Good day, ladies and gentlemen, and welcome to the LivaNova PLC third quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. As a reminder, this conference call is being recorded. I will now like to turn the conference over to your moderator today, Mr. Matthew Dodds, LivaNova's Senior Vice President of Corporate Development. Please go ahead.
All right. Thank you, Julie, and welcome to our conference call and webcast discussing LivaNova's financial results for the third quarter of 2019. Joining me on today's call are Damien McDonald, our Chief Executive Officer, Thad Huston, our Chief Financial Officer, and Melissa Farina, our Vice President of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any forward-looking statement. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is available on our website.
We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the investor relations section of our website under News and Events, Presentations at investor.livanova.com. With that, I will now turn the call over to Damien.
Okay. Thanks, Matt. Welcome to our third quarter 2019 conference call. Today, we will discuss our results, provide some recent highlights, and reaffirm sales and earnings guidance. Third quarter adjusted EPS exceeded the upper end of our guidance range, driven by high single-digit sales growth in neuromodulation that included another sequential uptick in our U.S. epilepsy sales. The solid performance in neuromodulation was partially offset by some softness in our cardiovascular franchise. I'm going to start off by discussing some recent highlights, then move to our sales results by business. After my comments, Thad will provide you with additional details on the financials. I will wrap up with closing comments before moving on to Q&A. In early September, CMS accepted the protocol for our RECOVER clinical study, evaluating VNS Therapy for treatment-resistant depression. RECOVER is a double-blind, randomized, placebo-controlled study with a follow-up duration of at least one year.
The coverage with evidence framework also includes the possibility to extend the study into a prospective registry. RECOVER will include up to 500 unipolar and 500 bipolar patients at a maximum of 100 sites in the United States. On September 27, Dr. Azfar Malik, President and Chief Medical Officer for CenterPointe Behavioral Health System in St. Louis, enrolled the first patient in the RECOVER study. We believe this represents a landmark achievement for patients who suffer from this debilitating disease. Turning now to our net sales results for the third quarter, which will all be stated on a constant currency basis. Total net sales were flat compared to the third quarter of 2018. Neuromodulation grew in the high single digits, while cardiovascular declined in the mid-single digits. Overall, our U.S. business declined 1% primarily due to difficult comparisons in HLMs and softness in heart valves.
Europe grew for the eighth straight quarter, and rest of world grew nearly 10%, excluding the impact of a Canadian distributor exit. Cardiovascular sales were $155 million, down 4.9% from the third quarter of 2018. Cardiopulmonary sales were $120 million in the quarter, a decline of 4.5% versus the third quarter of 2018. Heart-lung machine sales declined in the mid to high single digits due primarily to a difficult year-over-year comparison in the U.S. and Europe and a better-than-expected global performance in the first half of the year. Our oxygenator sales declined from the previously mentioned terminated Canadian distributor agreement. In the third quarter of 2018, sales from this agreement were $8 million in the rest of world category of Cardiopulmonary. Excluding this impact, oxygenator sales grew in the mid to high single digits. Also perform well, growing double digits in the quarter. Turning to heart valves.
Million dollars in the quarter, a decline of 9.1% versus the third quarter of 2018 as a result of Perceval declined in mid-single digits this quarter as double-digit growth in Europe was more than offset by declines in the U.S. Circulatory support, or ACS, reflects our TandemLife business that we acquired in April of 2018. Sales in the quarter were $7 million, representing 7.6% in 2018. Last interaction. The earlier-than-expected FDA clearance of LifeSPARC, our next-generation circulatory support pump and controller system. We expect the ACS business to full-year growth in excess of 20%. Let's turn to neuromodulation. $113 million, up 7.8% versus the third quarter of 2018. In the U.S., $88 million. We're above our expectations. The competitive pressures in field continue to moderate. We saw our overall implant rate rise quarter on a year-on-year basis.
SenTiva represented over two-thirds of our U.S. generator sales mix. Europe delivered mid-teen sales growth based on the continued adoption of SenTiva and a strong performance in the U.K., France, Germany, and Spain. European adoption of SenTiva sales. Rest of World delivered a robust quarter, growing over 65%, driven by a strong performance in the Middle East from our commercial expansion and our go-to-market strategies. Finally, neuromodulation pipeline continues to make that ANTHEM-HF rep U.S. pivotal trial continues to enroll ahead of our expectations, with over 70 sites active and more than 125 patients randomized. I'll now turn the call over.
Thank you, Damien. I'm going to discuss the third. Sales in the third quarter were flat versus the third quarter of 2018. Sales growth in neuromodulation, offset by a decline in HLMs, heart valves, and the impact from the termination of a Canadian. Adjusted gross margin as a percent of net sales in the quarter was 70.1%, up 190 basis points from the third quarter of 2018, and our adjusted gross margin has exceeded 70%. The margin improvement was driven by mix. Adjusted R&D expense in the third quarter was $39 million, compared to $38 million in the third quarter of 2018. Of net sales was 14.4% versus 13.9% in the third quarter of 2020. R&D is increasing behind our continued progress in the ANTHEM-HFrEF pivotal trial RECOVER study. Adjusted SG&A of $2 million, compared to $101 million in the third quarter of 2018.
SG&A as a percentage of net sales was 37.8 points versus the third quarter of 2018. The change is largely related to the full impact of expanding ACS commercial capabilities, strengthening our commercial organization in international markets, and increasing investments in neuromodulation. Adjusted operating income from continuing operations was $48 million, compared to $47 million in the third quarter of last year, as improvements in our adjusted gross margin were partially offset by investments in our key growth drivers in R&D. Adjusted operating income margin from continuing operations rose 50 basis points to 17.8%. Our adjusted effective tax rate in the quarter was 11.2%, an improvement from the quarter of 2018 as a mix. Dilutive EPS from continuing operations in the quarter was $0.84, compared to $0.78 a year ago and above range.
Our cash flow from operations excluding payments for one-time integration and restructuring costs through was $91 million. Capital spending for the nine months of the year was $17 million lower than the first nine months of 2018. Balance at September 30, 2019, was $75 million at December 31, 2018. Our net was $65 million, up from $124 million a year in 2018. In July, we made the first payment of $135 million in connection with the settlement by district litigation in the U.S., and we received $34 million in product liability proceeds from our insurance carriers. Turning to 2019 guidance. In neuromodulation, the third quarter results were ahead of our expectations, and we now expect the U.S. neuromodulation business to fall within a range of $325 million-$335 million for the full year.
In terms of overall guidance, we continue to forecast 2019 sales growth between 1% and 3% on a cost and currency basis. The range is more prudent at this point due to the performance of the cardiovascular portfolio. If current exchange rates remain unchanged, the company's full-year revenue guidance will be negatively impacted by 2%. Note that this guidance includes one quarter of sales from TandemLife prior to the deal closing in April 2018 or $6 million. The impact of exiting the distribution agreement in Canada that represented $32 million in sales in 2018. Turning back to the rest of the P&L. We expect diluted earnings per share from continuing operations to be in the range of $3 to $3.10. We now expect our tax rate to fall within a range of 14 to. Our guidance for all other full-year metrics is unchanged from May 1.
With that, I'll turn the call back to Damien for some final comments.
Thanks, Thad. We are confident in our growth prospects and continue to focus on execution, strong portfolio management, and developing the talent and culture of LivaNova. While our heart valve sales remain challenged and we are in a period of difficult comparisons for HLMs, the U.S. neuromodulation business is improving, and the rest of the business lines and regions are performing well. We continue to expand gross margins, make significant investments in our R&D portfolio in non-core areas. We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value. With that, Julie, we'll open it up for questions.
As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the questions. Your first question comes from the line of Raj Denhoy from Jefferies. Your line is open.
Hi, good morning.
Hi, Raj.
Hey. Maybe we could start with the VNS business, the epilepsy business. As you noted, some of the issues earlier this year, particularly the sales force turnover and then the competitive headwinds from the recent drug launch. I'm curious if you could maybe parse out which of those seems to be recovering for you. Are you seeing maybe the sales hires getting more productive, or is it that the kind of slowness in the pipeline progression of patients is maybe lessening because of that drug is kind of playing through? Any thoughts just really on where you are on that recovery?
Well, I think it's a combination of all of that. We've done a lot in the last six months to really understand the market dynamics. I think the uptake of EPIDIOLEX, the rate of uptake, has flattened. We're not seeing the progression of patients, and that I think is one thing. Definitely the sales force, I really believe, has become more productive. We see that in their new patient implants. The growth rate still declined year-on-year, it was a lower decline than we anticipated and ahead of our expectations. I think they're being more productive. End of service continues to tick along well in that low single digit.
I think the way we're changing our messaging and talking about why VNS is so essential to the mix of drugs, and you need to have this guardian to get at the other benefits like cardio protection, neurocognitive benefits, decreased hospitalization, SUDEP reduction. Those things, I think, are really starting to play through in our storyline.
Okay. Fair enough. Just two other ones quickly. I know you raised the guidance for U.S. VNS. Again, kind of a follow-on to the last question, where are you thinking in terms of the recovery now? Is this a business that we can reasonably assume can get back to sort of mid-single digits as we move into 2020?
Yeah, I think that for us is where we'd like to have the business positioned. We've always seen this as a robust business, and the U.S., I think, is ticking along well. Particularly pleased with what the international teams are doing too. Europe and the rest of world teams have done tremendous work in the last six months too, and I'm really pleased with the results.
Okay. My last question, just on the clinical study. You mentioned the first implant has occurred. I am curious if there is anything you can offer in terms of how that pace of patients getting done has progressed. The genesis of the question is really thinking about when you can get to an interim look at the data, 250 or so patients. How is enrollment going, and are you comfortable with maybe getting to that 250 patients third, fourth quarter of next year?
Yeah. You're spot on there, Raj. That's exactly what we're thinking. It's going to take a little while to ramp. We were thrilled that Dr. Malik could get a patient in three weeks after we had the approval for the study, which was a really fabulous effort from the whole team. That's what we're really looking at, is 250 patients around 4Q in 2020.
Okay. Fair enough. Thank you.
Cheers, Raj.
Your next question comes from the line of Rick Wise with Stifel. Your line is open.
Good morning, Damien. Congrats on the better-than-expected neural performance. Let me turn to the part of the business, if I could. You said some cardiopulmonary softness, among others. Can you take us through the various pieces? I'm sure this was not the quarter you wanted to see, but just help us sort of business by business understand some of the elements. TandemLife, obviously, LifeSPARC approval came earlier than expected. It sounds like your controlled rollout is later this quarter. Just help us understand what happened and how the raised pieces get back on track in the fourth quarter.
Great set of questions, Rick. Good to hear you. Look, I'll start with ACS. We did get the clearance earlier than anticipated, and honestly, I think that impacted our ability to drive new customer acquisitions. If the new model is coming, people are less inclined to want to be trained on the old model, and that's really what we saw. I think the team is doing well, and the account planning for the launch is progressing. We'll do a limited release back into 4Q, and we're really now building inventory so that we can do a more robust launch in 1Q. I think it's important that we go to market with a contiguous supply chain, and I think the planning there is on track. That's, I think, a very important step for us. That's a high growth business that we're very excited about. HLMs, tough comps.
We grew 10% in the U.S. and 14% in Europe through Q18, 10% overall. It was a tough growth comp. We're still working our pipeline. We're getting into the later innings of that conversion pipeline for the S3. Still some room left in rest of world, that means. Our business is not all just about conversions. We do have new installations and competitive conversions. We're at the back end of that program. I think, the tough comps and the conversion cycle is really what happened there. Again, funnel management is in place, and I'm really expecting the team to continue to drive that business. Heart valves. Look, this was tough for us, as you say, not what we wanted to see. Perceval continues to struggle in the U.S. with the execution there. Europe is still doing well. It's really fascinating.
We just celebrated with Massa, a clinic in Italy, their 1,000th implant of Perceval. I think it's the largest single center series in the world, and really phenomenal results and patient commitment there. Yet, we're still struggling to find that traction in the U.S. That's what we're continuing to focus on, better commercial execution, procedure training. The recent valve and valve indication, I think, is important. We're continuing to work with that team. I'd really like to see that turn around. I'm still committed to Perceval. I think it's a great product and offers an alternative for the thousands of patients where TAVI is not an option. I think if you're looking for a minimally invasive solution, this is a really great alternative.
Then lastly, the traditional tissue valves, we've really been moving away from that whole portfolio, that's continuing to decline high single digits. Mechanical was flat, which was also useful. I think that's the story. Great tough comps in HLMs, but continuing to work our funnel and then getting the Perceval profile working in the U.S. while we continue to make headway with the international group.
Yeah. That's terrific.
The only thing I'd highlight, oxygenators, as you highlighted earlier, did do quite well, mid to high single digits in the quarter. That business is holding in and gaining share.
Thank you for all that. Turning to guidance for a second. If I'm thinking about the guidance and doing the math right quickly here, the fourth quarter guidance and keeping guidance unchanged after, especially the strong Neuro, I think I'm doing it right in suggesting that it implies much softer Neuro results in the fourth quarter. Is that the right way to think about it? On gross margins, it would seem to imply, and I'm guessing if Neuro growth would be less, gross margins would be impacted. It would imply a big sequential downtick in gross margins. Am I thinking about it right or wrong? Maybe help us understand those dynamics looking at the fourth quarter.
While we feel good about the new range, we did want to remain prudent on the views of this business. You look at where we expect NPI to return to growth in Q4 is a very positive result. As we mentioned before, there is an impact on customer buying patterns, and we do still believe that EPIDIOLEX is having some impact on the new patient funnel. As you point out, taking the range up is a really positive sign. The thing to think about too, though, is that last year's Q4 represents a really difficult comp because it was a record quarter for the U.S., where we grew over 10%. Coming to gross margin, we do think that that should remain around that 70%.
Breaking through the 70% threshold, I think, is a really positive sign for the profitability of the company and maintaining the top and bottom line guidance that we previously provided.
Maybe last from me, sort of a two-part question. Damien, you highlighted Europe, eighth quarter in a row, I think you said, of solid performance. I know you've worked very hard to turn around that business, get the right leadership, get the right systems, make it work, and it would seem to be working in a big picture perspective. U.S. seems more frustrating, I think it might be fair to say. I know you're in a turnaround in your mind. How are you thinking about the next few years to get? Not a fair question, because I know there's a lot of moving pieces here, but just wondered at a high level your thinking. Every CEO, CFO's favorite question at this time of the year, how should we be thinking about 2020? I know it's early.
I know you're not giving guidance.
We want to be first there.
Yeah.
I think Matt would like me to say we'll provide guidance on our fourth quarter.
Good. Sorry, Rick.
Look, you really highlighted something that I think is important. The EU, eighth straight quarter, and what seems to be working and what was the difference there, leadership
Marco and the team there, I think have done a tremendous job. The double digit, again, in international. Roy and the team there, I think have really made great progress. A lot of change in those geographies with the go-to-market strategy, taking areas direct. I chalked this up to leadership, and I think this is the thing that's important in the U.S., is for the leadership to gain traction. Paul Buckman, who a lot of people know, about a quarter ago, and he's really stepped up and is starting to really understand where the opportunities are and how to bring the team together. It's not a one-man show. There's a team of people there that are doing, I think, great things. We'll continue to focus with that team. There's also a new CFO in the U.S. region as well.
Lawrence, I think, is going to bring a lot of discipline to that group. I think, we'll continue to focus our energy on getting the U.S. back to consistent growth. I'm quietly encouraged by the new leadership there.
Thank you.
Your next question comes from the line of Matthew O'Brien with Piper Jaffray. Your line is open.
Okay. Thanks for taking the questions.
Hey, Matt.
Morning. Clarification on Raj's question. Did you guys say the interim look should be Q3, Q4 of next year as far as the depression study goes?
Yeah. Q4 2020. It's the first look.
First interim look.
Yeah, the first look. Yeah.
Got it. Okay. Kind of following up on Rick's question a little bit on the cardiovascular business. I think you said in cardiopulmonary, you had a really strong first half, probably a little bit of pull-forward sales there. You're not going to get the new heart-lung machine out until the middle of next year. It sounds like the valve business, especially first of all in the U.S., remains challenged just because of other options that clinicians have at this business heading into 2020. Is it one that can deliver some decent growth throughout the first half of next year? Or is it going to be more of a growth headwind as the Neuromod business accelerates a little bit?
Yeah. It's Matt. For cardiovascular, we're not giving overall 2020 guidance, but if you just think about where the market is, we've said before HLMs, oxygenators, it's a low single-digit market. A lot of that's coming from international expansion versus the U.S. and Europe. Our take is that, we are assuming that's the current run rate. If you want to give a share, go right ahead. We're really looking at ACS, as we've been talking about, as being the key driver. Not just now, but also into 2020 because of the opportunity there, and as we continue to expand the sales force. When you put the three parts together, that should really be your driver. Not just now, but also as you look forward.
Okay, that's helpful. Matt or Damien, can you talk a little bit about LifeSPARC? We were at a conference recently, the feedback on that product was really strong. I'm not overly surprised to see the Q3 slowdown here. Why do you think Q4 accelerates a little bit? Did I see in the release that I think you're selling a little bit in Europe now. Are those your first sales in Europe? How do we frame up what you could do there in 2020?
Yeah. Sales in Europe are going to be prioritized for S5 cranking. This is why I think it's important what we're planning to do is have a limited launch in Q4, in a small number of accounts. Build inventory heading into Q1. There's a slight lift there. Also, the other thing is the CMS decision, which we really applaud them coming back and revisiting DRG 003, is being reinstated in just a couple of days.
No, October first.
October 1.
It's already started, yeah.
That's a big deal for us. We sell over in 100 DRG codes. A lot of patients are going to benefit from being able to access the product. Between the CMS, and launching LifeSPARC, we think that that's the key driver.
Okay. That's helpful. Thanks for that. Last one for me is just on the depression side. Raj alluded to it a little bit. Do you want to give us a little bit of an update as far as how enrollment's going here through October? I think you had talked about doing $5 million to $10 million in that business here in 2019. Should we just assume kind of the low end is the right number?
Yeah. Spot on. Yeah, look, it's very early days. We're going to not give sort of blow-by-blow accounts of enrollment, but focus on this milestone of the 250 at the end of next year. I think it's very encouraging where we've seen the engagement from the site. I was at the investigator kickoff meeting in Chicago, and that was really exciting to see the engagement, not just from the investigators, but also their staff that we brought in. I'm excited about what we're going to be able to do here, and that's the plan, enroll aggressively and work for a Q4 2020.
Thank you.
Your next question, Bardo with Berenburg Your line is open.
Yeah. Thanks very much for taking my questions. Good morning.
Hey, good morning, Scott.
Right. I guess it's not so surprising to see some volatility in heart-lung machines. You can't grow that business double digits forever. What has surprised me has been your communication confidence about this upgrade cycle. I think in the last quarter, you said you had some 12-month visibility into the Polaris launch. Clearly, it didn't come through quite as you were expecting this quarter. What's really changed since last quarter? That would be helpful to understand. More broadly, given that this is a capital business and is subject to some volatility, could you please at least split out how big heart-lung machine is in the context of cardiopulmonary so we can better gauge the more predictable consumable drivers? Thanks.
Yeah. In cardiopulmonary, it's about 25% of the business. Just to categorize that group. Look, I think you have been very close to this business for longer than any of us, actually. You know that this cycle was really an exciting driver, and I think a lot of people were surprised to see us be able to reinvigorate this whole product group. I've been very pleased with how the team have adopted funnel management. What we've seen, a real ability for the team to identify S3 conversions and drive units. We're coming to the late innings. We've, as well as identifying new installations, which is predominantly in the international region. We're also winning competitive conversions, too. I think the team has really stepped up there.
Having said that, we are in the back end of the S3 conversion cycle, which is the primary driver. There are just tough comps coming around. The growth rate on this will slow, but we're not any less excited about how we use this business and also to understand what we need to do to continue driving oxygenator share.
Okay. Thanks. Understood. With respect to heart valves, I know we talk about this often, but obviously, it's been many years for the company to try and improve positioning of that business in North America. Can you help us understand at what point you make a determination on that business? Key performance indicators that really make you comfortable that LivaNova can progress this to its full potential. Does the PERSIST-AVR trial, for example, have any impact?
Yeah, I've spoken in the past about average daily units, ADUs. I've seen benchmark-level performance of implants here in our sales team in the U.S. That's what makes me believe we can do this. We just have to be consistent. We have to be better at commercial execution. We've invested, in the last couple of quarters, more on procedure training. The valve-in-valve indication is giving us a new reason. I think for us, this is about the sales team finding traction in the accounts that are expansive and thinking about minimally invasive alternatives for valve replacement. For sure, the noise around low-risk TAVI is creating a headwind for us. That shouldn't take away from what we see as still a large opportunity. How do we know we can do it?
There are reps in the U.S. who are doing it. Importantly, there are reps in the rest of the world who are doing it. That's what makes us believe. As I said, that this Massa experience, 1,000 patients, shows that there is a longitudinal opportunity here. I continue to want to make sure this team succeeds.
All right. Thank you. Sorry, does the PERSIST-AVR trial make any difference here? When does that read out?
Well, oh, you want to talk about that?
Yeah. The PERSIST-AVR, it looks like right now it's going to be in the late first quarter, early second quarter of 2020 for the full readout being presented at a major medical meeting.
Okay. Understood. Thank you for just taking the follow-up. Great to see neuromodulation having a nice recovery. I think that's what we've all been looking for. As we look to the fourth quarter, I don't think there's been a fourth quarter in the company's history where, on an absolute basis, neuromodulation has not performed better than the third quarter. I just want to understand that there, in your opinion, given discussions about improving new patient implants, there's no reason why that trend shouldn't continue. Just trying to understand in the context of your group guidance.
Yeah, I think that's fair. We typically have a very strong Q4. When we provided this revised, we wanted to be prudent in our forecast. At the same time, Q4 last year was an extremely high quarter. The comp, obviously, we want to drive quarter-on-quarter sequential momentum. We provided that range.
Steve, just put some takes on the treatment-resistant depression trial. Obviously, great news to hear you're going to try and aggressively recruit for this trial. Just help us understand what that means from a revenue perspective into 2020. I know the trial is now bigger at 1,000 patients, what would you expect then? Maybe also on that point about re-implantation for patients. Just help us understand again, Damien, please, if you're going to have a look at a Q4 for follow-up data, how does that timeframe work within the context of the trial design? Thanks.
Yeah. Just on the numbers, I previously gave 5-10 for this year. We'll be at the lower end of that, given the late start of the study. For next year, 20-30. Again, looking at the ramp, the lower end of the 20-30 is probably reasonable. Again, we will be driving hard to enroll fast. If you want to model it, they're the ways I think about it. You wanted to?
Yeah, sure. For the endpoint that would get us to registry, 12 months response.
We get our first look at 250 patients. We can continually look every 25 patients after that. We're seeing up though at 12 months follow-up, somewhere between 250 and 500 hit the endpoint. It would be between the guidelines we gave of best case, late 2020, and then think about a few months after that as needing to enroll the rest of the patients.
Okay, guys. Thanks for the questions.
Cheers, Scott.
Yeah. Next question comes from the line of Matt Taylor with UBS. Your line is open.
Hi. Thanks for taking the question. I just wanted to follow up on Neuromod and ask more specifically, what are the pluses and minuses that we can think about for Q4 and going forward, in the U.S. and OUS? Can you help us understand last year's Q4 in the U.S.? Is there anything one-time, like a big bulk order that made that really strong, or was that just strong demand? For this year, are there any things that you can point us to, like Salesforce ads or the end-of-life comps or things that would help us to forecast the next couple periods?
Yeah. I think there's a number of things. We're continuing to see SenTiva traction in the U.S. and internationally. I think that's important. There's a price premium on that product. We're now at 58% of worldwide sales, and I think there's some small runway there still. We typically have a price increase in the quarter, where we selectively look at price changes by geography, and I think that's an important driver. I think we look at the end of service. I think we've said to you before, 2%-4% is sort of the long arc of that, and we're continuing to see that low single-digit end of service, which I think is an important base. Talked about our expectations for NPIs to gradually return to growth. We've seen sequentially since Q1, the declines start to decrease.
We had actually a better Q3 than we anticipated in that respect. That I think will be an important market for us as well.
The only thing I would say is end of service, that we're assuming we don't grow at the same rate we did a year ago.
Yeah.
That's now more than half the overall generator implants, or I should say, still is. That has a bit of an impact as well.
Got you. Last year's Q4 strong demand and then OUS, doesn't seem like you saw any impact from Epidiolex. Do you still think that? You talked about doubling that business over a multi-year timeframe. Is that the kind of outlook you're still expecting there?
Yeah, we really are very bullish about our opportunities internationally. The team in Europe, I think, is doing well. The markets we highlighted have continued to show great traction. The change in our go-to-market in Japan and going direct has really had a big impact for us. I think those businesses are continuing to grow well, and the international now is bigger than Europe, for neuromodulation, which is a huge step. In the U.S., I would say the team executed very well last year. We talked about in Q1 the change in buying patterns with the EPIDIOLEX. All of that normalized. We'll get back to a natural rhythm with this business.
Okay. Q4 was very strong also because of SenTiva and just the momentum that we had last year.
Yeah.
Okay. All right. Thanks, guys. Can I ask one other follow-up question on the heart valve business? I just wanted to understand if you thought your growth rate was indicative of the market, or are you losing some share there? Help us kind of parse out those two factors.
Well, yeah. Let's talk just about the U.S. I think that's where the sticking point is. I'd say we're losing share in the U.S. Internationally, I think we're in a good place. I think in Europe we're in a good place. It's the U.S. As I said, I think TAVI is definitely a headwind, and you've seen some great print from those companies on their results. Again, I think we can do more here, and that's why I'm continuing to invest and believe that this team.
Lost share in the U.S.
Yeah, we lost share in the quarter based on our trend and what else we saw.
All right. Thank you, guys.
Cheers, Matt.
Your next question comes from the line of Mike Matson with Needham & Company. Your line is open.
Morning. Thanks for taking my questions.
Hi, Mike.
I guess I just wanted to ask about your ability to really focus on both the neuromodulation and cardiovascular businesses at the same time. It feels a little bit like Whac-A-Mole here, where the neuromodulation was weak, it's getting better, but now cardiovascular is really slowing down. Part would just be, does it still make sense to have these two separate businesses combined in a single company?
I think that for us, it's about balance in the portfolio. We recognize that we haven't had all of the pieces working in unison here and driving growth at the same time for a few quarters. We continue to believe that the power of the combined LivaNova is really useful. The balance sheet, I think, gives us a lot of opportunities to invest in things. The scale and scope of our geographic reach is significantly enhanced by the business combination. That's, for us, what really is important. We've seen that. You can see what's happening in Europe now with neuromodulation crossing the Atlantic. You can see the international team taking the portfolio and growing neuromodulation, for example, 66%. We really believe that the scale and scope of the combined team is important here.
Okay. You mentioned the new heart-lung machine. I guess first, do you think that that has impacted sales of your existing system? Do you think if it hasn't, is there a risk that as we get into the first half of next year, that it does start to weigh on the sales of the existing system because the reps and/or the customers just don't want to buy the old one right before the new one's launched?
Yeah, I think we've been very thoughtful about that, and we're looking at ways of being flexible with accounts on how we make that transition. This is always the great question when you have a capital goods product. We believe we're being very thoughtful about that, and we've already seen places where that's what's going to continue to drive us. Let's go account by account and look at what they need and when. I think that market responsiveness has been important to us.
All right. Thank you.
Cheers, Mike.
Your next question comes from the line of Jason Mills with Canaccord. Your line is open.
Hi, Damien. Thanks for taking the questions. I wanted to go back to Mike's first question. I thought it was a good question. If we go back to the premise of the combination of the two businesses, a couple of them were leverage points on the P&L, and from a tax perspective, it looks like you've executed quite well there. A lot of folks are benefiting on that front as well. The combination has certainly benefited. SG&A, I think it's fair to say, has been a win vis-à-vis this combination. U.S. business on the cardiovascular side, vis-à-vis the combination of the strength that Cyberonics had in the United States hasn't come through. I guess I just wanted to go back to that. I hear you with respect to the benefit of or the ability to leverage a larger franchise.
At this point, have you not sort of squeezed the benefit out of the combination? Could you look to, like you did with the CRM business, divest underperforming assets when they still might have some value to someone else and focus on the pipeline? That was the subject of my follow-up, and I'll get to that in a second.
Yeah, sure. Look, I think you've hit on some really great points. Tax has been a friend. Our ability to invest, essentially double our R&D investment in what I believe is, and continue to believe is a great med tech pipeline. I think the big wins. The CV expansion. Look, I think it's done well except for heart valves. The cardiopulmonary heart-lung machine business in the U.S. was reinvigorated. We've done some great work with oxygenators there. It's really heart valves that I think has not read through. We really continue to believe that this is a great combination. Now, we've always said we will look at the portfolio in the light of day with new facts.
I think what you've seen from us is a continued investment in the pipeline that I believe is really, as I said, apart from the heart valves in the U.S., I think has really borne out well.
Yeah. I think we have scale, both with the balance sheet, the P&L. We've driven leverage and improved our cost base. As Damien pointed out, we've been able to invest in the pipeline while delivering great results. We've had some ups and downs, of course, with neuromodulation, but to have that business now coming back and improving our forecast, versus where we previously were is a very positive sign.
Okay. Before I ask my pipeline question, so would the answer, Damien, to that be that you wouldn't look to divest anything in the near to medium term?
Yeah. Well, that's not our plan. As I said, it's important to remember that we are prepared to make the decisions when we look at the portfolio and understand that there are better opportunities for that asset somewhere else. Never say never, but that's not our plan.
Got it. Okay. On the pipeline, I guess two-part. First on depression, just going back to the question about readout moving to registry. Your commentary would seem to imply you think that getting to sort of 250-plus enrollment in the fourth quarter as to hit at end of year, and then you've got a couple of months of data adjudication to sort of read them. That would imply a fairly bullish feeling about the ability to enroll near term. Secondly, on these calls, we used to talk a lot more about the pipeline. Maybe you could give us your current thoughts on mitral, what the firm's plan is long term to compete and what I think is becoming obvious, that it's requiring a toolbox approach with respect to addressing the mitral regurgitation market.
Also the OSA front. Maybe you could give us a pipeline update on sleep apnea. Thanks, guys.
Yeah, sure. Great. A lot of nested questions in there. RECOVER, yeah, you're right. It does imply very aggressive enrollment. Again, we believe there's a pent-up demand for these patients. Again, talking to the investigators at the kickoff in Chicago, we really do believe that there are patients that they can characterize and put into the study. The team are really working hard to be aggressive there to meet this timeline of 250 by 4Q20. You're right. You've got some follow-up period and then some work to do on the stats. That puts us into submitting for reconsideration in 1H22. You're spot on. Pipeline. Since we paused the study and went back to where the team's done a great job with the redesign. They've locked into a new design that incorporates the valve and the anchor in a single delivery system.
One of the things that I think became apparent in the user-centric design discussions was making it simpler to get the valve and the anchor in. I think the team's done a great job there. The initial feedback with the FDA was positive, and they've started preclinical work back into bench testing animal studies, the biocompatibility work. We're still looking at getting back into enrollment in 2020. I'm not entirely sure that the whole toolbox thing has fully played out yet. I think there's people talking about it. Certainly, the results with repair initially have been great. We still believe that a replacement option is going to be necessary and the team have developed. Sleep apnea. Love the sleep apnea market. I think there's just such tremendous opportunity there, and we really continue to believe that we have a great technology and a great know-how.
We know how to make these implantable generators and leads. We've done a lot of work on our Bluetooth capability with the SenTiva 2.0 work. I think that'll read over into our R&D efforts. We're bullish on the market, bullish on the disease state and what we can do to help patients. We concluded the THN3 study. The readout on the last set of patients where we changed our titration protocol has been really positive. We're still working with the FDA to find out what exactly would be required for a confirmatory study, but we expect to start in 2020 on that line, stabilize the supply chain. We understand the titration protocol much better than we did when we first inherited this business. I really think this is a great opportunity for us.
Thanks so much for taking all the questions, Damien.
All right. You're welcome, [audio distortion]. It's good to hear your voice.
Again, if you'd like to ask a question, press star one on your telephone. Your next question comes from the line of Scott Bardo with Berenberg. Your line is open.
Hi, guys. Thanks for taking the follow-up. Looking at your results today, I happened to sort of reflect back on a couple of years ago when you had your Capital Markets Day. Back in 2017, you had 65% gross margins and nearly 22% operating margin, and you were calling out by 2022, you should be a 70% gross margin business with well over 20% operating margin. Now you appear to have achieved your gross margin target three years early, and yet your operating margin has contracted by 5-600 basis points, not expanded. Gone in completely the diametric opposite position. Look, I know that there's been moving parts, and I know that you've invested in some pipeline that wasn't apparent in 2017, but clearly big differences.
I guess the nature of the question is when do we start to see some operating margin performance for a 70% gross margin business? Do we start to see that evidence as of next year? Thank you.
Yeah. We're not giving 2020 guidance today on the call, but you're absolutely right. That is what we laid out, and I'm extremely pleased that we're able to see the gross margin read through three years earlier than expected. I even believe now our belief is the target should ultimately be closer to 75% over time. We, in our strat plan, think that the profile has changed. One, we've built, I think, a fantastic pipeline here, and we've made significant investments in our international expansion. We've also made significant investments in getting neuromodulation back on track. We've made significant investments in build that out, both in SG&A and R&D. We've also with ACS and TandemLife. All those things will help us, I think, drive a sustainable high single, even double-digit growth rate over time.
Obviously, then you'll start to see the leverage come through in P&L. This window in 2019 and 2020 is still largely an investment period of time with the pipeline and the R&D investments that we're making.
No, thank you. That's helpful. Just to understand direction, actually, and I appreciate you're not going to give us any real concrete guidance, your R&D ratios are quite high. You're talking about a broader TRD trial next year. At the same time, that should be coupled with more revenue from CMS. Can you give us some sense, actually, whether operational ratios, cost ratios have some leverage potential next year? Do you think that they could expand further? Just some sense of direction would be helpful.
Yeah, I think a lot of the R&D investments we think as a percentage of sales and even absolute dollars are relatively consistent going into 2020, that the investments within that mix will be more focused towards TRD and in heart failure, as those are really progressing. We are driving leverage within G&A, still making investments in sales and marketing, particularly with TandemLife and international expansion.
Thanks very much indeed.
There are no further questions at this time. I will turn the call back over to Damien for closing remarks.
Julie, thank you. Look, everyone, thanks for your questions this morning. On behalf of the whole team, we really appreciate your support and interest, and thanks, and we look forward to the next quarter. Cheers.
This concludes this conference call. You may now disconnect.