Q2 2022 LivaNova PLC Earnings Call
Thank you, Matt and thank you to everyone for joining us and welcome to our conference call for the second quarter of 2022.
I'll start by discussing our second quarter revenue results and reviewing our strategic portfolio initiatives.
After my comments, Alex will provide additional details on our results and recent financing activities and an updated outlook.
I will wrap up with closing comments before moving onto Q&A.
In the quarter, we achieved 7% revenue growth excluding heartfelt.
This was driven by year over year growth in cardiopulmonary and neuromuscular mission.
Advanced circulatory support was unfavorably impacted by a significant decline in severe COVID-19 cases and hospital staffing challenges.
Now turning to segment results.
For the cardiac pulmonary segment revenue was $126 million, an increase of 14% versus the second quarter of 2021.
Oxygenator sales grew in the mid teens, driven by continued procedure volume recovery.
Heart lung machine sales increased in the mid teens led by growth in the rest of world and U S regions.
We're particularly pleased with the way the international team is driving results through the application delivered another business system to execute commercially.
We now expect cardiopulmonary revenue to grow 6% to 8% for the full year.
This range considers the strong first half performance and continued demand for the S. Five HL in particularly in the rest of World region.
Epilepsy revenue increased 3% versus the second quarter of 2021, driven by Europe and rest of world regions in the U S favorable pricing was partially offset by lower implant volumes.
Year over year comparisons were especially difficult given that implant volumes in the second quarter last year were the highest since the pandemic onset.
Procedures continued to be impacted by hospital staffing challenges and Covid related postponements.
U S epilepsy revenue was flat year over year with total implants down in the mid single digits.
On a sequential basis total implant growth increased in the high single digits driven by replacements.
U S. Epilepsy results continued to be led by our go to market initiatives, which currently encompasses 14 dedicated CEC teams.
These teams accounted for 21% of U S revenue in the quarter as compared to 20% on a same account basis during the prior year.
This key commercial strategy continues to deliver absolute revenue and implant growth as well as relative growth above the baseline business.
Epilepsy revenue in Europe grew 7% versus prior year, primarily led by improved commercial execution on NPI in France and Germany.
The rest of World region achieved 19% growth led by Brazil, Japan and Taiwan.
For the full year, we continue to expect global epilepsy revenue to grow 5% to 7%.
Our forecast includes sequential growth in new patient implants through the remainder of the year as we expect healthcare staffing challenges to gradually improve.
In addition, we anticipate a continued tailwind in replacement implants related to the backlog created during the pandemic.
We're pleased with the progress of the go to market initiative and plan to add two additional dedicated teams in the second half.
Ics revenue was $9 million in the quarter, representing a decrease of 29% from the second quarter of 2021.
Results were primarily impacted by a reduction in severe Covid cases, and continued hospital staffing channel challenge is leading to lower procedure volumes versus the prior year period.
Our field data suggested Icf's case volumes related to Covid declined nearly 80% year over year as fewer hospitalized patients progressed to the severity that required ecmo therapy.
Notably Ics non Covid case volumes increased in the mid teens year over year, driven by account acquisition.
For the full year 2022, we now expect Ics revenue to be down in the mid to high teens.
Forecast has been updated to reflect that further decline in COVID-19 related cases and assumes sequential growth in non COVID-19 cases.
We believe this business will return to double digit growth in 2023 and beyond.
A positive step towards this goal was achieved on Monday, the U S centers for Medicare and Medicaid approved a new technology add on payment or <unk> for our hemo lung respiratory assist system for in patient.
The <unk> designation is awarded to novel Medical technologies and services supported by clinical evidence that are expected to substantially improve the diagnosis or treatment of Medicare beneficiaries.
It will go into effect October one 2022.
As a reminder, our heart valve business was divested on June one of last year and heartfelt revenue for the second quarter of 2021 was $15 million.
Now turning to our strategic portfolio initiatives.
<unk> revenue for the second quarter was $1 8 million.
For 2022, we now anticipate DTD revenue of approximately $9 million.
The recover study continues to maintain momentum the randomized controlled study is designed with frequent interim analyses by cohort that will assess predictive probability of success has been reached if the study should continue.
As stated previously we believe a series of interim analyses is likely needed as we collect patient follow up data over time.
Our interim analyses for the unipolar cohort to date have confirmed the study's continuation with the next interim look at 350 patients which is expected this month.
We still anticipate the transition to the prospective longitudinal study for the unipolar cohort in late 'twenty, two or early 2023.
In heart failure, the anthem <unk> U S pivotal trial continues to advance.
The independent Statistical analysis Committee will conduct an interim analysis. After the 500 patient is enrolled.
Which we anticipate in the fourth quarter.
If all pre specified conditions, including safety a trend towards primary endpoint and success in the three functional end points, we would expect to submit the functional data to the FDA.
Moving to OSA. The Osprey trial continues to progress all 2000 study sites are active the majority of which are recruiting patients.
We still assume submission for FDA approval to occur in the latter half of 2023.
With a decision anticipated in 2024.
Before turning the call over to Alex I wanted to provide a brief comment on the Snia litigation.
The Supreme Court hearing has been scheduled for October five to review the appeals of liability and damages and we anticipate a decision in the first half of 2023.
And with that I'll turn the call over to Alex. Thanks, Damien during my portion of the call I'll share a brief recap.
Our second quarter results and provide commentary on the full year 2022 outlook.
Turning to results revenue in the quarter was $254 million, a 7% increase versus 2021, excluding heart valves.
Foreign exchange had an unfavorable year over year impact of approximately $12 million or 5%.
Adjusted gross margin as a percent of net revenue was 69% which was in line with the second quarter of 2021.
Adjusted gross margin was favorably impacted by the divestiture of heart valves offset by product and geographic mix combined with inflation.
Adjusted R&D expense in the second quarter was $42 million compared to $44 million in the second quarter of 2021.
R&D as a percent of net revenue was 16, 4% in line with the second quarter of 2021.
Yes.
Adjusted SG&A expense for the second quarter was $101 million compared.
Compared to $102 million in the second quarter of 2021.
SG&A as a percent of net revenue was 39, 8% up from 38, 4% in the second quarter of 2021.
The increase was driven by higher freight costs and the acquisition of Elan.
Yeah.
Adjusted operating income was $33 million.
Compared to $38 million in the second quarter of last year.
Adjusted operating income was 13% down from 14% for the second quarter of 2021 as.
As a result of product and geographic revenue mix and supply chain pressures, including inflation.
Adjusted effective tax rate in the quarter was 5%.
Compared to 14% in the second quarter of 2021.
The lower tax rate is attributable to changes in discrete items and geographic income mix.
For the full year, we now expect a tax rate range of 7% to 8%.
Diluted earnings per share was <unk> 53.
<unk> to 50.
In the second quarter of 2021.
Our cash balance at June 30 was $407 million in.
Including $298 million of restricted cash held as collateral for the Snia litigation guarantee.
Up from $208 million at year end 2021.
Total debt at June 30 was $466 million.
Up from $240 million at year end 2021.
The increase primarily relates to the bridge facility entered into in February .
The bridge facility was repaid and replaced.
By the $350 million term loan facility that we executed in July .
Adjusted free cash flow for the quarter was negative $14 million as.
As compared to the second quarter of 2021.
Free cash flow was unfavorably impacted by lower cash flow from operating activities, reflecting inflation foreign exchange and inventory builds.
Mitigate supply chain risk.
Also second quarter is one lever notebook page short term incentive compensation.
For 2022 pay off reflects higher performance in 2021 relative to 2020.
Capital investments were $11 million in the first half compared to $15 million in the first half of 2021.
Now turning to our 2022 outlook.
Based on our revenue performance in the first half of the year and including continued supply chain challenges the inflationary environment and.
And anticipated foreign currency headwinds, we are updating our full year outlook.
We now expect constant currency revenue growth between 4% to 6% excluding heart valves.
And adjusted EPS range of $2 25.
To $2 45.
And an adjusted free cash flow range of $60 million to $80 million.
Our outlook now assumes a 4% to 5% revenue.
And approximately 35.
EPS headwind from exchange rates.
With that I'll turn the call back over to Damien.
Thanks, Alex.
Operationally the second quarter performance illustrates the underlying strength of our diverse portfolio in light of challenging macroeconomic factors.
Our updated full year outlook reflects our commitment to drive the top line growth and delivering differentiated products and therapies to patients while we try to navigate a dynamic external environment.
Our emphasis on the strategic triangle underpinned by the living over business system positions us to drive long term shareholder value.
And with that Melissa we are open to questions.
If you would like to ask a question you can press. The Star then the number one key on your Touchtone telephone. If your question has already been answered or you wish to remove yourself from the queue. Please press the star.
<unk> followed by <unk>.
As we enter the Q&A session. Please limit yourself to one question and one follow up and then return to the key.
Just to follow up.
Okay.
We'll be taking our first question today.
Michael Pollock.
Wolfe research.
AVG.
Hey, good morning, Thank you for taking the questions.
Maybe starting them I'm curious on Acs looking at the updated guidance. The revenue ramp there is implied to the revenue there is implied to pick back up sequentially. So can you walk us through the <unk>.
And takes of how you get there what gives you confidence that after a couple of quarters of sequential erosion due to.
Case mix evolving away from Covid patients that.
That business is going to be back on.
Our growth trajectory in the second half.
Sure Mike its Matt.
Well if you so for Acs what's.
What's changed from Q2 to Q1 as the Covid procedures dropped even more in Q2 and that's why when we look at the full year. We now assume as Damian said, an 80% drop in procedures and you know last year that was a pretty big chunk of the mix, but if you look at the second half we do think there will be some improvement in staffing.
And for ACS, It's a very complex procedure to set up there's a lot of monitoring. So you have to have staff around if youre going to put someone on ecmo because they could be on it for multiple days. So that is one part of our thesis. The other part is we did expand the sales force last year and that does take time six to nine.
Nine months generally to see some.
Some growth in their performance. So those are the two primary drivers overall and as Damien also highlighted the cardiac side of the business not the respiratory side.
Has continued to grow so that's also going to help in the back half.
Under pressure and you guys have been kind enough to provide very specific insights on timing of enrollment there and the Uni polar arm.
Damian you mentioned in your prepared remark next interim analysis is expected this month.
Curious have you have you reached 350 patients yet or is that expected.
And the next week or two.
How close are you is the question.
It's pretty imminent and that's why we're saying we'll have the readout by the end of the month.
Okay.
Thank you and last one for Alex just to confirm in the in the updated EPS guidance as the.
The new term loan that replaced the bridge is the interest cost from that still excluded from the adjusted EPS outlook.
That's right Mike.
Said before.
Treating this term loan as sort of an extraordinary item.
It's related to the Snia litigation, which.
Is in fact, an extraordinary item so.
Until.
The liability is clarified.
We are going to continue to treat it as such.
Once we know about the outcome of the hearing we will it will either become part of our permanent.
Capital structure, or perhaps be repaid or redeployed.
Yeah.
Thank you so much.
Thanks, Mike.
Yeah.
Thank you, Mike who will take our next question today from Rick Wise of Stifel.
Thank you very much good morning Damian.
I guess.
Sure My question start with.
Cover as well.
Encouraging.
Got it look will be let's say this month.
Thanks.
Maybe it would be.
It's always good to hear actually from you about next one.
One how will you communicate too.
What are the.
Your current expectations for the timing of.
CMS response timing shift.
The shift to registry.
The data presentation any updated thoughts that you'd want to share along that line. Thank you.
Thanks, Rick Hi, welcome and thanks for making time for us.
We're pleased with how the team is progressing here the enrollment is continuing well.
The non Medicaid Medicare patient mix has been really good we had a bit of a burst of non Medicare patients in.
In the quarter, which help them get closer to the $3 50, and so we're still progressing to this transition to registry late 'twenty. Two early 2023 as you know <unk> is 500 patients.
And the probability assessment start being able to kick in somewhere in that sort of $3 25, $3 75 range.
So.
The fact, though is still powered to run to 500 patients. So we're hopeful that we get a signal earlier than that but we are progressing with the assumption that if we have to we'll run through the full 500.
The team have really done a great job in terms of the work for the whole.
So a patient.
To move quickly to the registry.
Once we do get the signal and I think we've got a good workflow there that we've communicated with the clinics. The other thing. They have also started to do is work on the shell of the paper for submission that's a very key step.
Because not only do we have to get the data, but we have to have it published for submission to CMS. So the team I think are doing really tremendous work in terms of the parallel preparation both the move to registry with patients then the move to submit the paper as quickly as possible and the selection of a journal is also imminent.
So I'm really pleased with how we're progressing there then our focus will of course tuned to the bipolar.
And thats recruiting slower, but again because all of our energy has been really on the Uni polar and as I've said before I view. The bipolar is sort of an indication expansion if you will for <unk>.
So the whole application of this therapy, so it's progressing well on unipolar and then as I said bipolar will be next.
Yes, so Rick on the timing as we said shifts the registry late this year early next year, we have to follow up every patient for a year or so a year to when we would actually get the data add in about two to three months for the analysis and then to Damien's point, we have to submit it to a major journal for publication.
Up to six months for that then it's in Cms's hands for the final decision, which could be anywhere from six months to a year. So none of that's changed.
Okay. That's great that's a great rundown. Thank you.
Turning to your assumptions for 'twenty, two and for the rest of the year got shot here. We are in the third week of.
The second quarter earnings season, then.
It's no shock currency.
Geographic challenges inflation supply chain et cetera.
Our factor.
My question is when I think about or maybe you could give us a little more color.
As you give us this new revenue guidance range I appreciate a lot of moving pieces, there, but as you think about it.
Are you comfortable.
Having this being in the middle of the range or maybe talk us through what pushes you to the lower end.
Or the upper end.
And Youre thinking and just I'm, sorry, I'm, just rattling on I can't help myself.
I'd like to say that Matt made me promise to ask about 2023 guidance, but I wouldn't I wouldn't want to say that.
Next slide.
Next question.
But maybe you could give us some early thinking is we are going to have to reframe our model.
Where would you hope.
What would you hope based on what you know now as you.
Think about contemplate the setup for 2003 I noticed a lot in there I apologize.
Yes so.
Rick I'll start out with E on as far as the revenue.
Guide we're comfortable.
In sort of.
The mid point.
Of our range.
Phil.
We.
We've seen sort of the strong performance from the cardiopulmonary business in the first half.
Which gives us confidence that we can achieve.
This guide.
With.
With epilepsy, where we still believe that we can achieve.
5% to 7% growth range. So midpoint is a good place to be.
In Acs.
When we talked about that already.
If you sort of look below below the line, we still expect our gross margin to improve by about 100 basis points relative to <unk>.
2021.
We now assume a higher mix of cardiopulmonary sales, which carry a lower margin profile relative to the rest of the fleet.
We continue to anticipate input costs.
Raw materials and labor.
To continue to be at sort of high watermark.
We're partially offsetting that with manufacturing efficiencies and select pricing actions.
But it will take time to kind of read through the results.
As far as.
SG&A is concern.
We expect it to be higher.
Just due to continued inflation and this is all primarily driven by freight costs freight costs have been skyrocketing and.
Well, we can share some stats with you when we have our one on one call but.
That's the primary driver there.
With with regard to.
The foreign exchange impact.
As I stated.
4% to 5% headwind from a top line perspective.
35 impact on operating income.
So.
Feel pretty good about this guide we think it's sensible.
And I would say Rick.
To your point, we're not giving 2023 guidance yet, but you can do the math on foreign exchange current rates, obviously carrying into next year and then like a lot of other companies have talked about the inflationary pressure, it's hard to know exactly when that lightens up but there is obviously some risk that goes into 2023 as well.
Thank you very much.
Thanks, Rick Thank you.
Our next question today comes from Mike Matson of Needham Mike. Please go ahead.
Yes, thanks for taking my questions.
First with the.
30.
Guidance reduction kind of at the midpoint can you maybe break that into components between currency inflation in the product geographic mix issue.
Thanks for your question, Mike, it's equal part sort of inflationary impact and in currencies like I said.
The current both currency and inflation are.
Significantly impacting the guide we're able to offset.
<unk> portion of that partially with efficiencies and pricing actions.
As well as our lower tax rate.
Okay got it.
And then I didn't hear anything about the new heart lung machine that some.
Can you give us some update on launch timing, there or is that being affected at all by the supply chain issues.
How does that factor into the guidance you've given for cardiopulmonary you guys.
No impact on the supply chain issues.
We're seeing.
We are essentially.
Roughly I would say roughly a quarter delayed so we still expect.
Sure.
A limited commercial release at the end of this year with the full commercial release early.
In Q1.
Okay. Thanks, and then just a quick one on recover you still plan to put out an 8-K within a few days of knowing something about the from the interim analysis beyond like just pay continue to enroll right.
Yes, Mike.
The case within four days, we would put out the 8-K, we believe it's a material event and a lot of people are interested so we would put out something within the four days.
Okay got it thank you.
Cheers.
Thank you Mike. Our next question today comes from Adam Nature of Piper Sandler.
Your line is now open.
Hi, Good morning, Thank you for taking the questions.
Maybe just to start would love some additional color on how youre thinking about.
The outlook here for the back half of the year, obviously recognize yet.
Updated full year guidance, but I'm asking about phasing for kind of Q3 and Q4, just any incremental color that you can provide on and puts and takes would be much. Appreciate it and then I had a follow up.
Yeah, Adam. Thanks, So Q3 is typically our sort of the lower Rev.
<unk> revenue quarter simply because of the holiday season, So that's kind of the normal seasonality.
<unk>.
With regard to our sort of phasing of gross margins, we're going to expect to see some.
Some improvement in more sort of on the back end of the second half.
And then as far as SG&A, where opex is concerned.
We're kind of on a normal run rate of about.
$140 million.
Combined R&D and SG&A for.
For each of the quarters.
Okay. That's helpful. Alex I appreciate that and then for the follow up.
Wanted to try and deconstruct the epilepsy guidance, I think thats, 5% to 7%.
Year over year can you just talked about what's embedded for NPI versus replacements kind of what those latest trends look like.
And then how you think about those progressing, especially in the U S market. Thanks again for taking the questions.
Sure Adam it's Matt so in the first half based on the comments you can see that.
Replacements continue to outpace new patients, we think that the gap will close in the back half, we expect new patients to improve sequentially in the third and fourth quarter, we still expect replacements to be strong the comps are tough, but we still think we have about 550 patients in backlog so I.
Would say that still assume replacements, maybe grow a bit a bit faster, but we should see a nice improvement in the new patients and that's in the guidance.
That's helpful. Thank you.
Thanks, Adam Thank you Oswald our next.
Next question today comes from Amit <unk>.
Of Goldman Sachs.
Chi.
Thanks. This is Phil on for me that I'm, hoping to probably just pull out a few more of these starts that have already been touched on maybe.
Maybe first for Alex trying to understand and decompose that currency impact dropping down.
I think you started the year.
1% headwind to top line can you remind us or give us sort of an incremental how about it.
That dropped through to start the year has changed basically what a point of topline FX headwind means in terms of operating income.
In EPS terms.
To your question, we started the year, yes, we expected a currency headwind of about 1% we thought we could.
Cover that with with all of our efficiency gains throughout the P&L and we're sort of at that level, we're kind of naturally hedged.
What we're seeing is our international revenue is sort of trending on the higher end. So that obviously has a higher level of exposure from a currency perspective, both from a topline and bottomline.
So we when we guided in May.
At 2% to 3% impact we thought we were still kind of in that.
I don't know 20 to 25 cents impact, which we thought we could cover with the favorable tax rate.
It's now sort of heading down another 100 to 150 basis points.
In an unfavorable direction, so we think that.
We're sort of at a point, where we can cover any more within our operational P&L and hence the change in the guide.
Okay.
Okay. So it sounds like it's kind of non linear once we start to get to these outer band. So if we saw another point of FX headwind to come through.
Roughly speaking how incremental would that be probably to the P&L another 15 cents.
Yes approximately.
Okay. That's really helpful and then circling back to the last question on epilepsy.
Hoping to dig just a little bit more into kind of the monthly dynamics and understand kind of how COVID-19 has been impacting new patients or even replacement scheduling.
Understand kind of June and maybe July dynamics, if you could give us a little bit of flavor.
Sure Phil So you remember at your conferences last time, we gave an update on the trends and we said April look good may look good June did slow a little bit and I think you've heard with a lot of us.
Other companies there was a little bit more of a an increase in staffing issues from from omicron.
And we saw that as well July .
Has improved a bit in terms of implant. So so far so good this quarter.
Overall.
Okay. That's helpful. Thanks, I'll jump back in queue.
Thank you. Our next question today comes from Zach <unk> of Jefferies. Please go ahead.
Hey, everyone. Thanks.
And congrats Brian on the new role.
I just wanted to touch on the heart lung machine replacement cycle.
Are you thinking about growth from that.
Central margin impact being driven by that.
Sure Zach.
I'll take this one yeah. So the heart lung machine, we expect to.
Launch, it's broadly commercially in Europe .
And then followed by the U S in Q1 of.
Of 2023.
That is going to be a premium priced product.
So that will have been a positive impact on gross margins.
With.
What was the was the other part of the question I'm trying to remember.
That was it.
The launch pricing and the margin impact.
That's helpful. Thanks, that's.
That's all I had.
Thanks, Zack Thank you Zach will take our next question today from Anthony <unk> with Mizuho Anthony <unk>.
Thanks, I have one question for Alex on guidance and then a follow up on on recover.
On the new EPS Guide just wondering if a plant in Germany and in other med Tech.
Competitor out there spoke about an unscheduled shutdown in Germany due to energy shortages and so I'm just wondering looking into the second half.
If gasoline imports were to be further compressed out of Russia into Germany.
Is that baked into the second half guidance.
Are there any offsets that the company is working on.
And then secondly on on recover just an update on treatment duration. Just wondering what is the target for how many of the patients later this month.
Of the 300 plus expected to be enrolled.
<unk>.
B will have treatment.
12 months thanks.
So just on Germany, we haven't seen the headwinds that other one that was reported in terms of disrupting production.
Biggest issues in Germany as they are in Italy, just around the supply chain in terms of delivery spot.
As we have done a great job I think with that whole team in terms of giving supply has been a long range forecast our review cycle of inventory has increased.
Our visibility to inventory.
And the German plant in particular has really increased that we've taken.
Program that we introduced first and in Houston called plan for every part.
And we replicated that in in Munich, <unk> is a very interesting thing because the bill of materials, but NHL limits like 7900, Skus. So using that plan for every part methodology. There has been much more complex to introduce but it's certainly giving us much more visibility.
On kanban cut ins.
And they've done a continental and reducing freight costs. So overall I think this group has really taken a lot of steps to work forward into what they've been facing.
Don't expect.
What we're seeing so far any of the issues that have been talked about with respect to like diesel fuel.
With respect to recover.
I wanted to understand what you're really looking for here is what's the pace of the recruiting the follow up no. How many patients by the end of the month, we will have been treated actively treated with neuro stimulation close to 12 months at that time of the analysis.
In other words, I'm asking on duration of treatment effect right.
Right right. So we haven't given yet.
As a percent of hit 12 months, but what we can tell you is that for the 350, the average will be a little over eight months and thats.
Important and the fact, if you look at all the prior data Arenson and other studies, we've done that have gone out to a year you really start to see separation at six so we're now getting into the sweet spot of when we should start to see the controlling therapy arm separate.
Thanks again.
Thanks, Anthony and congrats on the new gig.
Thank you.
Thank you Anthony that was our last question today, So I'll now hand back to Damien Mcdonald for any closing remarks.
Well. Thank you everyone and we appreciate you joining us for our call today on behalf of the entire team. We appreciate your support and we look forward to updating you on our Q3 results. Thank you.
Thank you. This concludes the call today you may now disconnect your lines.
Okay.