Okay, good morning, everybody. Thanks for joining us. My name is Matt Miksic, I cover US medical devices here at Barclays, and we're very pleased to have with us LivaNova. The recently appointed CEO, Vladimir Makatsaria, and, you know, the multifaceted Matt Dodds, in IR, strategic planning and business development.
All kinds of stuff.
All kinds of stuff.
Thanks, Matt.
So I wanted to start off, you know, Vlad, you know, we could make a joke about how you have everything figured out in a week now, having just recently taken the helm. But, 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, you know, what you can share about initial strengths, opportunities, and challenges facing the company at this stage.
Yeah. Thank you. Well, first of all, good morning. It's great to see, 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 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 you.
It's one of the best ones.
I'm gonna use that. Yes.
I'll take it.
This is probably one of the more positive descriptions I've heard of Matt. Look, so this is day eight on the job, so, I'm in a learning phase and kind of will take the next few months to go around the world, then kind of learn in a holistic way. You know, 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, you know, within, probably within the first three months. The one thing that I will tell you is my first impressions with the company. You know, first of all, I really enjoyed getting to know the board.
Bill Kozy, who is the Chairman of the Board and who's 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 very meaningful part of, you know, healthcare.
You know, if you look at cardiovascular diseases and neurological diseases, those are the two areas that will continue to grow, unfortunately, from patient population sizes 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 three, you know, there's kind of, it's a place where I see a lot of opportunities to accelerate and I'm gonna, you know, put my best foot forward using my leadership muscle and my experience many years in Johnson & Johnson to build something special with a great team that we have.
Okay. And I guess, you know, 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, you know, as you mentioned, you bring about 30 years of experience across multiple med device businesses, largely with J&J. I have to mention also a Division I Big Ten Conference men's tennis championship with the Golden Gophers-
Yeah.
which is not nothing. But, you know, seriously, as the company, you know, you had this conversation, what, what about your blend of experience, made you sort of the right fit for, for LivaNova at this time?
Oh, 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 healthcare, 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-
Mm-hmm.
-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 in London, led Europe, Middle East, Africa, and then six years in Singapore, leading Asia for med tech businesses and the China Johnson & Johnson business across all enterprise. And then last five 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, you know, massive growth driver moving forward. So, and I led it kind of with accountability for end-to-end, you know, 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, you know, is, you know, one is, in a way my experience in innovation with the last five years in Ethicon.
You know, we took the business that was losing market share and had relatively poor pipeline, so it was used more as kind of a cash cow, if you like. Then in five years, we improved our pipeline value tenfold. And so that is number one. I'm gonna, you know, put innovation at the forefront of what we do at LivaNova. Number two 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.
You know, if you have great people around you and, and great, great culture, you know, things will happen. And so, I will use my leadership experience, to build, to continue to, you know, kind of work together with a great team and, and build a culture that is, you know, gonna put patients first, and where, you know, 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, you know, one of the things Bill's talked about over the past year has been, you know, a strat plan of some kind, you know, a longer term, you know, 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 three months away?
Yeah.
Is that six months away?
So it's a great question. So, let me take it from different dimensions. You know, 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 gonna go.
And then I think beyond that then is, you know, what is the dream? And how do we build, you know, 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, you know, take this year to kind of build that dream beyond, the first two steps.
Okay. Some important, like, big, pretty big forks in the road, potentially-
Absolutely.
-in the back half of this year as you get more visibility into the data and what you're gonna do with it. And that, it, you know, obviously makes sense that you're gonna wanna know that before you-
Yeah
... before you lay out a long-term dream, as you say.
No, absolutely.
Okay.
I think that the dimensions, the topics that are important for me when I think about building a sustainable, great business is threefold, and I talked a little bit about it. But it's number one, it's about having great team. Number two, it's about, you know, 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 three dimensions that I will A, learn over the next few months, but B, kind of make it as the three dimensions of how we improve the business.
Okay. So maybe shifting to sort of like, you know, current guidance, current operations, maybe some questions around that. So growth guidance this year is 6%-7% organic, down from last year.
Mm-hmm.
Maybe if you could, Matt, talk a little bit about, you know, what's the puts and takes for cardiopulmonary and epilepsy in terms of like why, you know, why... If it's a conservative view, why and, you know, where could it be—where could it be conservative, or do you really think this is the—this is where we're gonna 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 two 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 gonna grow at the high single-digit rate. That goes down to 2%-3%, and that's about 70% of our implants in the U.S. So that's one kind of headwinds versus 2023. And then oxygenators, it's not that the demand's 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, you know, we're thinking mid-single digits would be a best case for the manufacturing volumes. So when you look at, you know, what could shift the guide in 2024, what are the variables? Probably in epilepsy, it's more 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. and new patients, that would be a level of upside. Essenz, you know, we do have good guidance for that. There's still the possibility it could do a little better with the price premium.
and then oxygenators, you know, if we can get to that 5% level, and deliver on some of the efficiencies we think we can get, then that, that's the third piece.
Okay. And then I guess, you know, relative margin contribution of the two businesses. So you've got, you know, as you just pointed out, maybe a little more confidence in the cardiopulmonary range and some more variability and flex potential upside to the neuromodulation. Maybe talk a little bit about, you know, which one of those businesses is a good guy or relative to the other in terms of margin contribution.
Sure. So in, if you look at neuromodulation, you know, the gross margin is probably not a whole lot of movement there. They're already quite high. I would say, you know, what you're seeing there is some of the spend going down in R&D, right? A lot of it's related to heart failure. SG&A, you know, generally, probably not a big change there. And then in CP, you know, it's the gross profit lift to a degree from Essenz. 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 moving over, but it does help a little bit there as well.
So both businesses, you know, have some of the 250 basis point-ish operating margin expansion we're talking about in 2024. They both contribute.
Okay. So one of the major topics, and you've lived with this more than anybody, was the sort of RECOVERY trial and, you know, difficult to treat depression. So maybe, you know, walk us through, you know, the timeline of, you know, what you'll have, when you'll see it, and, you know, then we can get into maybe, you know, how to calibrate the potential impact on market opportunity and growth, should that be supportive of reimbursement?
Sure. So we are in the home stretch, right? We're gonna. 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 adjudicate it. 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, you know, 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 gonna be a key moment. The bipolar is still enrolling. We said in June, we hit 150 patients. We're enrolling about 25 a quarter, so you can kinda do the math where we are. So that's ongoing. You know, that will obviously have an impact on how we see the unipolar data as well. But ultimately, you know, 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.
Okay.
In terms of the opportunity, we, you know, we've talked about how large the market is. I think one of the interesting components is when you talk about where's the most likely target population. If you looked at a paper that was presented by Dr. Conway in February 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 an 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, you know, 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's, you know, can show benefit on the pharmacological side for those patients.
Okay. So in large part, kind of a refractory but powerful therapy for those other, other treatment modalities. You know, I guess, you know, we've done a fair amount of clinician calls. I think everybody has in this area, and, you know, maybe talk a little bit about the sort of, you know, we're, we're a little bit of ways from a more active conversation with, with patients because of, you know, we're waiting for this strong, you know, this, this change in reimbursement to come through. But at that stage, you know, what are sort of the puts and takes if this, if this therapy, you know, is, is refractory and effective for patients who've tried ECT, for example, you know, what's the, what's the- what prevents it from moving forward? What's, you know, what, you know, what pulls it forward?
Right. So if CMS grants a favorable decision, which could be a full national coverage decision, or it could be going back to local, which is what most devices have, there's still gonna be market development. I mean, we you know, we have neurosurgeons put in the epilepsy devices. Neurosurgeons will largely put in depression, but you're going after the interventional psychiatrist, and we have no sales force currently focused on that. So that's gonna be a lot of the market development, and again, you know, working with them first and the patients to drive it. And you know, we see that kind of refractory advanced therapy as the most likely area we would penetrate first.
Okay. So, you know, good news is data comes through and, you know, could, should support reimbursement. You know, what tempers that in terms of how this lifts off, maybe in terms of earnings and contribution margins in 2026 and 2027 or something like that, is the investments in market development that'll have to come with that. Is that a fair balance?
Very fair. And, you know, the size of that, 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, you know, how we would commercialize this if the data's strong enough to do so.
Okay. So at the stock's valuation, you know, which is, you know, by our view, not, you know, stretchy. We're equal weight on the name at the moment, but really not a multiple that I think, you know, steers people away from the stock. The question we get often is, okay, how does sort of the cash capital structure, you know, cash flows, you know, support this business? So 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, you know, cash flows, access to cash, and sort of putting the SNIA litigation to bed potentially in the next, whatever that's gonna be, 1-2 years.
That's a good, good sequence. So on the adjusted cash flow, you know, 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, you know, 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, you know, I think operationally it's very strong, and it's gonna add, we hope, you know, 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, we had to, to deal with that because, you know, one year ahead of time, that's when the, the auditors start looking at like, you know, "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 kinda 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 2024, and given how strong the convert market was, rather than kinda cut it close, we, we decided this was a good time to, to, to switch it. So that was the rationale for it.
And then in terms of, you know, 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 Italian Supreme Court is likely to rule next year. But the good news is that we have the money to pay if, worst case, you know, we completely lose and the original damages hold, we have, we have the facilities. It's just a matter of we just don't know how the outcome's gonna play out yet.
Sure. Okay. Well, with that-
Both.
We are at time. So thank you both for joining us again, and pleasure to see you again, Vlad.
Thank you.
I look forward to, you know, talking more as we kinda get deeper into de Novo.
Thank you.
Yeah. Thanks so much.