LivaNova PLC (LIVN) Earnings Call Transcript & Summary

Good morning, everybody. Thanks for joining us. My name is Matt Miksic. I cover U.S. Medical Devices here at Barclays, and we're very pleased to have with us LivaNova. The recently appointed CEO, Vlad Makatsaria, and the multifaceted, Matt Dodds, in IR strategic planning and business development, all kinds of stuff.

So I wanted to start off, Vlad. We could make a joke about how you have everything figured out in a week now, having just recently taken the helm. But maybe in your initial perspectives of the organization, having obviously spent some time in advance of taking the position and taking the helm, maybe talk a little bit about what you can share about initial strengths, opportunities and challenges facing the company at this stage.

Thank you. Well, first of all, good morning. It's great to be here. And Matt, thank you for the opportunity to join you. You don't know that you play a special place in my career because my first Investor Relations experience in my career was with you when I was in Ethicon. And now this is my first meeting as LivaNova's CEO. So there is a connection there. So thank you. And the second thing is I've heard Matt described in different ways, multifaceted is a really good way to describe [indiscernible] someone to use that. This is probably one of the more positive descriptions I've heard. Look, so this is day 8 on the job. So I'm in a learning phase and kind of we'll take the next few months to go around the world and kind of learn in this holistic way, talking to our investors to the med tech community, to customers, to the team. Next week, I'll be in Europe in a few weeks and across Asia. So this will be kind of a learning journey. And I think I will come to some of the conclusions or probably within the first 3 months. The one thing that I will tell you is my first impressions with the company. First of all, I really enjoyed getting to know the board. Bill Kozy, who is the Chairman of the Board, and who has been leading the company on an interim basis over the last year, has done a tremendous job improving LivaNova over this time period. I was as a guest member in their board meeting in London, and I was very much impressed, not just with the leaders that are there, but also the way they operate as a team. So that was one big attraction. The second one is the space in which LivaNova operates. I think it's a very meaningful part of health care. If you look at cardiovascular diseases and neurological diseases, those are the 2 areas that will continue to grow, unfortunately, from patient population size as we age and grow with population around the world. So it's a really good space to be. And I think having a footprint there will allow us to continue to expand and grow in those categories. And then number 3, there is kind of -- it's a place where I see a lot of opportunities to accelerate. And I'm going to put my best foot forward using my leadership muscle and my experience, many years, in Johnson & Johnson as to build something special with a great team that we have.

Okay. And I guess that's maybe your initial impressions of the organization, maybe from what you can discern about the process that landed you here in this seat. Maybe, as you mentioned, you bring about 30 years of experience across multiple med device businesses, largely with with J&J. I have to mention also a Division I, Big Ten Conference, Men's Tennis Championship with the Golden Golfers, which is nothing. But seriously, as the company, you had this conversation, what about your blend of experience made you sort of the right fit for LivaNova at this time.

Well, first of all, thank you for the tennis. I don't know where you got that information, but it's a passion of mine. And I actually think there's a lot of connection between leadership and sports. And so I think it played a big role in shaping who I am. But in terms of my experiences, so like you said, I spent nearly 30 years in health care, most of it in medical devices. I had a short stint in consumer and pharmaceutical businesses in J&J when I was in China. But I had an opportunity to lead across different technologies in J&J, so cardiovascular surgery business, neurosurgery business, diabetes, orthopedics, and so pretty much -- ortho clinical diagnostics. So pretty much all med tech businesses with the exception of Vision Care. So vision surgery and contact lens business, I didn't have much experience there. So that's one dimension. The second dimension is the kind of the geographic dimension. I was educated here, but my first role in J&J was in Russia. I worked in Eastern Europe, Turkey, Middle East, Africa, then based on London led Europe, Middle East, Africa and then 6 years in Singapore, leading Asia for med tech businesses and the China Johnson & Johnson business across all enterprise. And then the last 5 years, my previous role before this was leading Ethicon for J&J. So Ethicon is a surgical technologies business. It's a leader in the marketplace. And it's an interesting case because it's a legacy business of J&J. That's the first product 130 years ago was sterile surgical suture, but it's also the massive growth driver moving forward. So -- and I led it kind of with accountability for end-to-end research and development, manufacturing, commercial, so all the aspects of the business. So that's a little bit about my background and experiences. And kind of what I bring to the table or I hope to bring is, one is, in a way, my experience in innovation with the last 5 years in Ethicon. We took the business that was losing market share and had relatively poor pipeline. So it was used more as kind of cash cow, if you like. And then in 5 years, we improved our pipeline value tenfold, and so that is number one. I'm going to put innovation at the forefront of what we do at LivaNova. Number 2 is the global experience, what I said. And it's interesting in LivaNova, although it's a global company, but if you look within the businesses, our neuromodulation business is very heavily concentrated in the United States, and our cardiopulmonary business is very heavily concentrated in other parts of the world. So we have tremendous opportunity to globalize the business in a better way. And then the third one, I think any great organization starts with people. If you have great people around you and a great culture, things will happen. And so I will use my leadership experience to build, to continue to kind of work together with a great team and build a culture that is going to put patients first. And where people feel that they can be at their best.

Great. And so not to again put you on the spot too much, given that you just got here, but maybe one of the things Bill has talked about over the past year has been a strat plan of some kind, a longer-term view of where the company can go, and what the priorities are, et cetera. What can investors expect in terms of timing for something like that? Is that 3 months away? Is that 6 months away?

So it's a great question. So let me take it from different dimension. First one, as part of the onboarding and interviewing process, I was exposed to the strategic plan of LivaNova. I'm impressed with it. And I think the plan takes a step on how do you build on the strength of our core business and make it stronger and build a sustainable momentum where the core business in both neuromodulation and cardiopulmonary performs sustainably above market. So that really is at the core of the strategy. I think the -- and I will build on that and maybe we'll make some tweaks, but we will execute that. The second piece is, obviously, in the summer, we will have outcome of the clinical study on depression and that will also shape which way that portfolio is going to go. And then I think beyond that then is what is the dream, and how do we build one of the incredible companies? And what is that kind of aspirational future in terms of portfolio, in terms of organization that we will build long term, that work will have to get done, and I will take this year to kind of build that dream beyond the first 2 steps.

Okay. So some important like big -- pretty big [ forks ] in the road potentially in the back half of this year as you get more visibility into the data, and what you're going to do with it. And obviously, makes sense that you're going to want to know that before you lay out a long-term dream as you say?

No, absolutely. And I think the kind of the dimensions, the topics that are important for me when I think about building a sustainable grade business is threefold. And I talked a little bit about it, but it's -- number one, it's about having a great team. Number two, it's about performing well short term and executing versus our commitments. And number three, it's what's the portfolio, what's the future strategy. So those are the 3 dimensions that I will, a, learn over the next few months, but, b, kind of take it as those 3 dimensions of how we improve the business.

Okay. So maybe shifting to sort of like current guidance, current operations, maybe some questions around that. So growth guidance this year is 6% to 7% organic, down from last year. Maybe if you could, Matt, talk a little bit about what's the puts and takes for cardiopulmonary and epilepsy in terms of like why -- if it's a conservative view, why? And where could it be conservative? Or do you really think -- this is where we're going to land?

Sure. So I'll break up in a few parts. So in 2023, we grew double digits, so above market. And if you look at what the 2 big drivers were, the replacement epilepsy in the U.S., replacement implants, was well above our plan. And then oxygenators, obviously, there was strong demand, and we think we took share. As you shift into 2024, we just don't think replacements are going to grow at the high single-digit rate. That goes down to 2% to 3%, and that's about 70% of our implants in the U.S. So that's one kind of headwinds versus '23. And then oxygenators, it's not that the demand is not there. We just don't have the capacity, which we've been talking about for a while now. We're looking to increase it modestly this year, and we'll see how that goes. But at this point in time, we're thinking mid-single digits would be the best case for the manufacturing volumes. So when you look at what could shift the guide in '24, what are the variables? Probably in epilepsy, it's more of the new patients than the replacements. I think the replacements are pretty locked and loaded. So if we can do better than the mid-single-digit implant growth in the U.S. in new patients, that would be a level of upside. Essence, we do have good guidance for that. There's still the possibility you could do a little better with the price premium. And then oxygenators, if we can get to that 5% level and deliver on some of the efficiencies we think we can get, then that's the third piece.

Okay. And then I guess, relative margin contribution of the 2 businesses. So you've got -- as you just pointed out, maybe a little more confidence in the cardiopulmonary range and some more variability in flex potential upside to the neuromodulation. Maybe talk a little bit about which one of those businesses is a good guy relative to the other in terms of margin contribution?

Sure. So in -- if you look at neuromodulation, the gross margin is probably not a whole lot of movement there, they're already quite high. I would say what you're seeing there is some of the spend going down in R&D, right? A lot of this is related to heart failure. SG&A, generally, probably not a big change there. And then in CP, it's the gross profit lift to a degree from Essence. And then also, we moved some of the ACS Cannula business into CP, that's got very high margins. Not that big, it was only $15 million as moving over, but it does help a little bit there as well. So both businesses have some of the 250 basis point-ish operating margin expansion we're talking about in '24, they both contribute.

Okay. So one of the major topics, and you've lived with this more than anybody was the sort of RECOVER trial and difficult-to-treat depression. So maybe walk us through the time line of what you'll have, when you'll see it? And then we can get into maybe how to calibrate the potential impact on market opportunity and growth, should that should that be supportive of reimbursement?

Sure. So we are in the home stretch, right? We're going to -- the unipolar arm, there's 2 arms bipolar unipolar. Unipolar arm, we will get the 12-month data on the 500 patients in June. We will analyze it. At a minimum, it will be presented in a major trade publication in the fourth quarter. That's part of the CMS approval. We have to have a third-party association adjudicated. We're hoping that we can say something in June. We just have to get CMS to sign off in the trade journal because, obviously, they want to keep as much of the information to themselves for the presentation. But we're working closely with both of them to see what we can say in June. We will get all the data. So there's 13 different endpoints in this study, and we will analyze everything. So that's going to be a key moment. The bipolar is still enrolling. We said in June, we hit 150 patients who are enrolling about 25 quarters, you kind of do the math where we are. So that's ongoing. So that will obviously have an impact on how we see the unipolar data as well. But ultimately, the prospects would be if the data is compelling, publication at end of the year, then it officially is in CMS's hands, that's like the last piece of the submission to rule, which would be in 2025. And in terms of the opportunity, we've talked about how large the market is. I think one of the interesting components is when you talk about where is the most likely target population. If you looked at a paper that was presented by Dr. Conway in February of 2023, it showed the patient demographics of the first 450 patients out of the 500, so pretty much the demographics. And we had 38% of the patients had already had their ECT, almost 50% had TMS, the cranial magnetic therapy, and even 24% had been on esketamine. And no other trials looked at any of those failures. So we've always felt that, that population, I call it advanced therapy, getting past drugs is where they've got no treatment options and has always been the most interesting and the study has a lot of those patients in it. So we've always looked at that, the ECT failures, the TMS failures, SPRAVATO failures as being first in line. So we'll have plenty of patients in this trial. If you look at prior pharmaceutical studies, they don't go near those patients. So there's really nothing out there that can show benefit on the pharmacological side for those patients.

Okay. So in large part, kind of a refractive, but powerful therapy for those other treatment modalities. I guess, we've done a fair amount of clinician calls I think everybody has in this area. And maybe talk a little bit about sort of we're a little bit away from a more active conversation with patients because of -- we're waiting for this strong -- this change in reimbursement to come through. But at that stage, what are sort of the puts and takes, it's this therapy is refractive and effective for patients who've tried ECT, for example, what's the -- what prevents it from moving forward? What's -- what pulls it forward?

Right. So if CMS grants a [indiscernible], which could be a full national coverage decision, or it could be going back to local, which most devices have. There's still going to be market development. I mean we have neurosurgeons put in the epilepsy devices. Neurosurgeons were largely put in depression, but you're going after the interventional psychiatrists, and we have no sales force currently focused on that. So that's going to be a lot of the market development. And again, working with them first and the patients to drive it. And we see that kind of refractory advanced therapy is the most likely area we would penetrate first.

Okay. So good news is data comes through and could, should support reimbursement, what tempers that in terms of how this lifts off maybe in terms of earnings and contribution margins in, say, '26 and '27 or something like that is the investments in market development that will have to come with that. Is that a fair balance?

Very fair. And the size of it, I think the marketing effort will really come down to the robustness of the data. So we'll know a lot more in June on how we would commercialize this if the data is strong enough to do so.

Okay. So at the stock's valuation, which is by our view, not stretchy, we're equally on the name at the moment. But really not a multiple that I think steers people away from the stock. The question we get often is, okay, how does sort of the cash capital structure, cash flows support this business. And maybe you could walk through, you recently raised, which is not much of a conversation because it's sort of swapping out an existing convert more or less, but maybe talk about cash flows, access to cash and sort of putting this new litigation to bed potentially in the next, whatever that's going to be, 1 to 2 years.

That's a good sequence. So on the adjusted cash flow, it's been improving. The guidance for 2024 is about $10 million higher than last year. And that's basically mostly from the improved operating income. We should improve inventory, but we are taking a big hit in CapEx, and we're also taking a big hit in the ACS wind down that's going through the P&L. So I think operationally, it's very strong, and it's going to add, we hope, range $100 million. In terms of the convert, our original convert in 2020 was cash exchangeable, and it was expiring in December 2025. So we had to to deal with that because 1 year ahead of time, that's when the auditors start looking at like, can you afford all the bills coming due. And then the other nuance with it was we have a Term Loan A. And if that basically gets paid out 90 days before the potential convert. So it kind of backed us up to September '25 is when we would have to deal with this. And then you move back a year for that forward look. So we had to address that original convert by September '24. And given how strong the convert market was rather than kind of cut it close, we decided this was a good time to switch it. So that was the rationale for it. And then in terms of the why, SNIA is still outstanding for us. This is at the Italian Supreme Court. Part of the case is now with the European Court of Justice in Belgium. That will rule first, and that will come out. And then that decision will be part of the full Italian Supreme Court case. We think the European Court of Justice decision will come out this year and the Italians recourse likely to rule next year. But the good news is that we have the money to pay if worst case, we completely lose, and the original damages hold, we have the facilities. It's just a matter of we just don't know how the outcome is going to play out yet.

Sure. Okay. Well, with that, we are at time. So thank you both for joining us again, and pleasure to see you again, Vlad. I look forward to talking more as we kind of get deeper into LivaNova.

Thank you.

Thanks so much.

Yes, you too.