Good morning. We'll go ahead and get started here. I want to welcome everyone to the kickoff of the Goldman Sachs 2023 Healthcare Conference, our last year in Miami. Variety of reasons. Very excited to host the management here. We have the entire team here. Vladimir Makatsaria, Chief Executive Officer, Alex Shvartsburg, Chief Financial Officer, and Philip Kowalczyk, Chief Strategy and Corporate Development Officer. Clearly, a great opportunity here to cover a wide spectrum of topics. I will invite people from the audience, if you do have a question, please raise your hand and we'll get a mic to you. Webcast. Maybe I'll just start zoom out a little bit and then zoom in. I think there are a lot of details that people would like to get to here.
We're six months into, a little bit more than six months from having issued your LRP back in November. Maybe just give us some reflections on how things have gone relative to your expectations, what has met what you had anticipated, and where are some of the areas that you-
First of all, good morning, and David, thank you for the opportunity to be here, and thank you, everybody, for joining this early morning. To answer your question, maybe for those of you who are newer to the story, just to recap to what we said during the Investor Day, LivaNova has two core businesses that have been leading in their markets for about 50 years. One of those businesses is Cardiopulmonary, the other one is epilepsy. The first chapter of our strategy is really to reinvest back into our core businesses to make sure that it is sustainable, that for years to come, it continues to drive above-market growth.
At the same time, we use the strength of our foundation, of our core businesses, to get into the areas of high unmet clinical need, high growth, and in the markets where we have the right to win. In our case, it's neuromodulation, and in our case, our next chapter is in obstructive sleep apnea. We have an optionality to have an additional opportunity with the difficult-to-treat depression . I think of when we execute the strategy, it puts us in the markets that are not just bigger and faster-growing, but also have very attractive financial profile, and it creates an opportunity for us to sustain accelerated growth both on the top and bottom line. That's kind of in a nutshell is our strategy.
I was asked a question during the Investor Day, what are some of the upsides to the plan that we put together? I actually named two upsides. One is getting reimbursement on improvement on new patients for VNS Therapy for treatment of drug-resistant epilepsy. The second one was our ability to scale manufacturing of oxygenators faster. Actually, both of these came through in a very positive manner. As of January 1st, there was almost 50%, nearly 50% improvement on reimbursement on new patients for epilepsy, removing the economic barrier to penetration of VNS procedures. That gives a very positive tailwind for us. Secondly, we have gained significant confidence in our ability to manufacture faster in terms of oxygenators. We've gained share from about 30% about 2.5 Years ago to 40% today.
We put additional eight points of growth in our strategic plan, today we see that we are actually able to scale our manufacturing significantly faster, and that's mainly driven by two factors. Our own expansion of capacity, also our partners that are providing components to us are doing an incredible job in terms of scaling up as well. Both of the upsides have played positively so far, and we continue to execute on our strategy.
Good segue and next topic around if you think about growth. Not a lot of companies are in markets around actually accelerate performance of businesses have the past couple of years. Maybe you could just give us some perspective on how you think your market growth is evolving, what's driving that, and what is enabling you to continue to outgrow these markets where you are effectively the category leader.
Yeah, no, thank you for how you framed this question. On the market front, unfortunately from patient point of view, I can say fortunately from the business point of view, these are very significant markets. Both if you look at cardiovascular disease is number 1 disease burden in the world. Neurological disorder is number two. The markets are large. They're growing fast, especially on the neurological side. It's a huge patient population, and it's a very under-researched space. There's a huge opportunity for growth. We believe from the market point of view, there is significant unmet need, and that is going to drive innovation and that is going to drive continuous market growth. From the second part of the question, I think there are maybe two dimensions about how we drive growth.
One is on the what and the other one is on the how. On the what, we are fortunate to have portfolio that have multiple drivers of growth. If you look at our growth, it's coming from multiple angles, and that gives us this high kind of confidence in sustaining that growth. First of all, geographically, it's well-balanced across different parts of the world. Secondly, from the portfolio point of view, the growth is driven by price, so we've taken price in a healthy way. The growth is driven by market share gains and oxygenators, and we see that we can continue to do that in a sustained manner. The growth is coming from upgrade cycle on our Essenz heart-lung machine. The growth is coming from improving low penetration of VNS procedures in epilepsy.
We've got multiple kind of engines to drive growth, and that gives us confidence and sustainability of growth. The second one, and that's probably the more important one, is any great organization starts with great people. We're very focused on bringing in top talent from across the world. We are very focused on developing our own talent. I'll give you an example. In the last two and a half years, we've changed about half of our director and above leaders, both from bringing people from outside, but also promoting folks from the inside. Shout-out to our recent leaders who joined. We just announced that we have a new chief legal officer who is coming from Hologic.
We also announced succession, where our legendary leader of cardiopulmonary business has been in the business for 42 years, and this is before some of you were born. He started at LivaNova, he is retiring this summer, and we're bringing in Stefano Folli. He is coming from a long-term career at Philips. Great leaders. That's on leadership front. Then on culture, we are trying to drive the environment where people can flourish. I'll give you a little point of maybe context. One of our cultural imperatives is called empowered accountability, where we empower the folks across the organization to make decisions, to drive results. With that empowerment comes accountability. We have kind of the entire company owning the results, working together.
We see this, we measure the engagement of the organization every year, and we see significant improvement in the engagement and the inspiration of the organization. Today, we're among the benchmarks in med tech industry in terms of how the organization is inspired and engaged to move forward.
One more strategy question and then dive into the businesses here. Maybe if you think about just capital allocation. Since the analyst meeting, MedTech valuations, I guess except for yours, have kind of collapsed. One of your big pipeline opportunities, OSA, appears to be a market that every data point appears to be worse than the prior one. How do you think about continuing to invest in the OSA program versus potentially taking that capital and investing in some external opportunities?
Well, let me start off by saying our capital allocation strategy hasn't changed since Investor Day. Our clearest line of sight to value creation continues to be our core, as Vlad mentioned. We're going to continue to invest in that. OSA was number two. Possibly DTD down the road. Thirdly, we said we'll use tuck-in acquisitions as a way to improve value creation. From our strategy perspective, the opportunity is still the same and we're going to continue to focus on those three areas. Phil, maybe you want to mention on how we feel about OSA at this point.
Yeah, I think part of your question there is the conviction on OSA. In our mind, this is still an incredibly attractive market, significant under-penetration. One in five patients today are diagnosed. What we're seeing with GLP-1s, with wearables, is that number's actually going up. The funnel of these OSA patients is getting bigger. In addition, there's questions around GLP-1s for what that does for a patient, and we're seeing that people who engage on GLP-1s are actually more likely data to go to an advanced therapy outside of that. We're seeing the top of the funnel grow. I think some of the headwinds that the incumbent is experiencing today, we see as transient. Obviously, the reimbursement and coding issue is one that's a complication that is not an ideal scenario today.
As we enter the market and we're able to partner and onboard accounts and be able to work with accounts to be able to appropriately code, we feel like it's overcomeable. Overall, we believe we have a differentiated technology with strong clinical results, and the market is going to continue to grow, and so we're well-positioned to succeed long term in it.
Okay. Maybe we'll come back to that. We started on the neuromodulation business. Talked a little bit about two of the upsides that you had contemplated at the LRP being price in new patients on VNS. Maybe we could sort of start with just remind people what went into effect January 1st, how you thought about it in your guidance, and what you've seen play out here to date.
Going into Investor Day, we knew that we were going to receive improved reimbursement on the replacement segment of VNS. As Vlad said, we anticipated some favorable benefits from new patients didn't know at that point in time. As of January 1st, new patient implant segment received improved reimbursement of nearly 50%. That went into effect. We're seeing the benefits of that reimbursement read through. In the first quarter, our realized price was nearly double what we normally get on the normal inflationary increases, 1%-2% a year. We expect to see that continue throughout the balance of the year. There are certain accounts that we kind of missed the window of renegotiation with them, and so we'll see the residual effect next year. This is purely on realized price.
This is not where we went and took extra price on the ASPs. We went back to these accounts, and basically, they claimed economic disadvantage in the past. We've renegotiated volume-based discounts and rebates with them. That's what we're seeing read through.
Okay. Realized price, instead of being 1%-2%, being 2%. That's a combination of entering new contracts, but also going back. To existing ones where you had rebates in place, you raised the price, the net price still had this-
Correct
this increase. What percentage of the accounts were you not able to get to?
Large majority we were able to get to, like I said, I think we'll see some residual effect next year.
One of the things that we've been trying to better understand on this is there an incremental volume opportunity?
Let me.
Yeah
Just to build on what Alex said, think about what I've started with is epilepsy treatment with VNS is relatively under-penetrated. One of the barriers to that penetration was the economic barriers. Think about it, an average patient has four replacements in their lifetime. You can say that a provider now gained $40,000 per patient based on that math. That is a significant removal of a barrier. That's number one. On the volume front, in addition to the reimbursement improvement, we also have a clinical outcome coming from this real-world evidence study called CORE-VNS. In that study, basically what it shows is while the least invasive procedure, VNS shows comparable results to more invasive procedures. The value proposition has significantly changed, and VNS has now taken a very different place in the treatment algorithm of epileptologists.
There's a combination of two tailwinds. One is on the reimbursement, the other one is on clinical data. Together, we anticipate that the volume is going to increase. Now, we are taking a position that we want to take a couple of few quarters of evidence of what is happening before we go to the market and talk about it. We obviously have seen leading indicators, but we want to see some evidence of lagging indicators before we go and we talk about it. This is a topic that we will be transparent about, that we will explain how and why volume is moving.
What are some of the leading indicators that you're seeing?
One is the price opportunity that we're renegotiating contracts. The other one is the pipeline of new patients has been the strongest we've ever had. The third one, again, it's more anecdotal, but I'll give an example. There was a scientific meeting of 150 top epileptologists in the world that came together to look at the core data. The first view on the data was like, "It's too good to be true." After the meeting, about half of them came to us with a request to independently present the scientific data at different meetings. That gives me confidence that the scientific community is embracing the data, it's a very good leading indicator for us. We are counting on both price and volume.
Exactly how it's going to play out and what is our view on the future, we're going to reserve a little bit our opinion to see the lagging indicator.
Besides economics being one of the barriers, what are some of the other barriers still needed to knock down, and where are you with them?
The other big one outside of economics was this clinical perception risk. The data from the approval trial decades ago showed a much lower median seizure reduction than we're seeing in the CORE-VNS data. 76% median seizure reduction is the data that Vlad was quoting there. There's a perception. The reason that data has improved, it hasn't just improved because we ran a different study. It improved because the technology has evolved over time. We have AutoStim features, we have better programming algorithms, et cetera. This is kind of capturing the latest of what VNS is. VNS has been around for 30 years, so it's going to take some time to engage with the clinician community and change the perception or bring the perception up to date, I guess you'd say.
That is kind of the other big barrier.
Before moving on to CP, maybe we just sort of talk about the emerging drug pipeline in epilepsy. I think some have long memories for headwinds and short memories for tailwinds. If you go back to, everyone has the 2019 example sitting in their head. I know there's some differences today, but maybe just sort of talk through how you're framing the potential around drug competition and maybe what are some of the things you're doing internally to educate sales force and get people ready to respond to potential competition?
Yeah. As Vlad touched on in the beginning here, this is an incredibly under-penetrated market where patients have long and arduous care pathway journeys to try to get to the right therapy. As a leading company in the space of epilepsy, we welcome all new therapies that can bring relief to patients and good solutions. I'd kind of start there. Beyond that, as we look at the data of the new drug or as we kind of study drugs, we don't expect a material change to the number of patients that are drug-resistant epilepsy that could benefit from VNS Therapy. It has been about a third for the last few decades in terms of the number of patients that are drug resistant, which is defined as failing two or more drugs, and we expect that number to kind of stay consistent.
To your question around what are we doing, the reality is we have a lot of positives to focus on with our sales force right now. Training them on how to disseminate the CORE data, training them on how to partner around reimbursement. Our focus for our sales organization is not to sell against the drugs, but rather to sell the value proposition, which we believe will still be a very important solution in the care pathway for epilepsy.
Why wouldn't we see trialing of, there are two novel agents coming to market from Biohaven and AbbVie. Why wouldn't we see a year of disruption as those drugs
Sure
come to market as we did in 2019?
You likely will see some trialing of the drug. The reality is we expect that to happen much earlier in the care pathway because that's where the largest TAM is for these companies. We don't really see it as a competition to DRE. You also have to remember, one of the nice things of our epilepsy business is the U.S. NPI percentage is actually only about 20% of the overall epilepsy business, right? The vast majority is in other areas that are relevant to the trialing.
Okay.
It was interesting because when I just started with LivaNova and I was educating myself, I went to the top clinicians and asked a similar question about different drugs. The interesting answer is, what I was told by clinicians, since the beginning of drugs to treat epilepsy, this ratio of 2/3 of drugs treatment versus 1/3 of drug-resistant, that ratio has not really changed over time. What has changed are the side effects of the drugs, and they significantly improved. From the safety point of view, it got better. It doesn't mean that this is not going to change moving forward. Historically, it really did not change the ratio.
Got it. Okay. I want to see if there are any questions in the audience before I move on to this. Okay. It's early. Maybe on CP, I think the way, let's start with Essenz. Certainly has evolved. I think originally we all thought about Essenz as, okay, it's an upgrade. Upgrade comes and goes. The business cycle's back to more normalized growth. I think one of the things you've talked about now is software enhancements, future upgrades. Maybe just sort of contextualize how the Essenz launch has evolved and how you're thinking about sort of runway of growth durability versus when you had originally kind of started down the process.
Yeah. Essenz is our heart-lung machine. It's a piece of equipment, kind of a central piece of equipment in the OR during the open heart surgical procedures. It has about 70% market share globally. The first generation was called S5. It's been on the market for 17 years. If you think about a normal kind of upgrade cycle of equipment, should be kind of 7-10 years. It's way kind of delayed and late in terms of which gives us an opportunity to upgrade faster. I kind of think about Essenz as a modern automobile that comes with a base option, and then you can have different optionalities built to it versus the old version is like you get a car that has no power steering, nothing else, and that's the only way you can kind of drive it.
When we launched Essenz, we counted on kind of the naked, the no option version of it is about 30% price premium to the older version. However, fully loaded optionality is almost double price. What we saw over the, since this period since we launched it is physicians and perfusionists see incredible clinical value proposition from those options. So far, majority of machines that have been ordered have been ordered with full optionality. As we increase the placement penetration of Essenz, that gives us significant price mix upside, and that drives double-digit growth, not just for machines, but for the entire Cardiopulmonary business. That upgrade cycle is going to continue through the uncertain .
On top of that, we have an opportunity, obviously, to gain market share because of the machine itself, but also we have a huge multi several thousands machines placed there. It gives us an opportunity to improve the benchmark in terms of how we service it, benchmark in terms of how we upgrade software, and make the machine smarter. Instead of follow what the perfusionist does, ultimately actually advising perfusionists on what to do, then becoming this digital center of the ecosystem in the cardiovascular operating room. The idea is to use the large fleet and the strength we have in this business to continue to upgrade each machine.
Also each machine has some additional pieces of equipment, a heater, cooler, air manager, that are part of the machine, and those are still old versions. We have an opportunity to upgrade those as well. I see this as an opportunity for us to continue to drive growth. Obviously, also by being such a leader in the equipment side, it also gives us an opportunity to get into the OR and drive market share improvements in disposable business.
Maybe we talk about oxygenators. You've been a great run for the past couple of years. You're sitting at about 40% share. Where are you on manufacturing? How much market share could you manufacture today?
Yeah.
The 40% could be what if you had sufficient-
That's a great question.
What will that be in a year?
There are two drivers of share gain. One is our ability to manufacture fast. Everything we manufacture, we will sell. We don't know where the limit is from that point of view, but we are gaining market share. From the manufacturing point of view, think about it in three stages. The stage 1 is doing what we're doing, but just better, so improving manufacturing process. That's what drove improvements over the last few years. The second one is that in the second half of this year, our additional manufacturing line goes live. The stage 3 is really a long-term approach where we are continuing to build our own manufacturing capacity and partnering with our suppliers in order to be able to supply majority of the market.
With 40% market share today, in the strat plan, we said we will improve our output by 60% and gain additional 800 basis points of share. However, what we see today gives us even more confidence in the ability to gain more share. I believe that today our gap is at 60% market share in terms of manufacturing. If we execute what we think we can do, this will be increased. The second lever of share gain is new product introduction. We've said in 2028, we will launch a new oxygenator that is clinically differentiated, and it's significantly better from the performance point of view versus anything on the market today. That is going to be another tailwind for us in terms of share gain.
Are you seeing anything from the competitors?
We are not taking this for granted, and we are monitoring closely what the competitors are doing. There's nothing new from the point of view that some of them are leaving the market. You saw that.
Yeah.
Some of the others are kind of doing what they're doing, but they're not increasing their manufacturing capacity, neither they innovate in the space. This is one of the markets where scale matters. The more market share we gain, the broader scale of our manufacturing is. I don't want to say it in an arrogant way, but it's easier for us to compete.
Two last topics I want to make sure that we cover. TRD, Any updates on reimbursement? What are you expecting in timing and as you're waiting for this, what are the things that you're doing? Are you doing anything internally to prime the pump or prep for this?
We are in talks and very close partnership with CMS. It's a very collaborative process where they've co-invested with us in the clinical trial. We're working very closely with them on next steps, educating each other on the clinical outcomes of the study. It's a close partnership with CMS, and we will obviously update everybody when there's some material news that are coming out of this. That's first. Internally, we have a team that focuses on the private pay market, and that team is also thinking about the strategy and looking at different scenarios of what the indication for reimbursement will be potentially. Yeah, we're thinking about different scenarios and then how we will address it if it comes to us.
Any latest views on timing?
I cannot speculate on timing just because it's out of our hands a little bit.
Okay. Do they give you much of a heads-up, or you find out when we find out?
They don't give us heads-up on timing. We're not disconnected. It's a very connected, closely kind of side relationship in the way that how we're working on the clinical data and the potential consequences.
We will announce when we do file. We'll announce that.
Okay. When you file.
Well, file
For the request for the NCD.
Yep.
Okay. Should we look at other NCDs? Like if you look at the early TAVR NCD, it was about a year from when they submitted their request to when the NCD was open. Is that a good benchmark to use?
Unlike FDA, CMS doesn't have exact timelines in the process.
Right.
You're right. A year is about the average, I think, and one of the latest examples was with Medtronic.
Renal
renal-
RDN.
Yeah, renal denervation. That was, I believe, nine months.
Nine months. Okay. Maybe we should close on margins. One of the things that I think had positively surprised investors at the analyst meeting was your ability to sort of retain margins while investing in OSA and someone, I think, had asked me prior to the meeting. Are they going to torch the P&L to invest in OSA, which obviously is not how you actualize things. Talk to us about kind of the puts and takes that allows you to have confidence that you're investing sufficiently against the OSA opportunity, while also being able to continue 20% and seeing 20% margins short term, and then obviously you have the longer term.
Yeah. Remember, it took us a while to get to 20% operating margin. That was an important metric for us as a company. We drew the line at continuing to deliver at least 20% operating margin as we continue to invest in OSA. Today, we're largely investing in product development to get to commercialization. Next year, we'll have a limited commercial release in the first half and a full commercial release in the second half. We're going to continue to maintain that floor of minimally of 20%. We think it's a disciplined way to run the company. We're going to focus on continuing to drive margin expansion in our core business, and fund OSA in tandem. That's what investors should expect there.
Everything with OSA on track from a PMA supplement perspective?
Yeah, we expect to file a PMA supplement in the second half of this year. That would get us to an approval sometime in the first half, which will enable us to do a limited commercial release. We'll follow several months later with a full commercial.
Last question on just the P&L topic is sometimes I know it's tempting that you set out these plans to invest and hire people. You don't hire people, you beat numbers, which is good in the short term. You talk about things about timing of OpEx, and everyone thinks you're being conservative. Where are you in that cycle? Have you hit your OSA in investment milestones? How are you seeing the different trade-offs play out?
Yeah. I think if you look at our first half, right, we were just about slightly below the 20% threshold. It's a timing of revenue relative to OpEx, right?
Right.
Typically our first half is lighter sales. Second half, usually, I think it's something like 48%-52% historically, from a phasing perspective. Our OpEx was heavier, and we expect it to be heavier in the first half and sort of level off for the second half of the year. That's where we expect to see the margin pick up, and we'll deliver on our commitments. Maybe from a team perspective, we have Lucile Blaise, who's the leader. She's built out a core kind of leadership team, and we started to engage. We'll have a much more significant presence at SLEEP this year now that we do have an approved product, even though it's not the commercialized product. The hiring plans will start to scale up as we get closer to commercial.
Excellent. Well, it's a good place to wrap up. We're out of time here. I want to thank you again for kicking off the conference and your time, and looking forward to updates in July. Thanks.
Thanks for having us.
Thank you, everybody.