Q3 2022 LivaNova PLC Earnings Call
Good day, ladies and gentlemen, and welcome to the live and know the plc third quarter 2022 earnings Conference call. My name is Charlene I'll be coordinator for today's call.
You'll have the opportunity to ask a question at the end of the presentation. Maybe lots you Register your question. Please press star followed by one on your telephone keypad.
As a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Mr. Matthew Dodds <unk> Senior Vice President of corporate development. Please go ahead Sir.
Thank you Charlie and welcome to our conference call and webcast discussing <unk> financial results for the third quarter of 2020 to join.
Joining me on today's call are Jamie Macdonald, our Chief Executive Officer, Alex <unk>, Our Chief Financial Officer, and Briana Gotland Director of Investor Relations before we begin I would like to remind you that the discussions during this call will include forward looking statements back.
Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the SEC, including today's press release that is available on our website we.
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 directly comparable GAAP financial measures can be found in today's press release, which is available.
On our website.
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 investors section of our website under news <unk> events and presentations.
At Investor Dot, leaving Dot com.
With that I will now turn the call over to Damien.
Thank you, Matt and thank you to everyone for joining US welcome to our conference call for the third quarter of 2022.
I'll start by discussing our third quarter results and reviewing our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results.
I'll wrap up with closing comments before moving on to Q&A.
In the quarter, we achieved 5% revenue growth, reflecting solid execution and neuromodulation in cardiopulmonary.
Advanced circulatory support remains on fiber will be impacted by a significant decline in severe COVID-19 cases in hospital related challenges.
More broadly as a company, we continue to navigate the macro headwinds, including supply chain inflation and foreign exchange volatility.
Now turning to segment results.
For the Cardiopulmonary segment revenue was $121 million, an increase of 7% versus the third quarter of 2021.
Oxygenate, our revenue grew in the high single digits, driven by continued procedure volume recovery.
Heart lung machine revenue increased in the mid single digits led by growth in the rest of World region.
We now expect cardiopulmonary revenue to grow 8% to 10% for the full year.
This range considers the strong performance in the first nine months of the year and continued demand for the S. Five HLA in particularly in the rest of World region.
Epilepsy revenue increased 11% versus the third quarter of 2021 with growth across all three regions. This performance was primarily driven by replacement implants, as well as improving market dynamics and focused commercial strategy.
U S epilepsy revenue increased 9% year over year with total implants up mid single digits with price contributing the balance.
Similar to prior quarter trends total implant growth was driven by replacements, which continued to benefit from a catch up in procedures deferred due to COVID-19 related challenges.
Additionally, both new patients and replacement implants improved sequentially.
U S. Epilepsy results continued to be supported by a go to market initiatives, which currently encompasses 14 dedicated CEC teams. These teams accounted for 22% of U S implants in the quarter as compared to 20% on a same account basis during the prior year.
This key commercial strategy continues to deliver implant growth above the baseline business.
Epilepsy revenue in Europe grew 6% versus prior year, primarily led by the Nordic region as acute pandemic impact softened.
The rest of World region achieved 28% growth led by Brazil.
For the full year, we now expect global epilepsy revenue to grow 6% to 8%.
Forecast includes sequential growth in new patient implants in the fourth quarter as we expect healthcare related challenges to modestly 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 initiatives and plan to add two additional dedicated teams in the fourth quarter.
ACS revenue was $9 million in the quarter, representing a decrease of 44% from the third quarter of 2021.
Results were impacted by continued reduction in severe Covid cases hospital related challenges and product mix.
I feel data suggests Acs case volumes related to COVID-19 declined more than 90% year over year as fewer hospitalized patients progressed to a severity that required ecmo therapy.
Notably Acs non Covid case volumes increased more than 20% year over year.
Results in the quarter were modestly impacted by a field action relating to the livestock control up.
Before turning to the Ics outlook I wanted to provide a brief update on the field action and related class one recall.
In July we notified customers regarding modifications, we made to the operations menu for the livestock controller.
This address situations during which certain uses were incorrectly stopping the pump in response to a screen error message.
At the end of September the FDA classify this as a class one recall.
Importantly, the FDA is not requiring that we remove the product from the field and the devices considered for use when used in accordance with the operations menu.
Patient safety is our top priority and before year end, we expect to release a software upgrade to address the screen error message.
Now turning to our revised outlook for the Acs business.
For the full year 2022, we now expect Acs revenue to be down approximately 30%.
Forecast has been updated to reflect a disappointing third quarter results and the impact of the FDA recall.
Turning now to our strategic portfolio initiatives.
CTV revenue for the third quarter was $2 1 million.
And for 2022, we are now anticipate DTD revenue of approximately $8 million.
The recover study continues to advance the randomized controlled study is designed with frequent interim analyses that will assess if predictive probability of success has been reached.
If the study should continue enrolling.
As stated previously we believe a series of interim analysis is likely needed as we collect patient follow up data over time.
Our interim analysis for the unipolar cohort to date have confirmed the study's continuation with.
With the next interim look at 400 patients expected by the end of this month.
We still anticipate the transition to the prospective longitudinal study for the unipolar cohort in late 2022 or early 2023.
Yes.
In heart failure, the anthem have risked U S. Pivotal trial continues to advance the.
The independent Statistical analysis Committee will conduct the next interim analysis. After the 500 patient is enrolled which we anticipate will occur in the fourth quarter with a readout early in the first quarter of 2023.
If the all pre specified conditions are met including safety a trend towards the primary composite endpoint.
Success in the three functional endpoints, we would expect to submit the functional data to the FDA.
Moving to OSA. The Osprey trial continues to progress all 20 study sites are active and recruiting patients we still assume submission for FDA approval to occur in the latter half of 'twenty three with the decision anticipated in 2024.
Finally, I wanted to provide a brief update on the <unk> litigation.
As planned the Supreme Court hearing took place on October 5th regarding 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 Damian.
During my portion of the call I'll share a brief recap of the third quarter results and provide commentary on our full year 2022 outlook.
Turning to results revenue in the quarter was $253 million, a 5% increase versus 2021.
Foreign exchange had an unfavorable year over year impact of approximately $14 million or 5% of revenue.
Adjusted gross margin as a percent of net revenue was 70% which was in line with third quarter of 2021.
Adjusted gross margin was favorably impacted by product mix offset by supply chain challenges and inflationary pressures.
Adjusted R&D expense in the third quarter was $42 million compared to $37 million in the third quarter of 2021.
R&D as a percent of net revenue was 16% up from 15% in the third quarter of 2021.
Sequentially flat the year over year increase was driven by lower spend in the prior year period.
Adjusted SG&A expense for the third quarter was $98 million.
<unk> to $93 million in the third quarter of 2021.
SG&A as a percent of net revenue was 39% up from 37% in the third quarter of 2021.
Similarly, the SG&A increase was driven by lower spend and variable expenses and marketing costs in the prior year period.
Adjusted operating income was $37 million.
Compared to $46 million.
Third quarter of last year.
Adjusted operating income margin was 15% down from 18% in the third quarter of 2021.
The adjusted effective tax rate in the quarter was 8% compared to 10% in the third quarter of 2021.
The lower tax rate is attributable to changes in discrete items and geographic income mix.
Adjusted diluted earnings per share was <unk> 58.
Compared to <unk> 66 in the third quarter of 2021.
Lastly, in the quarter, we recorded a $129 million noncash goodwill impairment charge for the Acs reporting unit.
To reflect current market conditions.
Which is excluded from our non-GAAP results.
Now turning to our balance sheet.
Our cash balance at September 30 was $506 million up from $208 million at year end 2021.
Our current cash balance includes $275 million of restricted cash held as collateral for the Snia litigation guarantee.
Total debt at September 30 was $540 million up from $240 million at year end 2021.
The increase is primarily related to the $300 million initial term loan facility that we executed in July .
Net debt, including restricted cash at September 30 was $95 million.
Adjusted free cash flow for the quarter was $41 million compared to $40 million in the prior year period.
Capital investments were $17 million in the first nine months of the year compared to $18 million in the prior year.
Now turning to our 2022 outlook.
We're maintaining maintaining our guidance ranges shared in August as we continue to navigate supply chain challenges inflationary environment and anticipated foreign currency headwinds, we expect constant currency revenue growth between 4% to 6% excluding heart valves.
And adjusted earnings per share range of $2 25 to.
To $2 45.
And then the adjusted free.
Ladies and gentlemen, we have lost connection to our speakers. Please pools as we reestablish that connection.
Okay.
Okay.
Thanks.
Okay.
Okay.
Okay.
Yes.
Sure.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
We now have the speakers back with us I'll hand back over to the team to continue with the presentation.
Welcome back.
About this technical glitch, but Alex why don't you talk about guidance again.
Flip to questions sure.
We are maintaining our guidance ranges shared in August as we continue to navigate supply chain challenges, the inflationary environment and anticipated foreign currency headwinds.
We expect constant currency revenue growth between 4% to 6%, excluding heart valves and adjusted EPS range of $2 25.
To $2 45.
And then adjusted free cash flow range of $60 million to $80 million alright.
Our outlook now assumes a 5% revenue headwind and approximately a 35 EPS headwind from exchange rates.
Back over to you David.
Let's open it up for questions Charlie.
Yeah.
Of course, thank you if you'd like to address your question. Please press Star then the number one on your Touchtone telephone.
<unk> been answered or you wish to remove yourself from the queue. Please press the pound key.
As we enter the Q&A session. Please limit yourself to one question and one follow up question and then but since the Q. If you have additional follow ups as.
As a reminder, the star followed by one on your telephone keypad now.
Our first question comes from Rick Wise of Stifel. Your line is open. Please proceed.
Thank you good morning, Damien good morning, everybody.
Let me start off with.
Your epilepsy performance obviously.
It was a very solid performance you were very clear about some of the drivers there.
US think through the.
Both the drivers of the performance this quarter.
Yeah.
<unk>.
Contribution to growth.
And help us understand again as we get as you work through your backlog how much is left.
And how we make.
What kind of transition.
You're expecting growth transition you expect as the replacement.
Backlog gets worked down.
Hey, Rick it's Matt good to hear from you. So let me let me start with that.
As it trends overall, I would say first and foremost the market, we do think improved a bit in the third quarter.
Some of the <unk>.
Bottleneck at the EMU, we think loosened up a bit it's still an issue, but we think it improved a bit and then your question on our go to market.
The increase the implants from 22% to 20% so that drove a higher number than the overall business.
I would say looking at.
What we have left on the Eos again, it's not perfect math, but our algorithms show that we have about 300 patients left as you can tell from the quarter. Pos was very strong both year over year and sequentially, but we still think we have 300 lap and then for next year, we're not giving guidance yet.
On any specifics, but as I think you can surmise, we do not expect Pos to have quite the same performance in 'twenty. Three so we're looking for the new patient growth to accelerate next year.
And both in the community and the <unk>, which is why.
We're pleased with the continued pod structure performance it still outperforming the baseline business considerably we're going to add another two this quarter and that will bring us to <unk>.
We ended the coverage now is increasing I think we're roughly 30, 35% of the.
CEC is a covered.
And Thats up again, another couple of percentage points. So we're really pleased with how thats growing.
Okay and.
So many things to talk about.
I guess ill.
It's hard to resist asking a little bit about 'twenty, three I know you're not ready to give.
You just said it.
And nor should you.
But it's hard for us.
Think about the setup for next year, just at a high level.
Maybe you could talk through.
Matt just highlighted.
Hum.
Some factors, helping us think about.
The epilepsy business next year, but.
At a high level.
Based on what you know now.
What are you more optimistic about what should we be optimistic about an order from a growth perspective.
Or are you more concerned.
Little Touchy feely, but hoping you can give us something as we start to put our revisit our models today.
Unusually touchy feely from you.
I would say this I think we overall expect and anticipate improving procedure trends on a global basis, we've seen it opening up in the U S. As Matt just said the end user.
Patients through a little more proactively international is opening up.
I think overall I'd say procedure trends.
Looking positive I think the macro factors again to continue to remain challenging the supply chain inflation foreign exchange.
We want to guide until the fourth quarter earnings call in February but the.
The trend in the NPI is progressing well and U S epilepsy, and we know that that's an important factor for us that heart lung machines in rest of world continue to track well and even though we're launching essence the rest of world most of those markets Dot come online for restaurants until 'twenty five 'twenty six so.
Seeing the continued growth of HLA EMS, there is important and procedure volumes around oxygenate has continued to be key for us.
Looking at the consensus for 2003.
I believe people are fully effected in the foreign exchange impact on the current rates.
Maybe you could expand on just that last point.
Yeah, Hey, Rick its Alex I can take that one we just just looking at sort of the timing of when the FX really started to trend in the wrong.
A direction for us.
In terms of in terms of sort of the estimates.
We see a potential of 5% to 10% or $5 10.
EPS impact.
In terms of the negative FX.
Thank you.
Thanks, Rick.
Thank you. Our next question comes from Mike Polk.
Mike Your line is open. Please proceed.
Good morning, and thank you for taking the questions.
I'm curious on the <unk> launch Nexgen HSM I didn't hear if you said anything I missed it I didn't hear anything in the prepared remark about.
Updated thoughts there, obviously building a lot of product.
That I presume and supply chain is tricky so still on track there.
Any kind of challenges to call out that you are navigating and can you just remind us on what's happening now in the second half in the fourth quarter and what you expect to happen next year.
Yes, hi, good morning, Mike.
So on actions that program is progressing well too we're moving through all of our verification and validation steps, we still expect the first clinical cases to occur before year end.
<unk> in Europe , and in terms of supply chain, we're actually pretty confident about the material for the first units.
Through the clinical cases, and then the the limited commercial release, so I think that's progressing well.
Then we will expand into the U S.
In the new year after the European expansion.
The follow up on Acs.
Understand the kind of evolving.
Case mix dynamics looking at the revenue sequentially down.
A bit but round numbers kind of in the $9 million.
<unk> range.
Can you describe your level of confidence or conviction that this is kind of the at or near the trough in from here.
Our growth pattern can be restored.
Sure Mike its Matt So when you look at the third quarter as Damian highlighted we were down 44%. We think based on third party data. The market was down 30. So we were down a little more this quarter remember last year, we said Covid was 40% of the procedure.
In the third quarter of 'twenty, one that's down all the way down to 5%. This quarter. So that was obviously a huge impact and non COVID-19 was up over 20%. So we caught some up.
I'd say the other couple of things that impacted the quarter.
The.
The issue we had with the reclassification that came at the end of the quarter, but the salesforce was dealing with it because we put the letter out in July . So there was a modest impact from that and then I'd say finally, there has been some additional competition on the cannula side, that's impacted us a little bit. So those are some small pieces.
And then for the fourth quarter, we do expect probably a modest improvement we're not factoring any benefit from flu that could be upside, but we're not factoring that in but the FDA classification again came out at the end of the quarter there'll probably be some impact from that in the fourth quarter.
And then we anniversary.
Covid impact really at the end of the first quarter of 2023. So after that we expect to see the growth pick up a more meaningful amount.
Thanks for taking the questions.
Alright, Thanks, Mike.
Thank you. Our next question comes from Matt Taylor of Jefferies. Your line is open. Please go ahead.
Alright, Thank you for taking the question.
Excuse me so I just wanted to ask a question about the recover study and the next interim look and I guess, maybe you could offer some thoughts.
Lots about why we haven't seen the curves separate or that statistical analysis results in conversion.
Yes versus what you might have thought.
Six or nine months ago.
Yes, Matt.
At $3 75, just based on the trial design there has to be some separation. What's occurred is we haven't had enough separation to stop early.
But overall when you look at the trial was designed to run at the full 500 patients and still hit the statistical significance for stopping the early.
The original paper did suggest that there were odds of this but we've always assumed it would occur later in the year.
Overall, we still think Theres a very good chance, we stopped early and again, we have very high confidence that even if we have to go the full 500 that we would hit statistical significance.
Yes, Matt this is required.
Vacation what happens after 500.
So if we don't stop early we would essentially have to run the full 512 months.
Okay. So that would be the main difference at this point in time, we're not certain that we would be.
<unk> allowed to shift to a registry, but that's not clear.
Okay. Okay.
Okay, great. Thank you.
Yes.
Thanks, Matt.
Thank you. Our next question comes from Mike Matson of Needham Mike. Your line is open. Please proceed.
Yes. Thanks.
I guess I'll start with the.
The Acs business just given the.
Headwinds there and the decline that we're seeing.
Are we at risk of seeing some turnover in the sales force are you doing anything to try to retain the reps there.
Sure.
Yes, that's a great question.
Done a lot of work to make sure that that team is intact.
Non COVID-19 business is actually progressing rather well that's up 20% year on year. So we're very pleased with that progression thats not like.
Their activity has disappeared.
<unk> in the non Covid respiratory cases is still very much in focus.
We have made changes to that business.
The reality of the new the new market. So we've taken out head count in non commercial spaces. We've recently replaced the leader of that business.
And I'm looking forward to that business getting back to double digit growth in the new year.
Okay. Thanks, and then.
Your SG&A and R&D per I guess, Opex overall was up a fair bit.
Alex the explanation was that there was lower last year, but I guess Conversely, it was higher this year or so so why was it either lower so much lower loss are so much higher this year.
Yes, Mike.
If you recall last year, we're sort of heading into the omicron.
Stage of the pandemic and.
We were seeing some softness in our business throughout Q3.
And we basically deferred spending into Q4. So if you look it's really just the staging.
<unk>.
Then.
And Mike we did highlight that last question when we hit the third quarter. We did say some of the third quarter expense will move into Q4 at that point.
Okay. Thanks, and then as far as sleep apnea goes with Osprey.
So if you're submitting the data I think you said, you're assuming that you expect to submit next year at what point would we see the data or will the data be made public or would it not have until after the FDA reviews. It.
It gives us a pivotal and it has to be in line with the FDA approving.
And then finding.
Finding a venue for that it would be appropriate.
Sleep Apnea conference.
Okay alright, thank you.
Jay its Mike.
Thank you. Our next question comes from <unk> Mehta of Piper Sandler. Your line is open. Please go ahead.
Hi, guys good morning, or good afternoon, perhaps.
Wanted to start with just neuro bought and I was hoping to flush that performance out a little bit more good performance in the U S and rest of world.
I was hoping to put a finer point on.
NPI is versus replacement in Q3 and kind of exactly what those figures look like and then how do we think about NPI versus replacements in Q4, and then I had a follow up thanks.
Yes, so end of service outpaced NPI is as Matt said.
<unk> grew low double digits year on year end.
The 2019 levels, which which was important.
We're roughly flat year on year, there is still below 2019, but importantly, they grew sequentially they.
They were up about 8% for the quarter and that for US was an important step exit the best NPI performance year on year for this year year to date, so the progression there as well again.
The CEC pods are the ones that are.
Forming well there and above the baseline.
So overall I continue to expect the NPI to improve sequentially, we think replacements will improve sequentially.
And that's why we've been more confident about what the full year it looks like for total epilepsy.
That's helpful. Damian. Thank you and then for the follow up I'll ask about the heart failure program and anthem.
Pivotal trial it sounds like we're still on track to get another look at the data in Q4 of this year.
What are the expectations for this look you expect the interim analysis to be positive.
Level set us there and then any color on pathway forward. Thank you.
Yeah. So that's progressing well let team is executing with there.
Our implant rate be.
Expectation is that we hit the 500 patient somewhere in the mid.
Mid to late Q4, we'll have the data the analysis here is a longer step up.
Depression studies or text.
Six to eight weeks so in January .
Expect to have the results.
What we're looking for here is.
The nine months, you've got to hit the five green lights.
Nine months safety data.
Primary endpoint.
Dancing on the composite mortality and morbidity and functional endpoints, which left ventricular ejection fraction six minute walk and quality of life.
We don't know which of the five.
If you did get a red light you don't know which of the five as the Red light but.
Again, very confident of that site given we've been proud of over 125000 a day.
So it's really the other four.
We're looking for grain loss at this time, but we can't handicap that in any way.
Understood. Thank you.
Good day.
Yes.
Thank you and our final question of today comes from Amit Hassan Ahmed Your line is open. Please proceed.
Taking the question.
A few follow ups, if I could the first one was the 23 FX comment sounded specific to EPS.
From a sales perspective does it seem like numbers are being contemplated properly it's kind of in the $2 50 to 300 basis points headwind range right now from what you guys are looking at.
But it's probably a bit higher fill it.
<unk>.
Again, we are sort of lapping the I'd say the first half of the year, which was probably less impacted by FX.
Okay, Alright, that's helpful and then flipped.
Flipping back to the recover trial I'm interested in kind of more qualitatively what the implication is.
The trial running a little bit longer before early completion versus what you kind of messaged previously in that $3 25 to $3 75 range. So.
I guess the question is.
If statistical significance was reached at any point is that really what you guys are focused on or do you think there is a qualitative element to this that is going to be important down the road as commercialization becomes more more in focus thanks for taking the questions.
Sure. So a couple of things on that in terms of where we are in the trial versus the original trial design because of Covid are where we are in the average follow up number of patients that have reached 12 months, we're still a little bit behind at this stage of $3 75, where we thought we would be in the original design that <unk>.
Past the statistical power I would say the second thing is what we're focused on here for stopping early as an endpoint called time and response and it's unique in depression trials, because you laid off trials going on this law. So you can't look at time and response and the different percentages between the <unk>.
On a therapy arm versus other depression trials, because nobody else has used that.
We still think that the.
The spread or the difference between the two arms can be very powerful in any of the three scenarios that we laid out overall, it's just we're going to you need to see the full data set ultimately.
Do I think better compare it to other depression trials.
Okay. So so patient months.
Even though we're at $3 75, or approaching 400, the number of patient months accrued is a little bit lower than what you would have anticipated previously because of the impacts of Covid and then.
It sounds like.
There is still some.
Definitely feel like the potential for the powering of this study if successful is still there.
Some confounding factors through the last couple of years.
Okay.
The number of patients that are at 12 months completion.
<unk> is the <unk>.
I'd call. It so that both numbers are still slightly behind them and again I think it's important.
Type of what studies powered to run to 500 patients that the early stop was really at that patients being on a sham controlled.
And with a device that's already approved so the.
The success the greatest statistical success of the program was.
Powered for 500 patients.
That's helpful. Thanks.
Okay.
Yes.
Thank you at this time, we have no further questions.
Damien Mcdonald for any closing remarks.
Thank you Charlie and thank you for everyone joining the call today and on behalf of the entire team. We appreciate your support and interest in live in over and we look forward to updating you on our Q4 results in the new year Cheers Bye.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Okay.