LivaNova PLC (LIVN) Earnings Call Transcript & Summary

Thanks so much, everyone, for joining us. Matt Miksic, I cover Medical Devices here at Barclays. Very pleased to have with us again LivaNova as we have Vlad Makatsaria, CEO; and Alex Shvartsburg, CFO; and Briana Gotlin, Vice President of Investor Relations.

So I wanted to maybe start with a broad question. you probably get this question often, but I'm curious, especially after you closed out the end of the year, sort of having been here just about a year, maybe walk us through how your perspectives have developed and changed and the prospects of the growth opportunities for this company and maybe how they've -- they're different from, I don't know, first half, middle of last year.

Yes. So thank you, first of all, and good afternoon, everybody. Thank you for your interest in LivaNova. And Matt, thank you for the opportunity to be here with you. So look, it's been one year for me in the role. And I think 2024 was a year where we continued to build on our strengths and made some meaningful changes to position us better into the future. First of all, I'm really proud of the strength of LivaNova in execution. 2024 was the second year in a row where we grew top line double digits on an organic basis. We expanded our margin and delivered very healthy cash flow. And I think that sets us well with the momentum into the future. From the people point of view, it's been very rewarding to get into the organization that is inclusive, that is welcoming change. And I think we've initiated as a cultural transformation of LivaNova to get our culture to more be in growth and innovation focused. And one thing that I'm proud that we've done in 2024 is actually accelerated many talents that are legacy LivaNova talent. And at the same time, we brought some of the leading external talent, some leading professionals in Medtech, especially in the area of innovation. And then third, which takes me to the innovation, and this is one of the areas where we need to continuously improve. We have some mixed history on both external and internal innovation. And we worked hard to upgrade our talent, our processes, our governance to make sure that moving forward, our innovation agenda is designed and executed well. So I think those 3 topics position us well for 2025 and beyond. And when I think about our strategy and what will drive our future performance is really about is threefold. One is continue to build sustainable performance in the core, where we grow sales faster than the market and where we grow bottom line faster than top line, and build core as a strong foundation for our future. The second one is our expansion into obstructive sleep apnea and difficult-to-treat depression, very interesting spaces with high unmet clinical need, but more importantly, for LivaNova's performance potential is that they take us to the markets of faster growth. And then three is beyond OSA and DTD. We are actively looking at the areas of high unmet clinical need, high-growth markets and where we [ want ] to win moving forward. So again, shifting our portfolio to faster growth markets. So those are the 3 elements of our future value creation, and we continue to execute on those fronts.

Okay. So one of the things that maybe focusing on that first sustainable in the core. What is that growth look like? As you -- I think you started maybe this time last year thinking mid-single digits. And as you say, delivered double digits started maybe thinking about cardiopulmonary as a business that sort of might have been benefiting from some competitive issues or stocking problems or other competitors exiting the market, it turns out. And that now seems more sustainable in a high single-digit, mid- to high single-digit range. So when you think of core, is that mid-single with aspirations of mid- to high? Or is that a solid mid-single over time? How do you think about it as a part of the model?

So let me comment on '25, and I think then we can talk beyond that. So we've guided 6% to 7% top line growth. I think that's a prudent guide. We have line of sight to upside opportunity especially in cardiopulmonary business. That would come potentially from 2 areas. One is continued growth in heart-lung machines. And then two is on a continued share gain in cardiopulmonary disposables. So that's 2025. On the longer-term view, our aspiration does not change. We want to be in our core business grow above market, what it would shape like and how the components come together, we would have a discussion during our Investor Day in quarter 4.

Okay. So a better long-term view, sort of calibrating some of those things. Understood. All right. And then on -- I know we want to make sure we leave a moment to get to the SNIA litigation since that's kind of coming up here. But your point about litigation -- I mean -- litigation, innovation, can't get it out of my -- is those -- the 2 programs that you talked about, OSA and difficult-to-treat depression, I think one of the questions we get often is the different avenues of commercializing OSA, assuming that the data continues to fall in place. Maybe talk a bit about that, about the timing, about the preference likelihood of which partnership, sale, I guess, or go it alone, if I can describe it that way.

Do you want me to focus on OSA or....

Yes, first, and then we'll get to DTD.

Yes. So I'll start and then you can build on that, and Briana, please. So I think it all starts with a significant unmet need. So it's fast growing patient population. And as a result of that, the market is growing fast, that creates an opportunity for us. We were very pleased to -- with our clinical results at 6 months. And what I can tell you that is it was the only randomized clinical study that's number one. The patient population that went into the study was very complex with high BMI, AHI and ODI. And then as a result, what we saw a significant improvement in AHI and ODI. So we can say very fast onset of response to treat. That's number one. Number two, we are not counter-indicated from complete concentric collapse, which is 20% to 25% of patient population, which gives access right away to this important patient population. And then number three, we also believe that the architecture of our technology with 6 electrodes is differentiated and gives us potential to continue to improve clinical outcomes. So those are kind of the big benefits why we think this is a very valuable asset for patients and for LivaNova. We are now in the -- so 2 important milestones that are going to come in quarter -- first half of the year. First is PMA submission to FDA. And second one, in May, we will announce the 12-month data, right? So that will inform them in a way, do we -- it will give our potential partners for commercialization an opportunity to reflect on 12-month data. And somewhere in the middle of the year, we will make a decision whether we commercialize the asset ourselves or use a commercial partner that already has commercial capability in either sleep channel or ENT channel.

Right. Okay. So before we get to DTD, I think sometimes we think about these things, okay? So you have an OSA, neurostim kind of opportunity, you have a DTD opportunity. They're both interesting. They're both large. But I think there is an important distinction, which is that one is an established market. And so you talked about the high growth of the market. I mean, growth is great. Market growth is great, but just penetrating and growing into an existing market without the, call it, market development burden and other aspects that some of the early entry companies went through just makes that a different opportunity than DTD. And so maybe with that in mind, if that's a fair way to think about the 2 opportunities, what's different about your approach to DTD than OSA?

Well, you're right from the point of view that DTD would be a market development effort. It's interesting with some historic data from early 2000s where when this therapy first started to be discovered, the penetration of the procedures had a very fast onset. Look, what -- why DTD is very interesting is because there's a significantly difficult patient population. That patient population with difficult-to-treat depression is growing and becoming a significant burden on the society. And then there's no alternative treatment. So that's number one. Number two is we already have strong capability in this area with our research and development on manufacturing because there's a lot of leverage with our current VNS device for epilepsy. And we have some strength in the commercial organization that was previously focused on executing the clinical study. So I see this as kind of a low-risk, high-impact opportunity for us if CMS grants reimbursement.

Right. Okay. So a way to, right, not have to invest quite so much perhaps it's a more focused call point, I would imagine.

Absolutely.

Don't have any competition and it is a large unmet medical need. So there's all that, but it's just slightly different. I think if I could say the go-it-alone for OSA, even though I think every negotiation of any partnership or any sale would require that you have a go-it-alone alternative right, so you've got to build that out. You've got to be prepared to pursue that publicly. But that final answer, I think most investors would prefer you to find a suitable partner. Maybe talk about the way partnership might work or the kinds of partners you might engage with.

Yes. So we are exploring this today already. And like I said, I think the final stages of this will have to be happening after the 12-month data is out. But we are looking at potential partnership with sleep companies that give us access to the subscriber, if you like, or to somebody who can channel the patients or ENT companies which then give us access to the operator, let's say, the implanter. So those are 2 types of companies that we're exploring. And like I said, we should have an answer by the middle of the year.

Anything about the current -- the incumbent leader in that market that makes one of those more challenging in terms of locking up the distribution or clinicians or folks having to choose between you and....

No, I think the market leader has done a formidable job developing this market. And obviously, we will be coming in, obviously, capitalizing on some of the incredible work they've done. But again, we will deploy different strategy, much more targeted, much more focused on our clinical outcomes, and we would not need to reinvent the wheel in terms of direct-to-patient advertisement and this type of activity. So it would be much more a focused effort to launch our OSA technology.

And is that focus mean like is it -- I don't want to read too much into this, but is it a concentration on more challenging patients presenting that alternative to the clinical channel.

So I wouldn't go there yet, but I would say concentrated in the way that first of all, right away, you have access to complete concentric collapse patients. So that's one, which I currently [ know ]. Secondly, we would focus on large sleep centers, high-volume centers versus come and go in broadly. And I think that is the first step, and those will be examples of kind of a very targeted approach.

Okay. So I guess, with about a little over 8 minutes left. We're going to talk about the big elephant in the room, which is SNIA, after talking about it for a number of years. we're kind of closing in on a decision. So maybe it's a serious issue. It's a significant issue. I think it's one that maybe a couple of years ago, investors were willing to think about later given all the things that were happening but now we have to think about it now. So maybe talk a little bit about how you're framing it for investors. Obviously, you're not going to predict what the verdict is, but you can talk about the impact and then kind of like where we can get into maybe some of the scenarios and how you manage the business in one scenario versus the other.

Sure. So let me just kind of frame the top line here, right? So February 26 is a hearing where both sides presented their kind of closing arguments. So basically, the Supreme Court is now in the liberation around the liability question and the quantum. From a capital structure perspective, we've been dealing with this issue as you noted, for a long time. So we had a financing event. We have a term loan A that we took to a tune of $350 million. We have $300 million of restricted cash on the balance sheet to deal with the guarantee that we are required to put up in order to proceed with the appeals process. And then we have another $300 million plus on the balance sheet to deal with a potential liability, remind you that this case goes back many, many years. And originally, when Sorin was sort of at the center of this. They were found not liable for the damages. And so that's been our contention all along that we are not responsible for the environmental damages. And so we continue to proceed down that path. So like I said, I think there's a variety of outcomes here. We're still hoping for the best case scenario, which is we're not liable, and we get to deploy our capital in a more productive way. But when this issue came up back up in 2021, the lower court ruled against us. They ruled against us to a tune of EUR 454 million, roughly $500 million and that's the amount that we appealed. We obviously have enough capital to deal with that if that is the ultimate ruling against LivaNova. So from a liquidity perspective, our balance sheet is in a good place. I kind of tried to frame this for investors in terms of what is this mean from our earnings power perspective. We've quantified this that if the ruling goes against us, and it's to a tune of $454 million, which was the lower court's ruling in the first place. The impact to the P&L is roughly $0.11 per quarter. So that's kind of the way I'm sort of boxing it in, if you will, obviously, for obvious reasons, we're not guiding to the potential impact here. And we'll see what the outcome looks like in possibly 60 to 90 days. So we're coming up toward the end of conclusion there.

Okay. So the additional interest expense is kind of like the -- having to hold the debt that you raised to raise that cash and -- but losing the cash having to pay that out, assuming kind of worst case it happens quickly. I think that's a scenario everybody can kind of understand and look at. In the other scenario where it kind of goes more favorably, I guess, what -- how does that change your -- because you'll get this question on day 1, if that does go that way, like what do you do now? What would you do differently in the back half?

Yes, we would retire the term loan A. So that's $350 million. It's obvious cash burn that goes along with that. So that would be extremely useful for the company. So that would be our sort of first order of business.

Great. Okay. So maybe a little more flexibility in P&L and cash flows to pursue some of the things that we've kind of talked about. So maybe you talked about innovation in terms of the 2 programs, what can you do -- are you doing? You mentioned some of the upside opportunities around cardiopulmonary. And I think they have to do at the level of sort of capacity build-out investment? What else can you do to drive a more sustainable mid- to high single-digit growth rather than one, which I mean I've seen like consensus just a year ago that everyone thought, well, this is cardiac surgery, so it's going to kind of just slow to something lower than -- what innovation opportunities do you have to sustain a higher growth?

Yes. I think on cardiopulmonary, again, the way I would look at it as in chapters. Chapter 1 is to continue to execute with excellence with what we have and main growth is going to come from our ability to expand manufacturing capacity. From the end of 2023 to the end of 2026, we are looking at a 40% increase in the output and we believe that, that's our opportunity to continue gaining share. The second chapter is -- the second one in this chapter is continue to improve our placement of Essenz at a significant price premium. So that, I think, for the next 2 to 3 years gives us a very nice path for growth for the current portfolio. Chapter 2 is driving innovation in the core business, and we are looking at a number of innovative technologies and they're kind of mid development. One of them is next-generation oxygenator that is clinically more differentiated versus anything on the market today. That's an example of internal innovation. We are looking at upgrade of other equipment outside of HLM, which will be another nice addition from the internal innovation. And then software innovation on HLM. And then Chapter 3 is looking outside of our current portfolio in the areas that are growing faster in terms of market growth, but also where we still have the right to win. And so we're constantly monitoring those areas. So those are kind of the 3 chapters of long-term growth in this business.

Okay. And the first chapter being kind of CapEx, capacity driven.

Execution, internal innovation, external innovation.

There you go. So -- and that kind of accounts for the step up in CapEx this year that you kind of start to leverage and benefit from, I guess, '26 and '27. Great. Well, we're coming up on time here. Glad if there's anything that you'd like to kind of offer in terms of your thoughts going forward or things that we haven't talked about.

Briana, anything you want to capture?

I think you covered everything.

Yes. I think the one thing that we haven't. Maybe we haven't touched on epilepsy as an opportunity to grow. And look, epilepsy is also a very interesting space, significant disease burden, a lot of unmet clinical need. And if you look at the procedure penetration, there's 1 million patients just in the U.S. with drug-resistant epilepsy and it's 10,000 procedures per year. So there's a huge opportunity to improve the penetration. And I think the formula to do that is we talked about is driving better innovation, which we are, again, looking inside and outside. It's making sure that indication continues to expand that reimbursement in this area continues to improve and that we can execute our commercial organization with excellence. And so those are kind of the chapters of driving growth in epilepsy, and we believe that there's still significant opportunities to grow this business moving forward.

Excellent. Well, thanks so much, Vlad, Alex, Briana, for joining us.

Matt, thank you.

Thank you.