolfe Research.

First one, gross margin in '23. Some sequential and year-on-year weakness in the fourth quarter not something we've clearly seen from others as that takes with inflation and supply chain snaps and currency and whatnot. I guess what's the baseline for that adjusted gross margin metric in your 2023 outlook?

Mike, yes, I think you're right. It's relatively flat. The improvements that we're seeing is in terms of productivity and price still being impacted by the inflationary pressures that we've seen over the last 18 months again so we're anticipating that to continue.

69% seem like a good input for now.

Yes.

Okay. The follow-up. Intrigued by the mention of the Dr. Conway poster presentation. I guess I have not seen that data. Is there anything in there that's new to you that kind of tells you about how the RECOVER unipolar cohort may be shaping up here late in the enrollment process?

Mike, it's Matt. So yes, the poster it came out again earlier this week and we can make it available. It was the first look at the unipolar kind of call it the demographic of underlying patient numbers so you can see things like the modular score, average age, other therapies they were on. And what we think is interesting about it is the average age is older, there's a lot more what we call -- Damien called aggressive therapies like ECT, TMS, even ketamine patients have failed in this trial. That's not normal in a pharmaceutical trial to even have any patients with those types of therapies in there. And so you can see just a lot more baseline demographics of how unique this trial is to any other I think depression trial that has been undertaken to date.

Our next question comes from Matt Taylor with Jefferies.

I had a follow-up on depression. I guess Matt, maybe I'll just start with could you take that thought 1 step further and help us understand based on the unique composition of some of the patients in this trial? Do you think that will have any implications for the likelihood of success or the strength of the treatment impact or what do you think that means for the ultimate result?

So I would say overall the impression we've got is that this is not unexpected in terms of what the age was, the modular score was. The people on these aggressive therapies, the number of pharmaceuticals that they've been on over a lifetime. What I think it helps with is if you look at time and response, which is a relatively unique endpoint when we talk about overall response rates, the initial design shows lower percentages than I think a lot of people have come to expect in some of these prior depression studies. And this is an example of why they're overall potentially lower, but still can be incredibly powerful just because this patient population has never had a therapy that kind of fits there where they are in their depressive state.

Got you. Okay. And then 1 follow-up on depression. So obviously last interim look did not transition into registry or show early stoppage success. I guess the question I think a lot of investors have is now that we have more data points, more water under the bridge and versus your initial expectation at 350 that you could show your early stoppage; does this have any implications for the overall strength of the treatment effect in the active arm meaning could we see a weaker treatment effect because of the lack of early stoppage or is that reading too much into what's going on here?

It's probably reading too much in what's going on because again it's all blinded. It could mean that. It could mean that the control arm is doing better, but the therapy arm is also doing better. What we are confident in is there is a futility curve on the bottom of this and that continues to go up every look. So we know we are seeing some benefit. We just haven't gotten to that level that would allow us to stop early. But the other thing I'd say, Matt, is data can actually improve over time especially when you go out to month 7, 8, 9, 10, 11, 12 where we believe that the therapy arm will have a more pronounced effect than the control arm. So you could not hit an early stoppage, but actually see data improve over time before you get to the final number. So that's why we're still really confident overall.

Which is what in the Aaronson paper. This whole study is predicated on 6 prior studies, 1,400 patients. But particularly the Aaronson paper showed that at month 6, you started to see the separation and it continued to separate and improve over time. So I think the point Matt's making is quite valid that the longer this runs -- I mean the trial was set up to run to 500 patients. So we continue to be believers in this showing a significant response to treat these patients.

The next question comes from Adam Maeder with Piper Sandler.

I wanted to start with a 2-part question on Neuromodulation and I guess really epilepsy. So first, I was hoping you could give a little bit more color on the epilepsy performance in Q4 and break out performance by NPIs and replacements. I'm wondering if NPI had growth either year-over-year or sequentially. And then as we look at the general mod guidance for 2023 the 3% to 5% range, maybe just kind of walk through the different assumptions there on the NPI and replacement side as well as by geography? And then I had a follow-up.

Sure. So let's take it from the top. U.S. implants grew in low single digits and they were above the 2019 levels, I think which was important for us to see that signal. Unit sales were flat and we were up mid-single digits with a combination of price and mix. The end of service outpaced the NPIs and they grew mid-single digits. NPIs in the quarter declined year-over-year and sequentially they were flat. For us, we looked at this from multiple different angles. We looked at the macro, we looked at that storm in December, we looked at the share and the bottom line is we just didn't execute. The team I think has some work to do. December really just didn't drive NPIs like we anticipated and the team has to really dig into their performance management and commercial execution. And we've increased oversight of their funnel processes, removed the bottom 10% of the performance. We've looked at the growth profile of the various businesses that we have that we're covering in the CEC. So we're expecting a change in that performance. So for 2023, this 3% to 5% is really looking at a decline in end of service as we previously discussed as we anniversary into the backlog of the COVID delayed cases and then we're expecting sequential improvement in the NPIs throughout the year.

And just for international again it's a small piece, but double-digit growth in international. So that should give you enough variables to get there.

Appreciate that, Damien and Matt. And then as for the follow-up, similar guidance question, but switching over to the Cardiopulmonary. CP grew double digits in 2022, the guidance for '23 is 3% to 5%. The last time that you launched a new heart-lung machine, you got a nice lift to growth. And I think you referenced the CP market kind of growing in that 3% to 5% range. So I guess when I take that all together, why is 3% to 5% guidance for the CP business in '23, why is that the right range at this juncture?

Adam, it's Alex. So for CP, typically the way we think about the market is in the developed markets it's probably a low to mid-single-digit growth business. 2/3 of our business is in consumables. Obviously 2022 the growth was fantastic. It was based on a lot of the recovery from the surgical procedures coming out of COVID. So we still believe that we're going to grow at a sort of a market rate from a consumables perspective. And from a capital perspective, this is kind of a transition year. We expect our limited commercial release to be effective and as we start to ramp Essenz sales in the back half of the year, we should expect a step-up in growth, but we're being prudent about the way we're forecasting this business.

Our next question comes from Mike Matson with Needham & Company.

So I have 1 on your covenants. I think the covenant requires the interest coverage ratio of 3:1. I was curious if that includes or excludes the interest on this neo loan and then are you comfortable you can stay within that compliance with that during 2023?

Yes. We're fine on our compliance with our covenants. So we pressure tested them and we're in a good shape, Mike.

Okay. All right. And then just as far as the OSPREY trial goes, I hear you on the potential approval in 2024. But when do you think we could see data from the trial? Is it possible we could see late this year or is going to be really more 2024?

I'll take that one. It's 2024. It's a pivotal FDA ID so we need to complete the study, file the data and then seek to publish or podium that. So it won't be until 2024.

Our next question comes from Matt Miksic with Barclays. Matt, unfortunately we're not receiving any media from the line. Could you please just check that you're not muted?

We might have lost him, Emily.

So at the moment, we have no further questions registered. So I will turn the call back to Damien McDonald for closing remarks.

Thanks, Emily, and thank you, everyone, for joining us on the call today. And on behalf of the entire team, we appreciate your support and continued interest in LivaNova and we'll talk to you on the first quarter call. Thanks very much.

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