Okay. Good morning. Welcome to Day Two of the Wolfe Research Healthcare Conference. My name is Mike Polark, medical device analyst here at Wolfe Research. Pleased in this session to be joined by LivaNova. From the company, we have CEO Vlad Makatsaria and Chief Innovation Officer Ahmet Tezel. Vlad and Ahmet, good to be with you. Thanks for being here.
Good morning.
Well, good morning, Mike and everybody, good morning, and thank you for the opportunity to join you this morning.
Maybe, Vlad, I will just pass it to you to start to set the stage, reflections on 2026 so far, highlights, challenges to the extent they are worth mentioning, and top few priorities as you roll into 2027. What are you most focused on for the company across the divisions?
Thank you for the question. I am going to assume most of you know the LivaNova story, but if you do not, we have two businesses that are leaders in their market. One is epilepsy and its treatment of drug-resistant epilepsy with neuromodulation, and the other side of the business is a cardiopulmonary business, so it is perfusion during open-heart surgery, surgical procedure. Both of these businesses are leaders in their space. We are in the process of launching obstructive sleep apnea business with proximal hypoglossal nerve stimulation, so that is on track for the launch next year. Then we have upside optionality with our difficult-to-treat depression business that is also hypoglossal nerve stimulation, so neuromodulation-based business. One thing that I am really pleased with the progress this year is with the quality of our growth.
We have delivered now several, actually three years of double-digit growth, but what I am really pleased with this year is this growth is very balanced. It is balanced between neuromodulation or epilepsy side and cardiopulmonary. Both businesses are growing double digit. I am pleased with our performance across various regions around the world, U.S., Europe, Asia Pacific, Latin America, so it is well-balanced geographically. Even within businesses, like for example, in cardiopulmonary, our growth historically has been dominated by heart-lung machines. Now you see a much more balanced growth between heart-lung machines and oxygenators. On the epilepsy front, the growth is driven both by price, volume, by new patients, by replacements. That kind of quality of growth and well-balanced growth gives us more confidence in the sustainability of that growth moving forward.
As we enter 2027, the focus remains consistent. One is on building a strong team, focusing on our culture. That is number one. Make sure that the growth is at the forefront of everything we do and continue driving growth. Innovation agenda, oxygen for our future, and making sure that both in the core businesses, but also our new categories that we are executing well versus our plans on innovation front and that culture of innovation is thriving. Then finally, execution is to make sure that we do everything efficiently and we continue to generate strong operating margins and cash.
Good setting of the stage. Thank you, Vlad. Let us go cardiopulmonary to start. We will do epilepsy, and then we will get into sleep apnea, and maybe a quick question on depression at the end. In cardiopulmonary, I will ask it through the lens of into 2027. I think Essenz goes from 80% of shipments this year to probably 100%. That is an embedded revenue growth tailwind on mix. Oxygenators, you have just announced a new, or completion of, I believe, a major manufacturing expansion, provides volume tailwinds for the consumable side, and maybe even heater-cooler and air manager, those modules will start rolling out at some point next year. Have I characterized the drivers correct, and which of those incrementally relative to the last few years of really good cardiopulmonary growth is even more impactful next year?
Maybe I'll start with the growth drivers, then I'll turn it over to Ahmet to talk a bit more about the innovation and the roadmap ahead of us. On the cardiopulmonary, you characterized the growth drivers very well. I would add maybe one more is price to that. Maybe start with oxygenators. In cardiopulmonary, about one-third of our business is equipment-based. It's heart-lung machines. About two-thirds of the business are disposables, and within disposables, oxygenators are the most differentiated and meaningful part of the portfolio. In oxygenators, it's a mature market, but we were able to gain about 10 points of share in the last couple of years. We went from 30% to 40%, and we have strong confidence in our ability to continue growing that market share, driven by three things.
One is commercial excellence, two is our ability to supply better, and three, innovation, which Ahmet will talk about. On the supply has been the key driver, and the reason for that is that the procedures themselves went from low single-digit growth to mid-single-digit growth over the past few years. We see that that mid-single-digit growth is sustainable moving forward, given the demographics, dynamics, and also some of the patients that used to have minimally invasive procedures are now coming back for more advanced type of surgery. That really drove the fact that the demand for the oxygenators is higher than the market's ability to supply. We've been focused on significantly improving our outputs on manufacturing.
The last two big milestones was our long-term partnership with Thermo Fisher in terms of supply agreement of a key component for oxygenators that removes that as a barrier moving forward. Also, in October specifically, we opened a new manufacturing line in our own facility for oxygenators, and that manufacturing line gives us an opportunity to continue with double-digit output growth into 2027. That's oxygenators. On heart-lung machines, again, we launched a new heart-lung machine a couple of years ago, and we've been gradually upgrading our fleet into this new machine called Essenz. This year, 80% of all heart-lung machines we placed were new ones or Essenz ones. Next year, 100% of our placements will be Essenz. If you look at the broader market, we have 70% market share approximately in heart-lung machines.
That translates in about 10,000 units placed out there, and only about 20% of those units today are Essenz. It gives us still a significant runway, and maybe we won't get that price mix impact after 2027. We can still play on volume growth as we have the significant opportunity to upgrade the remaining fleet of equipment. Then you talked a little bit about heater-cooler and air manager, those are modules into the heart-lung machines. We launched that new Essenz machine with old modules, so we are due to upgrade those. As of next year, we will start getting regulatory approvals for air manager and heater-cooler. It will start in Europe, and then it will gradually expand in other parts of the world, but the more meaningful growth will come in 2028. Ahmet, maybe comment on innovation.
Yeah, I mean, we are excited about three main pieces that Vlad talked about. The oxygenator launch that will happen in 2028. We are really excited about it because out of the 10 parameters that perfusionists care about in the performance of an oxygenator, this will become the best in class in all 10. We already have that kind of share momentum happening. We believe it will just fuel it. It is a highly differentiated oxygenator. It will not compete in terms of capacity with the existing oxygenator because it is in a different part of the plant in Italy, so we also like that fact. I would think of the air manager and heater-cooler, like if Essenz was a performance car, which it is, these will be like the tires or the gasoline that you put in it.
It just elevates the performance of Essenz because they are allowing Essenz to perform at its peak capacity, the air manager and heater-cooler. That is why we are, from a technology standpoint, think that when we launch those products, Essenz is just going to perform even better in terms of its technical abilities.
I will pull one follow-up, and then we can move to epilepsy. I think the oxygenator market, just an interesting one, two-parter. Do you still have any surprise that your competitors have not responded in the way that you seem to be responding? Any evidence that that could change, or no, this is LivaNova's market to win in? That is question one. Then two is just this sustaining a double-digit increase in output. That is volume, and there is still positive price. I just want to confirm that as an expectation as you roll into 2027.
Yeah, so maybe start with the end of the question. Absolutely, so it is volume and price, and I think one of LivaNova's strong capabilities is strategic pricing, and so absolutely price is going to play a role in that. Regarding the market itself, I think we were all surprised with elevation of procedure growth, and that caught us by surprise a few years ago. This is the market where scale matters, because it is high capital intensity, it is very high volume, it is relatively low value in terms of unit sales, and then that type of market scale matters. Now that we have approximately 40% market share, it just makes us more competitive purely from scale point of view. Then we saw some of the competitors exit for that exact reason, that Getinge, for example, had about 5% market share.
They exited the market, and that created another kind of opportunity for us to gain share. We have a relatively high level of confidence that the momentum we gained over the last couple of years due to those factors and the fact that scale matters, that that momentum will carry into the future.
Good. Let's shift gears to epilepsy. Not going to start on pricing. I want to ask about U.S. NPI, new patient implant trends, kind of 1Q, 2Q, 3Q. The environment is different because the provider reimbursement is up, and so the case is more attractive than it was a year ago. CORE-VNS, you're investing in clinical evidence, and that demonstrates good outcomes, and now the word is getting out, and maybe just commercial excellence. It feels like a better setup. I would love you to just comment on quarterly progression this year, and what are you seeing out of NPI? What are those growth rates in the United States?
Maybe I'll start, and then I'll ask Ahmet to comment a little bit more on the clinical data, because I think it is transformative data. If I step back on our epilepsy business, there are two major tailwinds that happened this year. Number one is more on the economic front, and that is for both new implants and replacement implants. The reimbursement went up by approximately 50%. I have never seen this in my 30 years in med tech industry, that on a mature product, that there is such significant improvement in reimbursement, and that gave hospitals and other providers opportunities to kind of make this procedure more profitable for them and more economically viable. With that trend, what we're starting to see also is there were a number of accounts that closed due to the kind of economic unsustainability that now are opening back.
That is one big trend that we're seeing. The other big trend is due to the clinical data. We are seeing that VNS is starting to play a more advanced role, a larger role in the clinical practices of epileptologists. That's another trend that we're seeing. Then from the price point of view, we are now able to renegotiate and not give as much volume discount, so it kind of gave us the price uplift. If I look at progression, I mean, you can see that the business has grown double digit in the last quarter. We are following very closely what are the trends, we want to get a few quarters behind us to be able to then kind of shape the guide moving forward.
What we clearly see is when those two things happened, clinical data came out and the reimbursement increased, we first saw the uplift in price almost immediately. Then gradually throughout the year, we're starting to see uplift in volume, and I think that is kind of what we should continue to expect. Ultimately, our goal is that we can kind of normalize price increases to our annual increases, but see kind of increased volume year after year, quarter- after- quarter. A lot of that will be driven by acceptance of the clinical data that we've published recently, and Ahmet, maybe you can comment.
Yeah. One of the challenges we had in the past was the FDA trial for VNS was done in early 2000, so the clinical data on label is pretty old. At that time, the technology was in a very different state in terms of its features. For example, it didn't have auto stimulation where when the device detects you're having a seizure, it kicks in. The data was old, and the effectiveness data wasn't representative around what it can do today. That created challenges because it's a Class III device, so it's heavily regulated. You can't just promote from a paper here, a paper there. We knew the performance was better, but we didn't have enough evidence to be able to promote with it.
The CORE-VNS data, which is 800+ patients, 60 sites, 16 countries, the breadth is strong that now we can promote with it. The performance of the device in terms of seizure reduction is extremely high. It's actually almost twice as high than the original PMA data, in the high 70s for seizure reduction, and 50% of the patients were seizure-free from the highest risk seizures. That's why it's extremely exciting because now it's no longer just a less invasive option, it's the less invasive option with equal effectiveness in terms of seizure reduction.
On reimbursement, just new tech APC 1580 confirmed again for 2027, so that's good news. The path to level six, the visibility into it, where does that stand today?
Yeah. I mean, we're happy to hear that the new tech APC is continuing. We will continue to work for a level six, but now the reimbursement is stable with the new tech APC, so we're very happy about that. We will continue to work with CMS in terms of upgrading it to level six for a more permanent solution. But where it stands today, we're very happy with it because the reimbursement is now stable and at that high level.
Maybe on the innovation front in epilepsy, the next-gen IPG, I think 2027 at some point. What is it? Why is it different?
Yeah.
When is it coming? How might it be rolled out?
Yeah. I mean, we're confident it will be 2027. It solves a fundamental workflow challenge for these patients. Today, when you have an implant, the only way a physician can interact with that implant is you have to be in the physician's office, and there's a third-party device that connects with the device. So, if you're a new patient, you have to do that 8- 10 times first year because you need to get your titration up, and post first year, you need to go to the physician's office once or twice a year. So these patients are either pediatric, and if they're adults, they don't usually have a driving license. So it's two people, the caregiver and the patient, and the average travel is about 40 mi to these centers, and in rural areas, it could be up to 150 mi.
With the new technology, we essentially have a brand new pulse generator or device that communicates through Bluetooth with the patient's phone, and now the entire connection with the device for the physician can happen remotely. The physician will be able to sit in front of their computer and adjust the device remotely. It has another benefit, so that completely eliminates that 8- 10 times first year and one- two times a year. It's the same coverage in terms of reimbursement for the physician, so there's no change there. The other advantage is that now a physician can see how the product is performing, so he or she can log in and say, "Well, last month, your auto stimulation kicked in 20 times. Let's adjust your dose." Today, they can't do that. Today, it's all relying on, "Did you have more seizures?
Did you have less seizures?" And you need to be in the office. It fundamentally improves the workflow, and we think in the long run, it's going to improve outcomes too because adjustments are just going to be more efficient.
Can you use this to drive the replacement cycle? I mean, it feels like something where there's a whole base of patients, this is a major improvement, call them today, early swap? Or is that a-
Yeah, I mean, that will be between the physician and the patient. It is still a surgery, so they have to say, "Okay, the risk-benefit." But it will work backwards. Any patient that has any neuromodulation implant from LivaNova would be able to be upgraded with this new device when they have their replacement.
Is there a component of this hardware that creates just firmware upgrades in the future?
100%. We have now a LivaNova Cloud system, which we are very proud of. We view ourselves as very front end of med tech in terms of cloud AI capabilities. We can now remotely upgrade all devices for epilepsy, sleep apnea, and we are now also upgrading Essenz to be able to utilize the cloud. Everything will happen through LivaNova Cloud.
All right, last one on epilepsy. Good discussion thus far. On the risk side, drugs are an option for patients with seizure disorders, and polypharmacy, I think, is very common, and there is innovation. There has always been innovation, new drugs launching, and I think there seems to be a little bit of a pipeline ahead. What are you doing today to prepare for the VNS franchise for perhaps another round of, not transformative, but new drugs to try? I think we have learned that patients are always interested in trying the next thing. How are you preparing for that, to the extent there is a cycle the next few years?
Ahmet?
Yes. In epilepsy, if you have epilepsy, two-thirds of the patients respond to drugs, one-third does not respond to a drug, and they are called drug-resistant epilepsy. If you look at the drug world, the focus is on that first two-thirds, and it is usually not improve effectiveness of the drug, but it is usually innovation is to reduce the side effects of these drugs, because the way these drugs works is that they reduce brain activity, and obviously, when you reduce brain activity, it comes with a consequence. We do not see anything in the pipeline, including the 2028 launch, with a drug, Xenon, a drug that fundamentally changes that paradigm that you have one-third of patients that continue to become drug-resistant.
Unfortunately, the way it works is that if you do not respond to the first two drugs that your physician prescribes you, after the third, fourth, fifth drug, you are down to 1%, 2%, 3% responder rate. Usually, if you are a drug-resistant epilepsy patient, you stay as a drug-resistant epilepsy patient, and that is the area that we serve.
Maybe just to add one thing is, it is not either drugs or VNS. Normally, patients that have VNS also have complementary drug therapy, so they are being managed with both neuromodulation and medication.
VNS is adjunct today.
Correct.
It enables you to reduce your drug dosage too.
Good. Let's move to sleep apnea. I think I get it. The device looks very competitive, and PolySync furthers that claim. I guess what I want to say is that I'm impressed, just slightly surprised. You sound very optimistic about this opportunity and are moving forward for it. I'm not going to ask for a reminder on why you think it's competitive. I think I'm there. I think it's the path and making that $200 million-$400 million revenue realization in 2030 come to fruition is going to be a lot of hard work. What is the path? We have a PMA, we need to supplement. The timing of that next year sounds really like the LMR year, and 2028 full launch. Have I mischaracterized anything on timing? Maybe comment on the level of confidence in the--
Yeah, I mean, I'll start with that part of the question, and Vlad can answer the first part too. Yes, we are very confident that the LMR will happen in 2027.
On the supplement, is it just the MRI or is there another component, MRI labeling, or is there another--
No, it's--
--supplement?
--it's a different IPG.
Okay.
We conducted the trial with a pulse generator that was designed years ago. This one is Bluetooth connected, so it has all the digital capabilities like the epilepsy and still connected to the LivaNova Cloud. I would describe it as MRI compatibility is very important, but equally important, if not more, is the digital capabilities. Remote programming, for example, will be available with this device.
Just remind me on the timeline that was communicated last week for--
What we said is, between the end of this year and first half of next year, we will submit the PMA supplement, and that was a time we communicated last quarter. Now we have three months more of data and time, so our confidence is now significantly higher on where we are. We're very confident that those timelines will happen and LMR will be in 2027.
Is it the next? Is it before the end of this year or is it in the first half?
If I--
Because it's a wide range.
If I say that, I get in trouble, so I won't.
Yeah. I guess, the market is large. I think it has really only been one company to this point. That market has fallen on growth challenges this year. I think one of the active debates is it saturation or is it the coding confusion? I guess, comment briefly, if you don't mind, on your confidence and how you think things for the category overall evolve in 2027, 2028, 2029, 2030, especially as you become a participant in the market.
We have high level of confidence in this market, and I would say there are several factors that play to it. The first one always starts with unmet patient need, and you look at the still about close to 1 million patients get off CPAP every year just in the U.S., and the penetration within patient group with neuromodulation treatment is still below 5%. That just for the market and for the technology itself, it creates a significant opportunity to drive improved penetration. Number two is, when we enter the market, we don't have contraindication for complete concentric collapse, and about a third of the patient population in that group have complete concentric collapse that today do not have an option to treat with neuromodulation. When we enter the market, the market expands automatically to those patients with complete concentric collapse.
The third piece is, we believe that our clinical data gives us a strong right to win. If you think about it, our technology works on 100% of patients versus excluding complete concentric collapse. Within that larger group, we have 85% responder rate, which means instead of one out of three patients gets a surgery today and doesn't have response, with our technology, it is one out of seven patients that get a surgery and doesn't get response. That is how clinicians talk to us about it. That is a very significant clinical benefit to patients. So, believe in the market because of high unmet need, additional market driven by complete concentric collapse patients, and our clinical data that gives us competitiveness in this space.
We have one minute. I have two topics, would love brief comment on. Margin profitability, it is expanding this year. 2027, you can imagine maybe flattish because you have to invest to fund sleep. Is that just a I know you don't have formal guidance, but you do have an LRP. Is that a reasonable way to start, or could margin expand next year?
Yeah. We will obviously guide after the next quarter, but at this point, I will just take you back to what we have guided to during the investor day where we said 2025-2028, we will maintain margin above 20%. We will expand margin in our core business and reinvest that in sleep apnea. We are doing those investments in very disciplined ways, so we prove success, invest, prove success, invest. Then post-2028, OSA starts scaling and starts contributing significantly to overall margin, so we expect by 2030, OSA margin itself will be north of 25%. Then, yeah, we will guide more precisely after the next quarter.
Depression, briefly, the update, what is the next action item on the--
CMS was They wanted to know if the durability of the therapy is there. In neuromodulation, it is expected the longer you use a neuromodulation device, almost in all diseases, the benefits improve. But they, I mean, scientifically, rightfully wanted to know if it is there. So the three-year data was available to us in May from the RECOVER trial. So we prepared that, analyzed that, and another requirement of CMS is that you cannot utilize data in a submission unless it is in the public domain. So peer-reviewed article or at least minimum in public domain. So we did that and submitted it to them. So that was early fall. We have not heard back, but our expectation based on the strength of the three-year data, which is publicly available, is that that should answer their question around, is this therapy durable or not?
From there, they will respond eventually and-
Yeah. I mean, they will never tell you. It is similar to FDA. They will never tell you definitively, "It is done, now go here," but they might say something like, "We have no further questions." Or they could come with new questions about the clinical data. That would be our kind of cue, "Okay, should we go to formal or not?
Okay. Good. Vlad and Ahmet, thanks for being here. Appreciate the conversation.
Thank you, Mike. Thank you, everybody.
Thank you.