Good afternoon. Thanks for joining us. It's a pleasure to be here with LivaNova this afternoon. And so joining me here today is CEO Vlad Makatsaria, who started on March 1st, and Matt Dodds, Senior VP of Corporate Development. I've got a bunch of questions that I'll ask. At some point, I'll open it up to the audience. To the extent you have questions, we'd welcome those. And so maybe I'll just start with the question that is on everybody's mind, given last week's news. So, Vlad, for you, given last week and the RECOVER study results, the preliminary results, what can you tell us about the results and the path forward?
Yeah. Thank you. Well, before I start, first of all, yes, thank you for the opportunity to participate in the conference. And thank you to all of you for your interest in LivaNova. And for those of you who engaged with me over the past couple of months, thank you for all the feedback and questions that clearly helps me learn better and also for us as a company to kind of sharpen our approach moving forward. So thank you for that. Before maybe I jump into your answer, let me kind of frame where DTD stands in our strategic framework. The way, the way we think about our strategy moving forward is in three steps. You know, one is how well we're doing our core business, which, in our case, it's cardiopulmonary and epilepsy-focused businesses. So maximizing our core is our first strategic pillar.
The second one is setting direction on two important innovations that are in the clinical trials. And one is DTD, and the second one is obstructive sleep apnea. Setting direction of that. And then the third one is thinking beyond that. What are the next chapters for LivaNova? Next growth opportunities in the areas of high unmet clinical need, high market growth, where we have the right to win and return shareholder value. So that's kind of the framework, which makes really the outcomes of the RECOVER trial and our decisions on how to move forward a very important strategic pivot for LivaNova. So Matt and I will talk about this in kind of three buckets. You know, the first one will give you a bit more flavor on the data that we saw so far.
The second one is kind of our process, over the next few weeks, to help kind of analyze the data and make smarter choices. And then the third one is the kind of the decision-making timeline, on the next steps. So maybe, Matt, if you can help me cover the first two.
Sure. Thanks, Vlad. And again, yes, thanks for having us. So on the data, the high-level data, we did put out a press release last Thursday. Here's what we can talk about at this point in time. We did not meet the primary endpoint, time and response. However, if you look at the data, the actual treatment group, the effect was within the expectations we had laid out at the beginning of the study and had published, as a publication, on the RECOVER trial itself. Where we were surprised was if you look at it, you know, versus baseline, again, a strong response, the control arm did a lot better than we were forecasting. So we didn't show the statistical spread that we needed to hit the P value.
The other thing I would say is that, you know, we also did show a clinically meaningful benefit on some select secondary endpoints. So, so overall, there is some, you know, interesting positive components of the data, but, you know, but at the highest level, we, we did not hit the primary endpoint. Do you want me to move on as well to, to, you know, in terms of, you know, what we're looking at now? We're now doing a thorough internal analysis. We also have an external group that is gonna be looking at, at the data. This is, again, the unipolar arm in its totality. So that's both underway. We also are gonna have an independent person look at our bipolar data just to see where we are with the data.
We will remain fully blinded to that data, but at a high level, you know, we can get an understanding of how it's tracking versus what we saw with unipolar. And then in general, you know, we've committed to having an answer on, you know, the program and the path forward on our second quarter earnings call, in the end of July.
Okay. So maybe sticking with, I think you described the three vectors. So let's stick with the second vector and shift to OSA. I know that you had a positive update in March. And so how should we think about the OSPREY trial and the opportunity there more generally?
Sure. Thanks. Yes. So if you look at OSPREY, this was a Bayesian design. So there was the ability to stop early. When we looked at 90 patients out of a study that could have reached as high as 150 patients enrolled, the independent statisticians at that time determined there was at least a 97.5% chance that we would hit statistical significance on our primary endpoint. And just as a refresher, the primary endpoint in this trial is, it's a randomized trial, 2-to-1 therapy, sham with device off, 6-month follow-up, 7 months total with about a month of kind of a, you know, a burn-in. And at that point in time, it was determined that we had at least a 30-point spread in response therapy arm, versus the control arm. So it allowed us to stop early, slightly under 110 patients.
We now have to follow all the patients for the 7 months. So we will have the primary endpoint data around the end of the year. If it's solid data, we would then submit that to the FDA to fully start the approval process. One caveat, we do have to provide the FDA with 12-month safety data. So we would get that in April of 2025, that would complete the submission. So if everything goes according to plan, we would still have approval in 2025. The other point I'm making in that trial is compared to the other companies that in OSA have done clinical trials, they were single-arm studies that went out 12 months. So an important data set for us is that in April of 2025, we will also have our 12-month data.
So you could compare our therapy arm for the full 12 months against the competitive data set. So that I think commercially, that's an important data set as well for, for the OSA program. But so far, so good.
Okay. So then on the commercial point, how do you think about commercialization of that opportunity given it's a new?
Right. A few interesting points about that market. You know, one is it's a big opportunity. It's already crossed $600 million in the U.S. alone, in a pretty short period of time. For us, it's gonna come down to the data, right? The 6-month-7-month data at the end of the year. And then also importantly, that 12-month data to see how commercially competitive we are. The one unique component of our trial is we treat patients with complete concentric collapse. That's roughly around 25% of all OSA patients. So our trial should not be contraindicated for that patient population. The other two did not look at those patients. So that would be our initial beachhead, I think, in terms of, you know, where we would have the most commercial opportunity in what I would consider at that point in time, an existing market.
And then hopefully we could expand on that as we move through next-generation technology.
Okay. Maybe we shift to the core, to the first pillar, and we can start with epilepsy, 13% growth Q1, 10% growth last year. What's behind the strength of the franchise right now?
Yeah. Well, thank you. Thank you. And, yes, I joined the company at the wrong time, you know, after 4 quarters of double-digit growth. So now the expectation is high. I usually start with very low expectation, but, fortunately, fifth quarter, in a row was also double-digit growth. So, the core is going very strong, on both fronts, epilepsy and, cardiopulmonary. So on the epilepsy front, we can think about several growth drivers that are quite well-balanced, right? So one is market growth, and that's driven by really by procedure penetration. So in this field of healthcare, the penetration of procedure within patients that can qualify for interventional treatment of epilepsy, it's still under 5%. So it's one of the most under-penetrated, treatments. And so clearly driving market growth, procedure penetration is the key lever. So we saw market uptake.
In our own business, we saw quite driven by price, replacement, and new patient implants. And obviously, the new patient implants are connected to my first point of market penetration growth. So very well-balanced growth. And so far, if I look at our performance, we have been positively surprised on each of those growth levers.
But so then, how do you give some context to this 6%-7% growth for the year? What are the puts and takes?
Look, I think we have a very strong momentum, and we will see how quarter two and beyond will frame. But if we continue to drive the levers that I talked about, I think we have a really good story to build on in epilepsy business.
And so history, recent history, double digits this year, mid to high single digits. How do you think about the, or 6%-7%? How do you think about medium to longer term? Can this be a mid to high single?
Yeah. And that's when I go back a little bit to say where I started. The first strategic pillar is maximize our core. And so what does maximize for me mean is build a sustainable business in both epilepsy and cardiopulmonary that is gonna grow short, mid, and long-term above market growth on top line and that income grows above sales. And so that is the goal on both epilepsy and cardiopulmonary business. What this means for epilepsy business is really focused on two things. One is procedure penetration and growing the market. And the second one is driving innovation within our portfolio. And the first step in that innovation is really building connectivity and software capabilities within the current portfolio as the first step of our portfolio upgrade.
If I just throw in a couple additional pieces, we now believe that the epilepsy surgery market in the U.S. is growing again. For a couple of years, we thought it wasn't growing. It started growing last year. We see it again growing this year. Competitors are talking about the same thing. So we're getting a better tailwind in new patient surgery for epilepsy. A year ago, Stephanie Bolton took over the role of global, and she's done a really nice job, I think in terms of driving the commercial component of this and stabilizing the overall sales force. And then also, I just think blocking and tackling execution has just stepped it up a level as well.
Great. So we pivot to cardiopulmonary.
Good.
So you talked about the bad time, 5 consecutive quarters of mid- to high-driving. I would argue it's good timing, by the way. What's driving that growth?
Yeah. It's interesting. Actually, on the last earnings call, most of the questions were about the cardiopulmonary business and how can we sustain the growth there. And look, I, I, it's, it's a, it's a very interesting business. And while I think the space itself has been in the healthcare industry for a while, I think there's a lot of opportunity to continue to build growth in that business and innovate. The way I think about this is we have several parts of the business, right? The first one is the heart-lung machine business where we have majority of market share with close to 70% global share. We have north of 8,000 units installed globally. And really the growth story in that business is upgrade. So with our new heart-lung machine called Essenz, you know, it's not only kind of has significantly more capabilities in terms of performance.
It has opportunities to be constantly upgraded in terms of software. And then obviously there's a, there's an economic benefit in this in terms of pricing. So really the name of the game in our heart and lung business, heart-lung machine business is upgrade. And as I said, the machines can be constantly upgraded in terms of software. So a lot of innovation on the heart-lung machine side is going into the software engineering and monetizing continuous improvement on the machine. The second pillar is service. You know, with such a significant scale of placements across the world, we need to make sure that we are absolute benchmark in terms of service. And it's also there, you know, analogs in other industries where kind of service revenue and service business plays significantly larger role in driving value of the business. And that's what we're trying to build.
And the third driver of growth is market share. So on the disposable side, whether it's oxygenators or cannula or even in our ATS business, our market share varies anywhere from 30%-10%. And our strategy is to continue to drive share gains. And really the levers to get there is using our commercial excellence, using the leverage with our HLM business and the footprint we have there. It's making sure that we innovate and build better clinically performing disposables, but at the same time digitally connect our disposables and equipment so that that helps clinicians make better choices and better decisions during the procedures. And then finally, you know, we're going through a metabolic rate change in this business from relatively slow growth business to the business that is growing at double digits.
I count on it continuing to grow, above market, which means we also have to manufacture and distribute more products around the world. So we're looking at manufacturing and supply chain excellence as a key lever of that growth.
And then in the very near term, you know, the industry in oxygenators has had supply issues. Even ourselves were backordered, but that has enabled us to gain share in the near term. And I think at least in the, you know, the next few months, it looks like that path is still available to us.
Actually on that, Matt, you had talked about increasing capacity in that business 10% for the year. Do you give a sense of if you're on track?
Yeah. So because of the disruption, you know, kind of the demand for our oxygenators increased drastically. And while we work very hard short-term to deliver on that demand, the market is still experiencing some backorder on the products because of those disruptions, competitive. So we have approached this in two phases. You know, phase number one is improve efficiency and effectiveness of our own current manufacturing network. And you can think about it from the end of last year to the end of this year, our capacity will increase 10% or just north of 10%. And it's a gradual increase throughout the year. So today we are tracking slightly above our target. So, good progress there.
And then the second phase is really thinking about kind of a step change in our ability to produce this product at the same time as building a flexible system where we can scale up and scale down, scale down depending on, because the number of competitors in this space is not so big. So we need to be able to be ready to cover for any disruptions. And so step number two is really making some network changes in terms of the way we increase capacity in a more significant manner.
Okay. So maybe back to the growth that you've experienced relative to what you're expecting for the year, mid- to high-teens, projecting more like 8%-9% for the year. Can you give context for the expected slowdown?
Yeah. I think on the positive side, and I'll start with the positive side, you know, the, the growth momentum is, is very strong and I, I see it continue throughout the year and all the levers that I talked about are, are, are, are driving this growth. On a more cautious side, you know, there are two, two areas. You know, one is that we launched our Essenz machine at the end of last year in Q4 and had a spike in, in growth and, and in absolute value of business. So from just phasing point of view, we don't expect Q4 to be at the, at the level of growth that we, we saw in the kind of first part of the year. And the second one is, the second one is obviously, I talked about our capacity increase.
So we're kind of stopped at about 10%-12% volume increase on oxygenators, and maybe price is another lever that we can have there. And then finally, you know, the market has been disrupted for a while with supply. And, you know, for the sake of patients and physicians, I sincerely hope that it recovers and that also will have some impact on our growth rates if it does.
So then specific to Essenz, you've talked about it a couple of times, obviously an important growth driver. How do you think about that as a contributor to growth?
Yeah.
Over time?
So when you go back to what I said about upgrade, you know, we have 8,000 units globally. Essenz is a minimum 30% price premium device that also performs better clinically. And you can think about a multi-year upgrade strategy here. So, you know, for the next 5-8 years, I can see this as it'd be a key growth driver for us, just from pure hardware upgrade point of view. And then during this timeframe and beyond it also, you know, we are looking at obviously at a software upgrade. And you can think about a life cycle of an equipment like this somewhere between 7-10 years. And so at that point, you know, it will be time for us to reinvent it and move forward and have next generation machine.
If you look at the geographies, we launched in the U.S. and Europe still early innings there. We've launched in a few other countries, but, you know, half of that installed base is outside of the U.S. and Europe. And we, you know, we barely started in a lot of those countries. So that's why to Vlad's point, there is a lot of runway left, even in getting all the countries up and running with Essenz.
So, a multi-year growth story.
We think so.
Makes sense. Before I shift to margins, maybe I'll see if there's any other questions on David.
Maybe just go a little bit deeper on the revenue outlooks this year because guidance implies that, you know, you got to pivot a little bit that your business sort of falls off a cliff here from what you're doing. And if you think of, you know, about your market growth rate, that would basically imply that you've gone from a period of sort of significant share capture of some of the back to sort of your market growth rate for a period of time. So maybe just like if you go into a little bit more detail on the 13.5% increase in margin, what would probably be like 4%-5% in a year based on.
Yeah. Look, I think this is a good question. And obviously, as I joined just three months ago, I'm also looking at what growth opportunities we have moving forward. I can tell you that the business is performing very strong. And I see that, you know, for me personally, I feel that our core business is underrated in terms of its growth opportunities. And so, you know, at the end of July, we will have our second quarter results. And I think at that point, we will set clear expectation where we think we're gonna finish the year.
The one thing I'll tell you is going back to, just a compare, comparative is Q4, because of the Essenz launch, we will see a slowdown growth-wise, not necessarily a slowdown in our kind of momentum in terms of value, value of business, but a slowdown in growth rate. So, but, you know, there's an element of conservatism in the current guide.
David, if you look at the Q1, even the two-year stack, it's by far our easiest comp of the year. And the fourth quarter being the toughest.
Maybe one strategy call before you go to margin. Just think about your three areas of the business.
Sorry. As you think about the three different segments of, of your business, these clinical trials like RECOVER are very significant investments. So how do you think about investing in some of these sort of moonshot indications in relatively established categories versus using that cash to go out and bring in new assets from an M&A perspective that would diversify, not only diversify the top line, but also allow you to further leverage your, your sort of strong distribution channel in those areas?
Yeah. I think your question, or I take it more as a feedback, not question, is spot on. Look, I think, again, I own this now. Obviously this is my responsibility and accountability. We have over-invested in moonshots versus our core business. And I think we want to rebalance that. And I think by rebalancing the investment back in the core, we will make sure that it is sustainable based on the drivers I talked about. But for me, I go back to why I started. The first step in our strategy and the consequence of it also means that we're gonna reinvest into this is maximize our core. And then I think beyond that, there's a couple of ambiguous questions, right? What is gonna happen with the DTD and OSA decision? That's number one.
What is gonna happen with SNIA, outcome in terms of the legal proceedings in Italy? That will give us enough input into, you know, what can we do moving forward? And moving forward, we're gonna look at the areas of, as I talked about it, of high unmet clinical need, high growth markets, areas, where we have the right to win and return shareholders' value. So that third piece, that last piece, the work is starting now. And we are kind of committed to finalize it by the year end and have a venue where we can communicate the three pillars of our strategy to the investment community, early next year. Does that answer your question?
Thank you.
Maybe moving on to margins. And so a myriad of growth drivers in the core and potential upside on the investment side. But on top of that, you're projecting 300 or forecasting 300 basis points of margin expansion. Help us understand what gives you confidence that you can do that? I could tell you there's not a lot of MedTech companies generating 300 basis points or even 100 basis points of margin expansion in a year.
Yeah. And we can still thank you for the question.
That must have been your pixie dust.
Look, I mean, first of all, we, you know, if on the top line, we still have opportunity to build sustainability of that growth momentum. On the bottom line, we, in the core, we have opportunity, and on the tool business, I'm sorry, we have opportunity to keep driving and improve our earnings. Kind of, if I look at our margins and at our earnings, I actually think they're high quality. A, because they're driven by good growth of the top line. B, if I look at most of the parts of the P&L, we have very healthy leverage, you know, on SG&A, we show 150 basis points of leverage on R&D. The team has done a great job in terms of rationalizing the moonshots, David, for your term, and how we kind of improve our investments in R&D.
So we had about 100 basis points improvement there. And then, on the gross margins driven by price, you know, we're forecasting 50 basis points improvement, but the momentum so far has been very strong. So I actually think it's not one thing that drives it. It's a holistic improvement in the P&L, and the goal is to continue to do that.
Great. So maybe a personal question for you, Vlad. My understanding is we're now over 90 days into your role. Congratulations. Any surprises relative to what you expected?
Matt surprised me from a positive point of view.
Yeah.
We work together again. You know, we work together a long time. Look, I think on the positive side, I'm really surprised by the people, their commitment to patients, to physicians, to LivaNova. I have now traveled the world. I have visited all our major sites in the U.S., in Europe. I just came back from Asia. This is the best part of my job, meeting with our teams and with customers.
And I can tell you it's an incredible group of talented people, highly capable and with deep expertise in the areas that we do, whether you're in Munich with heart-lung machine expertise that goes back many years, where you are in Mirandola and see this kind of amazing oxygenator and plastics capability, polymer science, where you are in Arvada with cannula or in Houston with neuromodulation capability is just an incredible team. And that gives us really the confidence in our future comes with confidence in our team. The biggest opportunity that I see is how we improve our work and our outcomes in terms of innovation. And you know, while we have incredibly strong short-term performance, our track record on innovation over the past few years has not been the best.
I'm committed, and the entire team is committed to improving it. Normally I always say, I don't make any changes and I don't do anything for the first 90 days. I broke my rule on this one, on the innovation front where we started to make some changes with bringing Ahmet Tezel as Chief Innovation Officer. Ahmet has tremendous track record in the industry, working. His last two roles were in Johnson & Johnson leading innovation for the MedT ech business. And before that, Alcon Surgical. And I think, you know, both tremendous experiences. And we really count on him to drive change here. You know, we are beyond Ahmet. We're looking at a number of roles both on our R&D front, but also business development front, to enhance our innovation capabilities.
You know, and that ultimately is gonna be the biggest driver of our long-term success.
Great. Any other questions out there? I have plenty more to go. We were gonna get personal with you, Matt. Somebody just saved you. Yeah.
Thank you. You did. Thank you.
Just taking a fresh perspective at the company, maybe you can frame it in terms of the innovation opportunity you see or potentially that third pillar of opportunity. Why do these core businesses still make sense together? What is the opportunity that you see taking a fresh look?
So, I mean, today, it gives us scale. Number two is the outside of the United States, CP business is serving as a rocket launcher for the Neuromod business because the penetration of, epilepsy business in, in most of the countries around the world outside of major markets in Europe and the United States and, and select kind of countries around the world is relatively low. So CP organization is kind of helping through commercial presence, through, just presence in those markets to, to launch and develop epilepsy business. That to me right now is the biggest driver, scale and, ability to help develop, you know, the, the businesses. I mean, it also gives us kind of a little bit more flexibility.
I feel that we invest well in both businesses, but it gives us flexibility to balance our investments more and be more targeted where we want to put additional growth investment. Look, longer term, that third pillar is gonna answer the question on longer term leverage between the two businesses, whether it's gonna come through research and development. I mean, ultimately, what glues businesses together in LivaNova or elsewhere is the ability to leverage science and technology, and if we find a path to do that, then obviously that is gonna elevate both businesses in a very good way.
Okay. Well, with that, thank you for coming down to sunny Florida in the middle of June. We appreciate having you. Although it's probably similar to Houston, so maybe that's fine.
Yes. Very soon.
There you go. Thank you, everybody.
Thank you, all.
Thank you.