Well, I think we're all set to get started. Thanks, everyone, for joining. I'm David Rescott, Senior Med Tech Analyst here at Baird. Happy to have the LivaNova team here with us. We've got Vlad, the CEO, we've got Alex, the CFO, and we've got Ahmet, the Chief Innovation Officer. Happy to have the team here, and thanks for joining us. I wanted to start maybe from a high level here. I feel like this is the way we kind of started this last year as well, but you've delivered this double-digit top-line growth, I think almost every single quarter for the past three to four years. You typically guide that mid to high single-digit growth, right?
Guidance this year is that high single level. What's, I guess, led to the success of this double-digit growth number? How sustainable do you think it is and how should we be thinking about that in the context of where numbers are shaking out so far for this year?
First of all, good morning. David, thank you for the opportunity to join you and thank you, everybody, for your interest in joining this morning. First of all, thank you for pointing out the performance. We're pleased with the growth we delivered over the last several quarters. The focus was very clear. One is on talent. We strongly believe that good leaders and good teams deliver good results, so there was a lot of focus on talent, and about 45% of our directors and above are new in the role, whether either coming from an external world or being promoted and developed internally. Number two, we focused a lot on execution and competitiveness, and one of the big examples of that is our improvements in supply chain that we had in cardiopulmonary business. Number three is innovation.
While we've executed in our core, we also are getting into new categories with sleep apnea, getting in the markets that are faster growth markets, and that can kind of accelerate the growth profile of LivaNova. So people, execution, innovation have been drivers of our success over the past few quarters. Moving forward, our strategy is pretty clear. We are number one, we're building strong foundation and sustaining growth in our core, and the goal is to grow faster than the markets in our core, expand margins, expand cash, and use this as an opportunity to kind of reinvest back in the core, but at the same time get into the markets with high unmet need, faster growth, and where we have the right to win. For us, that next chapter is sleep apnea. That's that.
And then maybe the last thing I think I'll say is more on the tactical level. We've outlined our strategy during the investor day. There were several tailwinds that followed that we didn't consider in our investor day discussion. Number one is the reimbursement improvement on new patients for epilepsy. There was nearly 50% improvement that went live as of January 1st this year for the new patient implants. That's number one. That's been an important tailwind for us. Number two is on the cardiopulmonary front, we gained about 10 points of share over the last two years, but the market is still operating in deficit for oxygenators. The reason for that deficit, one of the reasons was that component shortage in the market.
We were able to sign a long-term agreement with Thermo Fisher that really removes output or supply as a barrier for future growth. That long-term agreement has been a very important development for the market overall, but for us specifically. Number three is that in obstructive sleep apnea, at the time of investor day, we didn't have full data set with our PolySync responder rate results. We kind of assumed at the time 65% responder rate, and when the results came out after the clinical study was complete, we were at 85%. That's very significant because now the current data on the market with the current incumbent, one out of three patients that get implanted does not have a positive response. With 85%, it's one out of seven patients doesn't have. It's a very different conversation with patients.
Those are the three tailwinds that came after the investor day discussions, and that in a way gives us more confidence in our long-range financial plan.
I think at the investor day, you also outlined through 2028. There's the now to 2028 period and the 2028 to 2030 period. The now to 2028 earnings growth, I believe also is in this mid to high single-digit guidance range. I think past couple years, even though you've had some moving pieces below the line, some reprioritized R&D, you've also still delivered mid-teens earnings growth over that period. When you think about the pace of top-line growth versus the earnings growth or the leverage that you have through the 2028 period, is it also fair to assume that maybe there's some conservatism baked into that as much as we assume there has been on the top line?
Well, I think just generally speaking, we have two large-scale businesses, right? The growth that we are able to deliver has translated into margin expansion, EPS growth. These businesses are very leverageable, if you will. These are platform technologies that when we generate growth in a particular region or in a particular product line, we are able to translate that into profitability. We said in our investor day that during the first phase of our LRP, that margin expansion is going to be leveraged into launching into OSA.
We are looking to stand up a new channel that we do not have today, which will help us accelerate our growth in the second phase of our plan. But the profitability that we are able to generate from cardiopulmonary and epilepsy businesses will be reinvested in OSA. So our margin expansion will not be as significant as we have seen in years past.
And we said that our EPS essentially will grow in line with our top-line growth. So that is kind of the way we see it, and it is going to play out that way.
Glad you mentioned that, versus the analyst day, right? Reimbursement in VNS has gone right. You fixed some of the supply chain challenges in cardiopulmonary, the market that is concerned at this point. And that perhaps is going to lead to better top-line growth, we will say. And at the time, I think you guided to investing behind or ahead of some of these new product launches in 2027, 2028 and committed to keeping at least a 20% operating margin, which was below where you were in 2025, right?
Does the better drivers on the top line, that being reimbursement and the Thermo agreement also suggest that maybe you have better opportunities on the operating margin front, meaning that, hey, getting down to 20% is a little bit less likely and maybe we can squeeze a little bit more out of this top line and grow earnings faster?
I will just say, look, we are not going to continue to update our LRP every quarter, but obviously the signals are there that give us an opportunity to look at that as a way to create value for the company. At this point in time, we are sticking to the targets that we set. And obviously we will update guidance accordingly as we enter 2027.
Yeah, I think just to add in, the one thing I failed to mention on the tailwind as well is that on epilepsy, we have more understanding on the core VNS data that came out of real-world evidence and also gave us kind of significant tailwind moving forward. Our previous data set with the previous device showed about 40% clinical efficacy, and that was done early 2000s. Now with the new device, the core VNS data shows that 80% of epilepsy patients reacted positively. So that's a significant change in patient algorithm. On epilepsy front, and I'm going to your question as well, the previous question, we have two significant tailwinds, reimbursement and clinical data. We want to get some time behind our belt to see how the clinical community reacts to two of those.
On the supply chain, again, the impact of Thermo Fisher agreement is mid to long term, and we'll want to see how the competitive landscape plays out there. On OSA, again, I think we've given a range on top line. We have more confidence in that range now, basically, given the way the clinical data ended up.
I think consensus on the operating margin front is at like 21%-21.5% next year. It could be as low as, I guess, 20%, right? Based on what you know or what you're expecting at this point, is there any reason to think that the Street is under-modeling the OpEx investment needed to drive some of these 2027, 2028 growth opportunities, or do you feel as though where numbers are at this point are in a decent spot?
I think we're in a good place, relatively speaking. I'd just say the timing of the OSA launch will dictate a little bit of the investment profile. So we kind of laid out the range of the PMA supplement submission in the second half of this year, first half of next year. We do not intend to build the sales force until we submit. So that will be an indicator and sort of dictate the level of investment that we'll make in 2027, which will ultimately translate into our margin profile.
Okay. And the submission time for that?
Yeah, still within that range, second half of this year, first half of next year.
Have you called out what level of investment is required to build out a sales force behind that? $50 million, $100 million, $75 million?
No, we haven't done that specifically yet. But as we get into 2027, we'll be very transparent about how much we're investing in OSA.
Yeah, okay. Maybe moving on to epilepsy, the VNS business. You talked about reimbursement, you talked about core VNS growth is re-accelerating at this point. Can you parse out maybe what the contribution from price is, versus underlying volumes? I think you've also talked about increasing utilization potential, increasing the number of centers that are out there.
Help us break down what's driving this better growth and maybe what the legs each of those segments has.
Yeah. I'll start and maybe turn to Ahmet to talk about what we're seeing with clinical and reimbursement impacts of it. When you think about it on the epilepsy front, again, there are two dynamics that we're facing. Number one is improved reimbursement by about 50% that removes the economic barrier from providers to perform VNS procedures. Number two is the clinical data that shows significant improvement versus the previous data set. This impacted both price and volume. On the price side, we were able to go back to our customers and renegotiate volume discounts that we provided previously because they were under significant economic pressure under old reimbursement algorithm. That renegotiation kind of led to a jump in price. Today we're seeing 2x pricing improvement versus our normal annual price increases in epilepsy. This is a relatively short-term effect.
It will happen this year and next year as we complete a cycle of renegotiation of contracts. Then on the volume front, maybe, Ahmet, you can talk a little bit about what we're seeing.
Yeah. Maybe I will also double-click a little bit on the core data, because I think it is really important. Prior to core, as Vlad mentioned, we relied on communicating what is on our FDA label, which effectively shows that you get about 40% seizure reduction. When a physician and a patient was making a choice, at the time when they were evaluating different neuromodulation devices, VNS was always known as lower invasiveness, but unclear about how competitive its efficacy or effectiveness is on. With the core data, now that we can demonstrate that we also have 80% seizure reduction, now that dialogue in the medical community is changing very quickly as we roll out the data, where you get comparable efficacy or effectiveness with significantly less invasive procedure. That gives us a lot of excitement.
The second piece is that we are very excited that we are going to launch our next generation device next year. It is our next generation IPG. It has a fundamental different advantage than today's technology. It does have a Bluetooth connectivity, and that allows the device to connect to the patient's phone, so a physician can communicate with the device remotely. Why is that important? Because it fundamentally improves the workflow for the patient and the physician, because now you do not have to go to the physician's office 10 - 12 times the first year and one or two times every year. After that, you can do all of that remotely. So we are very excited about the capabilities of the next gen IPG.
I want to ask about that as well, but on the comments around pricing contribution to two times that of historically what you have seen. My guess is based on the timing of how that rolls through, it ramps through 2026, and then it starts to ramp down in 2027, meaning that at least for Q1 of 2027, maybe part of Q2, you have some pricing tailwind still as you annualize some of those contracts. But by the time you get to the back half of 2027, at least on the contract perspective, excluding this—
Yeah
—new product, that is the way in which we should think about phasing of price.
Yeah, I think it's fair. I think the way I would think about price holistically, you have our annual price increase. LivaNova is very disciplined about that. Then on top of that, you have this impact that mainly came this year, somewhat will come next year from this renegotiation of volume discounts. Then next year, as we will launch new and upgraded product, you will start seeing some price uplift as well there.
Do you have a sense for, or I guess would it be fair to think that a next-gen product in this market in which reimbursement has just gone up 50% will have a bigger contribution than what contract price renegotiation has been so far this year?
We have not. We are still doing the homework on kind of how the price points that we will launch. But you can think about it as a significantly differentiated product versus what is on the market today. It improves patients' flow. It changes the way the patient-physician interaction is going. It has significantly different, more upgraded features. So I think it is fair to say it is going to be not as incremental as-
If you think back to the last new product launch in 2017 with SenTiva, we launched with about a 10% increase in ASP. We think the value proposition warrants a premium price. We are not in the position to disclose what that is at this point.
Is this as big of a step change in your mind as what SenTiva commanded?
In terms of capabilities, absolutely, because it fundamentally changes the workflow for the patient and the physician. Today, when you talk to patients, if they are adult, they do not have a driving license, and if they are pediatric, they obviously do not have a driving license. The concept that you have to visit a physician's office is a big deal because on average, they travel about 40 mi for each visit. We do have a group of patients and caregivers that choose not to do neuromodulation because of that. It is a substantial improvement in the workflow for both the patient and physician.
Okay. Last one on epilepsy, then I want to move to cardio pulm. There is, I believe, a new class of some epilepsy drugs coming in 2027 or 2028 or 2029, the Xenon drug. If you look back to 2018, 2019, the EPIDIOLEX came out, everybody tried them and deferred and then get the implant anyway. I guess, have you heard anything in the field about this? How do you feel about your competitive positioning here? If at all, is there any learnings from the—
Yeah
—EPIDIOLEX that make you feel more comfortable?
There's some few important facts. In epilepsy, about two-thirds of patients react to drugs, and about one-third are drug-resistant epilepsy. That number hasn't really changed over time. A lot of the innovation in the drug space has been about reducing the side effects of these drugs versus improving efficacy of these drugs. Because these drugs work by reducing brain activity, and when you reduce brain activity, obviously, you have some side effects. If you look at, for example, Xenon's clinical data, you would see that the seizure reduction or seizure freedom rates are not fundamentally different than existing anti-seizure medicine. We don't view it as a fundamental change. We do appreciate that there's going to be more options for patients, and these ASMs are utilized together adjunctly with neuromodulation, so usually patients are on both.
We don't anticipate any major change, and we've also done some market research that confirmed that for us.
Okay. Moving on to cardio pulm, another business that's been growing double digits for the past several years. I think everybody's been waiting to see when it's going to go back down to mid-single digits, and it happened that has not come yet. Can you talk about your level of confidence in that business, right? There's moving pieces around now, oxygenator supply.
HLM, at least in the U.S., is at the end of the cycle. You have international opportunities on the HLM side. How do you think all of those kind of coalesce to get to the LRP in that segment?
Yeah. So maybe I start with the short term. We have guided this year to 9.5%-10.5%, and that is about 250 bps improvement since we started this year. So we are confident in this year guide. Regarding longer term view, there are two dimensions in this. One is, this is the market that has improved its growth rate, as number of procedures. So historically, open heart surgery was low single-digit growth procedure market. After COVID, it accelerated to mid-single digit, and it has been consistently there. Some of the reasons for that is, A, we are getting older as a society, so people are having more complex procedures. Number two, there is a large group of patients that have undergone minimally invasive procedures like stenting or valve replacement that are going back now into more complicated open procedures.
Then finally, countries with under-penetrated cardiovascular procedures like China, India, for example, they are a bigger part of the overall pool now, and they are contributing to faster growth. So we are confident in this healthier growth of the market and the mid-single digit procedure growth. At the same time, we are confident in our ability to grow faster than the market. It comes from four growth drivers that we see. Number one is our Essenz platform. All the way through 2027, price mix effect will continue to play a role, and this is until in 2027, all units placed will be Essenz units. So the price mix effect may kind of slow. However, we still have significant volume growth opportunity on Essenz. That is, if you think about it, there are about 10,000 units of LivaNova's heart lung machines out in the market. That represents approximately 70% market share.
Only 20% of those 10,000 units today are Essenz. So we still have significant upgrade opportunity. I can make an argument that there is a sense of urgency that is increasing to replace those units that are out there in the market, because now it is nearly 20 years of capital equipment cycle, and your normal capital equipment upgrade cycle is 7-10 years. So there is a sense of urgency to upgrade the entire market. So I still believe there is a volume opportunity on Essenz. Number two, oxygenator market share. We gained 10 points of market share. We have guided additional 800 bps of share growth at the time of Investor Day, so taking kind of mid-40s
But now with new manufacturing capabilities, with the long-term agreement with Thermo Fisher, we are building capacity to be able to support north of 70% share. That's number two, oxygenator. Number three, we are launching new heater, cooler, and air manager, and at a premium price versus the old generation. These are kind of modules within every HLM, so that creates a significant opportunity for us. And number four, the regular price increases that we take every year. So you commented on double-digit growth in the past, and part of the reason of this double-digit growth is that every cylinder of growth engine fired in a positive way. So moving forward, I think there will be some hiccups. I don't expect that everything will go smoothly. But given the fact that we have these four major growth drivers, gives us strong confidence in our guide.
I think in the U.S. cardiopulmonary business this quarter, there's a big focus on that 2% growth number.
Yeah.
I think it was 14 maybe in Q1, so your average is 8% or 9% for the first half.
Yeah.
Sounds like timing was a component there. That's obviously where Essenz is fully upgraded and price mix has gone away. So can you, I guess, comment on some of the dynamics there and if at all, we could extrapolate some of those first half averages as what market growth looks like once you get to the end of 2027 and price mix is out of the way?
Look, you mentioned the fact that we performed extremely well in the first quarter, right? 14% growth. We did average out nearly 8% for the first half. When you have a capital business, it is very uneven and you have orders that are placed. It is not like a hospital replaces one machine. They often replace multiple machines. You have capital equipment placements that happen very unevenly, and that is exactly what happened in the second quarter in the U.S. Those orders were accelerated into the first quarter, so I think we are right on track with our business plan, and we still expect the U.S. to contribute to high single-digit growth in the second half of the year. I think this business is continuing to perform extremely well.
Vlad described all of the key drivers of growth, and we still fully expect them to materialize in 2026 and into 2027.
Is the assumption, I guess, that second half U.S. cardiopulmonary growth is similar to that average of the high singles in the first half?
That is right.
I do not know the mix of heart and lung versus oxygenators in international markets, but if you have got high single-digit U.S. growth this year at a point in time at which Essenz is fully upgraded, is that a similar way to think about what happens in the 2028 plus timeframe when international markets have been fully upgraded on the Essenz cycle as well?
I think strategically, innovation is a key element of our growth story here. We are going to continue to invest behind innovation in the cardiopulmonary business. We said this is one of our top capital allocation priorities. So we have to continue to innovate, and our pipeline will absolutely reflect that. I do not know if you want to mention that.
I think in 2028, one of the drivers will be the new oxygenator launch that is OBC. It is a highly differentiated oxygenator, so there could be price opportunities for there.
That has to do with the printed circuit board upgrades you did maybe a year or so ago.
That is more on the Essenz, yeah.
That is more on the Essenz piece. We view long-term innovation in Essenz to make the device provide guidance to the perfusionist, and add increased digital capabilities to provide that guidance, and the PCBA upgrade allows us to do that. I was referring to the actual oxygenator we have in a late-stage development program. We are in the manufacturing expansion stage of a next-gen oxygenator that we plan to launch in 2028.
Okay. I am going to squeeze in two in 30 seconds, but just a follow-up to the next-gen HLM. Any timelines on that or when that could be? On OSA, heard the comments on that. Reimbursement is maybe not going to be as clear until 2028. Your launch plans are for second half of 2027. How do we think about the decision points around rolling out and investing behind OSA?
You maybe want to talk about OSA first?
Yeah. At the time of launch, we worked together with Inspire for the new CPT code that is going to go into effect in 2028, January 1st. At the time of launch, we will use the prevailing CPT code at that time. If it launches earlier than that date, we will use different codes.
From an HLM per se, you mentioned next gen. I think we are going to continue to add incrementally in terms of there is not going to be this new machine that we are developing as a next gen machine. But we will continue to add modules to it like we are doing with the new heater, cooler that is going to launch next year, the Essenz air manager. Those are all sort of add-on components where we can leverage our 10,000 unit install base to drive kind of an upgrade cycle in that particular segment. Then long-term, I think you mentioned the PCBA upgrade.
Yes, we are doing that just to support the digitization of the platform, and ultimately we will be able to push software upgrades and additional features to the Essenz platform to make it smarter, as Ahmet described.
With that, we are out of time, so thanks for joining us.
Great. Thanks for having us.
Thank you.