Q2 2023 LivaNova PLC Earnings Call
Yeah.
Good day, ladies and gentlemen, and welcome to the leaving over plc second quarter of 2023 earnings Conference call. My name is Emily and I'll be coordinating Yoko today.
After the presentation you will have the opportunity to ask a question by pressing star followed by the number one on your telephone keypad as a reward.
Mind, you that this conference call is being recorded.
Now I'd like to introduce your host for today's conference Mr. Matthew Dodds leave it now if as senior Vice President of corporate development and I T. Please go ahead Sir.
Thank you Emily and welcome to our conference call and webcast discussing <unk> financial results for the second quarter of 2023, joining me on today's call are Bill Cozy, our chair of the board of Directors and interim Chief Executive Officer, Alex <unk>, Our Chief Financial Officer.
Sure Stephanie Bolton President of global epilepsy, 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 factors that could cause actual results to differ materially are discussed in the company's most real.
<unk> filings and documents furnished to the SEC, including today's press release that is available on our website, we do not undertake to update any forward looking statement.
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 reckon.
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 <unk>.
Investor Dot, leaving no dot com with that I will now turn the call over to Bill.
Thank you, Matt and thank you everyone for joining us.
Welcome to <unk> conference call for the second quarter of 2023.
Before discussing results for the quarter I'd like to recap some firsthand observations introduce Stephanie Bolton and provide a brief update on the CEO search.
Since taking on the role of interim CEO in April have been firmly focused on our patients performance and execution.
I've engaged with many of our global customers and colleagues.
That ongoing customer focus commitment to quarterly results and shaping our 2024 strategic plan will remain as top priorities.
In May we named Stephanie Bolton is leaving <unk> as president of global epilepsy. The assignment of global responsibility for this key business aligns well with our commitments to leveraging an integrated worldwide business strategy with a continued focus on local execution.
Jeff has a 12 year record of achievement at leaving over.
She started as a territory manager before taking on leadership roles in epilepsy and cardiopulmonary.
Most recently stepped served as president of international where she led both businesses to commercial success.
We're excited to have steps commitment to company performance and passion for helping epilepsy patients.
We look forward to your participation in the Q&A.
Now allow me to provide a brief update on the CEO search the board and I are currently in the process of reviewing our first slate of potential candidates our process of slate review.
Interviews selection and board assessment remains on track, we're committed to selecting the right individual to lead our team.
For the remainder of the call I will discuss our second quarter results and.
Then turn to our strategic portfolio initiatives.
After my comments, Alex will provide additional details on our results and updates to 2023 guidance.
I'll wrap up with closing remarks before moving on to Q&A.
In the quarter, we achieved 16% revenue growth marked by strength in the cardiopulmonary and neuromodulation businesses across all regions.
We were encouraged by the continued strong performance in the rest of World and Europe regions, and we're particularly pleased with the U S commercial execution, which drove strong double digit revenue growth and helped improve profitability in the quarter.
Now turning to segment results.
For the cardio pulmonary segment revenue was $151 million in the quarter, an increase of 21% versus the second quarter of 2022.
Oxygenated revenue grew in the mid teens led by the U S driven by higher demand and steady supply chain execution.
Heart lung machine revenue increased more than 30%, primarily driven by S. Five placements in the rest of World region, and initial essence installations in Europe and the U S.
The commercial rollout of essence is progressing and we're encouraged by early customer feedback.
Following the clearance of our blood gas monitoring software integration later in the year, we still anticipate increased contribution.
We now expect cardiopulmonary revenue to grow 11% to 13% for the full year 2023.
Our revised forecast incorporates the strong first half performance and auction Daters and HL lamps.
As previously stated we continue to expect a ramp in essence revenue through the second half of the year with much of that coming after our next wave of software launches.
Alex will comment on some underlying factors that impacted second quarter results and cardiopulmonary.
Epilepsy revenue increased 14% versus the second quarter of 2022 with strength across all three regions, including growth in both new and replacement implants on a year over year and sequential basis.
U S epilepsy revenue increased 15% year over year, driven by higher total implants realized price and favorable product mix.
Notably.
We achieved 838, new patient implants in the quarter, representing 13% growth versus the prior year and achieved 1947 replacements, representing 8% growth versus the prior year.
So, let's say revenue in Europe grew 10% versus prior year led by the Nordics and the U K the.
The rest of World region achieved 15% growth led by Turkey and China.
For the full year 2023, we're now expect global epilepsy revenue to grow 6% to 8%.
Our revised forecast incorporates the strong first half performance and replacement implants.
Alex will comment on some underlying factors that impacted the strong second quarter result in epilepsy.
ACS revenue was $9 million in the quarter, an increase of about 1% versus the second quarter of 2022, reflecting growth in cardiac case volumes and partially offset by respiratory case declines and product mix.
For 2023, we now expect Acs to be flat year over year.
Turning now to the strategic portfolio initiatives.
DTD revenue for the second quarter was $1 million for 2023, we now anticipate DTD revenue of approximately $6 million to $8 million.
Primarily from the recover study.
The recover study continues to advance enrolment for the unit polar cohort of this study has been completed and we await the results of the 12 month follow up.
As a reminder, we randomized a 500 unit polar patient into the trial in March and subsequently completed all implants in may and upon receipt of the 12 months follow up data for the 500 unit polar patients in June of 'twenty 'twenty four we will conduct a final enel.
<unk> and expect the publication of the study results by late 2024.
The bipolar cohort is similar to the unit polar cohort in that the randomized controlled study is designed with frequent interim analysis that will SaaS, if predictive probability of success or futility was reached.
Or if the study should continue enrolling.
In June the interim analysis for the 150 patients in the bipolar cohort was completed.
This milestone was achieved faster than previously communicated.
And we were pleased with the success, we had in refocusing our recruitment efforts from unit polar to bipolar patients.
Moving to OSA, the Osprey trial continues to progress and as of earlier. This month. All 25 study sites are actively recruiting patients.
In heart failure, the closeout of the anthem clinical study is progressing as expected we fully defined most of the accelerated cost in 2023, the majority of which occurred in the first half of the year we continue.
To expect the overall R&D spend related to heart failure this year to be approximately $24 million.
With that I will turn the call over to Alex.
Thanks, Bill during my portion of the call I'll share a brief recap of the second quarter results and provide commentary on 2023 guidance.
Turning to results revenue in the quarter was $294 million, an increase of 16% versus 2022.
In the quarter and first half we observed favorable comparisons in.
In addition.
<unk> was impacted by pricing programs implemented in the second half of 2020 to.
Higher than expected U S epilepsy replacements and.
And tailwind from oxygenated share gains due to competitor supply chain challenges.
Accordingly, we cannot expect the revenue growth in the second half of 2023 will reflect the growth experienced in the first half of the year.
Foreign exchange in the quarter had an unfavorable year over year impact of approximately $2 million.
Or 1% of revenue.
Adjusted gross margin as a percent of net revenue was 72% compared to 69% in the second quarter of 2022.
Adjusted gross margin was impacted by favorable realized price.
Higher volume, which drove positive fixed overhead absorption as well as lower inbound freight costs, which offset component cost inflation.
Adjusted R&D expense in the second quarter was $48 million compared to $42 million in the second quarter of 2022.
R&D as a percent of net revenue was 16% in line with the second quarter of 2022.
The year over year increase on a dollar basis was driven by continued investments in our strategic portfolio initiatives and costs associated with closing out the anthem trial.
Adjusted SG&A expense for the second quarter was $113 million compared to $101 million in the second quarter of 2022.
SG&A as a percent of net revenue was 39% down from 40% in the second quarter of 2022.
The year over year increase on a dollar basis was driven by higher sales and marketing expenses.
These include essence launch expenses and variable costs, such as freight and commissions associated with increased revenues.
Adjusted operating income was $49 million compared to $33 million in the second quarter of last year.
Adjusted operating income margin was 17%.
<unk> to 13% in the second quarter of 2022.
Adjusted operating income was driven by improved gross margins and operating expense leverage.
Okay.
Adjusted effective tax rate in the quarter was 10% versus 5% in the second quarter of 2022.
The higher tax rate is primarily attributable to changes in geographic mix.
Adjusted diluted earnings per share was <unk> 78.
Compared to <unk> 53 in the second quarter of 2022.
Our cash balance at June 30 was $223 million up from $214 million at year end 2022.
Total debt at June 30th was $587 million up from $542 million at year end 2022.
The increase in total debt was driven by delayed draw $50 million on the term loan a facility that we put in place in July of 2022.
Net debt, including restricted cash at June 30th was $101 million.
Adjusted free cash flow for the quarter was negative $10 million up from negative $14 million in the prior year period.
As a reminder, liebenow pays its short term incentive bonuses in the second quarter the.
The year over year improvement was driven by operating income offset by higher <unk> inventories.
Capital investments were $13 million in the first half compared to $11 million in the first half of 2022.
Now turning to our revised 2023 guidance.
As Bill mentioned based on our performance during the first half, we're increasing our full year 2023 guidance.
We now expect 2023 revenue growth on a constant currency basis between eight and 10% and continues to assume approximately a 1% tailwind from exchange rates.
We now expect adjusted diluted earnings per share in the range of $2 55.
$2 75.
With adjusted diluted weighted average shares outstanding to be $54 million for the full year.
Adjusted free cash flow is now expected to be in the range of $85 million to $105 million.
In summary, I am encouraged by the first half execution contributing to financial performance.
Continued emphasis on new patient acquisition in epilepsy, maintaining our cardiopulmonary market position as well as price and expense discipline are key factors to delivering margin expansion.
With these factors in mind, we remain positioned to drive modest operating leverage by year end.
And with that I'll turn the call back over to Bill.
Okay. Thank you Alex as a company we've demonstrated progress across the portfolio through the first half of 2023 and are well positioned to deliver on our full year guidance pipeline commitments and operating leverage by year end.
This would not be possible without the hard work and commitment of our employees across the globe.
Certainly take this moment to thank them for their continued focus on our patients performance and execution phase.
Phase III areas underpin our dedication to serving patients worldwide focus on long term innovation and shareholder value creation.
With that Emily we are now ready to open the call for questions.
Thank you if you have a question at this time. Please press the Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the key. Please press star followed by K as we enter the Q&A session. Please limit yourself to one question and one follow up and then return to the queue. If you have.
Additional follow ups, we would just take a brief pause to assemble a Q&A roster.
Our first question comes from the line of Rick Wise with Stifel. Rick Your line is now open.
Thank you good morning Bill.
Hey, good morning writers starting off maybe.
Good morning to you.
It's nice to see the quarter and your comments were very clear.
About some of the factors favorable comps price.
<unk>.
Better than expected replacement I'm, hoping you can dig into the <unk>.
The latter two little bit can you give us a sense of the price benefit in the second quarter growth is that is that fully done now is there any benefit.
Likely or possible or included in the second half and at the same time as part of this.
Maybe you could talk about that.
Stephanie could talk about the better than expected replacement volumes and.
What created that.
Why wouldn't we assume that continues into the second half.
Sure Let me take the front end, Rick and I will then pass to staff on the end of service volumes.
As you well know, it's a pretty complex enel.
Analysis in recognition of these underlying factors, but for sure price.
End of service revenues and oxygenated as kind of a cluster of products as best we can tell clearly contributed somewhere in the 6% or so range and that's in about 6%.
We recognize that our oxy generated competitors, who we anticipated coming back to the market in the second quarter did not happen. We do know for sure that they are right now shipping product and having just been with our customer here in London on Monday, I know for a fact.
That they are shipping products. So that's that's one factor we got our eye on Alex mentioned that most of the price activity was kicked off in the third quarter of last year. So we started to get some of those benefits in third and fourth quarter of last year. So we don't see a big carryover there.
Now if I could staff may I ask you to comment on Rick's question related to into service revenues.
Rick it's good to hear you.
We continue to believe that with the increased benefit programs that we've had in place and those programs have really been driving to help physicians identify ended.
Advice is and ensure that all important continues to cancer patients.
Moura casting online back we entered the market in 2017 with <unk> and <unk> and includes the key feature called scheduled programming and that enables patients to reach an optimal therapy quick in fact, we see patients reaching an optimal therapy in six months.
This is 12 minutes that in itself drives a higher placement rate.
And as a continuation to that we are starting to see the first wave is with placements from patients who were initially treated with <unk>.
If I can fuel second part of your question, which is.
Why do we potentially see that slowing in the second half of the year. So we're continuing to monitor.
We're continuing to monitor the impact of 10 to either on our interest rate. The current forecast that we have is based on our latest data which takes into consideration our revised expectations.
I'll, probably have a better answer for you as we move through the coming quarters. In fact, you can come back to me in Q1 next year.
Thank you.
Okay and just.
Thank you as a follow up and sort of on.
Bill.
At the same kind of sense.
The epilepsy business I'm.
Im sorry, the normal business.
Very well.
Maybe.
Talk about.
Okay.
Both.
NPI growth the mix of NPI versus replacement.
And just what's happening on the sales side, that's driving that again, particularly thinking about looking ahead.
From second quarter.
Trends.
Yeah very good question.
<unk> has spent the bulk of her time since starting in this new role on that so I'm doing a push it steps would you mind sure. So.
We're really pleased about the results we've seen this quarter as I know on the epilepsy team.
Our focus is firmly on NPI and the team all working tirelessly with our physician base to identify the right patient at the right point to their treatment journey and creating the all important urgency to treat my focus has been on implementing clear operating mechanism focusing not just words.
But how we're doing and being consistent and disciplined about it and not to set it up.
This feature.
An example of this is a clear commitment to collaboration that we have between our sales organization and our case management group.
And is it clear contributing factor to our Q2 results with fewer surgeries being rescheduled at the ended the quarter due to those improved workflows that we've put in place between our case management group and also asked to volumes as well.
And then just quickly Rick Bill gave the NPI in the U S numbers. This quarter. It's 30, 70, NPI to Eos, which is pretty consistent with the most recent quarters.
Got you thanks, Matt.
Eric Thank you question.
Our next question comes from the line of Matt Taylor with Jefferies.
Go ahead. Your line is now open.
Hi, and thanks for taking the question congrats on a good quarter. So I wanted to ask okay. Thank you.
About the other side of the house.
Sure.
Talk a little bit about the CPE trends I guess, what I was curious about was you did call out.
Some of these contributions from the <unk> launch in rest of World and Europe getting some initial orders there. So I was hoping you could help us think a little bit more about the funnel there and how that.
Could ramp and just give us some more color on how the launch has gone so far and what to expect in some of the coming quarters.
Sure. We're in commercial launch mode. As you know all essence activity is focused on Europe or the U S. There is no essence efforts going on outside those areas and so all the revenues what you heard about earlier rest of World War S. Five.
And they were quite healthy to.
Our pipeline is building when I when I use the term commercial launch remember that we are creating many many evaluations nobody will purchase in essence until they have personally tried it in their cardiac surgical suite, we have a nice load of those activities underway.
Right now we have a number of.
Activities and major institutions, both in the EU and in the U S. We are quick to recognize that the software upgrades that are continuing to rollout are important to many of our bigger customers and the reason I keep mentioning the bigger customers. Okay remember that they won't buy one.
Or two machines, there cardiac care facilities tend to be much larger we've got evaluations going on right now and some institutions that could buy as many as 10 to 12 and a single purchase order so thats going to take some time and they're going to want to test the upgrades, but we did get some some now.
This signals if you would from the efforts that we made in.
In the quarter, the the 30% <unk> growth overall encouraged us and know essence was a small part of that in the U S.
We actually had a modest decline in S. Five so it was it was essence that perked us up.
In the U S and we also had some some good penetration in the Europe very early stage.
There is no question that we expect the fourth quarter to be the more critical quarter in terms of the ramp starting to take off and are <unk>.
Forecasting as well as our production alignment are really teed up for that window of <unk> and leading into 'twenty four.
Got it thanks for clarifying that.
That's one follow up I just wanted to know is there anything to call out in the quarter that was a discrete benefit I think last quarter you called out some.
Minor inventory stocking benefit and I know some of your competitors have had some supply issues is there anything that you would call out that helped this quarter.
Yes.
Carl.
We didn't get it explicitly but there's three things that we noted.
Hey, let me tell you why.
I wish we were a 16% growth company, yes of course, I do but we know that we had this year on year favorability of price, which started in the third quarter of last year. We know that we had end of service and end of service epilepsy sales that were much better than anticipated and the oxygenate.
<unk> volume continued to really support cardiopulmonary those three things collectively and by the way. This math is not perfect. We do the best we can within our complex P&L do identify that but think about those three things being somewhere around 6% impact on the quarter no.
The price will not carry out until the second half of the year.
Steph.
Very very.
Direct on the Eos, we got our eyes on that and we got a pleasant surprise. This quarter, we've got to watch that for a couple of quarters to see what happens there oxygenate as our competitors are back.
And their product is hitting the Doc Matt I just wanted to clarify something so we will continue to see price carry forward into the second half of the year, but it's the comparative relative to when we started to implement our pricing programs, which were in Q3 of last year. So we're getting the favorable comp in the first half.
Oh, great. Thanks for all that clarity I appreciate it and congrats again.
Okay. Thanks.
Our next question comes from Michael <unk> with Wolfe Research Michael. Please go ahead. Your line is now open.
Hi, Good morning. Thank you I have one on epilepsy, and then one for Bill Big picture on epilepsy in the U S. NPI 838 can you remind us.
What was that number in like the second quarter of 19, I just I'm interested in where we are relative to.
Pre COVID-19 baseline and the strategic question on epilepsy.
Over the last nine months you had mentioned.
He changes obviously leadership in.
The sales team.
Some of which were described as involuntary as you sit here today and look at execution and team in the field are.
Is it heads down block and tackle and Youre pleased with.
The team currently or what do you anticipate more changes over the next day six to 12 months.
Stephanie as you kind of.
Yes.
Settled in your new role.
Let's let's switch the first one and let me make sure I got the question right you are interested in <unk> 19.
NPI.
Placements.
Yeah.
Correct, yes.
Yes.
By chance do we have to do we have that in the room or I am not sure I don't have it.
Or are you.
Do you think you are above or below or in line with pre COVID-19 baseline I guess, that's the question you know what.
We're just let us promised to get back to you al Al Hookup with Brianna when we're done and we will get you an answer to that question. Let me let me commit to that is that okay. Because we just don't have that number here in front of us.
Alright.
I'll try to give you some other context real quick.
Trying to get.
<unk> things remember that 22, <unk> year on year to 21 were down 6%.
And we're encouraged by what we've seen thus far in the first half of the year, our staff anything else to add or yes, I think Michael I'd like to address and adhere to that point as well in the past.
And since the talent that we brought into the organization I would also like to talk a little bit about the culture that I've seen coming in.
<unk> is a hugely.
Passionate and committed team.
You will excuse me for the early days is based so I started in Israel 12, ne it will always be extra on migraine.
I've spent half my professional life working with this amazing therapy in advancing the adoption of it. So this is a wonderful opportunity for me and I have to say the team that I am now leading bidding credits the welcoming and the culture is one of wanting to win one team.
To execute and do as well as they can and we are sure benefiting from some of the talent upgrades that we seen in the recent months of the year.
Helpful.
The bigger picture one for you Bill is just as you've gotten closer to the business in this new role.
What surprised you most in its first 90 days.
In terms of surprises.
I guess theres, a pleasant surprise here.
We had the opportunity to.
To take advantage of a couple of tailwind you know every once in a while youll get a tailwind and the important thing for the organization is to see that tailwind coming and to react my one of my favorites to your good question is is the way our plant in Mirandola, Italy is running flat out.
Making every oxygenated that they possibly can remember that these are going into cardiac surgical suites and this product is instrumental to People's health and lives being saved so thats been one nice surprise I've been.
Equally impressed.
With the effort of steps team.
And the discipline that is now starting to be displayed in this is how we approach. Our physicians. This is also how we collaborate with physician patient complexity, which is a hard thing for in the revenue production of this product those two things right now.
Probably at the top of the list.
And I really didn't want to hi, Thank you for the question because we certainly wanted a chance to read.
Recognize our mirandola team because you talk about heads down you'd have to see this to see the effort that they've made.
Seven to eight months running now to get that type of I remember you guys know <unk> well, it's a 5% grower.
They've done well and so I give them all credit for <unk>.
Seeing the tailwind and taking advantage.
Thank you.
Thank you.
Okay.
Our next question comes from Adam <unk> with Piper Sandler Adam Please.
Please go ahead. Your line is now open.
Hi, Good morning, everyone. Thank you for taking the questions and congrats on the nice quarter.
Hey, Thanks, a couple from me wanted to start on the adjusted EPS guidance.
Obviously, a big beat here in Q2 you.
You took up the full year EPS guide by <unk> I believe so maybe just kind of reconcile that for us and talk about the key considerations are puts and takes and then had a follow up thanks.
Sure.
Look I think we feel really good about the first half, but ultimately it comes down to the revenue component.
We over achieved for the first half we do expect.
Volumes to be impacted in the second half, particularly on the cardiopulmonary side with with.
With the oxygenated business as we expect the competitors to come back into the market. So we saw the.
We saw a significant improvement in gross margin and in the first second quarter first half.
But we expect to.
We're not going to enjoy the same level of benefit that we.
We had in the first half.
That.
As we look at the investments that we have to make.
To drive productivity and.
As well as improved some of our innovation on the core business, we're going to make those investments in the second half so they'll have a bit of an impact.
On our expenses as well, but.
We've largely derisked the year end.
It's why we feel good about where we're guiding.
Okay.
Okay I appreciate.
The color there Alex.
For that and for the follow up wanted to ask about.
The recover trial in.
Specifically the bipolar cohort.
You guys had 150 patients.
Randomized I believe in mid June .
Talk about pace of enrollment going forward when should we start to see it.
Interim looks there and then maybe level set expectations for for the Street.
Should we expect this cohort to run to the full 500 patients or.
Do you think we could potentially transition to registry earlier.
For taking the questions.
Sure Adam it's Matt.
For bipolar interim looks obviously it started earlier at 150 part of that is we assume that the average follow up we'd be a little longer when we got there but.
But also as you've seen from all the prior data either bipolar group generally performed a bit better than unit polar.
So we're expecting there is only about a third of the patients or bipolar or two thirds of unit polar. So we do expect it will enroll slower our current estimate is about 25 a quarter. So the interim looks at this time, we are going to occur more and more around the lines of quarterly.
Bill told you earlier same as unipolar, it's either going to be stopped early transition too.
The.
Kind of a prospective.
Reimbursement or futility or keep going so no different there I would say overall, our working assumption is the full 500.
Well, if you look at the 25 a quarter it will take a while but as you can see from the public paper. That's been published in the past there are estimates on when the trial potentially could complete.
Okay.
Thanks, Matt that's helpful.
Our next question comes from Mike Matson with Needham Mackay Mike. Please go ahead. Your line is now open.
Yes. Thanks.
Couple more on ethylene so.
I guess I was wondering what youre seeing with regard to the essence.
Customers, either once or just trawling, it or actually purchased.
How many of those are kind of upgrades from the X five versus older units.
Or do you think this is driving further upgrades.
The past.
Well, we had commented I think in the last call that we had over 7000 machines that were out there that were over 10 years old and so theres been.
And admitted focus on our part to get back into those accounts and by the way no surprise all of those accounts have some degree of interest now as I mentioned, a little bit earlier.
Rest of World.
More interested and that's five and the availability of essence is just not there right now we've got our first kind of replacement focus on the EU and the U S.
The sales force goes through just like I mentioned pretty extensive trial period.
Don't have any customers, who arent going to try this on any less than 45 patients before they'll give us a thumbs up on going forward and Thats where were at right now in many many accounts in both geographies.
Okay got it and then.
I know or I believe Athens is priced at a premium to the Tibet five so.
Is this going to be kind of a immediately accretive to gross margin or is it I know, sometimes with these new product launches such as something that's complicated.
Volumes the production volumes kind of the ramp up before you start to.
Get end up with a better gross margin on our opinion.
Uh huh.
Yeah. Good question I think Alex is going to remember this question because I've asked many times, but let me have him go ahead.
The gross margin currently on essence.
Is comparable to the five but as we scale the volumes.
And really start to.
Impact absorption and component cost.
The gross margin will improve.
So the cost basis higher relative to the premium we're charging for essence.
As we start to ramp the essence volume relative.
Two the oxygenate or mix it should have a positive impact on the overall mix.
Our gross margin profile for the company.
Sure.
Okay got it thank you.
Okay.
Our next question comes from Matt mixing with Barclays. Please go ahead. Your line is now open.
Hey, Thanks, and congrats on a really strong quarter here.
A couple of follow up questions one on more on epilepsy.
Welcome Bill.
Oh no.
One on just kind of.
Margin and investments going forward, so on epilepsy just to understand.
The programs that were put in place that sort of drove this identification at the service station.
It sounds like that was that was part of the.
The positives here.
Second quarter.
Just maybe some sense of how long that continues.
<unk> continues to sort of drive those through.
And and then on Ntis.
It sounds like that the efforts you put in place here to lift that number.
Have not yet kind of get to sort of show a meaningful impact some impact but is that is that a fair statement.
And so when when do we start to see that more significantly.
What's to come and then as I mentioned that one follow up.
Okay.
Yeah, Thanks, Matt for the question.
If we look specifically at the programs that we've had in place since has been building on.
So I would say the backend of last year.
So we have the.
Battery life follow up program that we're working through and we also have disposition pool. So that we've rolled out to allow our customers to get a full end to end view.
So cohort if you like of their implanted patient database.
We will continue to see that.
Ramp throughout this year and hope to see as we move into the future. So it's early days and I'm looking forward to coming back with some more specifics it will add at least looks like.
The feedback that we get from our customers is this is very much appreciated.
And then when I look forward to NPI.
NPI is all about how we do that in terms of the discipline and the rigor that we have in our operating mechanisms and I've seen this already start to read out.
The daily the weekly and monthly will all lead to the quarterly and so that really is what we're spending our efforts on is establishing that operating mechanism and ensuring that we start to see that lead through future quarters.
Yes.
Terrific. Thanks, and then.
Maybe sort of leverage and sort of investment reinvestment.
As to be reinvestment.
Good drop through 'twenty.
$24 million from from the heart failure study so.
Thank you you talked about modest leverage by year end, maybe you could.
With some of the puts and takes there are in gross margin and Opex and then.
And how are you thinking currently about that.
The roll off of that clinical program.
Where is that spend goes.
The reinvestment or.
Just to further leverage thanks.
Thanks for your question Matt.
We did target modest leverage for the year I mean, when we started this year.
We said, we're going to deliver modest leverage to our P&L that remains the goal now given given the better performance that we're seeing in the first half and how we're projecting the rest of the year, we're taking the opportunity to make some incremental investments in our core business to strengthen.
Our manufacturing capabilities as well as our it capabilities. We're also looking at reinvigorating the innovation programs within within epilepsy as well as cardiopulmonary. So those are some of the incremental investments we were taking the opportunity to.
<unk>.
Put back in the business to drive future growth and value creation.
Not coming off our goal to deliver modest leverage now your follow up question on.
The heart failure program.
As I said before.
We have about $24 million of investment planned for this year.
About 70% of that occurred in the first half of the year. So.
The we're still on track with the closeout of the program.
Feel good about where we are at this point.
And we will address that heart failure.
<unk> thousand 24 question as we work through our Strat plan and budget.
Yeah.
And more to come on that over the next couple of quarters. We've got two things to do number one we've got to figure out what do we have to still maintain in 'twenty four specifically to support heart failure. These things are quite never done done and we want to make sure. We've got both eyes on that as we planned 24, and then we want to take a look.
At the programs that Alex was.
Mentioning and the timing of benefit to those as we move into the year, But trust me. The heart failure topic is on our planning and budget agenda, and we will not miss it in the next couple of quarters and to be more definitive to your question.
Thanks, so much.
Hey, thanks.
Our next question comes from Anthony Petrone with Mizuho Great. Anthony. Please go ahead. Your line is now open.
Thanks, Congrats on a quarter here not to operational and then one on the recover trial.
I'm just thinking on cardiopulmonary.
Youre welcome Bill just on the 7000 machines 10 years or older.
Just curious how many of those have actually turned over to essence.
What the economics are around and upgrade as opposed to a new sale and when you think about your competitors being out of the market here for a few quarters how much share.
And new sites has leaving over gained.
And then I'll have one on epilepsy.
Now let me take the share question first we are trying to chase that down.
<unk>.
We.
We answer is we don't know exactly how much share we have gang because a lot of these orders that we're getting are substitute orders an account get some from somebody else. They don't get them. We go back in with another order, but it's quite clear from a market that even with the hospital upturn a market that was historically growing it.
1% is right now a.
A little more favorable than that and so that market is probably at two we don't have a hard estimate on the share gain I would probably say, it's somewhere in the 2% range of share gain but I got to tell you that one to three with two is the midpoint. There is no external data on an oxygenate.
Here's where the disposables the tubing sets. So we can't really give you a hard fact on that one we just know what we're making and moving out the door.
And Alex you had yes, so John first just to clarify the <unk> installed base Anthony So 7000 units out there we believe that about.
40% of those units are.
Over a sort of the 10 year useful life cycles. So that's that's kind of the immediate focused us on what you're going after.
Yeah.
And then operational on epilepsy mixed right now, 30% NPI, 70%.
End of stage replacement patients.
Where do you think that mix can go over the next two years and let's say MPI is get to I don't know 50.
<unk>, 50% mix.
Can epilepsy be a sustainable low double digit grower.
Okay.
Let me ask <unk> to comment I'd like to open up first we are doing a significant amount of strategic planning work for the 24 to 26 business plan on that topic and let me just throw a couple of the big questions that you've heard this before but but number one we've got to understand more deep.
<unk>, there's 22000 or more patients coming in every year only 8000 of those people are getting treated. So there is some really heavy lifting being done by step and her team to say what is going on here how can it be that these people aren't getting treated and she is leading a team to really address that.
Within that exercise I'm going to suggest that please comment.
Therein lies the answer to this question right now today tell me I don't have a view yet on where that can go and so I think a very good question, we're probably little too early for us to to guesstimate or estimate even today, but jump in here. Please Anthony I think it's a really good question.
One I'm asking the team during our strategic planning process at the moment as we look towards the future. The one thing that we do know about this patient population is that when we think about trick resistant epilepsy continues to be 30% to this population. So when we look at the treated incident pool every year.
We are not getting close to treating that introduced on a yearly basis, let alone the overarching prevalence within the market.
That's where we're sharpening our pencil is to understand how we can ensure that.
Patients come through the right pathway to access the right treatment and we are absolutely wanted treatment options.
And it's probably a long winded answer to your question, but it's a well timed question and these are the things that we're challenging ourselves currently during our strategic planning process and let me add just a little color and Steph if you wanted to.
Some of the work that's going on.
Number one stephane team are heavily engaged with multiple key opinion leaders that are out. There. These are both epileptoid logistic and surgeons. These are some of the people that I'm spending time with two number two she has a.
Kind of Reenergize department in the area of reimbursement and health care economics and her team is in place now to deeply analyze how those factors. So we are taking a multi factorial kind of assignment here and really tried to break it down as we move distract.
It would be obviously, our hope that within that broad base of work, we're going to find additional insights that take us up the higher performance path not today, though.
Okay.
That's very helpful. I'll hop back in thank you.
Sure. Thanks.
Our next question comes from it comes from David <unk> with Baird. Please go ahead, David Your line is now open.
Yes.
Hi, Thanks for taking the questions and congrats on the strong quarter.
Maybe first on epilepsy, and just diving a little bit more into some of them.
Questions.
Yes, I think broadly across and I think we've kind of heard about maybe some of these elevated inpatient hospital admission bubbles and.
Maybe be the benefits for ups.
<unk> for the downstream, but you've also made some other changes or investments on the salesforce side. So I'm wondering if you'd be able to maybe parse out at least what the relative contribution in the quarter or the first half of the year or at least have bad maybe from that broader kind of market recovery or backlog versus the sales force investments and then I guess just based.
On that response, if it is maybe more sales force driven.
Is that something that does or potentially could accelerate in Q3 and into the back half of the year.
Okay.
I think David if we could take that into call. It. So I'll, let Matt answer in regards to utilization.
I'll answer first in terms of sales force execution. So it's something that we've spoken about in the past that go to market territories. So I'd like to make a few comments about last if I may. So we have overall 19 designated market territory and we see.
<unk>.
Performance of that group in line with that base business. However, we have full open territories and so.
It posted my job I think coming into this is to dig into this to look at the strategy and about 15 fully staff go to market territories, we see an outperformance both in the quarter and also in <unk>. So we continue to be committed to that strategy and we're also going to be having.
Two more operational territories in Q3.
So I think we can for sure say that our strategy around working with our customer base.
With this current sort of direction of travel it to July one.
Matt can I have to use of the overarching sure for.
<unk> FC surgery, a couple of things I would say we track now the IMU capacity in the second quarter. It was about 85% that was similar to what we told you in the first quarter and that was up from the fourth quarter. There's a six months lag. So that's encouraging but it didn't improve from the last Q.
And then I'd say in terms of overall neuro surgeries, which is where we primarily have our implants I would say anecdotally slightly better, but nothing stood out as being like a.
A meaningful change in capacity or or scheduling in the quarter.
Thank you David.
Okay great.
Our next question comes from Michael <unk> with Wolfe Research Michael. Please go ahead. Your line is now open.
Thank you for taking the follow up can we get an update on the Italy. Please any change to timing about from from the European Court of Justice in expectations for say mid mid next year.
Prime court to weigh in.
Yes.
Yes, I'm here.
The latest that what we've got while the timing of the decisions by E. C. J and then subsequently I remember that goes back to the Italian Supreme Court.
It's just it's uncertain, we don't have specific information to share we do not anticipate nor should we anticipate any final decision until at least 2024.
We're still carrying the cash burn.
Finish off the question is on <unk>, it's about 15% to $20 million a year, that's all inclusive of legal fees and cost of guarantee so we have our eyes on it we continually pay attention. Our general counsel is highly focused on this particular activity and all we can offer you right now is that we are going to obviously.
We're going to keep you informed.
Yeah.
Thank you.
Yeah. Thanks.
Our next question is a follow up from Anthony Petrone, with Missouri, Hey, Great. Anthony. Please go ahead. Your line is open.
Okay.
Thanks, I appreciate that just had a follow up on recover just as it relates to unit polar and the duration of treatment effect in <unk>.
And just looking at.
Sort of clarify a few points there. So obviously, we have a 12 month endpoint on improvement in module scores, but when you look at the enrollment cycle. It dates back to 2020 2021 so in theory.
There are patients in there that.
<unk>.
Been on treatment 24 months potentially longer than that so what has been the overall drop out of the study and when we look at just the average treatment duration of.
The patients enrolled today, where does it sit.
And we are in probably the better question will be where does where will it sit.
Come March 2020 for next year ahead of the final readout. Thank you very much.
Sure Anthony So if you just look at the overall numbers.
The dropout rate.
Published paper, we showed scenarios between a 20% drop out 10% drop out and we've said in the past nothing's changed.
We're well below the 20, so nothing to read into there in terms of any issue of dropouts.
In terms of percent completion that number it's really based on I would look at it as scores.
You look at the number of patients that have been implanted. Each one gets 10 scores. It's a matter of what percentage of scores we have and as you can imagine since were now in the final follow up that percentage has gotten quite high.
So there we still we are blinded we won't see the data until may of 2024, but in terms of overall score and were pretty far along and I'd say.
Your point full dataset in May of 'twenty, four we will analyze everything there's 13 total endpoints timing responses as the primary.
Yeah.
Okay.
Our next question is a follow up from David <unk> with Baird. David. Please go ahead. Your line is open.
Hey, again I think my follow up question might have got cut off so I'll ask it again, but just.
It was on kind of the bigger picture.
When you think about your overall portfolio.
And CP in neuromuscular have these durable growth drivers here newer market opportunities.
With OSA DTD longer term and then there are some segments that are a little bit profit dilutive.
I guess.
Kind of thinking about this this near and longer term view and how you think the.
Portfolio of the company shapes up over time, I mean, how do you think about prioritizing maybe those investments at least relative to these three or four different kind of potential drivers are shifts within the portfolio overall. Thank you.
Sure, let me take a shot at that.
As you said the Spi, we are fully committed to they are fully funded and.
With the open understanding that heart failure stopped DTD and OSA continue to go forward, what Alex mentioned and it's worth maybe restating is that we know that we want to create some iterative.
And impactful innovation within the core product portfolio of both CP.
And epilepsy, and we are starting to build out that capability on both sides you might recall at the last meeting I had mentioned, let's take epilepsy and as an example, we talked about a two day technology strategy and planning meeting to be held in Houston.
Staff and her team and several of his senior managers were there and the purpose of that was to start to further develop kind of view with that core product.
Innovation portfolio for the epilepsy business, we've got that activity going on in the Strat planning process across the company that's been backed up by the modest investment that Alex mentioned, so that we can get that work started in 2023, that's where our head is at in terms of.
Our fundamental strategy to ensure.
Number one high customer acceptance.
Improved and better products.
That's where we will continue to go and Thats on both sides, that's on CP and Thats on epilepsy.
Hey, Joe the questions. We have time for today, So I'll turn the call back to Bill Casey for closing remarks.
And thank you everyone for joining on today's call on behalf of the entire team. We really appreciate your support and interest in leaving Alva and we'll look forward to speaking more facts.
Thank you everyone for joining us today. This concludes our call you may now disconnect your lines.
Yeah.
Yes.
Yes.
Yes.
Okay.