Good morning. My name is Adam Maeder. I'm one of the med tech analysts here at Piper Sandler. Very pleased to introduce the management team from LivaNova. With us, we have Bill Kozy, Interim CEO, Matt Dodds, SVP Corporate Development, and Alex Shvartsburg, CFO. Gentlemen, thanks so much for joining us.
Thank you.
Thanks for having us, Adam.
So, I know Bill wanted to make some opening remarks on the cybersecurity situation, which was 8-K'd last week. So Bill, I'll pass the mic to you.
Yeah, thanks. Thanks for that opportunity. Before we get into the program, we just wanted to touch base with you on the cybersecurity incident Adam just described. I recognize that there'll be a lot of questions on the topic. We appreciate your patience as we continue to conduct an ongoing investigation, which began promptly after the identification of the issue. Though our investigation is in early stages, response to the incident by the organization has been swift. We have a dedicated cybersecurity team. We have external experts, both of these focused on remediation measures and actively working in a very collaborative way with our cross-functional business response teams to support the business continuity efforts that are underway. Well, I hope you understand that we're limited in what we can share at this time, and the situation is indeed quite fluid and subject to change.
Here's what I would like to share with you today. We're continuing to assess what information and systems were impacted and are executing on our response plan, as you would expect, to mitigate the impact. We have taken and will continue to take actions on remediation related to this issue, such as taking certain systems offline, allowing us to still operate. We're taking business continuity efforts to the highest level and upholding our focus on patient care as we work with all of our customers to address their needs. Now, while the business is experiencing some disruption, I'd like to offer brief commentary on our ability to still make and ship products relative to our critical manufacturing locations in the U.S. and the E.U.
In the U.S., we currently expect our sites to be in a soft startup mode as soon as the end of this week, meaning Saturday, December 2nd, allowing us to both make and also ship product. In the E.U., our sites are in an even earlier stage of recovery, and we do not yet have a firm expectation on that soft startup for those particular locations. However, we do not anticipate the downtime to be a long-term issue. Further, we're tightly monitoring inventory at all of our facilities and in the field to enable our ability to serve customers at this time. The response of our IT team, excuse me, has been exceptional to this point in time. The capabilities of our external partners across many dimensions of challenge, which I'm sure you are familiar with, have been highly valued and keenly appreciated.
We've got a lot of energy and commitment from the management team, as you would expect in this situation, all across the globe, and every level has remained patient-focused, but highly committed to the business and getting us back on the rails. While it remains early days, and clearly, this is going to take some time, I'm confident we have the right team and strategy to get through this situation. Again, I appreciate you giving me the opportunity to make these introductory statements.
Sure. No, thanks so much, Bill. You know, I know you're a bit limited in what you can say. I guess I'll ask the question this way: How should we think about kind of disclosure strategy going forward, when we might get an update on the situation?
Yeah, very, very fair question. We want to do some more work. This is just very recent, as you know. You know, when we filed our 8-K. So we are right in the front end of this activity. I know everybody in this room has got some familiarity with the challenge of this. So we're not at a... We got to do some more work, to be honest. Let us do more investigation, and we are going to be as responsive as our situation will allow us. There is an extraordinary amount of work being done right now in every LivaNova business site across the world.
Okay. Okay, fair. And then I guess just one more question on the topic: insurance policies to cover potential damages, remediation. How do we think about any potential increased costs going forward to kind of-
We have a cyber insurance policy. It's so early in the game, okay? As you would expect, we're just now getting ourselves, you know, structured well to approach and have that dialogue. The investigation needs some more time, but we will be circling back on that topic.
Okay, perfect. I do want to look ahead to 2024 and, you know, certainly realize there's some uncertainty just given cybersecurity situation. But maybe let's just kind of put that aside for now. You know, I have consensus revenue for 2024, just shy of $1.2 billion. I think that's about 5.8% reported growth year-over-year. Any reaction to those figures? And if not, curious if you would just provide some puts and takes.
Well, thanks for the question on 2024-
Yeah
... and a little bit more of a long-term perspective. I appreciate that this morning.
Sure.
Let me turn that to Alex, if I could.
Yeah, as usual, we'll provide guidance in February, Adam. I mean, great opportunity for us to talk about sort of some of the components of our business and how we're thinking about it. You know, as we look at the epilepsy business, focus really is on just continuing to drive performance in new patient implants, really focusing on the fundamentals. Cardiopulmonary business, the focus really is on driving Essenz. As you know, we've launched a new heart and lung machine in the second half of this year, that continues to be our focus. On the oxygenator side, you know, we know that we're at capacity, right? So we're working feverishly to try to expand the capacity and try to squeeze some growth out.
You know, that's pretty much all I can say about the core businesses.
Okay. That's totally fair. We'll stay tuned there. I did wanna ask about tax rate, which is a question I've been getting, and I think the comments on the Q3 earnings call maybe caught some folks by surprise. You're talking about a potential step up to 15%-20% for tax rate, beginning in 2024. Maybe just walk us through, you know, the reason behind that. And then I've also seen some recent news and about tax reform and cuts in the U.K., where you guys are domiciled, for both individuals and businesses, that's been proposed. So just any thoughts on that legislation?
So first of all, if you look at our tax rate today, relative to our peer group, we appear, you know, to have a very optimized tax rate. You know, we've been anticipating changes in tax legislation, going back to our Investor Day in 2021, where we forecasted our tax rate was going to go up to 15%-20%, over three years. We've actually done better. You know, we continued to work on our optimization strategies. You know, if you look at the key driver today is really the changes in tax legislation around the OECD's Pillar Two solution, which really minimizes our opportunity to optimize our tax rate.
So, that's really the gist of it is. You know, I think, you know, we're heading towards, you know, 20% tax rate, and that's more or less in line with our peer group.
So, a couple of questions. I guess one, on the U.K., you know, legislation, any thoughts there, or is it too early, or do you think this is not impactful?
It's really not impactful. When you think about the UK legislation, yes, we're domiciled there, but we don't manufacture in the UK. We don't do research and development. That's where a lot of these opportunities come.
Not to nitpick your words, Alex, but 15-20 is the right range, or is it closer to 20?
I, I-
Just wanted to clarify that.
I think, I think we're still in that range. We're working through it. Obviously, it really depends on, you know, the country level performance and how we're forecasting the business. So, you know, the statutory rates vary across different jurisdictions.
Okay. Let's, I guess, stick with the P&L, and maybe talk about OpEx. You have $80 million to spend annually for your SPI initiatives across heart failure, depression, obstructive sleep apnea. You shuttered heart failure at the beginning of this year. How should we think about potential cost savings in 2024, 2025, and kind of the amount of money that's going towards these programs?
I say, as you said, you know, this, this year we're spending $24 million to wind down the heart failure program. As we look forward, our R&D portfolio is well-defined, right? We're funding our two remaining SPIs, fully funding those, and then continuing to focus on innovation and capacity improvements in the core businesses around CP and epilepsy. So we don't have any additional SPIs or any sort of investments of, you know, to the magnitude that we've seen in heart failure.
I got it. And I guess if we were to look out, you know, a couple of years from now, I think your mid-teens today for R&D as a percentage of sales, you know, OSA and depression aren't gonna run forever. I mean, where do you think that figure can go over time?
I think, with depression, I think it... You know, assuming we're successful, then we're gonna continue to innovate around the product itself. And, with OSA, you know, once the trial is completed, I think similar to depression, we're gonna continue to innovate around the product. And, you know, as we look forward to, you know, sort of normalized run rates, and we're not gonna see the same levels of R&D spend in clinical—on the clinical side, but, we'll start to invest in the product development side to continue to innovate around the product.
Sure. Now, that's a totally fair point. Do you think it's fair to say that that mid-teens rate could start to step down?
I think it's fair to think about it that way, yeah.
Okay. Wanted to ask one more on the P&L, just, SG&A side of things. We're modeling $450 million of spend this year, and I think about $1.1 billion of estimated revenue for 2023. Let's just maybe walk through these spend levels. What are the key expenditures, and how do we think about potential opportunities to tighten some of that SG&A spend?
Yeah, the key expenditure this year was really centered on the Essenz launch. That's been sort of the key step up in investment in SG&A. The other element is we're outperforming our revenue run rate. So the variable costs associated with that, that's you know, freight and commissions, things like that, that reside in the SG&A on the P&L.
Okay, that's helpful. Let's spend a minute on Essenz. It's now in full launch across the U.S. and Europe. You know, maybe just talk about how the launch is going relative to expectations and, you know, kind of how you expect that launch to evolve in 2024.
Sure. Let me, let me take that one. We're encouraged. It's still very early as you know, we didn't get our FDA approvals until late August. But since that August timeframe, our pipeline has filled quite nicely. The funnel is healthy. I mentioned not that long ago that we converted two major prestigious U.S. accounts. Those two accounts, standalone, accounted for over 40 units in orders. They also were achieved in the face of a one-on-one bake-off evaluation. So anyhow, those are the very pragmatic things that we're looking for to say, "How is it, how's it going?" We have a solid start with that product. The customer feedback is good. The perfusionists that I've met with are encouraged by not just the software advances, but by the intuitive design of the product.
We've said all along that we'd still be kind of getting the wheels turning a little faster in the fourth quarter. We think Essenz is much more of a 24 type of impact, but, you know, sometimes you have a soft start, and sometimes it goes a little better. I'd probably put this in the really solid mode, and just as importantly, all the average selling price expectations to date, not that long of a period of time, all average selling price objectives have been achieved so far with the placements we've got. We're quite encouraged by that.
That's a great comment, and maybe just to piggyback off that, Bill, if I'm remembering correctly, Essenz is being priced at a healthy premium to your previous generation. I think it's 30%?
That's a good rough cut.
Okay. It would be helpful just to maybe walk through kind of how you're thinking about impact to margins in the coming years. I don't know if it's helpful to kind of pull apart the margin profile for CP, specifically relative to your overall business, break apart oxys versus HLMs. Just maybe flesh that out a little bit for us.
I'll make a quick comment, and I'll flip it to Alex. We're still scaling on Essenz, and so that... Remember, it's a funny business because the, actually, the HLMs carry higher margins than the disposables. We're not at that scale yet. If all goes well, we should reach that scale sometime in 2024. But let me pass it on to Alex. He'll have some more.
If you think about our margin profile, the capital business has about a 70% gross margin relative to the consumable business, which is kind of low-to-mid 50s%. Obviously, we're expecting to grow the HLM business faster than consumables next year. That should theoretically improve our margin profile. The Essenz cost base, as Bill said, is higher today. As we scale, that margin should improve, but you know, we do expect some overall improvement in the margin profile for CP.
HLMs, historically, as a percentage of CP, 30%-ish for revenue?
That's right.
Okay, very good. You know, I guess I'll ask about the other side. You know, we just talked about HLMs, but, you know, oxys, oxygenators have been doing really well, and I know there is some benefit there from competitor recalls. Curious what you're hearing on those competitor recalls. When do you think they might be able to, you know, come back and supply the market? Does this tailwind continue in subsequent quarters, or does it potentially start to flip the other way?
We are surprised that we don't have a lot of deeper information at this point in time about what's going on with the competitive products. We do know that one of the competitors has advised customers that they're not planning on being able to supply until sometime into the new year. We don't have any specifics on that. We know that the smaller competitor in that space seems to be relatively inactive and is not involved in any way of trying to address this. This is an industry-wide problem for oxygenator sourcing, obviously. Okay? Our focus, of course, is on doing everything we can to maintain the new customers that we've picked up in the past year, and that will be the top priority as we enter 2024 with our commercial organization.
That's great. Let's change gears again, but now talk about epilepsy. The epilepsy business is feeling like it's starting to find its stride again. Two components there, new patient implants and replacements. You know, just a broad strokes question, how are you thinking about, you know, those two segments over the next couple of years?
I'll comment on NPIs, and, Matt, you can-
Sure.
Jump in on replacements. You've got a real command on that. Through three quarters... You know, our quarters can be lumpy, and so it's hard to take a look and see what's going on. But if you take three-quarter period of 2023, our NPIs were up over 7% year-on-year. So, so we're encouraged by that. That's a little bit, nothing dramatic here, but it's a nice uptick from where we've been. As you know, we have a new business leader in place. I've commented recently on the fact that for the very first time, we have 19 key account managers in our commercial organization in place, covering every major geographic concentration of the Comprehensive Epilepsy Centers. We've talked about that for a couple of years. We have that in place.
We've got territory managers now also covering every other Comprehensive Epilepsy Center on an assigned basis. So as if we step back and look at our fundamental structure, the allocation of resources, higher level account management resources, to specifically high-volume accounts. We've made progress there, for sure in 2023, and so we're seeing a steady, steady sign or signal, if you would, of our organization getting some traction. Matt, can you comment on replacement?
Sure. So replacements are generally a lot easier to model, right? You're looking at the historical implants percent that we usually capture. And the only change that's happened recently is SenTiva is now a much bigger part of the mix because we started selling that in late 2017. SenTiva is smaller. It also has more automated titration, so you can get to a higher level of juice quicker. So that's what impacted us this year and why we were a little bit surprised by the growth rates as we went through the year. But for 2024, right now, we're assuming that it's going to be roughly flat on implants. And we'll have an update, obviously, when we give the new numbers in February. But right now, that's what we're looking for replacements in 2024.
Flat year-over-year for replacements?
Correct.
Yeah.
In implants, there's always a little price.
Okay, I got it. But specifically on the replacement piece.
Yes.
Yeah, I got it. Okay. You know, I think... I don't know if it was you, Bill, that made a comment, you know, at a recent conference, but it sounds like there may be something on the come from a, an innovation standpoint, new product standpoint, and epilepsy. Hopefully, I'm remembering correctly.
No, we, we did comment on it, Adam. We put our organization through a pretty rigorous business planning process this year, and we realized that it had been quite some time since we had brought new products forward on the epilepsy side. So we actually have a product development portfolio in place. It's now fully funded. It's particularly designed to move the product portfolio towards a much more digital and connected care type of environment, which, if we look in the mirror at ourselves and say: Are we there today? Not where we want to be. And so that's where that portfolio is designed to be, and we're very encouraged by the thought that went into that. We've got a couple products already churning there. I wish it happened quicker. It's product development. They're a couple of years out for sure.
There's nothing gonna appear in the year ahead, but the allocation of the resources is there, and we're excited about pursuing some innovation.
That's very helpful, Bill. And maybe just to circle back, and I know you're a little bit probably limited on what you want to share on 2024, but I think the epilepsy guidance for this year is seven to nine . You know, it sounds like you're encouraged by the NPI growth, which is 7% year to date here in 2023. You talked about flattish implant growth for replacements in 2024. So I guess the question is, do we think about that seven to nine stepping down next year? Just any comments you want to make at this point?
I'll chime in too, but it's going to come down to the NPI in the U.S., right? So we've talked about double-digit growth internationally, much smaller, but that adds a little bit to the overall growth rate. We gave you replacements are flat. You can comment on price, normal, and then you've got to fill in your last variable, and that's what we're still working on, is the NPI growth next year.
Just from a price perspective, we typically get 1%-2% a year, so that, that helps with the growth each year. We expect to see the same thing as we move forward.
Okay, perfect. Lots more to cover, but only two minutes or so left. Maybe, in the interest of time, I want to touch on the CEO search. You know, just any updates you can share there, Bill? Thoughts on timing, and, you know, one question I often get asked is: Who's the perfect candidate or ideal candidate for-
Yeah
... for this position? Is it someone that's operational focused? Is it someone that knows neuromodulation? Is it someone that can trim fat from the business?
First of all, in terms of the progress, we are in a full board interview process at this point. We're well past the screening. You've got a couple of serious candidates at this point of the game. Brianna always makes fun of my analogy, but it's about the seventh or eighth inning of the game, if you would. We're not planning on extra innings, but you never know. We've got some solid people. It's med tech-based, it's proven strategic orientation, and likes the challenge of the longer-term thinking. Somebody who is experienced and can align their operational activities to the strategy. And why the focus on those two? When those two things are well aligned, in at least in the view of our board, the financial outcomes tend to be very good. And so those are at the top of the list.
Also, because of the nature of the current portfolio and the SPIs, somebody that likes market development and has got some experience on that, that's going to be another nice check mark on personal qualifications for the role. But we're on timing, I wish I could give you something concrete. Will it be by Christmas? I don't think so. Will it be earlier in the new year? I think so. That's just a guess. That's an expectation and nothing more, because we're not that close today, but we like people working.
That's perfect. No, that's, that's good color, Bill. Thank you for that. The last minute, did want to touch on the pipeline briefly, and, you know, we'll stick to depression here. A couple questions. Maybe just remind us the timelines for unipolar, specifically. You know, when will we get that, top-line data? I think that's middle of next year, if I'm remembering correctly. Timing reconsideration from CMS, is that a 2025 event? And also just curious about disclosure strategy. You know, or-
Mm-hmm.
Is this press release, do we have to wait for the formal journal publication? Just maybe walk through that.
Sure. So you, you got most of it right. We'll get the data in May, analyze it May, June, and then the question is going to be: How can we disclose it? Can we disclose it? The one obvious scenario is it will be in a major publication by year-end. That's a given. We would like to disclose something earlier, but we have to get that, that association that's doing the publication to agree to it and CMS. So that's where we still have to determine the path. But in terms of the timing, exactly right. If you think about that timing, CMS needs that publication to be handed to them to officially rule, so it's a 25 decision for CMS.
Perfect. I'm going to try and squeeze one more in. You know, go/no-go decision on depression. That's a question I also get from investors. What do you want to see in order to push the depression program forward? You know, what and commercialize versus shuttering?
Right. So the first thing would be, obviously, for CMS, you know, what we call the primary endpoint, time and response. That's important, but there's 12 other endpoints, and there's some other pretty powerful endpoints in there. We use time and response because that was the easiest way to structure our trial, so you could have the frequent looks. But a lot of the other endpoints are pretty important. So it's really going to come down to the totality of the data when we see it, to make that decision.
Okay, perfect. We're out of time, but, I want to say thank you again, gentlemen, for joining us this year.
Thanks for having us.
Thanks very much.