LivaNova PLC ($LIVN)

Good morning. We'll go ahead and get started here. I want to welcome everyone to kick off the Goldman Sachs [ 2026 ] Healthcare Conference last year in Miami. Variety of reasons, but very excited to host the management team entire team here. Vlad, Chief Officer; Alex, Financial Officer; and Phil Walton, Chief Strategy and Corporate Development Officer. So clearly, a great opportunity here to cover a wide spectrum of topics.

I will invite people from the audience. If you do have a question, please raise your hand, we'll get a mic to the webcast. Maybe I'll just start kind of zoom out a little bit and then zoom in. I think there are a lot of details that people would like to get to here. But we're kind of 6 months into -- a little more than 6 months from having issued your LRP back in November. Maybe just give us some reflections on how things have gone relative to your expectations? What has met what you had anticipated and where some of the years [indiscernible].

So first of all, good morning, and David, thank you for the opportunity to be here, and thank you, everybody, for joining us early morning. So to answer your question, maybe for those of you who are newer to the story, just to recap, to what we said during the Investor Day, LivaNova has 2 core businesses that have been leading in their markets for about 50 years for 1 of those business particular the other 1 is epilepsy. And the first chapter of our strategy is really to reinvest back into our core businesses to make sure that it is sustainable that for for years to come, it continues to drive above market growth. At the same time, we use the strength of our foundation of our core businesses. to get into the areas of high unmet clinical needs, high growth and in the markets where we have the right to run. So now a case is neuromodulation. And in our case, our next chapter is in obstructive sleep apnea. And then we have an optionality to have an additional opportunity with the difficulty impression. And I think when we execute the strategy, it puts us in the markets that are not just bigger and faster growing but also have the financial profile, and it creates an opportunity for us to sustain accelerated growth both on the top. So that's kind of in a nutshell [indiscernible]. Now I was asked the question during the Investor Day, what are some of the upside to the plan that we put together. And I actually named 2 upsides. One is getting reimbursement on improvement on new patients for VNS therapy for treatment of drug-resistant epilepsy. And the second one was our ability to scale manufacturing of oxygenators faster. And actually, both of those came through in a very positive manner. So as of January 1, there was 50% -- nearly 50% improvement on reimbursement on new patients. For epilepsy, removing the economic barrier to penetration of VMS procedures. And then -- so that gives a very positive tailwind for us. And then secondly, we have gained significant confidence in our ability to manufacture faster in terms of oxygenator. So we've gained share from about 30%, about 2.5 years ago to 40% today, we put additional 8 points of growth in our strategic plan. But today, we see that we are actually able to allow manufacturing significantly faster, and that's mainly driven by 2 factors: our own expansion of capacity but also our partners that are providing components to us are doing an incredible job in terms of scaling up as well. So both of the upsides have played positively so far, and we continue to execute on us. Good segue to extortion as you think about growth, not a lot of companies in market around actually accelerate have passed the past couple of years.

So maybe you could just give us some perspective on how you think your market growth is evolving, what's driving that? And then what is enabling you to on to outgrow these markets where you are effectively the category.

Yes. No, thank you for the fringes question. So on the market front, unfortunately, from a patient point of view, I can say, fortunately, from the business point of view. But these are very significant markets, both. If you look at cardiovascular disease is disease burden in the world, neurological disorders, #2. So the markets are large growing fast, especially in the neurological side, it's a huge patient population and it's a very under research space. So there's a huge opportunity for growth. So we believe from the market point of view, there is significant unmet need, and that is going to drive innovation and that is going to drive market -- continuous market growth. From the second part of the question, I think there are maybe 2 dimensions about how we drive growth. One is on the what and the other 1 is on the house. So on the what we are fortunate to have a portfolio that have multiple drivers of growth. So if you look at our growth, it's coming from multiple angles, and that gives us this high quality and high kind of confidence in sustaining that growth. So first of all, geographically, it's well balanced across different parts of the world. Secondly, from the portfolio point of view, the growth is driven by price. So we've taken price in a healthy way. The growth is driven by market share gains and oxygenators. And we see that we can continue to do that in a sustained manner -- the growth is coming from upgrade cycle on our essence, part lung machine. The growth is coming from improving low penetration of BNS procedures in epilepsy. So we've got multiple kind of engines to drive growth, and that gives us confidence and sustainability of growth. And the second one, and that's probably the more important 1 is any great organization starts with great people. And we're very focused on bringing in top talent from across the world, we are very focused on developing our own talent. So I'll give you an example. In the last 2.5 years, we've changed about half of our director and above leaders, both from bringing people from outside but also promoting folks from the inside and shut out to our recent leaders who joined. We just announced that we have a new Chief Legal Counsel -- Chief Legal Officer, who is coming from [ Ann Liddy, ] who is coming from logic. And we also announced succession where our legendary leader of cardiopulmonary business has been in the business for 42 years. And this will be for some of you were born. He started at LivaNova, and he is retiring the summon we're bringing in Stefano Foley. He is coming from a long-term career at Philips, the great leaders. So that's on leadership front. And then on culture, we are trying to drive the environment where people can flourish. And I'll give you a little point of maybe contact 1 of our cultural imperatives is called Empowered accountability, where we drive -- we empower the focus across the organization to make decisions to drive results. And with that, empowerment comes accountable. And so we have kind of the entire company owning the results working together. And we see this, and so we measure the engagement of the organization every year, and we see significant improvement in engagement and the inspiration of the organization. And today, we're among the benchmarks and MedTech industry in terms of how the organization is inspired and engaged to move forward.

And as 1 more strategy question and then dive into the business here. Maybe if you think about just capital allocation, since the Analyst Meeting, medtech valuations like to guess except for years have kind of collapsed. What you've had your 1 of your big pipeline opportunities, OSA, appears to be a market that every data point appears to be worse than the prior one. So how do you think about continuing to invest in the OSA program versus potentially taking that capital and investing in some external offers.

Well, let me start off by saying our capital allocation strategy hasn't changed since Investor Day. Our clearest line of sight to value creation continues to be our core, as Vlad mentioned. So we're going to continue to invest in that. OSA was number two. Possibly DTD down the road. And thirdly, we said we'll use tuck-in acquisitions as a way to improve value creation. So from our strategy perspective, our -- the opportunity is still the same, and we're going to continue to focus on those 3 areas. Phil, maybe you want to mention on how we feel about OSA.

Yes. At this point. Yes. I think part of your question there is the conviction on OSA. And in our mind, this is still an incredibly attractive market. significant underpenetration. 1 in 5 patients today are diagnosed. What we're seeing with GLP-1s with wearables, is that number is actually going the funnel of these OSA patients is getting big. In addition, there's questions around GLP-1s for what that does for a patient. And we're seeing that people who engage on GLP-1s are actually more likely data. to go to an advanced therapy outside of it. So we're seeing the top of the funnel growth. I think some of the headwinds that the incumbent is experiencing today, we see as transient. Obviously, the reimbursement and coding issue is one that's a complication that is not an ideal scenario today. But as we enter the market and we're able to partner and onboard accounts and be able to work with accounts to be able to appropriately code -- we feel like it's overcomable. So overall, we believe we have a differentiated technology with strong clinical results and the market is going to continue to grow, and so we're well positioned to succeed long term.

Okay. Maybe we'll come back to that. But we started on the neuromodulation business. You talked a little bit about 2 of the upsides that you had contemplated at the LRP being priced in new patients and on D&S. And maybe we could sort of start with -- just remind people what went into effect January 1, how you thought about it in your guidance and what you've seen play out hereto.

So going into Investor Day, we knew that we were going to receive improved reimbursement on the replacement segment of BNS. As Vlad said, we anticipated some favorable benefits from new patients didn't know at that point in time. As of January 1, new patient implant segment received improved reimbursement of nearly 50% right? That went into effect. So we're seeing the benefits of that reimbursement read through in the first quarter. Our realized price was nearly double what we normally get on kind of the the normal inflationary increases 1% to 2% a year. We expect to see that continue throughout the balance of the year. There are certain accounts that we kind of missed the window of renegotiation with them. And so we'll see the residual effect this year, and this is purely unrealized price. This is not where we went and took extra price on ASPs. We went back to these accounts and basically, they claim economic disadvantage in the past. We've renegotiated volume-based discounts and rebates with them. So that's what we're seeing read through.

Okay. So it was a realized price instead of been 1% to 2% being [indiscernible] and that's a combination of entering new contracts but also going back to existing ones where you had rebates in place or you raise the price and net price are this increase. So what percentage of the accounts were you not able to get to?

What majority we were able to get to, but like I said, I think we'll see some residual effect next year.

One of the things that we've been trying to better understand on this, is there an incremental volume opportunity I'll let me maybe build on what Alex said. But -- just to build on what Alex said. Think about what I've started with is epilepsy treatment with VNS is relatively underpenetrated. . One of the barriers to that penetration was the economic barrier. So think about it. An average patient has 4 replacements in lifetime. So you can say that a provider now gained $40,000 for patients based on that math. So that is a significant removal of a barrier. So that's number one. On the volume front, so in addition to the reimbursement improvement, we also have a clinical outcome coming from this real evidence study called ENS -- and then that study, basically, what it shows is while the least invasive procedure, DMS shows comparable results for LivaNo[indiscernible]. So the value proposition has significantly changed. And it is now -- VNS has now taken a very different place in the treatment algorithm of epileptologists. So there's a combination of 2 tailwinds. One is on the reimbursement, the other 1 is clinical data. And together, we anticipate that the volume is going to increase. Now we are taking a position that we want to take a couple of few quarters of evidence of what is happening before we go to the market and talk about it, just to see that I mean we obviously have seen leading indicators, but we won't see some evidence of lagging indicators before we go and we talk about it. So this is a topic that we will be transparent about that we will explain how and why volume is moving.

And what are some of those indicators that you're seeing?

So 1 is the price opportunity that we're renegotiating contracts. The other 1 is the pipeline of new patients as strong as we've ever had. And the third 1 -- and again, it's more anecdotal, but -- so I'll give you an example. There was a scientific meeting of to epilepsy in the world that came together to look at the core data. And the first view on the data was like it's too good to be true. And then after the meeting, about half of them came to us with their request to independently present the scientific data at different meetings. I mean that gives me confidence that the scientific community is embracing the data. And so it's a very good leading for us. So we are counting on both product and volume, exactly how it's going to play out and what is our view on the future. We're going to reserve a little bit our opinion to [indiscernible].

And besides the economics being 1 of the barriers what are the other barriers still needed to knock down and where are you with?

I mean the other big 1 outside of economics was this clinical perception risk. So the data from the approval trial decades ago showed a much lower median seizure reduction than we're seeing in the core data. So 76% median seizure reduction is the data that Vlad was quoting there. And so there's a perception. And the reason that data has improved, it hasn't just improved because we ran a different study. improve because the technology has evolved over time. We have auto Stim features. We have better programming algorithms, et cetera. And so this is kind of capturing the latest of what VNS is -- now VNS has been around for 30 years. So it's going to take some time to engage with the clinician community and change the perception or bring the perception up to date, I guess, but that is the other big barrier. And once we get that, we expect a lot of good. And before moving on to we just sort of talked about the emerging drug pipeline in I think people have -- some have long memories for headwinds and short memories for -- and so if you go back to -- everyone has a 2019 example sitting in their head. I know there are some differences today, but maybe just sort of talk through how you're framing the potential around drug competition? And maybe what are some of the things you're doing internally to educate sales force and get people ready to respond to competition. Yes. I mean, as Vlad touched on in the beginning here, this is an incredibly penetrated market. where patients have long and arduous care pathway journeys to try to get to the right therapy. And so as a leading company in the space of epilepsy, we welcome all new therapies that can bring kind of relief to patients and good solutions, but kind of start there. Beyond that, as we look at the data of the new drug or we kind of study drug, we don't expect a material change to the number of patients that are drug-resistant epilepsy that could benefit from BNS therapy. It has been about 1/3 for the last few decades in terms of the number of patients that are drug resistant, which is defined as failing 2 or more drugs, and we expect that number to kind of stay consistent. Now to your question around what are we doing? The reality is we have a lot of positives to focus on with our sales force right now, training them on how to disseminate the core data, training them on how to partner around reimbursement. A focus for our sales organization is not to sell against the drugs, but rather to sell the value proposition, which we believe will still be a very important solution in the care pathway for it.

And why wouldn't we see trialing of are there 2 novel agents coming into market from Biohaven and like why wouldn't we see a year of disruption as the stores come to market as we did in 2019?

You likely will see some trialing of the drug -- the reality is we expect that to happen much earlier in the care pathway because that's where the largest TAM is for these companies. So we don't really see it as a competition to DRE. You also have to remember 1 of the nice things of our epilepsy business is the U.S. NPI percentage is actually only about 20% of the overall epilepsy business, right? And so the vast majority is in other areas that are relevant to the trialing. But it was interesting because when I just started with an oven I was educating itself, and I went to the top clinicians and asked a similar question about intra. And the interesting answer is what I was told by clinicians and since the beginning of drugs to treat epilepsy, this ratio of 2/3 of drugs treatment versus 1/3 of drug resistant, that ratio has not really changed over time. What has changed the side effects of the drugs and they significantly improved. So from the safety point of view, it's got better. So it doesn't mean that this is not going to change moving forward, but historically, it really did not change the rate.

Got it. Okay. I want to see there are any questions in the audience before I move on to [indiscernible]. Okay. It's early. So maybe on CP. I mean I think the way -- I'll start with Essence sternly has evolved. I think originally, we all thought of in essence is, okay. It's just it's an upgrade, upgrade comes and goes and the business cycles back to more normalized growth. One of the things you've talked about now is software enhancements, future upgrades. Maybe just sort of contextualize how the ESSENCE launch has evolved and how you're thinking about sort of runway of growth durability versus when you had originally kind of started down the process.

Yes. So Essence is our heart-lung machine. It has -- it's a piece of equipment. The kind of a central piece of equipment or during the open heart surgical procedures. It has about 70% market share globally. And the first generation was called S5, -- it's been on the market for 17 years. So if you think about a normal kind of upgrade cycle of equipment should be kind of 7 to 10 years. So it's way kind of delayed and late in terms of which gives us an opportunity to upgrade faster. So I kind of think about as a modern automobile that comes with a base option and then you can have different optionalities built to it versus the old version is like you get a car that has no power steering, nothing else, and that's the only way you can kind of drive it. When we launched Essence, we counted on kind of the naked no option version of it is about 30% price premium to the older version. However, fully loaded optionality is almost double price. And what we saw over the -- since the Spirit since we launched it is physicians and perfusion is see incredible value -- clinical value proposition from these options. And so far, majority of machines that have been ordered have been old full optionality and so as we increase the placement penetration of essence that gives us significant price/mix upside and that drives double-digit growth, not just for machines but for the entire cardiopulmonary business. And that upgrade cycle is going to continue through the placement fleet will be a -- now on top of that, we have an opportunity, obviously, to gain market share because of the machine itself, but also we have a huge several thousand machines placed there. So it gives us an opportunity to improve the benchmark in terms of how we service it, benchmark in terms of how we upgrade software and make the machines smarter. And instead of kind of follow what the perfusion is does ultimately actually advising perfusionist and what to do and then becoming kind of this digital center of the ecosystem in the cardiopulmonary in the cardiovascular overall. So the idea is to use the large fleet and the strength we have in this business to continue to upgrade each machine. And also, each machine has some additional pieces of equipment would heat a cooler air manager that are kind of part of the machine. And those are still old versions. So we have an opportunity to upgrade those as well. So I see this as an opportunity for us to continue to drive growth. And obviously, also by being such a leader in the equipment side, it also gives us an opportunity to get into the OR and drive market share improvements in disposal.

And maybe talk about oxydators. I mean you've been a great run for the past couple of years, you're sitting about 40% share. Where are you on manufacturing -- if you -- how much market share could you manufacture today -- the 40% could be what if you had sufficient -- if you just . And then what will that be in a year?

So there are 2 drivers of share gain. One is our ability to manufacture fast. Everything we manufacture, we was -- we don't know where the lift is from that point of view. But we are gaining market share. And from the manufacturing point of view, think about it in 3 stages. The first stage is doing what we're doing, but just better. So improving manufacturing process. And that's what drove improvements over the last few years. The second 1 is that the -- in the second half of this year, our additional manufacturing line goes live. And then the third stage is really a long-term approach where we are continuing to build our own manufacturing capacity and partnering with our suppliers in order to be able to supply a majority of the market. So with 40% market share today in the strat plan, we said we will improve on output by 60% and gain additional 800 bps of share. However, we see -- what we see today gives us even more confidence in their ability to gain more share I believe that today, our cap is at 60% market share when we -- in terms of manufacturing. But if we execute what we think we can do, this will be increased. And the second level of share gain is new product introduction. So we've said in 2028, we will launch a new oxygenator that is clinically differentiated. And it's significantly better from the performance point of view versus anything on the market today. So that is going to be another tailwind for us in terms of [indiscernible].

And are you seeing anything from the competitors?

We are not taking this for granted and we are monitoring closely what the competitors are doing. So I mean there's nothing new from the point of view that some of them are leaving the market to use that. And some of the others are kind of doing what they're doing, but they're not increasing their manufacturing capacity, neither they innovate in this space. So this is 1 of the markets where scale matters. So the more market share we gain, the broader scale of our manufacturing is I don't want to kind of say in an arrogant way, but it's easier for us to compete.

Two last icon to make sure that we cover TRD, where are we on -- any updates on reimbursement? What are you expecting in timing? And as you're waiting for this, like the things that you're doing, you're doing anything internally to kind of find the pump or [indiscernible].

We are in talks and very close partnership with CMS. It's a very collaborative process, where they've co-invested with us in the clinical trial. We are working very closely with them on next steps educating each other on the clinical alcom of the study. So it's a close partnership with CMS, and we will obviously update everybody when some material news that are coming out of this. So that's first. Internally, we have a team that focuses on the private pay market. And that team was also thinking about the strategy and looking at different scenarios of what the indication for reimbursement will be potentially. And so yes, we are not -- we're thinking about different scenarios and then how we will address it if it comes to us.

Any latest views on timing?

I'm not -- I cannot speculate on timing just because it's -- now it's kind of -- it's out of our hands at [indiscernible].

And do they give you much of a heads up or you find out when we finance?

They don't give us heads up on timing, but we are -- it's -- we're not disconnected. It's a very connected closely kind of side relationship in the way that how we have we are working on the clinical data and the potential consequence.

We will announce when we do file will announce that.

Okay. When you file for their request the request for the [indiscernible] .Okay. And then -- okay. That's -- and should we -- if we look at other NCDs if you look at the early TAVR NCD it was about a year from when they submitted their request to when the NCD was open. Is that a good benchmark to [indiscernible].

So unlike FDA CMS doesn't have exact time lines in the process, you're right, a year is about the average, I think. And 1 of the latest examples was with Medtronic with -- Yes, real derivation that was I believe 9 months.

Okay. Maybe we should close on margins. One of the things that I think had positively surprised investors at the Analyst Meeting was your ability to sort of retain margins while investing in OSA and so on I think, had asked me prior to the meeting, so are they going to torch the P&L to invest in in OSA, which obviously is not how you actualize things. Maybe where -- just kind of the puts and takes that allows you to have confidence that you're investing sufficiently against the OSA opportunity, while also being able to continue 20% margin short term and then obviously, you have the longer.

Yes. So remember, we took us a while to get to 20% operating margin. So that was an important metric for us as a company. we drew the line at continuing to deliver at least 20% operating margin as we continue to invest in OSA. Today, we're largely investing product development to commercialization. Next year, we'll have a limited commercial release in the first half and a full commercial release in the second half. we're going to continue to maintain that floor of minimally of 20%. We think it's a disciplined way to run the company. So we're going to focus on continuing to drive margin expansion in our core business and fund OSA in tandem. So that's so should extend that.

And everything is on track from a PMA supplement perspective?

Yes, we expect to file a PMA supplement in the second half of this year. that would get us to an approval sometime in the first half, which will enable us to do a limited commercial release. And then we'll follow several months later with a full partial.

And then how -- so the last question on just the P&L topic is sometimes I know it's tempting you set up these plans to invest and hire people. You don't hire people. You beat numbers, which is good in the short term, but it comes because the pace -- and then you talk about things about timing of OpEx and everyone thinks you're being conservative. Like where are you in that cycle? Like have you hit your OSA in investment milestones? How are you seeing the different trade-offs play out?

Yes. We have -- I think if you look at our first half, we were just about slightly below the 20% threshold. It's the timing of revenue relative to OpEx, right? So typically, our first half is lighter sales second half usually, I think it's something like a 52 historically from a phasing perspective. And our OpEx was heavier, and we expect it to be heavier in the first half and sort of kind of level off for the second half of the year. So that's where we expect to see the margin pick up, and we'll deliver on our commitments.

Maybe from a team perspective, we have BlueSeal Blaise, who's the leader. She's built out a core kind of leadership team and we started to engage. We'll have a much more significant presence in sleep this year now that we do have an approved product, even though it's not the commercialized product and then the hiring plans will start to scale up as we get closer.

Excellent. Well, that's a good place to wrap up. We're out of time here. I want to thank you again for kicking off the conference on your time and looking forward to updates in July.

Thank you.

Thanks for having us.