I think we're going to get started here. Welcome to the 2024 Piper Sandler Healthcare Conference. My name is Adam Maeder. I'm one of the med tech analysts here at Piper. I'm very pleased to introduce the management team from LivaNova. With us, we have Vladimir Makatsaria, CEO. We have Alex Shvartsburg, the CFO. And we have Ahmet Tezel, the Chief Innovation Officer. I also see Briana from Investor Relations in the audience. So thank you for coming again. Maybe a good place to start would just be on the Q3 result and really the Q4 guidance. So Q3, very strong print. You did raise the guidance. But when I kind of double-click on the full-year top-line guide of 9%-11%, that's excluding currency, excluding the ACS, it does imply a decel to growth in Q4. The comps are tougher in Q4, prior-year comps. But, you guys have been executing so well. So is it purely a comps issue or anything else that you'd like to call out?
So maybe before Alex answers the question, first of all, great to be here. And Adam, thank you for the invitation. And thank you, everybody, for your engagement with LivaNova. I really look forward to the discussion. And Alex, I'll let you kind of take the first.
Appreciate the question. You know, if you look at our Q4 of last year, we had a significant step up in the heart-lung machine sales. We had launched Essenz in the second half of last year. We had significant pent-up demand. So if you look at sort of the average of HLM placements over the course of last year, even in the first three quarters of this year, the fourth quarter of last year was a significant step up. So it's a comp issue for us. I think the other piece is, and we've commented on this before, is on the epilepsy side, the replacement units are now starting to slow. We're starting to comp 2019 with Epidiolex launch and then also COVID in 2020. So the total placements during that time frame were significantly lower. We're starting to come up against those comps as well.
Okay. So it sounds like it's purely just kind of a math issue. You're pleased with the execution of the business?
Yeah. I think the teams doing extremely well. Really pleased with the commercial and operational execution across the board. So really just, you know, want to give a shout-out to our teams.
Okay. Perfect. It's that time of the year. I have to ask about 2025. I'll, I'll ask the question this way. Maybe two questions for you. First, 2025 revenue, I show consensus at $1.319 billion. I think that's 5.3% reported growth year over year. Any reaction to the top line, kind of where the street's sitting? And if not, just any puts and takes that you want to opine on.
As you know, this is the time of the year where I have to tell you that I'm not going to comment on 2025 guidance, but let's talk about the puts and takes. The key levers of growth for us remain the same, right, so we have number one, healthy markets. Both cardiopulmonary and epilepsy markets are sort of mid-single-digit growth markets. We've gained market share, particularly on the CP consumables. We've expanded capacity. So you know, those growth drivers remain the same. With epilepsy, we feel good about the market growth opportunity. HLM is a growth driver for us, going into next year, given the sort of price mix effect with Essenz continuing to ramp our placements there, so overall the puts and takes are the same. Pricing also is something that we will continue to use as a growth driver for us.
Okay. Fantastic. Let's talk about the P&L for 2025. Again, I recognize you might not be able to, you know, comment on some of the specifics in terms of where the street's sitting. But, you know, as we think about the P&L for 2025, maybe just talk about, you know, from an operating margin standpoint, you know, is the goal to grow margins again this year? You've had fantastic progress in 2024. You know, how do we think about some of the spend related to depression and obstructive sleep apnea? And then, you know, we have some below-the-line items as well that we need to kind of contemplate, that being, potential interest expense from SNIA, and, and then a step up on, on tax rates. And maybe just anything you'd like to comment on.
Yeah. So again, I'm not going to comment on margins specifically or EPS guidance for next year. But as we think about our stated objective is to continue to grow our top line faster than markets that we participate in. And as far as our objectives on the bottom line is to grow that, you know, profitability faster than the top line, so implying margin expansion. That stated objective remains the same for us going into 2025. The only other things I will comment on is, and we've said all along, with the DTD program, right? This year, we're spending about $40 million on the program. We said that we are significantly ramping down the investment in DTD for next year. We're going to continue to spend about $10 million on the program. We're going to give back $20 million.
That will drop to the bottom line. And then we're going to reinvest $10 million in sort of high growth opportunities for us with epilepsy and cardiopulmonary. So, you know, that will sort of find its way through the P&L. And the other element is the tax rate. We talked about that after Q3. We expect tax rate to step up to about 24%-25%, going into next year. That's about it.
Okay. Good color. Thanks for that, Alex. You know, I don't know who's best suited to take this question. Maybe, maybe it's for you, Vlad. You know, as we think about a new administration taking over next month, you know, any potential implications for your business? You are a global company. Anything you want to call out regarding tariffs, tax legislation, access to care?
Yeah. Look, we don't know where the policy is going to end up, obviously, and I wouldn't comment on that. I do get kind of a question: what is our exposure to tariff risk? and we do have very limited exposure. If you think about our key manufacturing facilities, you know, they are in the United States, in Germany, and then Italy. So that gives us relatively low risk from that point of view, and our business in China, while it's important for us and it's growing, proportionally, it's not such a huge part of our business as it is for some of the large multinational companies. So we feel that we're relatively protected and kind of can focus on health of people versus the potential implications of policy change.
Okay. Good. That's great to hear.
By the way, for folks that are standing, there's a few seats up front if you'd like to come up here.
Let's perhaps pivot back to the core business and start on Cardiopulmonary or CP. We'll start with oxygenators or oxys. The oxy growth has been really good this year. I think it was 15% year-over-year growth in Q3. You know, maybe just kind of parse out the strong performance, you know, between procedure environment, some of the competitive dynamics, and then you've also increased capacity. To lump one other question into that mix. You know, you did talk about some competitors increasing supply chain in certain countries on the Q3 earnings call. Wanted you to kind of flesh that out a little bit. You know, how much has the supply increased? When did it start?
Yeah. So just to also, before I go into specific answer, I want to step back a little bit and reiterate our growth drivers that Alex talked about. So, HLM upgrade, market growth. And then oxygenators give us two important growth drivers. You know, one of them is gaining market share. So if you look at the last 18 months, we went from low 30s to mid-30s, and that trend continues. And secondly, pricing. So, pricing, we gained about 300 basis points of growth this year to date due to pricing. And a lot of that came from oxygenators. So my view on what is happening in the market right now, it starts with patient. You know, procedure growth, we estimate to be on pump procedures to be 4%-5%. That is a step up versus where the procedure growth was historically.
Our hypothesis is twofold. One, it's coming from emerging markets. Number two is during COVID patients were underdiagnosed, so post-COVID you have more advanced heart disease. So people, instead of going to stenting, potentially are now going to open heart surgery, bypass surgery. And that really kind of ramped up the procedure growth. The industry that is used to 1%-2% procedure growth was not really ready for this and quite quickly reached capacity constraints. And because for us versus some of our competitors, this is oxygenators are strategic portfolio category. Two years ago, we invested in capacity expansion. And we've benefited from the procedure growth, thus gaining market share, so this year we had a path to kind of optimize our current network and have a goal of growing production or output by 10%.
We have a similar path next year to grow another 10% within our current network. And then beyond that, we are reorganizing our manufacturing footprint and we'll have relatively unlimited supply, you know, to the market. It's important for us to expand that capacity because when you, in any business, when your manufacturing utilization rate is in high 90s, any blip in manufacturing or supply chain process creates impact on back orders to the customer. So it's important for us that we continue to improve our manufacturing footprint. So what we see from the competitive environment is, and although I don't have exact intelligence on what is happening, but we don't see. We believe that they, our competitors, are still at capacity limitation. And we've gained market share. And so 60% of this business is tender business.
So once we win a tender, you know, it's two- to three-year commitment to this customer to those customers. And we see our competitors kind of going to other accounts and trying to compete with us elsewhere. So that's, that's, I think, that was the comment on the Q3 call. But to summarize it, you know, I'm less concerned about competitors in this space. Our energy is really focused on how can we grow 10% capacity, 10% output next year. And the challenge we have is it's not just depending on us. It also depends on all of our suppliers. And so 20% growth over a two-year period. So it's demanding on all of our partners. But so kind of long answer to your question, but it's a very important part of our business.
Yeah. Well, I asked a very long question, so I appreciate the fulsome response. Maybe just one clarification question on oxy market growth. I think you said 4%-5%, Vlad. Is that revenue or is that volume?
Volume.
Okay. And pricing has been a tailwind for you guys. Will it? Do you think it'll be a tailwind in 2025?
Yeah. So one of my, you know, I'm still relatively new, nine months at LivaNova. And one of the very positive surprises was LivaNova's pricing capability. It's very strong. And so we don't disclose pricing on specific product categories. But what I can tell you is, year to date, 300 basis points of growth came from pricing. And that excludes Essenz upgrade. We count that as an upgrade. So, I mean, we're looking at kind of mid-single-digit type of price increase across the portfolio, which is in medtech market, in my mind, is best practice. Now, can you count on the same level moving forward, especially if we can generate more output? Maybe not. But price increases will be maybe at a low single-digit point, still a lever for growth.
Okay. Perfect. 11 minutes left, and a lot of topics to cover. So we have to move on. Maybe switching over to heart-lung machines. You know, just remind us where we are in terms of the replacement curve opportunity for Essenz, how you expect that to evolve. And I'll also just lump in a pricing question because you are, you know, seeing really good price mix benefit there. Just compare and contrast that versus the prior Gen S5.
Yeah. So the way to think about it, of annual placements, last year we were at 20% Essenz placement. This year we're at 40%. Next year we target 60%, the year after 80%, and then 100%. So it's going to be a three-year journey that will give us tailwind in terms of growth, and the way we look at it is every 20-point improvement in the mix for Essenz should give us anywhere from 200- 400 basis points of growth for the enterprise. This year it's given us 400 because the pricing has been significantly different. If you take a base machine, that it doesn't have any options in it, it's 30% price premium versus the older generation. But a fully loaded machine with kind of different options, it's around double the price.
Maybe just to double-click on that comment, just how many of your customers are kind of just doing bare bones? How many are getting additional features?
So far, majority of placements are fully loaded.
Fully loaded. Okay. Great. Switching over to epilepsy. Feels like that business is, you know, starting to find its ride again. The execution there has been good. You know, two components, NPIs and replacements. Just a high-level question. How do you think about kind of the epilepsy business in 2025 and 2026? And, you know, I guess the question really is, can this be a durable mid-single-digit to high single-digit, you know, type asset?
Yeah. Look, I think that first of all, our team has done extremely well this year. The performance has been outstanding, commercial and operational execution across the board in epilepsy. As we think about the market, we do believe it is a durable growth opportunity for us.
You know, from a new patient implant perspective, we think that the market should be growing at, you know, 4%-5%, mid-single-digit levels. As I mentioned before, we're going to see a slowdown in replacements next year just because of the comps described earlier. We will continue to take inflationary pricing actions as we do every year. You know, I think our business outside the U.S. is going to continue to improve. We had a slowdown this year, some execution challenges that we are working hard to remediate. You know, we expect our OUS business to accelerate its growth next year.
Yeah. And just to add to that, thank you, Alex. Just to add to that, it's important to know there's over a million patients that suffer from drug-resistant epilepsy, that are potential customers or patients for this type of therapy. And so procedure penetration is still very low. So there's a lot of space for us and our competitors to reach more patients.
Yeah. Good color. We'll switch over to pipeline initiatives and we'll start with difficult-to-treat depression or DTD. I think we're expecting some publications here in short order and then I think it's a total of five over the next, let's just call it three to four months. So, Vlad, I'll just give you the opportunity or Ahmet to just kind of outline what those publications are and what we should expect.
Yes. I'll start and then turn it over to Ahmet. And so first of all, we're very, very pleased with the progress on DTD. You're exactly right. We will have first two publications coming out shortly. And then publication three, four, and five, will be early in 2025. And I'll let Ahmet talk about kind of why we have high level of confidence to pursue approval for reimbursement.
Yeah. So I'll comment on the confidence piece as Vlad says, so this was not an FDA trial, so it was a trial designed together with CMS, so with FDA trials, if you miss the primary endpoints, you don't expect approval versus CMS has a policy to look at the totality of the data, so that's one reason we're confident. The second is the huge unmet medical need that exists. Just to give some context to what I mean by that, in this trial, an average patient had a major depressive episode more than 18 years, so they spend more than 50% of their lifetime in major depression. They had, on average, 13 treatments that did not succeed, drugs and interventional therapies. 70% of them tried an interventional therapy like transcranial magnetic stimulation or electroconvulsive therapy, so they really, really tried unsuccessfully.
40% tried at least one attempt to suicide. And only a quarter of them were employed. So the unmet need is huge. And there's no other alternatives that these patients have that also increases our confidence that CMS will look at this population, offer this as an alternative therapy. The other comments I'll make about the papers is that in this study, we looked at different endpoints. We looked at endpoints that reduce the symptoms, endpoints that improve the functionality of the patients, and endpoints that improve the quality of life of the patients. And also, we looked at it from three different perspectives: the patient's perspective, self-evaluation, the treating physician's perspective, and an independent evaluator. And when the publications come out, we believe you will see that VNS Therapy offers a significant, significant alternative for these patients in all those aspects. Patients have seen it, treating physicians that observed it, and independent observers have observed it.
That's fantastic color. Looking forward to seeing those publications. One more on depression. You know, maybe just talk about how quickly you think the CMS review process will go. You know, and I guess really what I'm trying to ask is, could we see a revenue contribution in 2026 if you get a favorable decision?
When obviously we cannot comment on behalf of CMS. Historically, if you look at kind of evidence, what it takes about a year, and you know, if in this case, if we get the approval, we will launch the product, so yes, 2026 is probably the right way to look at it.
One thing I'd add to that is, we've maintained a level of infrastructure that will allow us, sort of, to quickly be able to commercialize the product. This was all part of the strategy that we had in managing the RECOVER study.
Just add the timing. We anticipate to submit sometime in Q1.
Okay. Submit for CMS review.
Yeah. To start the process.
Yeah. Perfect. All right. Let's, let's switch over to hypoglossal nerve stim and obstructive sleep apnea. So you toplined some data November 11th. You announced the trial met its primary safety and efficacy endpoints, which is fantastic. The reduction in AHI and ODI at six months versus baseline, very good results there. You know, one question that I do get, however, is, you know, why not disclose the responder rate? Ahmet, Vlad.
Yeah. I mean, we didn't disclose the responder rate because our competitors have not. But you know, and it's really not scientifically appropriate to compare different trials that were done in different times. But as a reference, I think you can get a good indication of the strength of the data and looking at the AHI reduction and ODI reduction from the baseline, which are 66% and 63% for ODI. The other very exciting piece of our trial is that we did not exclude triple C patients. So you did not require to screen for it. And you did not exclude them. And they're about 25%-30%. And the last comment I'll make is that in the OSPREY trial, our trial, we enrolled more severe patients in terms of their starting AHI, starting ODI, and starting BMI. So that's why we have very high confidence on our data. But the 12-month data we will disclose our responder rate because that's what other companies have done.
Okay.
I think the key question for me that came on that day that the results were available is that both patients will get the value out of this technology but also LivaNova as well. I think we were very, very pleased with the data we saw.
Yeah. Appreciate the color. One quick follow-on on the HGNS program. I think you're spending around $30 million this year. Please correct me if I'm wrong. Presumably that's going towards the OSPREY study. You know, that goes away, I think, at some point next year. So how do we think about the spend for HGNS in 2025?
Yeah. The investments are going to shift from the clinical operations component to more on the product development. We need to continue to iterate the product and continue to innovate around that. So, we intend to shift that investment to product development.
$30 million-ish is that a reasonable way to think about it? Do you think it's high or lower? Any intervention?
We're still in the sort of budgeting process. We'll discuss that in February.
Okay. Perfect. Just about one minute left here. I did want to kind of close out with a bigger picture strategy question. We were fortunate enough to host you all on the road a few weeks ago. And, you know, one of the themes that emerged was your objective to become what you called, Vlad, a benchmark company by 2030. So, I guess the first question and probably the only question I can sneak in here is, what constitutes or defines a benchmark company in your view?
So thank you for the question. I mean, look, we, you know, when we think about our long-term strategy and who we want to become, we set an aspiration to become a benchmark company that has four dimensions. You know, one is develop top talent and ultimately be an export of talent across the industry. Number two is excellence in operating, operational excellence, you know, so have a benchmark financial performance. Number three is innovation. And again, there's, you know, benchmark organizations that in terms of pipeline and health and sustainability of innovation. And ultimately, if we do the first three right, it's growth. And so, be a sustainable above-market leader in growth in the markets that are growing faster than average. So those are the four dimensions we're looking at. We're working on the strategy and the path to get there. And we're, we'll be excited to share this path with everybody next year.
Okay. Perfect. Well, we're out of time, unfortunately. But want to say thanks again, gentlemen, for joining us. Really appreciate it.
No, Adam, thank you.