Q3 2020 LivaNova PLC Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the LIBOR, Nova plc third quarter 2020 earnings Conference call. At this time all participants lines are in a listen only mode. After the speakers presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone as a reminder.
Andrew This conference is being recorded I would now like to introduce your host for today's conference Mr., Matthew Dodds, leaving no senior Vice President of corporate development.
Thank you Catherine and welcome to our conference call and webcast discussing we even though its financial results for the third quarter 20 Twond.
Joining me on today's call Keith.
Give officer.
Schwartzberg or corporate VP of DNA in international who will be appointed or interim Chief Financial Officer effective November Onest and Melissa for even our vice president of Investor Relations.
Before we begin I would like to remind you that the discussions during this call will include forward looking statements factors that could cause actual results to differ materially are discussed in the company's most recent filings in documents furnished to the FCC, including today's press release that is available on our website.
We do not undertake to update any forward looking statement.
Also the discussions will include certain non-GAAP financial measures with respect to our performance, including but not limited to sales results, which will all be stated on a constant currency basis.
Reconciliations to the most recent directly comparable GAAP financial measures can be found in today's press release. It is available on our web site. We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials and should be used as an enhanced.
Communication tool you can find the presentation and press release in the Investor Relations section of our website under news and events presentations at Investor Dot, leaving Nova Dotcom with that I will now turn the call over Damian.
Thanks, Matt and thank you for joining us and I Hope you and your families continue to remain safe and healthy during these challenging times.
During the third quarter that team remain focused on execution toward realizing the full potential for that portfolio.
On a global basis and across all business segments sales improved compared to the second quarter with September having the strongest result, as hospital and local governments continue to navigate the pandemic.
The impact from Carbonite team has been ongoing and the pace of skywave recovery remains a varied across regions.
Before we get into quarterly results I'd like to take a moment to update you on the actions underway to deliver our strategic plan.
Over the past few years, the board and management team have taken a number of initiatives to shape that portfolio and structure. The organization to ensure that livanova is best positioned to serve that patients and drive shareholder value.
No that has two compelling platforms neuromodulation cardiovascular.
Both of which have growth opportunities beyond what we have achieved to date.
We recognize there is more work to be done and remain highly focused on ensuring that they are set up to deliver the underlying value embedded in their businesses.
To that end, we are targeting three key areas.
First enhance execution to deliver on that Prime regards drive as U.S. epilepsy, and advanced circulatory support for IC, yes.
Second delivering on our pipeline and third improving profitability and cash generation.
With respect to growth drivers, we are focused on achieving consistent profitable revenue growth in our core.
We are in the process of implementing and we'll continue expanding and new go to market strategy targeting DRG patients and clinical research supporting Fiennes therapy as the standard of care.
For IC, yet we expect to continue at least 30% growth in 2020 and at least 20% growth in 2021, driven by our recent launch of the lock stock platform.
The pipeline execution, we expect to make significant near term advancements in depression hot side, yet and heart lung machines will excellence.
For depression that includes transitioning to recover studied the registry by like 22 or early 2023.
For heart failure, we plan to achieve our first clinical milestone of 300 patients enrolled in the first half of 2021.
The next generation HLN program is a key initiatives that will support our market leadership position and continue to make progress towards commercialization, which is expected in 2022.
While driving growth and innovation are fundamental to any world class Medical Technology Company. We also plan to improve our operational excellence by increasing cash generation along with operating profitability.
To that end, we have taken a number of recent steps to right size the cost structure improved margins and focus our investments on our core growth drivers.
We believe these initiatives will result in expanding operating license cluster to benchmark levels.
To be clear as we position ourselves for near and long term growth. We are committed to segments, where we have we'll plan to have leadership positions in underserved markets that drive margin expansion and multiple pipeline opportunities to accelerate growth.
As part of their ongoing dedication to investors. We are committed to intensify communications on key elements of our therapeutic areas strategy and why we believe investing in these areas of large unmet need will drive enhanced shareholder value.
Accordingly over the coming months, we will share updates on each core business and detailed their respective growth opportunities go to market strategy and near term product pipeline.
Lastly, before reviewing the quarterly results I want to acknowledge the dedication of our nearly 4000 team members, who jarring. This pandemic have continued to execute and deliver for patients towards our goal of long term growth.
I will now review the results of our primary growth drivers epilepsy, and I see US then I'll move to our pipeline and finished with the results of our remaining businesses.
After my comments.
Alex will provide you with additional details on the financials reaffirm our 2024 year sales and EPS guidance and update that free cash flow guidance.
Epilepsy sales declined 14% versus the third quarter of 2019. This decrease is attributable both to the impact of totaled 19 on both new patient and end of service or replacement implants.
Epilepsy sales in the U.S. declined 11% in the quarter importantly, the business grew significantly over the second quarter with sequential improvement in both new patients and end of service implants.
In the third quarter epilepsy sales in Europe reached 96% at prior year levels with strong performances in Germany, and the Nordic region.
The rest of World region declined 37% as a result of continued impact of curve at 19, particularly in the left hand, and the middle East regions.
For the full year, we still expect to us epilepsy business, which excludes the TV to declined 15% to 25% due to the impact of COVID-19 on non emergent the stages.
That said at this point, we anticipate continued sequential progress across the fourth quarter.
I see it now represents nearly 10% of cardiovascular sales or $13 million in the quarter, an increase of 92% compared to the third quarter of 29 team.
In July we commenced the full use commercial release of livestock.
As we mentioned on our second quarter call. Some orders were deferred into the current quarter.
We are pleased with the team's ability to drive uptake in both new and existing accounts.
We continue to expect our IC business to grow at least 30% in 2020.
Turning now to difficult to treat depression sales in the quarter with $2.5 million.
Consistent with our previous expectations, we anticipate DCD sales of approximately $5 million to $10 million for the year.
Despite the pool is caused by type of 19, just over half our target recover sites have now been activated.
In heart failure, and some have Rick US pivotal trial was temporarily paused in March to the kinds of 19 after enrolling just over 200 patients.
During the third quarter. The team was able to re initiate recruitment in more than 75% of the sites and to date. The trial has enrolled more than 240 patients.
For our cardiopulmonary business sales were $107 million in the quarter, a decline of 12% versus the third quarter of 2019.
Hmm sales declined in the high teens due to kind of 19 impacts on hospital budgets for capital equipment.
Oxygenated experienced a faster recovery in procedure volumes in the us and Europe and each region declined less than 10% for the third quarter.
Moving to heartfelt sales for the segment were $21 million in the quarter, a decrease of 27% versus the third quarter of 2019.
First of all performed well in the rest of World region, returning to double digit growth driven by solid performance in Japan.
For the full year sales in our cardiovascular portfolio. We are still estimated to be in the range of flat to down 15% with continued growth from livestock, largely offset by tighter capital spending budgets and the impact from lower cardiac surgery procedure volumes on but oxygenators and hospitals.
Starting in the second quarter and continuing the third quarter, we reduced costs to offset some of the sales decline we.
We continue to reallocate resources to fund their priorities. These actions have delivered approximately $40 million in savings year to date.
Specifically these key initiatives include the following.
First we instituted a hiring freeze adjusted employee related expenses and continued to participate in government sponsored work programs.
Second we reduced spend related to travel marketing events field presence and have shifted to working with our customers and stakeholders using remote methods.
Third we reduced that other discretionary spend related to external consulting and temporary staffing and fourth we balanced our manufacturing output to coincide with the anticipated reduction in demand.
But before I turn the call over I want to take that Theres. Many contributions to live in either during his tenure.
Diabetes partnership patient focus and integrity as we work to transform the than either.
Now is the right time to transition as we prepare for our next phase to this end said, we'll leave the organization and the CFO responsibilities will transfer to other spots on an interim basis.
Alex is well known to us and to some revenue.
He joined US at the end of 2017 is active in roles of increasing responsibility. Most recently as corporate Vice President of EQT, Cnine and the international region.
Prior to Livanova, Alex was CFO and COO of a private equity backed clinical services organization.
Previously he held a variety of finance leadership roles, including divisional CFO of genetic sciences at Thermo Fisher.
I will now turn the call over to Alex for review of our financial information.
Thank you Damian Im going to discuss the third quarter results in greater detail sales for the third quarter were 240 million a decline of 11% compared to the same quarter prior year.
Cardiovascular sales were $141 million down 10% from the third quarter of 2019.
Neuromodulation sales were $98 million, which is a decline of 13% versus third quarter 2019.
Adjusted gross margin as a percent of net sales in the quarter was 67% down from 70% for the third quarter of 2019 and sequentially improve from 61% in the second quarter.
The year over year margin decline was primarily driven by mix from lower neuromodulation sales and unfavorable manufacturing variances.
Adjusted R&D expense in the third quarter was $36 million compared to $39 million in the third quarter of 2019.
R&D as a percentage of net sales was 14.9% versus 14.4% in the third quarter of 2019, the $3 million decline in R&D spending is due to expected spend reductions in legacy products.
Adjusted EPS DNA expense for the third quarter was 92 million compared to $102 million in the third quarter of 2019.
SDMA as a percentage of net sales was 38.2% up from 37.8% for the third quarter of 2019. This.
This $10 million decline in ESG in expense is a result of planned cost containment actions previously highlighted.
Adjusted operating income from continuing operations was $32 million compared to $48 million in the third quarter of last year adjusted operating income margin from continuing operations was 13% compared to 18% in the third quarter of 2019.
Our adjusted effective tax rate in the quarter was 4.5% compared to 11.2% in the third quarter 2019.
The lower tax rate is related to changes in geographic income mix and a partial valuation allowance in the U.S.
Finally, adjusted diluted income per share from continuing operations in the quarter was 38 cents compared to 84 cents in the third quarter of 2019.
Now moving to cash our cash balance at September Thirtyth, Twentytwenty was $228 million.
Up from 61 million at December 31, 2019.
Our net debt at quarter end was $528 million up from $272 million at year end 2019.
These changes reflect the impact of our financing completed in the second quarter of 2020.
In this quarter, our free cash flow was negatively impacted by several items, including a quarterly hedging settlement based on the recent sharp decrease of the US dollar. Additionally, working capital is not improve as we expected relative to sales.
Capital spending for the first three quarters of the year was $28 million, which is $12 million higher than a year to date 2019 related to our initiatives to support manufacturing and sterilization capabilities in Houston and Arvada for both parties.
Mary Ann HTS, and finally to further develop our epilepsy digital innovation platform.
Now turning to our 2020 guidance as David mentioned, we are reaffirming our previously announced full year sales and EPS guidance.
We are also updating our free cash flow excluding extraordinary items.
To recap sales and EPS, we are forecasting 2020 sales to decline between seven and 17% on a constant currency basis, assuming a minimal impact from exchange rate in the full year sales.
We are estimating adjusted diluted earnings per share from continuing operations in the range of $1.15 to $1.35.
We are now estimating free cash flow, excluding extraordinary items to be in the range of 10 million to $30 million down from previously projected 80 million to $100 million. This.
This change reflects my earlier comments on the third quarter and a more conservative outlook on working capital and capital expenditure for the remainder of the year.
With that I will turn the call back to Damian for some final comments.
Thanks, Alex with that captured why don't we open it up for questions.
Thank you if you have a question at this time. Please press the Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue press the pound key.
As we enter the Q and a session. Please limit yourself to one question and one follow up question and then return to the queue. If you have any additional follow ups.
Our first question comes from Rick Wise with Stifel. Your line is open.
Good morning, Jamie and good morning, everybody.
Thanks for that.
So clearly laying out.
The program.
Many changes that are positive changes it sounds like that are taking place.
Jamie maybe just to start.
Stepping back before we give you some details how should we think about.
All these actions and how that setting.
We would know but for 2021, obviously disappointed investors are going to look ahead to next year. It sounds like that business has reasonable momentum. This year and you are feeling reasonably positive, but the direction of the fourth quarter, but how does that set us up for 21, both from a sales side.
And on the cost and cash flow side I appreciate the big question, but.
[laughter], yeah, Thanks, Rick and good morning.
Well first of all.
I think we tried to lay out very clearly what our strategic intent is and how we're driving to that and we call that the triangle first it's about growth and focusing on growth and we're pleased with the sequential momentum.
From Q3, and what we're seeing early in 20 billing dive into Q4 with October the momentum and the trajectory.
I guess like everyone. We continue to track and listened to global headlines listened to customers about how color that is evolving but the early signs for October have been entirely and the intent for that is to continue to focus monopoly on our growth drivers with us epilepsy Nic.
Yes, we think there is a tremendous runway there is that the pipeline as we lay that has enormous opportunity in these key areas and particularly the big clinical trial development and lastly, what we tried to lay out five Alex and Ani the focus on operating excellence, so operating discipline using the live in other businesses.
Some to be more focused on operating margin expansion and cash generation. So we believe that discipline is important were demonstrating we believe in the quarters how were focused on those things.
We recognize there is more work to do but where we're very bullish about abstract plan and what we can do to drive shareholder value.
Turning to capital spending obviously.
That's been a factor.
That's been unhelpful.
Or headwind this year.
How concerned are you as you head into the fourth quarter.
Hospitals under pressure.
Et cetera, but.
That.
Let you do that you're in the right places you give us guidance and again you think about.
Finishing this year and heading into next year.
Yes, I would say that again, we're really pleased with the initial trajectory of Q4.
Like I said, we continue to track all of the kind of good news, we've got a lot of customer feedback.
You know HL EMS and EPS is going to rely on on continued work there, but we have a number of programs in place to be able to respond to the white customers.
Able to deal with capital spend and they're interested in ensuring we support them.
Just to put it in context.
HL lambs, a 30% of cardiac woman rate we're also.
Very much focused on ensuring the oxygenator in the other parts of that cardio pulmonary portfolio continue to expand.
As we are with I see yes, I mean, I think Thats importantly is that a tailwind for us with the opportunity we have incurred related environments with IC, Yes, I think thats ecmo opportunities is really key to us and I think thats less than half less impacted by capital.
Yes, and just one last quick one from me Damian.
TRG, you're making progress currently 50.
50% of the sites activated are you where you expect it to be it just if I'm remembering correctly youre your timing in some of the commentary about where you expect to be it hasn't changed much.
Are you far enough along are you, where you expected to be and again is.
Is that the enrollment accelerating how are you thinking about it. Thank you so much.
Yes. Thanks to go again, a key program for us and so as I said you know, we're continuing to assume a transition to registry in like 22 early 23 again dependent on CMS review timing I think importantly, since we started reactivating sites.
We've been able to activate more than half of our target sites, but we'll know more as we progress through the next quarter and I think the best thing to do is provide an update in February, but where there's lots to do there and we believe that all of our sites I understand the importance of this to patients and especially as everyone read the headlines whats.
Happening with depression patients in this environment. So we think there is a compelling argument for people to engage in the study.
Thank you.
Thanks, Rick CIT.
Thank you. Our next question comes from Raj Denhoy with Jefferies. Your line is open.
Hi Raj.
Hey, sorry about that we were on mute. This is zach on for Raj just two questions for us on the guide can you provide a little bit more color as to where you guys feel comfortable model is falling out in the down 17 to down 7%.
And then also on Opex spending.
Where do you see 2021 Boeing in comparison to 2019 levels. Thanks.
Yes, so on on the guide as I said I think we're giving you our best view for those programs and again seeing what were seeing in October 1st 20 days in where we're seeing improvement in where were encouraged not.
Notwithstanding what I said about how the world is viewing today, but in terms of Opex and 2021 guidance, we're going to give guidance in February but again I think what we're trying to message here is disciplined and focused on ensuring that our opex in the SG and I and R&D are very focused on core programs and.
I'm more focused on ensuring we have operating margin expansion.
Okay, Great Thats helpful. And then also on the free cash flow guidance can you provide a bit more color on the bridge from.
Our expectations for Fourq, you and the updated guidance.
I'll take this one zack.
Thanks for your question I would say really two issues or two areas that.
That came out in Q3, we had we hedge our intercompany debt positions and.
We saw sharp declines in the us dollar relative to the euro and the Canadian dollar, which impacted the the hedges and.
At the time of settlement.
The second issue or the second.
Item is really around.
Working capital and we just didn't see the the improvements the velocity.
That we had expected in the quarter.
So just looking at it.
Please standby.
Thank you for standing by please standby.
[laughter]. Okay go ahead.
Okay, sorry about that folks it was not so how that line, but cut back I don't know, where we lost you on the free cash flow do you want to just come back on the free cash flow today, and where you where Alex sure. So I just wanted to highlight two items that we saw in the third quarter.
Sure.
First of all we hedge our intercompany debt positions and.
When the currencies the dollar.
The short dark dollar decline relative to the euro and the Canadian dollar really impacted the.
Hedge the hedges.
On those settlement dates.
So that was one one area and then the other one we just didnt see the progress.
On working capital, particularly and.
She bubbles relative to the sales velocity.
We continue to see just to make progress on Dsos, but just.
Just didnt.
This see as much progress and.
In terms of the guide as a as I was saying earlier, we're just we're taking a more conservative outlook on working capital and capital.
Expenditures for the remainder of the year.
Thanks, Alex.
Again, sorry about that thanks, Catherine I'll send it back to you.
Our next question comes from Adam Major with Piper Sandler Your line is open.
Hi, Adam.
Hey, there just a couple from me and maybe starting with Apple App see that business saw nice.
Snap back in Q3, I'm, just curious to get an update in terms of you know the pace of new patient visits in referral activity is and maybe how that compares to.
The pre cold at levels, where we all the way back nearly all the way back.
And then additionally on the epilepsy front.
Might be tough to decipher in this environment, but just any updates around what you're seeing competitively on the on the drug side and then I had a few follow ups.
Sure sure no. Good question I mean, I will say, we're very pleased with the things execution in the quarter and the sequential improvement over a over Q2.
Put it in context, the you know what rebounded and how well both end up service and Npis rebounded into service probably recovered two x. faster than Npis and you know again I think that's important given that we believe into service represents a lift elective procedure can you influence.
And I think thats critical for patients and.
And we believe there is probably a large backlog at the end of service can pay the npis since they require patients to return to their doctor for one finals device interrogation before it's scheduled surgery, so and we know not only rather just the same in office patients.
Great comfort levels.
So I think I think we're encouraged by the sequential improvement we're encouraged by what we're seeing in Q4 early on I think I think that fundamentally a difference as we looked at the internal and external data.
Between and urology business and other devices that Neuromodulation and I think that comes down to a few things.
Firstly, you know you have patients.
Patients that skewed pediatric for us so one of our key aspect is that we probably have more.
You want to make sure. This is Matt on the drug side as you recall, we did factor in our initial guidance in 2020, some impact from new drug launches new indications that are still still baked into our forecast I can say broadly both from third party data, we've been tracking and our field force.
Back nothing has we've seen has influenced our forecast and what we think the drug impact would be this year, which again relatively minor.
And you said, Okay. My other question.
Got it thanks, Daniel in that for the color there, yes, I actually if I can sneak into more.
My next question is.
It is actually on the shareholder letter and I. Appreciate the color you gave on the strategic update at the beginning of the call.
There were a few proposals outlined in the shareholder letter including portfolio management.
Or divestiture of certain businesses. So my question is is that something that you would potentially.
Entertain and with CP, specifically is that something that you looked at or explored in the past.
If you could give any color there that would be much appreciated. Thanks, yes, good thanks to rising net.
I would say first of all let me say I appreciate all the shareholder feedback, we get and we still continue to see really candid enormous engagement with all their shareholders.
Not just the letter we received.
On this particular aspect of portfolio management I know several issues were right I would say that we continually evaluate a strategic footprint.
And we've done I think outfit.
Okay in the past to ensure that we've got the right portfolio and continue to have discussions with the board about what we think is the most appropriate investment opportunity for us so.
Thanks Jade.
Our next question comes from Michael Park with Baird. Your line is open.
<unk>.
On the gross margin understanding that mix is obviously a.
A major influence and ER.
Revenue from here is hard to call get all that but just.
Structurally has anything changed about your manufacturing platform Youre.
Gross margin potential versus say looking at 2018, and 2019 I heard on the call today.
Another comment about unfavorable manufacturing variances, so just want to understand as we.
As we model out into a quote normal future or more normal future next year and the year beyond are there any structural reasons why the gross margin can't approach.
Approach, what we saw the last couple of years, if if revenue mix were to normalize and epilepsy were to continue to recover.
Hi, Michael It's Alex I'll take this one.
The way to think about it is you know.
The fixed overhead.
Within our manufacturing facilities is dependent on.
This throughput.
So given the current situation and the reduced volumes running through our plants as we reduce our manufacturing bill on inventories to preserve working capital.
As well as just the overall impact of our sales velocity.
Essentially we are under absorbing that fixed overhead so as we think about moving forward.
We expect our business to rebound.
And that will will take care of itself.
Fair enough Alex maybe another one for you a lot of numbers in your release and it's early and I'm only halfway through my coffee, but.
So if I missed if if im screwing this one up but please forgive me, but in the non-GAAP reconciliation in the R&D line, there's a 10.7 million dollar item it looks like a cost and the GAAP numbers and it's pulled out.
Of the adjusted metrics I see a mention of contingent consideration remeasurement are those two tied together.
And if so can you unpack that for me a little more if not what is what is that adjustment in the R&D line.
Yes. This is this was related to our.
Our acquisitions.
And and alike.
And so on a quarterly basis, we re measure our assumptions arounds contingent considerations or earn out there.
They are dependent on the discount rates. So its kind of the accounting net mechanisms looking at the probabilities as well as the discount rates.
That that really drive that you're kind of accounting adjustments nothing nothing fundamental.
No real fundamental changes there in our in our cost structure.
I presume those since it is the cost on the P.
Now that it's a reflection of things are a little bit better right, you're absorbing the cost on a on a contingent liability.
Quarter over quarter. So is that is that an unfair way of looking at it I mean, you my experience with these is if you took out we took a big benefit thats because something has gone on favorable. This this would seem to imply that something at least relative to June 30 has.
Gotten a little bit better.
It's a deep discount discount rate change based on just kind of natural market reality and so that's that's all where it's an estimate and it tends to change if you've seen our prior quarters and we've had some ups and downs.
On that front so.
I'll just leave it at that.
Okay Fair enough last one here to mention about some upcoming communications about the various business lines and Damien I'm just curious what what what should we expect what might that look like in terms of events and or communications from livanova over.
Coming months sand or quarters.
So listen do you want to take that one.
Sure So Mike over the next few months will be holding a series of education event. Thanks.
Injunction with itself sell side, our first event scheduled for November nine and will be life support simplified how bad the advanced circulatory support will follow that with the education sessions in epilepsy depression, and heart failure, and so definitely more to come as we as we progress through the rest of this year and into next.
Here.
Great. Thanks, so much.
Thanks, Mike good.
Thank you. Our next question comes from Scott Bardo with Bamber Your line is open.
Yes, Thanks for taking my question, Hey, guys. Thanks for taking my questions.
Then I think you alluded to it a little bit here on the Neuromodulation side, but.
As I look at your performance in Neuromodulation in the second quarter.
It was down sharply broadly along with Cabot's Neuromodulation business I'm.
Im not business in the third quarter was broadly flat, but you'll still having some declines.
I guess it makes you. The question is is there any reason not to assume some pent up demand pull DNS.
Neuromodulation, such leading to if you like disproportionate growth in 2021.
Second question, please just relates to cash HM.
I think it was on the.
18 months ago. The group is guarding 490 200 million in operating cash and now we see a rather than they usually 10 2030 millions or sorry.
So as we look into Twentytwenty, one historic cash <unk> is that likely to be a reasonable proxy for 2020, one I'm more broadly so getting margins up on paying down the elevated back.
I'll leave it there and I had a couple of quick follow ups. Thanks.
Well, if you think firstly, let me say well broadly guy for 2021 in in February when we released the fourth quarter results.
In terms of epilepsy, you know what I'm, what I'm seeing I'm going I'm pleased to see the same do it sequentially improved their performance and we're saying it's sold at all Teladoc again, notwithstanding what people are saying about how markets are evolving with lyft cars, but and you know I would like to say that you know the other opportune.
City sports here to continue to focus on this pent up into service so that regardless of.
Hi, 29 pain levels, the recruiting or not what we believe is that we're going to continue to focus on driving sequential improvement. There's two aspects to that one is the npis and one at the end of service into service I've already commented on Npis to the other thing that we've talked about a little bit more recently is how were trying to.
I'd go to market strategy in the U.S. to be more a lot more aggressive with their engagement with CE CE, who have lots to see every population. So our intent is to continue to focus there with that key account management, the MSL and engaging with clinical evidence discussions and patient educators. So.
We're looking forward to the group to continuing to execute on that and as I said, we'll talk more broadly about 2021 in the new year you want if you want to talk about cash sure sure. So Scott if you recall in the second quarter.
Earnings announcement, we tightened up our definition of free cash flow.
What we're trying to make it easier for you guys to kind of follow you know the free cash flow metric for us It really reflects the operating activities less investing activities in the sand just really excluding.
The phase one time extraordinary adjustments for free T. litigation and any benefits from the current tax stimulus and 2019 is under the old yes, yes.
Okay. Thanks.
And maybe that's a part of that question, which I'm just like you to hit please which is you brought attitudes to improving profitability and paying down debt if you could.
To talk to that plays out would be helpful and maybe just real quick can we have an update on some of your base business pipeline developments, the Polaris and the new.
Excuse me a movie and this divorce or and lastly, what's I appreciate I'm, having some education events.
We have a oh God you frame look out in the market, which appears somewhat outdated what are the broader thought so given your eye a new medium term garden too. Thanks.
So a few things brought attitude operating excellence and all the eggs.
Fit but uses of dice that language.
Our intention is to be more focused on that and to drive operating expense reductions in both equity and I couldn't be more prudent with Iran thing and you've seen the lines in the last two quarters being more disciplined in that respect so you.
Our intention is to you know I can't.
The more prudent there secondly, you know generate more cash and lastly, you know look at out around Apple program, Iran, cash preservation and appropriate application of that but we do intend and would like to pay down this debt. So that we get back to a more normalized ratio.
Are there and again, we talked about what that looks like in the past.
Secondly, bike business pipeline you know we have two major internal programs. Excluding the the trials. One is a large program I continue to expect that next generation heart lung machine to commence rollout and 2022 as we mentioned in the last call we were impacted by co, but but importantly by.
Number of suppliers and their engagement with us around the software development. So.
We're very pleased with how that program is progressing and again, we'll update on those.
Those programs as we as we double that whole along that pathway there and next generation since Eva there's multiple aspects to this one is the I.P.J. and we're continuing to work on that and expect that to be rolling out in 2022, yes.
The thing that we mentioned that the attachment and important to that digital epilepsy initiatives.
Those have other aspects to the program that we've talked probably less of that but the development of our FC patients at and the clinician FC hub App are important aspects of that whole program and we think very focused on that in this current world being able to provide information and guidance as Tyson.
And I was pleased with how that started to roll out and we'll update that in one of our investor call you want to talk about sure I'm, the Investor Day, Scott its Matt.
We're planning an investor day in 2020, we had you know to date pick the site take everyone's Covidien, we decided to push it out I know a couple of companies have done virtual they seem to have gone pretty well, but our thought was that we would roll them into 2021 and were actively looking right now at.
To date in the state, but that's our that's our expectation for 2021.
Okay. Thanks, guys.
Thank you. Our next question comes from Matt Taylor with you, but yes. Your line is open.
Hi, Thank you for taking my question.
Hi, there.
I wanted to just clarify I'm confused by the cash flow guidance on a GAAP basis, you're you're minus 150 year to date and then your your for your forecasting 10 to 30 for the years that implies.
A huge step up in Q4, but I guess, you're excluding litigation posted adjusted cash flow is that correct. So it's minus 25 to get to the Q4 can you just help us with that that bridge because it implies a big step up.
Non-GAAP basis.
It's just that that's correct. So we are excluding litigation settlements.
Under the revised definition.
And then so you know as we look at Q4 this that our cash improvement cash generation improvement is going to be driven by obviously our profit our profits which are in improving in Q4 as well as continuing to drive our working capital down.
[laughter].
Okay that makes that makes more sense. Thank you.
And then just on the strategic review that you're talking about here, Yes, I'd love your thoughts on you know reflecting on the last several years with the merger.
In the different businesses, how much synergies do you see between good could you separate them do you think that they could operate on a standalone basis nearly as efficiently as you do together or do you really see a lot of strategic rationale to keeping all these businesses together.
Yes, that's a great question and I would say this is a part of the discussions we have with the board I think the important thing is to look at the fact that we have the two compelling platforms you know, but both of those businesses have I think untapped potential and what we're working towards is ensuring both of them are set up to be idle.
To deliver on that potential you know I'm not going to get into a you know should we separate right not separate I think the important thing is ensuring that focuses on exploring.
Exploring the ways. They can grow exploring the wife pipeline can develop and we can work towards making sure that they are improving their operating oh.
Got it and both of those businesses I think still have plenty of room to grow.
Got you okay. Thanks, a lot David [noise].
Hey, Matt.
Thank you. Our next question comes from Mike Matson with Needham Your line is open.
Yeah, Hi, Damian and Alec this is David taxing on for Mike. Thanks for taking my question.
Hi, a couple yeah, Hey, just a couple one on to lead clinical programs first one on recover can you update us on how many patients you have enrolled in the union pour in bipolar cohorts I think Q 50, and 150, we're milestones.
For interim analysis, so any any color on you know where you are now and when do you expect to get to those levels.
Yeah that you're spot on and I. You know you are one of the people who I know Scott a detailed view of that too. So I think you're right to 50 in the unit holder on 150 into bipolar yeah. It's the milestone where we can take a look at the first the first <unk> review of that data, we expect at least one of those items.
To make the milestones in two whites 21, or both are enrolling we continue to target enrollment of 250 between both arms by mid 21 and.
And then once we get to that we'll start looking at the daughter and you know that we believe that there is a significant power in many in the study and so once we get to those milestones will be able to start looking at separation I don't know if you want to add anything more no. That's that's spot on exactly what I was told.
Okay, Great and then another one on on clinical stuck on and then I think you said you're out to 50 and I think you can get a functional <unk> label at 300, and you said first quarter 21, so how longer long after the 300 patient is enrolled.
Do you expect to get that label.
Sure Mike its Matt So I 300 patients essentially once we follow them up for nine months that is the data we can submit to the FDA. We obviously have to review with a little bit of time. After that so you know at 310 o'clock essentially starts for the follow up on the other caveat to that it should not be an issue at all.
We also have to have enrolled 200 patients before we submit but looking at the cadence in the nine months you know, it's actually go hand in hand, with the 300, so essentially add you know but.
Probably nine months to a year to the a 300 patient enrollment milestone and then you'll get an idea of when we'd be ready to submit to the FDA I think whats exciting is the current discussions going on in the U.S. with that see a mix breaching that you know what what is normally a very long.
Bridge between approval and reimbursement with that four year time window for products that a designated breakthrough and we do have expedited access pathway breakthrough approval for this product. So we think that this is a hugely encouraging sign from CMS and the FDIC collaborating.
Okay. Thanks, and sorry, just another one on recover is is the the flip to a registry 12 month. After you hit the 250 150 or is that independent.
There's two enrollment milestones.
No. That's what you need that that's got to be able to flip the registry. So that's why we're saying like 22 early 23, depending on you know CMS is reviewed as we've said before there's no time boundless execute requirements, but we know we're we've been working well with them in terms.
With that relationship on this whole study and defining the milestones that would constitute a flip the registry. So you know again, we're continuing to target that like 22 early 23, depending on the review right and like the you know the primary endpoint there that for the registry conversion. This time in response.
It's a 12 month endpoint spacing. So you know could be less than 12 months, depending on how well the patients doing during their during their 12 month. So if you look at you know when we're talking about getting to 250 and getting to 150 and when we plan is to me, there's a little bit of a lag there because obviously you know the odds of hitting exactly at 250 pay.
Since with the follow up is low not physically impossible that low. So you can kind of back into you know how we think about the the timing of each patient follow up in the trial.
Great I appreciate it and thank you.
Thanks, that's it.
Thank you and I'm showing no further questions in the queue I'd like to turn the call back to management for any closing remarks.
Well, thank you Catherine and thank you everyone for joining US today, we look forward to updating or we're going to drive top and continue our progress and delivering on our commitments. We believe that improving the lives of patients around the world and driving shareholder value is an important mission and we'll look forward to updating you on our next.
Cool and I'd, just like again to thank you all for your engagement and support it with another thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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