Welcome. With me today is Alex Shvartsburg and Phil Kowalczyk, CFO and Head of Strategy and EVP from LivaNova. My name is Ben Bible. Pleasure to be speaking with you all at the Global Healthcare Conference here in Palm Beach. Alex, Phil, thank you for coming.
Thanks for having us.
To start things off, for those of you that don't know the company, can you help frame LivaNova, where it is today, and where it is heading?
Sure. LivaNova is a global healthcare company built on nearly five decades of experience. We have two very interesting components to our business. Our core business is in the cardiopulmonary space and epilepsy space. It's been a bit of a turnaround story for the company. We've come a long way in terms of transitioning our portfolio. Now we are strictly focused on these two core businesses, which are large, profitable, cash-generating businesses that actually fuel the investments into the next stage of our evolution with the near-term opportunity that we have with obstructive sleep apnea and then possibly getting into difficult-to-treat depression. Company has performed extremely well over the last three years. We've achieved double-digit growth each of the last three years. We continue to perform well this year, and we've taken guidance up significantly over the course of this year.
We operate in a very disciplined way in terms of driving top-line growth as we focus on margin expansion and cash generation. That continues to be kind of the North Star for us in terms of where we're going from here. I don't know if I missed anything, Phil. No. Great.
That's great. Well, let's dig into CP a little bit more, which you guys have made a big deal and talked a lot about your leadership in Oxys, leveraging what you've done in HLM market. How do you view the competitive landscape today, and how do you view it in the context of signing the Thermo Fisher agreement, and what does that mean for you?
Cardiopulmonary business as a whole, right, competes in the kind of a $2 billion market segment. Historically has been growing at low single digits, but what we've seen over the last few years is it has accelerated. The market itself has accelerated. I think some of the demographics continue to drive market growth, but also, historically, the market was impacted by kind of the minimally invasive cardiac procedures. Now as that patient base continues to age, they're no longer good candidates for kind of the repeat procedures. So they come in for open heart procedures, and that's where we step in. We are in roughly, in terms of our market share from a capital equipment perspective, we're in 70% market share position. So we effectively, we're enrolled in 70% of the procedures from around the world.
Our capital equipment segment continues to grow with the launch of our Essenz product that we launched back in 2023 that has continued to fuel our growth. Then about two-thirds of our revenue base comes from the consumables part of the portfolio. That piece of it has The key component there is the oxygenator. We've grown our market share in that segment from about 30% to about 40% over the last couple of years. That's been sort of on the heels of our ability to improve supply. As I said, the market has historically grown at a slower pace, so when the market accelerated, really the industry wasn't prepared for it. While we have been investing in our capacity expansion, we haven't really seen that from our competitors.
We're also investing in innovation in this space that we can talk a little bit about as we launch our new products in 2028. But the capacity expansion, our investments there have really been fueling the growth on the consumable side. We're building enough capacity now to satisfy a market share position of nearly where we are from a capital perspective, 70%. We're not committing to that from a long-term growth perspective, but we think we have the opportunity to get there with the investments we have made.
That's great. The Thermo Fisher agreement, how does that play into it?
Yeah. So kind of the gating factor to our growth has been the critical component supply, and that being the fiber component, which is a key element of the oxygenator. So, that component has changed ownership over the last few years, started as a 3M product, which was ultimately spun out into Solventum's business, and then acquired last year by Thermo Fisher. So we have been working with Thermo Fisher to improve the supply. They've done a good job of supporting our production output over the last 12, 18 months. But there's more work to be done there, and they're actually investing in building out some of their own capacity, which will come online later in 2027, which will give us kind of unlimited supply, as I said, where there's a big opportunity for us to become much more competitive in this space.
To date, we've been largely serving our own customer base.
Yeah.
Unlocking this supply really gives us an opportunity to kind of a license to hunt from a competitive perspective.
That's great. That's really exciting. Maybe if we could turn to epilepsy. VNS is very under-penetrated. How has the improved reimbursement in the long-term CORE-VNS study changed behavior in this market?
Yeah, it's a great question. It's an exciting time for our epilepsy business. We start with the market, maybe, to give you an appreciation for the opportunity in front of us. So you've got about 3 million, I'll use U.S. numbers, of patients with epilepsy. About 2 million of them get drugs, respond well, and kind of it's sufficient therapy. About 1 million don't. They're classified as drug-resistant epilepsy. Within those 1 million patients, we only see advanced therapies in about 10%. So this is a massively underserved patient population, and the average patient takes almost 15 years and cycles about seven drugs, even though they basically know those drugs won't work for them after they've been classified as DRE, before they get to that therapy.
Our strategy has always been about getting, kind of condensing that timeline and demonstrating the clinical effect of the device to convince a patient to get to that therapy. Two really important dynamics have happened for us in the last year that are accelerating our ability to execute on that strategy. One is reimbursement. Historically, patients or a physician and hospital would lose money every time they put in a VNS device, and that was causing some constraints. It was causing constraints around the number of procedures that were being done, and in some severe cases even, you'd see practices that would stop doing VNS therapy.
Last year, we saw a 47% increase in our NPI reimbursement, a 48% increase in our EOS, or the battery replacement side of the business. That's basically removed cost as a losing money proposition for hospitals to now it's either break-even or money-maker, depending on the patient mix from public to private. What we've seen is both our ability to stop doing the volume price discounting that we were doing, as well as driving volume in the reimbursement side. We are seeing an uptick in volume growth, and that's been a big driver for our success this year. We are pleased to see that on the reimbursement side for next year. We just got announced that we're going to stay at that same level for 2027 on the NPI side.
There's actually going to be an 11% increase again in EOS for 2027 as well. So we expect this dynamic to endure and continue to drive. The other big piece for us is our CORE-VNS study, which is our largest real-world across, I think it was 16 countries, over 800 patients, demonstrating, I'd say the headline number is a 77% median seizure reduction. Historically, VNS was maybe viewed as a little less efficacious, but had the value proposition of being less invasive. What CORE-VNS demonstrates is that the reality of the therapy is a very strong efficacy profile compared to any other solution in the marketplace, with that value proposition of less invasive. We just recently had the publication come out for CORE-VNS.
This is something that we're working closely with our commercial organization and with clinicians to help reshape kind of how VNS is used in the care pathway. I'd describe it still as early innings in where we are, and we expect kind of the value of CORE to be an important driver for the business over the next-
Yeah
many years.
I think you commented on this, but it's having a positive impact on your results, which I recall at your investor day, you forecasted mid-single-digit growth, and as of your most recent quarter, you've raised it to 8%-9%, at least for the year.
Yeah.
I guess, how do you think about this and the impact longer term?
That's right. When we, at investor day, we kind of viewed this business as a mid-single-digit growth business. Two-thirds of the revenue comes from the replacement side of the business, so that's a kind of a slower growth element. Our focus really is on, again, as Phil Kowalczyk said, enrolling more patients, new patients into this therapy to improve the quality of life. So, that's always been the focus, and we felt at that point in time that it was kind of a mid-single-digit growth business. This was before
We got the positive news around reimbursement, particularly on the new patients segment, which at the time we rolled out that forecast, we didn't really have a clean understanding what's going to happen. That's a tailwind for us that was unexpected at that point in time. We're obviously benefiting from improved reimbursement. I'd also comment to the CORE-VNS study, as Phil Kowalczyk said, has probably been underappreciated in terms of the uptake and the value proposition there with really strong clinical results in the minimally invasive procedure. So, those tailwinds are kind of manifesting themselves in our performance this year, both from a realized price perspective, as well as Phil Kowalczyk said, a volume perspective. Our new patient funnel continues to improve. Our key leading indicator in this business is new patient identification, right? That funnel continues to improve.
That has contributed to both the economics of the hospitals or the healthcare systems, as well as the clinical benefits, which translated into higher growth. We are encouraged by the performance to date.
Last one on epi. Your next generation IPG, how should we think about that?
Yeah.
Can you comment on the value that it is going to bring to this franchise over time?
Yeah, it is great. It is the first new product we have launched in about a decade in that business. A lot of excitement inside the organization as well as the external community for the next generation. This is a Bluetooth-enabled IPG with the digital health platform around it that is going to enable a number of incremental features. I would say the big ones being remote program. Right now, the average patient has to come in their first year of implant, has to come back to the office about 10x to 12x and drives 40 miles. These are patients that a lot of times with epilepsy are not able to drive, they have caregivers. It puts a lot of burden on the patient and a lot of burden on the provider as well. This is going to remove that.
It's going to allow you to do a telemedicine visit, go in, look at the programming, type in kind of the new settings for the IPG and hit enter, and nobody had to do kind of everybody can do it from the comfort and convenience of their home. That's a big workflow benefit, but I think what's not appreciated is it's also a big clinical benefit. One of the dynamics that's very important to seeing strong clinical efficacy in VNS is getting to the right therapeutic level of dosing. Sometimes when we see less strong clinical benefits, it's because we're not at an appropriate therapeutic dose. A lot of times that happens because this burden of getting these patients in and seeing them this many times, it creates kind of a bottleneck into getting there.
This should eliminate that bottleneck, and as a result, we'll see us getting to a therapeutic benefit in a faster period, and therefore better clinical efficacy for patients. It's an exciting one for us. We plan to start commercialization next year with kind of the more significant financial impact probably being seen in 2028 and beyond, but it's an important next step.
That's great. Shifting gears, OSA. There's been a lot of discussion in the market pertaining to reimbursement as well as GLP-1s. How do you guys think about this market given your franchise and where it's going?
Yeah. Yeah, it's getting a lot of attention, I think, over the last few months. It's something that we've been studying closely as we kind of reiterated our commitment to that $200 million-$400 million revenue target that we put out for our OSA business by 2030. What I say is, this historically has been a double-digit growth market, and our belief is that it will return to a double-digit growth. Why is that the case? First and foremost, this is still a massively under-penetrated opportunity. You start at the top of the funnel, only about one in five patients are being diagnosed with OSA, but we're seeing that number go up. That is creating a nice tailwind, kind of rising tides, all boats situation for any therapy that would exist in OSA.
We are also seeing, this is a second-line therapy that happens after you have failed or are non-compliant with CPAP, and we are still seeing up to almost 1 million patients that fit that criteria every year. You are seeing a penetration rate of around 5% for HGNS in that patient population. So a really big opportunity to increase that percentage and grow the market. Specifically with the HGNS market, I think you are seeing three dynamics that have caused what was a historical double-digit market to plateau in the last year or so. One was, and probably the most significant one, is this coding and reimbursement piece. I think the news that came out a couple weeks ago that established Category I codes, that will go into place January 1st of 2028, is a huge step forward.
We were pleased to be part of that application, and it is going to be a very important single framework to eliminate any of that ambiguity that exists in the market today, and remove that headwind for market growth. Second is, our technology is not contraindicated for CCC patients. Unlike the incumbent today, where there has to be a DISE procedure that then screens out CCC, we treat all comers with that. The result of that is an expansion of the TAM of about 30% or so. As our solution comes to market and expands that available patient population, we would expect to see market growth increase as well there. Then third and finally is GLP-1s. We are about a year in, I would say, to GLP-1s being introduced as part of the care pathway for the treatment of sleep apnea patients.
I think it has caused, like we see normally in any neuromodulation market with a drug upstream, it has caused a little bit of an elongation or rethinking of the care pathway a little bit. Ultimately, we expect it to be a tailwind to the sleep apnea HGNS market, as we start to bring more higher BMI patients into the range that are therapeutically eligible for HGNS. The other point I would make on that one is, about 30%-40% of patients are not obese. There is still a really strong opportunity for OSA patients for other therapies needed beyond. So that is how-
Yeah
we think about the market. There are a lot of moving parts happening today, but long term we see that-
Busy market
very attractive. Yeah.
I guess given these dynamics though, Phil, what gives you confidence in the ability to compete? Then second part, do you believe there is an underappreciation for LivaNova entering this OSA market?
Yeah. I mean, our confidence in our ability to compete starts with the clinical and technical value proposition of the device. So the architecture of our device with the six electrode cuff allows us to approach the titration process in a much different way, recruiting all different kind of muscle fibers. This allows us to treat higher BMI patients, and it allows us to treat more complex patients like CCC. What we also see is, with our PolySync algorithm, a cumulative 85% response rate.
If you frame that a different way to a patient as a patient's having a conversation with their provider, you would sit and say, "We're seeing the pivotal trial data from the incumbent is around 66% responder rate." You would sit down and you'd say, "Hey, we've got this therapy, and there's a one in three chance that maybe you don't have a great clinical response." With an 85% responder rate, that number goes to one in seven. That creates a very different conversation at that critical inflection point where you're making that decision to have a surgery, which is always the biggest barrier in neuromodulation. Our confidence comes from the technology, the clinical data, and that is going to be the basis for how we compete, how we message, how we build our commercial strategy, et cetera.
I think what's underappreciated about LivaNova is, yes, we are building a new commercial channel, a new call point with ENT and sleep physicians, but the underlying engine that creates our right to win in neuromodulation is not new to us. Take from an R&D and technology standpoint, the digital health platform that's enabling the launch of our next gen IPG in epilepsy to do remote programming, that is the same exact technology platform that's going to be applied to our OSA business. Supply chain, these are batteries, these are cans, these are leads, these are things we know how to do well, and we're going to get significant synergies as part of that.
Market access, the team that helped shape the strategy that allowed us to increase reimbursement for VNS in epilepsy is the same group that helped get to the successful resolution for the Category I codes in HGNS. These are capabilities that we have in neuromodulation that are directly being ported over to our OSA business, and I think it does confer on us a strong right to win.
That's great. Definitely a lot to leverage from what you've done in epi. On last week's earnings call, I believe you reiterated the timeline on the supplemental PMA for the next generation OSA system, which I believe is the first half of 2027. As you move closer to the milestone, how are you thinking about commercialization? Where are you in that journey, and how do you think about market adoption as you guys get going there?
Let's start with the development timeline. We're making really good progress in our verification validation process, so our confidence continues to increase that we'll hit that window outlined during our earnings cycle. From a development process, we have a high degree of confidence of achieving that target. As we look to scale, we intend to begin the commercialization or the kind of the scaling of the sales force
as we get closer to the submission, and obviously we know the timeline to gain approval from that point forward. So we're going to be very measured in terms of the hiring process for the sales force. As we continue to scale, we expect we're standing up a new channel that doesn't exist at LivaNova today, that being sleep and ENT channel. We intend to invest behind the commercial scaling of the commercial organization. That will happen over time, and we can be much more measured about it. As Phil described, the great clinical benefits and the technology architecture, that's kind of our differentiator. We don't have to do direct-to-patient advertising to scale this business.
We're going to compete on the basis of clinical evidence, and really drive the scaling through education about the therapy, the benefits of therapy, and obviously the results will drive the value proposition there. Over time, we think that this business is very scalable for us, and we're confident in achieving that long-range target that we put out there in terms of $200 million-$400 million in top line by 2030. We think because of the platform technology that we have with OSA and all of the infrastructure that's already in place, the path to profitability, break-even and profitability is much shorter for us. We think that as OSA scales, we could actually drive our margin profile to kind of the mid-20s range as an enterprise, which is highly attractive from an investor perspective.
Maybe just for clarity for the record, the range we put out there for the filing was second half of 2026 to first half of 2027. So, everything Alex said around the confidence of achieving that is all true. I just wanted to
Thank you.
...make sure that's there.
Shifting gears, capital priorities. You guys got a lot going on, but how should we think about reinvestment versus M&A, and what is important to you?
Yeah. We've been pretty consistent about our capital allocation priorities. Our top priority is to continue to invest in our core businesses, right? Given the growth, the scale, the profitability there, we see that as kind of the clearest path to value creation for investors, so we're going to continue to invest in the core. Second priority for us is OSA. We're getting ready to launch. It will require us to invest in the commercial organization, as I said, so that's our second priority. Third priority for us is tuck-in M&A. We don't need M&A to grow. Obviously, we talked a lot about our pipeline and everything that's going on in our core businesses. We have enough growth drivers, but we think it's an important element to supplement our core businesses and the new neuromodulation areas that we're looking to get into.
We are going to look to use M&A as kind of a force multiplier to drive the core and OSA, and hopefully DTD at some point in time. We have very high sort of targets and hurdles in terms of strategic fit as well as financial fit for M&A, so we are going to be very disciplined about how we approach M&A opportunities.
Makes sense to me. My last question for our discussion today. You guys raised revenue guidance by 300 basis points last week, and I believe increased EPS by about a quarter, at least at the midpoint. As the year has unfolded, what has exceeded expectations, and what have you been most pleasantly surprised about in your business?
First of all, we raised guidance about 100 basis points, just to be crystal clear on that front from a top-line perspective, and increased our EPS guide by about $0.10 at-
300 year to date. I think he was saying the year to date.
So, just for clarity's sake. As we think about how the year unfolded, clearly our commercial execution has been very stellar, on both the cardiopulmonary front as well as the epilepsy front. In CP, going into the year, we were conservative in how we guided our Essenz growth. As we continued to expand our placements across the globe, we weren't sure whether we were going to be able to maintain the price premiums that we were successfully able to do last year. So that was kind of our big unknown. We've done extremely well. From a price premium perspective, we've done pretty well on that front. On the oxygenator front, as I said, one of our biggest gating items from a growth perspective has been critical component supply. That Thermo Fisher agreement and our relationship with them has helped us improve our output.
Our new manufacturing line has now gone live, which gives us kind of a path to higher growth in the future. But we were kind of conservative in terms of our capacity expansion initiatives and the manufacturing output. On the epilepsy front, I think we underappreciated the uptake that the CORE-VNS data would drive in the marketplace. So that's been a pleasant surprise that has really improved the new patient funnel, as I said before. Our realized price has been really stellar for this year. So, I think those were kind of the key elements that we perhaps didn't see at the beginning of the year, but have played out in our favor.
I think the team has done a really good job of executing, and that's been sort of our key to success over the last number of years is that really commitment to execution and excellence from an operational perspective, commercial perspective.
That's great. Well, gentlemen, thank you. You guys have a lot to be proud of, and I know it's a really exciting future, so appreciate you guys sharing some of that with us today. Again, thank you for being here.
Yeah. Thanks for having us, Ben.
Thanks.
Thank you.