Q3 2024 LivaNova PLC Earnings Call
Lydia: Good day ladies and gentlemen, I'm welcome to the Leave and Over PLC 3rd Quarter 2024, an in-conference call. My name is Lydia and I'll be your operator today.
Lydia: As a reminder to this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Matthew Dodd. Leave a know that's Senior Vice President of Corporate Development and IK. Please go ahead, sir.
Matthew Dodd: Thank you, Lydia, and welcome to our conference call on webcast discussing even oba's financial results for the third quarter of 2024.
Matthew Dodd: joined me on today's call our Vladimir Makatsaria, our Chief Executive Officer and member of the Board of Directors.
Matthew Dodd: Alex Shvartsburg, our chief financial officer.
Matthew Dodd: on Metzazel, Archie Finnavation Officer, Stephanie Bolton, President of Global Epilepsy, and Brianna Gottland Director and Best of Relations.
Matthew Dodd: Before we begin, I would like to remind you that discussion is during this call, William Kozy forward the
Matthew Dodd: Factor's Echo Cause Actual results differently are discussed in the company's most recent filing and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any fold-looking statements.
Matthew Dodd: Also, the discussions will include certain non-gap financial measures with respect to our performance, including by not limited to remedy results, which will all be stated on a constant currency basis.
Matthew Dodd: Reckens to the most directly comparable gap financial measures can be found in today's press release, which is available on our website.
Matthew Dodd: We have also posted a presentation to our website that summarizes the point of the call.
Matthew Dodd: Dispresentation is complimentary to the other called materials and should be used as an enhanced communication tool.
Matthew Dodd: You can find the presentation in press release in the Investor section of our website under news, events and presentations at investor.leavenovah.com. With that, I will turn the call over to live.
Speaker Change: Thank you, Matt, and thank you everyone for joining us. Welcome to leave on all the conference call for the third quarter of 2024.
Speaker Change: Our 11% revenue increase marks the 7th consecutive quarter of double digit growth. Our performance is well balanced across geographies and business segments, with 12% organic revenue growth here to date.
Speaker Change: Geogatically, which is 15% in the U.S. and 9% in the Europe and rest of the world regions.
Speaker Change: by business, which you 15% in cardiopulmonary and 9% in epilepsy.
Speaker Change: This strength is supported by the following key growth drivers. First, our markets remain healthy with both cardiopulmonary and epilepsy procedure volumes estimated to be growing in a single digit.
Speaker Change: Second, we gain market share via our commercial execution and ability to supply cardifulmonary consumables.
Speaker Change: We estimate our oxygenate and market share percentage has grown from the low 30s in early 2023 to the mid 30s today. Can you be more than 100 basis points of growth here today?
Speaker Change: Third, we're leverage pricing strategy in epilepsy in cardiovascular pulmonary consumables, which contributed approximately 300 basis points of growth here today.
Speaker Change: and finally, we've benefited from a successful essence launch, which contributed approximately 400 basis points of growth, so far this year.
Speaker Change: On the innovation front, we're pleased with the progress we have made in our Cardiff pulmonary and Epoxypropyline development, as well as in difficult to create depression and obstructive with AFNAM programs.
Speaker Change: in difficult to treat depression or DTD. We continue our efforts in pursuit of CMS coverage.
Speaker Change: If any reimbursement is granted, it could represent a transformative opportunity for critically ill patients with DTD while further diversifying our portfolio.
Speaker Change: in obstructive sleep apnea, or OSA. In November, we expect all patients to complete seven months of follow-up for primary endpoints for safety and effectiveness.
Speaker Change: These growth drivers, our innovation agenda, and focus on talent support the sustainability of above-market growth.
Speaker Change: For the remainder of the call, I will discuss our third quarter results, and after my comments, Amit will discuss our innovation pipeline, and Alex will then provide details on our results and updates for 2024 guidance.
Speaker Change: I will wrap up with closing remarks before moving to Q&A.
Speaker Change: In the quarter.
Speaker Change: We achieved 11% revenue growth versus the prior year.
Speaker Change: Excluding the impact of the ACS segment wind-down, revenue increased 12% versus 2023.
Speaker Change: This growth was achieved while also significantly expanding operating margins.
Speaker Change: Based on these results, we are increasing our 2024 four-year guidance.
Speaker Change: Now turning to segment results.
Speaker Change: For the cardiopulmonary segment, revenue was $172 million in the quarter, an increase of 15% versus the third quarter of 2023.
Speaker Change: Part-long machine revenue increased over 20% driven by a sense.
Speaker Change: We are pleased to see a sequential increase in essence placements and continuing strong price mix in the quarter.
Speaker Change: As a point of reference, we expect Essence will represent approximately 40% of our annual HLM unit placed in 2024.
Speaker Change: Oxygenator revenue grew approximately 15%, driven by customer demand and price.
Speaker Change: The oxygenated business continues to see strong demands outpacing global supply, and our efforts to increase manufacturing capacity remain on track.
Speaker Change: We now expect cardiopulmonary revenue to grow 13-14% for full year 2024.
Speaker Change: Our revised forecast incorporates strong demand for consumables and continued HLM growth despite difficult comparisons versus the fourth quarter of last year.
Speaker Change: Now turning to epilepsy. Revenue increased 9% versus the third quarter of 2023.
Speaker Change: U.S. epilepsy revenue increased 10% year-over-year.
Speaker Change: versus prior year which achieved approximately 10% growth in new patient implants and realized about 8% growth in replacement implants.
Speaker Change: Epilepsy revenue in Europe and the rest of the world grew a combined 3% versus prior year, with double-digit growth in the rest of the world offset by a decline in Europe.
Speaker Change: Thank you for watching!
Speaker Change: for the full year.
Speaker Change: 2024. We now expect global epilepsy revenue to grow 7 to 8 percent.
Speaker Change: Our 2024 forecast continues to incorporate mid-single-digit growth for U.S. new patients and low to mid-single-digit growth for U.S. replacements.
Speaker Change: which assumes U.S. replacements volume to be flat beginning of the fourth quarter. We now expect the combined Europe and rest of world regions to grow in the low single digits.
Speaker Change: With that, I will turn the call over to Ahmed to discuss our innovation pipeline.
Ahmed: Thank you Vlad and good morning. As Vlad mentioned, innovation is a key growth driver for Livanova. Since I joined in May, our innovation committee has focused on four key areas, which are processes and governance, operational models, talents, and our innovation culture.
Ahmed: We targeted these areas to drive our core portfolio roadmap while we simultaneously advance our depression and OSA programs.
Ahmed: Let me provide a few examples, starting with RTP business.
Speaker Change: Thank you for watching!
Speaker Change: Furthering our leading market position in hot lung machines, Essence will serve as a foundational platform for our future innovation, particularly around future upgrades including data capture and analytics.
Speaker Change: For example, we're investing in our in-line blood monitoring capabilities utilizing sensor technology.
Speaker Change: This is designed to deliver additional real-time data to guide the perfusionist during the procedure to further optimize patient-tailored outcomes.
Speaker Change: In our consumables business, we are developing a next-generation oxygenator with a unique design, targeting a best-in-class feature set and performance standards.
Speaker Change: In Epilepsy, we are focusing our work on the next-generation BNS therapy system that includes enhanced features such as connectivity that enables remote programming, offering value to both patients and physicians in a connected environment.
Speaker Change: Similar to CP, we are also investing in data capture and analytics, which has the potential to combine treatment, detection, and prediction of seizures to improve patient outcomes.
Speaker Change: In Difficult-to-Treat Depression, we continue our efforts in pursuit of national coverage by CMS.
Speaker Change: We expect five critical publications over the coming months.
Speaker Change: The first two pivotal manuscripts on the unipolar cohort data from the RECOVER study should be published in a peer-reviewed journal this quarter.
Speaker Change: These publications will provide details on the primary and secondary endpoints of the study.
Speaker Change: Based on the subsequent in-depth analysis, we anticipate the next three supporting manuscripts will be submitted in the fourth quarter and are expected to be published in the first quarter of 2025.
Speaker Change: We look forward to discussing the findings with CMS to define a path forward for coverage for critically ill patients with difficult-to-treat depression.
Speaker Change: Once all manuscripts are published, we will make a formal request to CMS for coverage.
Speaker Change: In OSA, we are encouraged by the early stoppage in enrollment of the Osprey Study in March.
Speaker Change: which was based on a determination that there is a 97.5% or greater chance that there will be a statistically significant result in the primary endpoint for effectiveness.
Speaker Change: We continue to expect all patients to reach seven months of follow-up in November, and this is, again, the primary endpoint.
Speaker Change: This data is part of our PMA submission, which is expected in the first half of 2025.
Speaker Change: In summary, we are pleased with our progress in core innovation as well as difficult-to-treat depression and OSA programs. With that, I will turn the call over to Alex.
Alex Shvartsburg: Thanks, Amit. During my portion of the call, I'll share a brief recap of the third quarter results.
Alex Shvartsburg: and provide commentary on 2024 guidance.
Alex Shvartsburg: Turning to results, revenue in the quarter was $318 million, an increase of 11% vs. 23.
Alex Shvartsburg: Excluding the impact of the ACS segment wind down, revenue increased 12% versus 2023.
Alex Shvartsburg: Foreign exchange in the quarter had a negligible year-over-year impact.
Speaker Change: Thank you for watching!
Speaker Change: Adjusted gross margin as a percent of net revenue was 71% in line with the third quarter of 2023.
Speaker Change: Adjusted R&D expense in the third quarter was 47 million dollars compared to 42 million dollars in the third quarter of 23.
Speaker Change: R&D as a percent of net revenue was 15%, in line with the third quarter of 2023.
Speaker Change: The year-over-year increase on the dollar basis included a one-time charge associated with the DTD program, as well as higher investments in the epilepsy business.
Speaker Change: This increase was partially offset by the closeout of the heart failure trial and the wind down of the ACF segment.
Speaker Change: Thank you for watching!
Speaker Change: Adjusted SG&A expense for the third quarter was $116 million compared to $115 million in the third quarter of 2023.
Speaker Change: SG&A as a percent of net revenue was 37% as compared to 40% in the third quarter of 2023.
Speaker Change: The year-over-year decrease of the percent of revenue was driven by improved operating leverage and was favorably impacted by the wind-down of the ACS segment.
Speaker Change: Adjusted operating income was $64 million compared to $45 million in the third quarter of 2023. Adjusted operating income margin was 20% compared to 16% in the third quarter of 2023.
Speaker Change: This increase was primarily driven by higher revenue, improved operating leverage, and the wind-downs of the Heart Failure Program and the ACS segment.
Speaker Change: Adjusted effective tax rate in the quarter was 23% compared to 10% in the third quarter of 2023. The increase is related to developments in the global tax landscape.
Speaker Change: Looking ahead, we're anticipating a 24-25% effective tax rate in 2025, driven by geographic mix and the phase-out of tax attributes that have contributed to our historically low effective tax rate.
Speaker Change: Adjusted diluted earnings per share was $0.90 compared to $0.73 in the third quarter of 2023.
Speaker Change: Our cash balance at September 30th was $346 million, up from $267 million at year-end 2023.
Speaker Change: Total debt at September 30th was $626 million, up from $587 million at year-end 2023.
Speaker Change: This increase in total debt was driven by the closing of a $345 million private offering of convertible senior notes maturing in 2029 and repurchase of the $230 million of convertible senior notes.
Speaker Change: Net debt, including restricted cash, at September 30th was $61 million.
Speaker Change: Adjusted free cash flow for the quarter was $47 million, up from $26 million in the prior year period. The year-over-year increase was primarily driven by stronger operating results and working capital improvements.
Speaker Change: Capital spend was $37 million in the first nine months of 2024 compared to $22 million in the prior year period. The year-over-year increase was driven by cardiopulmonary capacity expansion initiatives and IT investments.
Speaker Change: Now, turning to our revised 2024 guidance.
Speaker Change: As Vlad mentioned, based on our performance in the third quarter, we're increasing our full-year 2024 guidance.
Speaker Change: We now expect 2024 revenue growth on a constant currency basis between 8.5% and 9.5%, and between 10% and 11% when excluding the portion of the ACF business that we are exiting.
Speaker Change: Foreign currency impact is expected to be negligible based on the current exchange rates.
Speaker Change: We forecast a full-year adjusted effective tax rate between 21 and 22 percent.
Speaker Change: We project adjusted diluted earnings per share in the range of $3.30 to $3.40 with adjusted diluted weighted average shares outstanding to be approximately 55 million for the full year.
Speaker Change: Our forecast contemplates higher operating expenses in the fourth quarter compared to quarterly run rates year-to-date.
Speaker Change: This includes higher R&D investments based on our plans to accelerate innovation.
Speaker Change: Additionally, we expect SG&A to peak in the fourth quarter of 2024, driven by commercial activities to support growth and enabling infrastructure for scalability.
Speaker Change: Adjusted free cash flow is now expected to be in the range of $110 million to $130 million, an increase of approximately 25% at midpoint versus the prior year.
Speaker Change: This range includes a meaningful step up in capital spending versus the prior year, which we forecast to be approximately $60 million.
Speaker Change: As a reminder, our cash flow projections include costs associated with the ACS wind-down in the range of approximately $15 to $20 million, the majority of which occurs in 2024.
Speaker Change: In summary, I'm pleased with our team's continued execution, which has led to consistent growth and margin expansion.
Speaker Change: We remain well-positioned to deliver our financial commitments in 2024, including more than 400 basis points of operating leverage.
Speaker Change: over 40% growth in adjusted operating income and approximately 20% growth in adjusted diluted earnings per share despite the significant step up in our effective tax rate.
Speaker Change: With that, I'll turn the call back over to Vlad.
Vlad: Thank you, Alex.
Vlad: To conclude, we're pleased with the progress we've made over the first three quarters of this year, including double-digit revenue growth and significant operating margin expansion.
Vlad: Importantly, this performance was achieved while positioning Levanova for future success.
Vlad: Our growth is supported by strong business drivers, as well as well-balanced across geographies and the portfolio. This foundation gives us confidence in the sustainability of our cardiopulmonary and epilepsy businesses.
Vlad: Additionally, we continue to make progress on our innovation efforts in the core as well as the DTD and OSA programs.
Vlad: We look forward to building on this momentum in the fourth quarter and in 2025, driven by our continued focus on performance, innovation, and talent.
Vlad: Finally, our success would not be possible without the strength of our team's ongoing execution and steadfast commitment to serving customers and their patients. And for that, I say a big thank you.
Vlad: With that, Lidia, I will turn it over to you for questions.
Lidia: Thank you. If you have a question at this time please press the star then number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue please press star followed by two. 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 any additional follow-ups.
Speaker Change: Our first question today comes from David Roman with Goldman Sachs. Please go ahead, your line is open.
David Roman: Thank you and good morning, everybody.
David Roman: I wanted just to start, Vlad, maybe on a higher-level strategy question and then...
David Roman: I had a follow-up related to the outlook for the balance of the year. You've been in the CEO role kind of a year, when you're going to get into 2025. And can you maybe just help us reflect a little bit on how you're approaching portfolio management?
David Roman: and maybe more specifically as it relates to R&D deployment and the balance between investment in some of the higher risk programs like DTD and OSA versus incremental innovation to support continued share gains and momentum in the core business.
Speaker Change: Thank you for watching!
Speaker Change: Thank you for watching!
David Roman: David, good morning first of all and thank you for the question. Yeah it's been just over seven months I think and look I think
David Roman: First of all, kudos to the team that made some really...
Speaker Change: strong portfolio decisions before I arrived, which was really to
Speaker Change: focus and refocus our portfolio in the areas where
Speaker Change: You know, we have better execution and have the right to win. So I think wind down on ACS is an example of that, you know, one of those decisions.
Speaker Change: Okay, so the way I kind of...
Speaker Change: look forward and we are in the middle of working on the longer-term strategy to shape how Livanova is going to look for the next decade and you know we look forward to communicating that strategy in 2025.
Speaker Change: But I think the key chapters within that is, number one, is maximize our core businesses.
Speaker Change: Epilepsy and Cardiopulmonary. And we are, like Alex said, we are reinvesting into the core R&D and making sure that those businesses have sustainable innovation pipeline.
Speaker Change: You see that not just in dollar investments, but also in investment in the human capital. Number two is...
Speaker Change: in setting directions for DTD and OSA. And like Ahmed said, we're pleased with the progress. We're waiting for
Speaker Change: the reimbursement piece on the DTD and then on the clinical data for OSA to make further decisions.
Speaker Change: But on the DTD front, for example, we're freeing up some of the investments planned for next year and dropping some to the bottom line and reinvesting some back into the core.
Speaker Change: and then the third chapter would be what's the next growth portfolio for Livanova
Speaker Change: Getting in a faster growth market, in the markets where there's significant unmet clinical need, but also in the markets where we have the right to win, leveraging either our commercial or R&D capabilities.
Speaker Change: And like I said, I look forward to communicating that and getting the feedback from the investment community in 2025.
Speaker Change: Great. Appreciate all the detail there. And maybe, Alex, just to follow up here, trying to put...
Speaker Change: some of the pieces together with the commentary around.
Speaker Change: the momentum in the business, what you've seen.
Speaker Change: year-to-date and the kind of guidance for the rest of the year.
Speaker Change: Can you maybe help us think through kind of the assumptions here on the fourth quarter and is there anything specific related to maybe timing of capital sales or any other drivers that would produce kind of the implied slowdown in revenue growth in Q4 as well as kind of the sequential
Speaker Change: step down in earnings and then any initial comments that you're willing to offer on on how we should think about that as setting the base for 2025.
Speaker Change: Thank you for watching!
Speaker Change: Thanks for your question, David.
Speaker Change: So, we've seen tremendous performance in
Speaker Change: in the first three quarters of the year. The slowdown in revenue that we're contemplating is a really a function of our strong performance in the fourth quarter of 2023. If you recall, we had accelerated our placements of S&P.
Speaker Change: In the fourth quarter, this was related to the launch of the
Speaker Change: the additional software that we were working on throughout the year.
Speaker Change: It's really a comparisons issue that appears to be showing a slowdown in growth. The fundamentals are there. We're well positioned to deliver on them.
Speaker Change: continued performance for the balance of the year. As far as the margin component goes, it sort of goes hand in hand with the revenue commentary, but we are
Speaker Change: investing on an sort of incremental basis in the fourth quarter relative to our run rate over the first three quarters of the year and that's really
Speaker Change: just sort of positioning ourselves to continue to thrive.
Speaker Change: growth at about above market rates, right? So we're investing in innovation programs. We're trying to accelerate our
Speaker Change: That's the response on the margin.
Speaker Change: Thank you for watching!
Speaker Change: Thank you for watching!
Speaker Change: Okay, and sorry, are you willing to make any comments as it relates to kind of 2025? I think you had made it in some public forums setting sort of some view around high single-digit growth or the comment about above-market growth if markets are kind of mid-single digits. Is that a reasonable starting point for next year that that high single-digit growth number? How should we think about 2025? And then I'll jump back in queue.
Speaker Change: Thank you for watching!
David Roman: Yeah, so David, at this point we will not give any indication for 2025, and as for the comments about high single-digit goals...
David Roman: The comments I made, and I kind of went through the growth drivers that we have in a similar manner that I tried to do in my opening comments.
David Roman: And, you know, those levers of growth, if you like, they're market growth, and kind of in 2024, we see a very healthy, maybe a bit above what we expected in terms of market growth.
David Roman: Pricing is the second lever that you know continues to to be driving our growth. The third lever is continuous upgrade of our
David Roman: Equipment Fleet to Essence. And so that's another major goal driver that will continue into next year. And then finally, market share. And here, kind of on the plus, we would see
David Roman: We anticipate to see continued market share gains in our PP disposables on the minus what we also anticipate is the slowdown
David Roman: in the replacement procedures for epilepsy. So my comment in that forum was saying, you know, if all those levers...
David Roman: Fire in a positive way. We will be looking at obviously at a high single-digit growth But there will be I'm sure there will be some You know ups and downs. Well in terms of the levers
David Roman: Thank you for watching!
Speaker Change: Understood. Thanks for indulging. Next for follow-up.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Rick White with Stiefel. Please go ahead.
Rick White: Good morning, everybody, and nice to see a really solid quarter. Very impressive. Thank you. I want to dig into two things. First,
Rick White: Maybe give us a little more color about
Rick White: your capacity, which you talked about being, you're sort of on track for your capacity expansion. Where are we in that process? And again, just the sustainability of this excellent performance in this story into next year.
Speaker Change: Thank you for watching!
Speaker Change: Thank you, thank you for the question.
Speaker Change: The procedure growth we estimate is above historic average and above what we anticipated for this year as an industry.
Speaker Change: Thank you. Bye. Bye. Bye.
Speaker Change: What is driving this is, first of all, growth of procedure in emerging markets, which by nature, you know, the starting point is low penetration of cardiovascular diseases.
Speaker Change: And from that point of view, I don't have any indication to kind of assume that the market will slow down. You know, we see a healthy growth of the market and reaching more patients.
Speaker Change: factor that contributed to the deficit of products is that the entire industry is is kind of
Speaker Change: because of the way we plan for market growth and it's faster than kind of a plan, the entire industry is facing capacity constraints.
Speaker Change: You know, to the benefit of our business, we were able to grow the capacity in 2024, in our estimate, better than some of our competitors.
Speaker Change: … … … … … … …
Speaker Change: And so from our point of view, our first step was to do better in terms of productivity with the footprint that we have today. And we are on track to achieve at least 10%
Speaker Change: volume growth in terms of manufacturing output from the end of 2023 to the end of 2024, and it's been a gradual increase.
Speaker Change: throughout the year. And so we've learned a lot and we still have some room to keep improving that beyond kind of the end of this year. So, and keep driving our productivity.
Speaker Change: Thank you. Bye.
Speaker Change: The second factor that is influenced in this year is that
Speaker Change: On the competitive side, we don't see any movement in terms of improvement. So we see the capacity constraint and kind of...
Speaker Change: flat supply, if you like, of oxygenators on the market overall outside of Lee Vanilla. Again, if this continues, gives us additional opportunity in 2025 for continued gain of share.
Speaker Change: But for us to achieve that...
Speaker Change: You know beyond just
Speaker Change: improving the productivity with what we have today.
Speaker Change: We are also looking in terms of
Speaker Change: How do we expand our capacity?
Speaker Change: for the long term. And that has two factors in it. One, launch of new products that Ahmed talked about, and B, continued supply of our legacy oxygenators.
Speaker Change: So the team is developing and designing a plan to build that
Speaker Change: Long-term capacity.
Speaker Change: Alex, maybe you can have a few. Rick, I would just add to your second question about the competitor dynamics. Our understanding is that our major competitors resume full operations in the US.
Speaker Change: and have increased supply in several countries around the world.
Speaker Change: Despite that, we see that the customer demand is continuing to outpace global supply. In fact, we still remain in the back order.
Speaker Change: So, we feel pretty good about, you know, how the market is shaping up for the quarter and into 2025.
Speaker Change: That's great. Maybe for Ahmet, as my follow-up question, Ahmet, you highlighted your, I think, very thoughtful, well-articulated plan and outlook and the innovation progress you're making in each of the areas you detailed. Maybe,
Speaker Change: to help us understand from an innovation perspective.
Speaker Change: What are the timelines associated with some of these initiatives? I know it's not perfect.
Speaker Change: But, I mean, are we going to see these interesting products with data capture and, you know, some of the attributes you talked about?
Speaker Change: starting in 25, or no, this is going to take two or three years.
Speaker Change: and maybe specifically on DTD, you're saying once all the publications are out there, you'll request CMITS as coverage. Any updated thinking about potential timing there as well? Thank you.
Speaker Change: Thank you for watching!
Speaker Change: Good morning, Rich. So maybe I'll start with the depression piece.
Speaker Change: so
Speaker Change: it is hard for us to predict the timelines with CMS you know the general rule of thumb is from the point that you do your formal application it is about a year but there's definitely some variance there
Speaker Change: What makes us hopeful is that this patient cohort has a very high unmet need. There are not a lot of alternative therapies, so we believe that will help us
Speaker Change: <unk> that these are not discovery research they are not very high risk programs. They are engineering execution programs.
Speaker Change: Okay.
Speaker Change: Oh do you want to make a comment on the OSA.
Speaker Change: In OSA.
Speaker Change: So we will have our primary endpoint is the seven months for both effectiveness and for safety.
Speaker Change: We will have our last patient.
Speaker Change: Exit the study from that primary standpoint.
Speaker Change: Primary endpoint standpoints in early November.
Speaker Change: And then that data will be utilized for the PMA submission and we plan to have a press release in November with the preliminary topline data.
Speaker Change: Seven months safety and effectiveness endpoints for OSA and move forward with our PMA application in the first half of 2025.
Speaker Change: Thank you very much.
Speaker Change: Yeah.
Speaker Change: Our next question today comes from David <unk> with Baird.
Speaker Change: Please go ahead.
Speaker Change: Oh, great. Thanks for taking the questions and congrats on the quarter here.
David <unk>: Wanted to follow up a little bit more on some of the 2025 comments more so on the EPS kind of margin expansion line I think you called out 20% plus EPS growth. This year you have a benefit from some drop through from prior trials.
David <unk>: Little bit of a tax headwind this year as well it sounds like there might be an incremental maybe even smaller tax headwind next year relative to this year. The DCD program kind of dropping through as well. So can you help us maybe think about how some of those pieces play out.
David <unk>: Next year as well as just the ability to expand margins grow margins above whatever that top line growth number shakes out now.
Speaker Change: Yes, so thanks for your question David.
David <unk>: Again.
Speaker Change: It's premature to talk about.
Speaker Change: 2025 guidance.
Speaker Change: Our stated goal has.
Speaker Change: Has and will continue to be to grow our margins.
Speaker Change: Faster than our revenue base.
That is our objective as we move into 2025.
Speaker Change: We started our our modeling on the tax rate, that's why I highlighted that in my prepared comments.
Speaker Change: When we started looking at our geographic mix around.
Speaker Change: Yes.
Speaker Change: The statutory tax rates and hence I wanted to.
Speaker Change: Provide the insights early on so you can you can update your models.
Speaker Change: Just broadly speaking.
At the highest level we.
Intend to grow our.
Speaker Change: Our margins at a faster pace than revenues in 2025.
Speaker Change: Okay.
Speaker Change: Just to clarify would the margin growth above revenue.
Speaker Change: Inclusive or exclusive of the DTD kind of drop through.
Speaker Change: Be inclusive of DTD drop through as well as the benefits of the roll off of the Acs.
Speaker Change: <unk>, which we are exiting this year.
Speaker Change: Alright.
Speaker Change: And then maybe on <unk>.
Speaker Change: It sounds like.
Speaker Change: I heard the comments there sounds like maybe at least at the margin slightly.
Speaker Change: Slightly more positive and challenging at least in our view on the potential.
Speaker Change: For that program.
Speaker Change: You don't get to play out.
Speaker Change: Maybe help us think about some of the scenarios there around what the data should bring them out.
Speaker Change: Our submissions to the FDA or the CNS sorry.
Speaker Change: And how youre thinking about.
Speaker Change: That program again on a relative basis, maybe what some of the comments were earlier this year. Thank you.
Speaker Change: Sure. This is Amit so.
Speaker Change: I mean, there is a few key points that.
Speaker Change: Makes us.
Speaker Change: Fairly optimistic one is something that I mentioned earlier. This patient population has a very high unmet medical need that doesn't have other therapies available to them today that works for example in our patient population in this study.
Speaker Change: The mean duration of depression was more than a decade.
Speaker Change: The mean number of failed therapies was more than.
Speaker Change: So the fact that there is a very high unmet medical need.
Speaker Change: Is something that.
Speaker Change: CMS would like to resolve so that is that is one reason that we are feeling optimistic the second is.
Speaker Change: When we disclosed the primary and secondary endpoints if you recall.
Speaker Change: While the primary endpoints were met.
Speaker Change: Certain secondary endpoints were met and we know that.
Speaker Change: MFS looks at the totality of the therapy and the trial. They do not single out for example, just looking at the primary end points and moving on to the secondary endpoints. If those are successful like an FDA trial dose.
Speaker Change: And then the third piece is that we have done.
Speaker Change: Secondary analysis and try to answer key questions like.
Speaker Change: Why did the control arm performed better than anticipated why was the placebo effect better than anticipated and are there certain subgroups and cohorts that respond differently. So when we looked at everything and worked with experts in the world.
Speaker Change: I have worked with CMS in the past.
Speaker Change: That's why we decided to pursue our path.
Speaker Change: Once the publications are out that is the strategy that we will take and initiate our formal application with CMS. So just to summarize the fact that there is a very high unmet medical need the fact that in our trial, we were able to demonstrate that VNS therapy has a very positive impact.
Speaker Change: This very old patient group.
Speaker Change: We are feeling optimistic to progress with our application to FEMA.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from Michael <unk> with Wolfe Research your.
Speaker Change: Your line is open.
Speaker Change: Hey, good morning, I have a question on U S epilepsy.
Michael <unk>: How do you handicap here in the next week the prospects for getting the coating.
Michael <unk>: Moved up to a level six came in and if that were to be achieved how would you frame the impacts.
Michael <unk>: For us.
Michael <unk>: Next year and beyond.
Michael <unk>: Price opportunity if that were to happen or is it more you would expect volume.
The react positively because procedure economics improved any puts and takes provisionally would be helpful.
Michael <unk>: Sure.
Kent.
Michael <unk>: So I don't want to wide scale, Cleveland had a reinvestment strategy <unk> trillion.
Michael <unk>: Cool.
Patient access.
Michael <unk>: And a piece of keeping faithful to that mission.
Michael <unk>: Six is very much part of that.
Michael <unk>: A couple of points on the price testing all CMS is not obligated.
Speaker Change: Thank you Mindy.
Speaker Change: And we're very encouraged to see that you're not in this to close in on our request.
Speaker Change: So it is highly quantified potential impact there.
Speaker Change: There are a number of different factors involved here.
Speaker Change: We do believe that it may be different.
Speaker Change: Key to launch a retiree.
Speaker Change: Right.
Speaker Change: Right.
Speaker Change: Sure.
Speaker Change: And over time, what we see is increasingly.
Speaker Change: Our internal embraced CBS therapy utilization.
Speaker Change: <unk>.
Speaker Change: Population.
Speaker Change: Pricing standpoint.
Speaker Change: Intend to continue with annual.
Speaker Change: Inflation based price increase strategy.
Speaker Change: There will be some level of six.
Speaker Change: Great flexibility each year.
Speaker Change: Switching to your pipeline.
Speaker Change: And then just maybe I'll stop there.
Speaker Change: Michael Great question.
Speaker Change: Just to add this as well.
Speaker Change: If you step back just.
Speaker Change: From the clinical unmet need there are over 1 million patients with.
Speaker Change: Drug resistant epilepsy there.
Speaker Change: Untreated today.
Speaker Change: And while.
Speaker Change: And the procedure penetration if you look at that patient population is very low it's below 5%.
Speaker Change: So there is still significant opportunity to grow the procedure penetration.
Speaker Change: And one of the barriers to that growth.
Speaker Change: As reimbursement and so.
Speaker Change: Bob.
Speaker Change: The improvement in reimbursement were achieved that will obviously unlock it won't solve a complete puzzle, but it will unlock a very important area for us.
Speaker Change: Thank you quick.
Speaker Change: Quick follow up another fishing expedition for 2025, I want to keep it simple.
Speaker Change: You are raising 2024 EPS by <unk> 20 at the.
Speaker Change: Mid point.
Speaker Change:
Speaker Change: If I just knew that.
Speaker Change: Next year's number might be biased higher by 20, but tax rate is going to step up again, if I do the math on Alex 24% to 25%. That's another <unk> <unk> headwind. So so the raise this year plus 'twenty the tax rate coming up minus 15, it kind of it.
Speaker Change: It kind of leaves the street unchanged, maybe up a nickel of 365, 370, thats, 10% EPS growth year on year off this new <unk>.
Speaker Change: For EPS base.
Speaker Change: How does this sound thank you.
I appreciate the fishing expedition Mike.
Speaker Change: I mean, youre always good with your with your modeling so ill.
Speaker Change: I'll just leave it at that.
Speaker Change: Yes.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from Adam <unk> with Piper Sandler your.
Speaker Change: Your line is open. Please go ahead.
Speaker Change: Hi, good morning, and thank you for taking the questions and congrats on the nice quarter. One quick clarification for me on DTD.
Speaker Change: Wanted to confirm that there's no change to your plans for the cost savings next year I think you talked about $20 million plus of pre tax cost savings that will go back into models in 25 on last quarter's call. So is that correct and then I had a follow up thanks.
Speaker Change: Adam that is that is absolutely correct.
Speaker Change: $20 million pretax drop through.
Speaker Change: 2025 earnings.
Speaker Change: Okay perfect. Thanks for that Alex.
Alex Shvartsburg: And then I wanted to pivot over to.
Alex Shvartsburg: Obstructive sleep apnea so.
Speaker Change: It sounds like we will get the seven month data in November.
Speaker Change: I guess the question is what do you think is a good result for your hypoglossal nerve stimulation technology. Obviously, we have this 97, 5% predicted probability of success.
Speaker Change: Hanging out there, but whats a good result in your opinion, what do you need to see to kind of ultimately push the program forward commercially.
How do we think about the importance of the seven month data.
Speaker Change: That will get in November versus maybe the 12 month data that will get in the first half of 'twenty five thanks for taking the questions.
Speaker Change: Yes.
Adam: Adam Thank you for the question.
Speaker Change: So.
Speaker Change: I'll start and then I'll, let Ken can maybe build on that.
Speaker Change: But if I step back and say what success looks like I think it all starts with the clinical data for us right.
Speaker Change: Success from that perspective would look like us.
Speaker Change: Our competitive.
Speaker Change: Data to the current standard of care in the Neuromodulation treatment.
Speaker Change: OSA.
Speaker Change: What we also know from the previous research is that.
Speaker Change: The.
Speaker Change: The clinical outcome improved from <unk>.
$6 12 up from 7% to 13 months treatment.
Speaker Change: So we will be looking at that.
Speaker Change: The seven months of resolved, we will be looking at how that compares with.
Current standard of care with <unk>.
Devices performance at the same.
Speaker Change: Brian and then we will.
Speaker Change: Extrapolated into the future, but ultimately the most important is what is our clinical results on the show at 13 months.
And our success will be to be at least comparable.
Speaker Change: With the data.
Speaker Change: Competitors. So that's number one and then beyond that obviously, we're also working to make sure that our device from a technology point of view.
Speaker Change: Is competitive.
Speaker Change: In terms of ease of use.
Speaker Change:
Speaker Change: And and just technology that.
Speaker Change: Kind of is in the device. So so the second one is more engineering compatibility.
Speaker Change: With the with the current competitors and then the third one is the decision on how we're going to commercialize that and again there are different options for us moving forward. So those are the three big factors that we're going to taken into consideration, but overwhelmingly most important one.
Speaker Change: Is the clinical outcome and how it compares to.
Speaker Change: The devices on the market.
Speaker Change: Yes, maybe I'll add a couple of quick points one is.
Speaker Change: With our device and our trial design. If you recall there is no dice requirement and complete concentric collapse CCC will not be a contra indication. So we feel very excited about that.
Speaker Change: And the second point I'll make is that.
Speaker Change: You asked about the performance of the trial, obviously, we haven't seen the final seven month data. However.
Speaker Change: We truncated this study back in March.
Speaker Change: Just on the results that we saw that.
Speaker Change: We will indicate that the device performed better than our original expectations, but allowed us to truncate. The study and move forward with a much smaller study than origin that plan. So maybe those will be the two points I will make we are very excited about.
Not requiring guys because dice adds significant tree.
Speaker Change: <unk> pathway obstacle for patients that prolongs process, it's not a very well reimbursed process. So we think that has a significant advantage with our technology.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Anthony Petrone with Mizuho.
Speaker Change: Your line is open.
Anthony Petrone: Thanks, and congrats on the quarter here, maybe back to DTD.
Anthony Petrone: The study is comprehensive was 12 additional endpoints.
Anthony Petrone: And when we had the press release earlier in the year, there was indication that certain of those endpoints saw some.
Anthony Petrone: Some benefit the overall composite endpoint wasn't met.
Anthony Petrone: But certainly it wanted warranted further analysis on the data so maybe just a little bit on the.
Anthony Petrone: And the secondary endpoints that we should be looking at to gauge success as it is at the suicide attempt endpoint is it time to first remission time to rate of response et cetera. So maybe just a little bit as we go through.
Anthony Petrone: The details in these publications as they come out on which secondary endpoints really will drive the decision on whether or not to go ahead with depression and I'll have one follow up thanks.
Anthony Petrone: Yeah.
Speaker Change: Thank you Anthony for the question so.
Speaker Change: What I would say is a both the primary and secondary endpoints.
Speaker Change: <unk> would be published very soon.
Speaker Change: So I do not want to comment prior to the publications because that won't be appropriate for the publications.
Speaker Change: But at that time, you would be able to very clearly see and as I mentioned during my speech we.
Speaker Change: Anticipate those publications for primary and secondary endpoints of first two publications to be available.
Speaker Change: Fourth quarter of this year.
Speaker Change: Right and when we look at those endpoints are there any that jump out as being more heavily weighted.
As it relates to the Companys decision on whether or not they would move forward to mark to commercialize depression.
Speaker Change: In other words when the data comes out.
Speaker Change: How should we be thinking about which of these 12 secondary endpoints will really be the drivers in the decision making process to commercialize depression.
Speaker Change: So Anthony Thank you for this again.
Speaker Change: It would take it from the point of view of decision to commercialize.
Anthony Petrone: It will be driven by the outcome of the reimbursement.
Anthony Petrone: And so from our point of view our current assumption is.
Anthony Petrone: If the reimbursement.
Anthony Petrone: As outcome is positive we will commercialize.
Anthony Petrone: This technology.
Anthony Petrone: For two reasons really one.
Anthony Petrone: One is the.
Speaker Change: There are many critically ill patients that don't have.
Speaker Change: Another option in terms of treatment.
Speaker Change: But also the consequence of that is that fair.
Speaker Change: We're kind of a market a business opportunity is significant for us.
Speaker Change: End of <unk>.
Speaker Change: Expand our portfolio. So the decision to commercialize is not driven by.
Speaker Change: Primary secondary points, we're looking at it will be purely driven by the reimbursement decision of the seamless seamless.
Speaker Change: Alright very helpful. And then just just their process just to round that out.
Speaker Change: It's from Mike Matson with Needham.
Speaker Change: Please go ahead.
Mike Matson: Yeah. Thanks, So just starting with that and so I think he said it was around 40% of <unk> sales this year.
Mike Matson: I would assume that the global number is that right and then where do you think that sort of peaks I mean can it get to a 100% eventually or are you going to continue to sell the older system and some of the developing markets.
Speaker Change: Yes, Mike Thank you for the question.
Speaker Change: Youre right the global number this year will be around 40%.
Speaker Change: Penetration of gas.
Speaker Change: And our total portfolio of placements.
Speaker Change: We assume at this point that.
Speaker Change: We can.
Keep improving by about 20.
Percentage points every year.
Speaker Change: Which will then kind of stake about a three year cycle for us to get to a 100% the goal is to get.
Speaker Change: Okay.
Speaker Change: <unk> platform.
Speaker Change: To 100% of our placements and then.
Speaker Change: The way I think about essence, it really gives us a wide range of opportunities for.
Speaker Change: Upgrades is a bit like you'd get a car and you have different options within that and so.
Speaker Change: Can really get our hardware with various number of options.
Speaker Change: And to your comment between emerging and developed markets or.
Kind of more economically.
Speaker Change: Wealthy customers versus less the.
Speaker Change: The differentiator will be in those options that they can get with a machine and.
Speaker Change: Rather than having two different platforms on the market.
Speaker Change: So that's our strategy.
Speaker Change: Okay got it and then I just wanted to ask one on epilepsy. Following up on Mike's question on this potential reimbursement change. So can you just tell us the portion of epilepsy patients that are on Medicare currently.
Speaker Change: I'd imagine it's lower just I think it's a younger patient population then.
Speaker Change: Big <unk>.
Investments that youre, probably thinking about are related to the DTD and OSA.
Speaker Change: The way is less.
Speaker Change: Where we're going to <unk>.
Speaker Change: Continued to.
Run the program sort of at a bare minimum in terms of investments.
Speaker Change: Up until the point, we get to positive.
Speaker Change: Signal from CMS.
Speaker Change: That's the game in terms of.
Speaker Change: And expanding our our investments in <unk> and <unk>.
Speaker Change: Commercializing.
Speaker Change: The asset.
Speaker Change: On the OSA front, we have to obviously the gating item here is the PMA submission and approval from the FDA.
Speaker Change: If if if positive.
Speaker Change: That gives us.
Speaker Change: It gives us an opportunity to think about commercializing.
Speaker Change: Ask that again.
Speaker Change: We have some we have lots of options and how we go to market with.
Speaker Change: With this.
Speaker Change: With this asset so we.
Speaker Change: We can choose to commercialize it ourselves we can choose to partner it.
Speaker Change: Sure.
Speaker Change: Other options. So we're trying to create as much optionality as we can to that degree.
Speaker Change: Great value.
Speaker Change: Sure in the end.
Speaker Change: Just to put numbers around those the baseline minimum investment level for DTD as we're now and just to remind us maybe where the.
Speaker Change: The spend is up until a decision point on OSA roughly.
Speaker Change: Yes.
Speaker Change: At this point as we said in.
Speaker Change: Last quarter's call, we were thinking about $10 million in 2025.
Speaker Change: Or did you do for.
Speaker Change: <unk>.
Speaker Change: And for us and for OSA.
Speaker Change: Yes OSA is.
Speaker Change: We're sort of coming up on the completion of the trial.
Speaker Change: So.
Speaker Change: We are now starting to focus more on the.
Speaker Change: On the medical affairs side, so it's more preparatory to make sure we're in a good place.
Speaker Change: Potentially commercialize the asset.
Speaker Change: And Matt just to add on the on the OSA front you know.
Speaker Change: That said you know we're targeting submission.
Speaker Change: In the first half of 2025, so to your point, if we make a decision to commercialize or expand the investment. This is most likely not a 2025.
Speaker Change: Story of this business.
Speaker Change: 26 and beyond.
Speaker Change: Got it thanks, so much and thanks everybody.
Speaker Change: Thank you we have no questions in the queue. So I'll turn the call back to flat demand metric salaries for any closing remarks.
Speaker Change: But we do thank you for helping us facilitate the goal and thank you everyone for joining the call today and more importantly for your support and interest in live on all of them.
Speaker Change: Have a great day thank.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: This concludes our call. Thank you very much for joining you may now disconnect your lines.
Speaker Change: [music].