LivaNova PLC (LIVN) Earnings Call Transcript & Summary

Perfect. I think we'll get going here. First, just an administrative thing, there is a disclaimer on the Morgan Stanley website. So please make sure to go look at that. I'm very happy to welcome back the LivaNova team to the stage here. We have Vlad, Alex and Phil to talk about all aspects of the business.

So maybe to start us off, you can just ground us a little bit for those who are newer to the story about LivaNova today and where you all are headed.

First of all, thank you for the opportunity to join you and thank you all for joining this morning and for your interest in LivaNova. So for those of you new to the story, LivaNova is a global medtech company. We have nearly 50 years of experience in some of the market-leading portfolios. Today, we have our core business, which is our cardiopulmonary business, that it's a portfolio that is used during open heart surgery, heart-lung machines, oxygenators and other disposable technologies that help this life-saving surgeries possible. On the other side, we have -- that business is -- has about 70% market share globally on the equipment side and about 40% market share on the disposable side. On the epilepsy front, which is the second part of our core portfolio, it's neuromodulation technology used for treatment of drug-resistant epilepsy, and there were more than -- or nearly 200,000 patients that have been treated with this technology and also it's a market-leading technology in this space. At the same time, we are expanding our portfolio into high unmet need areas from a patient point of view, areas of potentially higher growth and market size and areas where we have the right to win. And the next shift of our expansion comes in obstructive sleep apnea, where we have clinically differentiated technology. And then potentially, we are looking at expansion in difficult-to-depression with a similar neuromodulation technology, and that is pending CMS approval. So that is a little bit about our portfolio. And then in terms of kind of the recent news, we had a number of tailwinds across our businesses. On epilepsy, both new patient and replacement procedures received nearly 50% improvement in reimbursement earlier this year. At the same time, there's a new clinical data that came out on treatment of drug-resistant elicit neuromodulation that shows significant improvement versus the previous clinical studies that we have. So that's another step forward. On the oxygenator front, we've -- one of the barriers to growth in the market has been supply chain. So the market -- the demand has been growing faster than the ability of the market to supply and we had a major improvement in our supply with a long-term agreement we signed with Thermo Fisher to unlock mid- and long-term supply opportunities. And then finally, on obstructive sleep apnea, -- we've completed our clinical trial and this new technology that we call PolySync. It's a titration algorithm that delivered 85% responder rate with patients with sleep apnea, which is significantly higher than the current incumbent

Great. I mean, those are a lot of different growth vectors. And over the last few quarters, if we just look at the performance versus your weighted average market growth rate, you've significantly outpaced that. How would you contextualize the outperformance and the drivers of the outperformance and also kind of the sustainability of that?

Yes. Thank you for that question. I mean I think we focus on 3 things in terms of kind of improving our performance. Number one is on talent. I strongly believe that any great organization start with great talent and good teams drive good performance. And so we've focused a lot on building a strong culture, bringing great new talent. So over the last 2.5 years, about 45% of our direct and above team are new in the role, coming either from external hires or internal promotions. So that's number 1 factor. Number 2 is execution. On the execution front, we were able to grow faster than the market. And I mean, the main contributors of that were our developing competitive momentum in the business, improving our supply chain. And so execution has been a huge focus area. And then finally, innovation. We have significantly upgraded our skills in R&D and the external innovation and renewed our innovation portfolio, both in the core businesses where we have a few new product launches coming up as well as getting into new categories, sleep apnea is an example of that. So people execution and innovation have been improving our growth performance.

Okay. Why don't we unpack it a little bit more and starting off on the cardiopulmonary side? You've continued to gain share in the oxygenators market, while having a leading position in the heart-lung machine market. What's your current assessment of market dynamics and the competitive landscape?

Sure. So the 2 things that we see in our cardiopulmonary business that is helping our growth. One is the market itself is growing with a healthy mid-single-digit growth. And it's an improvement from historic low single-digit growth market. And that is driven by aging population. It is driven by the fact that patients that have undergone some minimally invasive procedures are coming back in open heart surgery. So we see that this mid-single-digit market growth will remain and be sustainable. Number 2 is we are gaining share in that market. And the drivers of the share gain came from 2 areas. One is the launch of new heart-lung machine that we had a couple of years ago. And then number 2 is our ability to gain share in oxygenators. And so over the last 2 years, we went from 30% to 40% share in oxygenators that was supported by improved supply chain. And like I said, we recently signed a long-term agreement with Thermo Fisher that kind of removes supply as a governor of our growth moving forward.

Yes. And potentially allows you to further the gain growth over time. Okay, perfect. I mean I think that the growth of the U.S. cardiopulmonary business last quarter got decent amount of attention for being uneven. Can you talk about the sustainability of growth in the business and how people should really think about that on a go-forward basis?

So I think the performance in the U.S. specifically for second quarter was 2% in cardiopulmonary business. It's not reflective of the durability of growth in our cardiopulmonary business. As you know, we've now guided that business from 9.5% to 10.5%. It's an improvement of 250 bps of growth since where we started the year and what makes me confident in our sustainable growth in cardiopulmonary businesses, it comes from a number of different levers. So one is upgrade from old to new heart-lung machine. The other one is the share gains in our oxygenator business. The third one is our ability to continuously improve our pricing and number 4 is a launch of new technologies, for example, heater-cooler and air manager and that kind of module parts of every heart-lung machine and starting in 2027, we will be launching those upgraded version. So growth is coming from a number of different factors, and the quality of that growth gives me confidence of its sustainability.

Okay. Great. And you touched on a little bit of the pipeline within CP, but just to double click on it. As you think about those next generation of products, what are the clinical benefits? And how do you expect them to support the continued growth within CP?

Yes, sure. Thank you. So it's an exciting pipeline for us in CP, and it's one that I think, is unique in the marketplace. First, I'd start with oxygenators. So Vlad described the supply dynamic and the share gains that we've had over the last few years. On the back of that, we'll be launching a clinically differentiated product in 2028. There's a number of different clinical parameters that a perfusionist cares about in our preclinical testing we meet or exceed every one of those. And so for example, whether it's pressure drop or blood platelet preservation, what we see is strong outperformance that can translate to better clinical outcomes for the perfusionist whether it's infection rates, bleeding, et cetera. And so really exciting to be able to introduce that into the market in '28, and we expect that will continue to drive those share gains for us. As we talked about and Vlad mentioned briefly on the capital HLM side, there's a number -- when we initially launched Essenz we launched it with a legacy modular component. So two of them being heater-cooler and air manager. We've since been developing next-generation versions of those products, and we expect them to launch in 2027, and that will be at approximately 2x ASP from the legacy products. And so the launch of those, as we go to upgrade around the world will be a driver of the durability of the cardiopulmonary growth over time.

Okay. Great. I mean maybe we'll switch gears and talk about epilepsy. VNS remains underpenetrated. How is the improved reimbursement and core changing behavior in the market? And what does the next generation device add to that growth algorithm?

Yes sure. You mentioned the underpenetration in epilepsy. And I think it's important to put that into context. So there's about 3 million people in the U.S. that live with epilepsy, about 2 million of them take drugs and it manages them well. 1 million don't, and they're classified as drug-resistant epilepsy. Within those 1 million in the U.S. of prevalence, less than 15,000 a year get some sort of advanced therapy. So that prevalence is growing. And so there's a real underpenetration right now of these advanced therapies in addressing the market. And our goal is to reach more patients and to reach them sooner in the care pathway. Because right now, the average patient takes 15 years from being classified as drug-resistant to actually getting to an advanced therapy. And that's why we're really excited about the tailwinds that you mentioned. The first is around reimbursement. So at the beginning of this year, we received about a 50% increase, both on our new patients for epilepsy as well as for the battery replacements. We call that EOS. And that's removing what had historically been a financial headwind into the decision of whether or not to implant a VNS therapy in the treatment of epilepsy. So we've been seeing some good signals in our business, already around kind of the growth of our patient pipeline that's being driven by that reimbursement piece. Secondly, core VNS, it's the largest real-world study, 16 countries. Over 600 patients globally that demonstrates the efficacy of VNS and it really represented a step change from what may be the historical perception of VNS therapy was to kind of today in the reality of what physicians and patients are experiencing. So 77% median seizure reduction. And this is really starting to reshape how patients are thinking about VNS within their algorithm of treating patients, both from recommending it as well as where in the care pathway. So both of those are, I think, really exciting dynamics that's going to help that underpenetration. And then maybe lastly, next year, we have our first product launch in almost a decade in the epilepsy business. And this is a Bluetooth-enabled connected product that's going to allow for remote titration. And that's really important because if you look at your average epilepsy patient, this is somebody that, on average, drives 40 miles to get care. And in the first year after implant can -- has to go back to the physician's office up to 12x. And a lot of times, they can't drive or in the case of a pediatric patient, the burden on the adult caregiver. And so this is removing a very significant burden on a potential new patient as they think about making that decision to get a VNS therapy. So all of those we expect to really drive kind of the future of the business.

That's great. That's very helpful qualitative color. Turning into a quantitative impact. If I just look at the guidance for the business, you all improved to increase it to 7% to 8%, up from 6% to 7%, which is also a step up, I'd say, from the mid-single-digit profile share at Investor Day. How do you guys think about the drivers of that guidance increase?

Well, historically, we've been very prudent in terms of the way we guide for the year. We guide to what we see in the business. Vlad mentioned some of the tailwinds around reimbursement and the traction we've seen with the clinical evidence. So the initial sort of impact of the reimbursement change has manifested itself in terms of our realized price. So we saw that coming through in the first half of the year. We expect that to continue in the back half of the year. We feel confident in that component of growth. The next element is new patient implants. And what we've seen is our new patient funnel has continued to improve. It's -- that's kind of the leading indicator. We need to see that converted into implants. We're starting to see traction on that. And that gives us greater confidence in our ability to drive growth through that segment of the business. And then the third element is our end of service or replacement business. That's a historically kind of a low single-digit growth part of our epilepsy business. That's been performing according to plan and is a solid kind of annuity stream value stream for us. So all in all, new patient growth as well as the pricing elements gave us confidence to increase our guidance for the year. And then finally, I would just say -- our international business, our OUS business has performed extremely well in the first half of the year. We see that continuing in the second half. All those things combined is the reason we took guidance up -- and we will continue to watch it and hopefully overachieve as we move along.

That's very helpful. And maybe I'll just switch to OSA now. How are you currently thinking about the market? And why will you be clinically differentiated when you do go to market?