LivaNova PLC (LIVN) Q4 2020 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the LivaNova PLC Fourth Quarter and Full Year 2020 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Matthew Dodds, LivaNova's Senior Vice President of Corporate Development. Please go ahead, sir.

Thank you, Catherine, and welcome to our conference call and webcast discussing LivaNova's financial results for the fourth quarter and full year 2020. Joining me on today's call are Damien McDonald, our Chief Executive Officer; Alex Shvartsburg, our Interim Chief Financial Officer; and Melissa Farina, our Vice President of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings 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. Also, the discussions will include certain non-GAAP financial measures with respect to our performance, including, but not limited to, sales results that will all be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to our 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 and Events and Presentations at investor.livanova.com. With that, I will now turn the call over to Damien.

Thanks, Matt. And thank you for joining us, and I hope you and your families continue to remain safe and healthy during these challenging times. Welcome to our fourth quarter and full year 2020 conference call. As you are aware, we have a large employee population in Houston, all of whom were impacted by the storms last week. I'm relieved that everyone is safe and would like to thank all of them for their dedication and ingenuity to keep our operations running. Today, we will discuss our results and provide recent company updates, including guidance for 2021 and the first quarter. The COVID-19 pandemic has presented unique operating challenges. Many markets around the world have operated inconsistently or shut down for varying periods of time, and this dynamic has continued in the fourth quarter and thus far into 2021. I will start off by discussing some recent updates to our business and Board structure, then move to sales results, focusing on the primary growth drivers, epilepsy and ACS. Then I will discuss our strategic portfolio initiatives, DTD, heart failure and OSA. After my comments, Alex will provide you with additional details on the results and our 2021 guidance, which continues to include heart valves. Then I will wrap up with closing comments before moving on to Q&A. In December, LivaNova entered into an agreement with Gyrus Capital for the sale of the Heart valve business. This portfolio will benefit from the ownership of Gyrus and its ability to singularly focus on building a heart valve business. This will enable us to sharpen our focus on the primary cardiovascular and neuromodulation platforms. As you know, divestitures are complex, and we are currently discussing an amendment to the purchase agreement with Gyrus related to a deferred closing of a subsidiary that is responsible for site management services at the Saluggia campus. We continue to expect the initial closing, consisting of the heart valve operations in Italy and Canada to occur in the second quarter, followed by closings of the sales infrastructure in the second half of the year. In December, we announced a series of Board leadership changes driven by the Nominating and Corporate Governance Committee. Included in those changes, Todd Schermerhorn was appointed to the Board of Directors. Todd has 35 years of experience in global health care, including 27 years at C.R. Bard, where he held positions of increasing responsibility, which culminated with his 9-year tenure as Chief Financial Officer. He currently serves on the boards of Metabolon and also Travelers Companies, where he is the Independent Lead Director and chairs its risk committee. Todd will succeed Hugh Morrison as Audit Chair upon Hugh's retirement at the 2021 AGM. Additionally, we will be rotating the Board and 2 committee chairs following the 2021 AGM. We believe all these changes underscore our commitment to leading corporate governance and to help further enhance the Board's independent oversight. Now I'll discuss the core growth drivers, epilepsy and ACS. All net sales results will be stated on a constant currency basis. Epilepsy sales declined 4% globally versus the fourth quarter of 2019. This decrease is attributable to the impact of COVID-19 on both new patient and end of service or replacement implants. Importantly, sales rose sequentially and were in line with our full year guidance range. U.S. epilepsy declined in the mid-single digits and implants continued to improve sequentially over the third quarter. In the fourth quarter, epilepsy sales in Europe reached nearly 90% of our prior year levels with strong performance in the Nordic region and Spain. The Rest of world region grew 11% as a strong growth in the Middle East and Australia as non-emergent procedures recovered. For the full year 2021, we expect global epilepsy sales to grow 15% to 20%, including strong growth in new implants as patients return to their physicians, and we expect a tailwind in replacement implants related to the backlog created in 2020. We are pleased with the progress of the go-to-market initiative and still plan on adding 3 new dedicated teams in the U.S. during 2021. ACS sales were $13 million in the quarter, an increase of 50% from the fourth quarter of 2019. Growth was driven by the adoption of LifeSPARC and an increase in acute respiratory distress-related procedures. We continue to expect ACS to grow at least 20% in 2021. Turning now to DTD. Sales in the fourth quarter were $1 million and $7 million for the full year. In 2021, we expect DTD sales of approximately $10 million to $15 million from a combination of the RECOVER study and the replacement implants for CMS-eligible patients. We continue to expect to reach 250 unipolar patients and/or 150 bipolar patients implanted in their respective RECOVER study arms by year-end. In heart failure, the ANTHEM-HFrEF U.S. pivotal trial continues to progress with over 265 patients enrolled. We still expect to achieve 300 patients enrolled in the first half of 2021. We continue to make progress in OSA. The confirmatory study was submitted for IDE approval during the fourth quarter. We received some additional questions and still expect to start the study in mid-2021. For the cardiopulmonary business, sales were $122 million in the quarter, a decline of 10% versus the fourth quarter of 2019. Oxygenators have declined in low double digits globally as a faster recovery in the procedure volumes in the U.S. and the rest of the world region was offset by procedure restrictions in Europe. HLM sales declined in the high single digits due to COVID-19 impacts on hospital budgets for capital equipment and all regions improved sequentially over the third quarter. Moving to heart valves. Sales for the segment were $24 million in the quarter, a decrease of 27% versus the fourth quarter of 2019, including another double-digit growth quarter in Japan, driven by Perceval. Starting in the second quarter of 2020 and continuing through the year, we reduced costs to offset some of the decline in sales. We continue to reallocate resources to fund priorities. These actions have delivered approximately $65 million in savings in 2020. Specifically, these 4 key areas included the following: First, we instituted a hiring freeze, participated in government-sponsored work programs and adjusted employee-related expenses, including lower performance-based compensation and a significant reduction in executive leadership short-term incentives; second, we reduced spend related to travel, marketing events and field presence and have shifted to working with our customers and stakeholders using remote methods; third, we reduced other discretionary spend related to external consulting and temporary staffing; and fourth, we balanced our manufacturing output to coincide with the anticipated reduction in demand. We remain focused on disciplined control of expenses as we move through this next phase of the pandemic while still investing in our pipeline initiatives. I'll now turn the call over to Alex for an overview of the financial results.

Thank you, Damien. I'm going to discuss the fourth quarter results in greater detail and then provide our 2021 guidance. Sales in the quarter were $270 million and declined 7.7% compared to the fourth quarter of 2019. Cardiovascular sales were $160 million, down 10.1% for the fourth quarter of 2019. Neuromodulation sales were $109 million, a decline of 3.8% compared to the fourth quarter of 2019. Adjusted gross margin as a percent of net sales in the quarter was 67.2%, down 250 basis points from the fourth quarter of 2019. The margin decline was primarily driven by lower volume from sales and unfavorable manufacturing variances. Adjusted R&D expense in the fourth quarter was $39 million compared to $38 million in the fourth quarter of 2019. R&D as a percent of net sales was 14.5% versus 13.1% in the fourth quarter of 2019. R&D is increasing behind continued progress of the ANTHEM-HFrEF pivotal trial and the RECOVER study. Adjusted SG&A expense for the fourth quarter was $94 million compared to $108 million in the fourth quarter of 2019. SG&A as a percentage of net sales, was 34.7%, down from 37.4% in the fourth quarter of 2019. Adjusted operating income from continuing operations was $49 million compared to $55 million in the fourth quarter of last year. Adjusted operating income margin from continuing operations was 18% compared to 19.2% in the fourth quarter of 2019. The adjusted effective tax rate in the quarter was negative 0.1% compared to 5.3% in the fourth quarter of 2019. The lower tax rate is primarily attributable to geographic income mix and partial valuation allowance in the U.S. Finally, adjusted diluted earnings per share from continuing operations in the quarter was $0.71 compared to $1 in the fourth quarter of 2019, and was within the full year guidance range. Moving to cash flow. The cash balance at December 31, 2020, was $253 million, up from $61 million at December 31, 2019. Net debt at quarter end was approximately $505 million, up from $272 million at year-end 2019. These changes reflect the impact of the financing completed in the second quarter of 2020. Our adjusted free cash flow, excluding extraordinary items through the fourth quarter of 2020 was $17 million. Capital spending for 2020 was $35 million, which was $10 million higher than 2019, related to initiatives to support manufacturing, sterilization capabilities and to further develop our epilepsy digital innovation platform. As a result of the heart valve divestiture, we took a charge of $202 million in the fourth quarter related to the anticipated sale of the heart valve business. In addition, we have reserved $42 million for a provision for future obligations of our site management subsidiary related to hazardous substances from former operations at Saluggia, Italy, campus. Now turning to 2021 guidance. We forecast 2021 sales growth between 8% and 13% on a constant currency basis, and this includes the full year of the heart valve business. If current exchange rates remain unchanged, the company's full year revenue guidance will be positively impacted by less than 1%. We anticipate the neuromodulation business to grow 15% to 20%. We estimate our cardiovascular franchise to grow in the low to mid-single digits, with strong growth from ACS, largely offset by late-stage replacement cycle of HLM. We are projecting adjusted diluted earnings per share from continuing operations in the range of $1.40 to $1.90. The share count is expected to be approximately 49 million. Adjusted cash flow from operations, excluding extraordinary items, is expected to be in the range of $30 million to $50 million. While we don't provide quarterly guidance, sales in the first half are assumed to be lower, while expenses are generally more evenly spread out. For the first quarter of 2021, we expect net sales to be down 3% to 7%. The first quarter is expected to be the softest earnings quarter, and we forecast a range of $0.10 to $0.20 per share. With that, I'll turn the call back to Damien for some final comments.

Thanks, Alex. While 2020 did not go as expected, we have become stronger, more agile, and remain cautiously optimistic that our execution focus, coupled with expectations of declining COVID-19 infections rates will lead to improving results throughout the year. As we transition out of the pandemic, we believe customers will continue to reward both our innovation and actions as valued partners with increased trust and market share. As procedures return, we believe the work we've been doing to improve margins will become clearer. We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value. And with that, Catherine, we're open for questions.

Our first question comes from Rick Wise with Stifel.

Damien, I’d like to start by discussing recent trends. We have all noticed the impact of COVID-related challenges affecting everyone since late December and into January. Can you provide more insight into recent trends and what you are observing? Have conditions stabilized? Is the situation improving or deteriorating as we progress into the first quarter? Any additional information would be appreciated.

Yes. First of all, Rick, lovely to have you on. Fourth quarter. Look, the fourth quarter was interesting year-over-year. Look, October was the strongest, and then we faced headwinds, like a lot of people, in mid-November that carried into December, especially Europe. I mean, that was the noisiest for us. And you can see that in some of the commentary we just gave. Sales in the first quarter really continued that trend with the COVID-19 hospitalizations increasing. Comparisons start getting easier in March, but Q1 has been noisy, to say the least.

I'm sorry, noisy, meaning? Can you give us any more color? Are you feeling a bit more optimistic? Many companies have talked about recovery or some have cited some signs of light at the end of the tunnel kind of thing. Anything else you can share?

So what we're observing aligns with what many other companies have reported. January and February weren't as challenging as they were last year around April and May, as hospitals are in a better position, particularly in the U.S. However, Europe has faced more difficulties and hasn't bounced back as strongly. On the international front, things have remained relatively stable compared to where we were at the end of last quarter. There were signs of slight improvement in February, but recent weather issues and the situation in Houston appeared to cause a temporary setback. I believe we'll have a better understanding in the next two weeks.

Okay. Regarding the RECOVER trial enrollment timelines and milestones, if I understand you correctly, Damien, you mentioned 250 unipolar and about 155 or 155 for bipolars by the end of 2021. It seems like enrollment is on track with the expectations or guidance we have discussed in recent months. Is that correct? Additionally, are there any headwinds we should be concerned about regarding these timelines?

Yes. You are hearing that right, yes. So 250 in the unipolar or 150 in the bipolar or both. We actually thought that the bipolar was not going to recruit as fast because it's just harder to deal with those patients and track them. But it turns out that, that has been a faster recruiting timeline than we anticipated. So it's tracking well. The implants are progressing well. The consents into the trial have been really progressing well. Again, the limiting factor is just clinics being open to implant, which, as you know, from some of the studies, neurology, psychiatry visits to clinics are lower, whereas a lot of the telehealth is progressing very, very well. So I like the progression there. The consents are definitely tracking extremely well, and I'm pleased with how the team is doing that study and following up on the existing patients that we've already implanted. We've not missed a titration or follow-up yet.

Our next question comes from Anthony Petrone with Jefferies.

Great. I hope everyone is healthy. I have a couple of questions about guidance. For the negative 8% to 13%, what specific aspects are included for heart valves? I'm trying to clarify the numbers while excluding that. Regarding the neuromod outlook of 15% to 20%, how much of that accounts for COVID recovery compared to new patient starts and reimplants from the existing base of 100,000? How are reimplants factored into those figures?

First of all, let me just say, welcome, Anthony. Great to have you tracking us. And I'll pass this to Alex.

Yes. So from a sales perspective, heart valves ended 2020 at roughly, call it, $90 million in sales. We expect a recovery from heart valves sort of low to mid-double digits, I would say. So that's kind of a good way to forecast the heart valve business. And right now, we have it in for the full year. But as we said, we expect to close the transaction sometime in the second quarter.

And it's Matt. For neuromod, the 15% to 20%, I would say, look, a little bit of that is DTD. That's up year-over-year. If you look at epilepsy, what we've been saying is at least 5% underlying is our plan, hopefully, a little better, higher OUS because that's a global number. And then don't forget the U.S. is 75%. So it's mostly driven by the U.S. So if you take those pieces, you can kind of see what the difference is in terms of what we consider to be the snapback. And our thought right now is more of that's going to come from the replacement or under service than the NPI.

Our next question comes from Adam Maeder with Piper Sandler.

I wanted to begin with a couple of logistical questions. First, it seems you provided an update on the pending heart valve divestiture, but I’d like to clarify my understanding of that. I know the divestiture isn't included in the guidance, but how should we consider any potential impact in terms of dilution once it's finalized? Additionally, could you provide any updates or more information regarding the CFO search and its current status? I also have one follow-up question.

Adam, it's Alex. On the heart valve divestiture, as we stated previously, we expect the full year impact to be about $0.10 to $0.15 dilutive. So that's the way, obviously, given the timeline, I would model it in that fashion, prorated as you see it.

And with respect to the CFO search, two things. First of all, the end of year is an interesting time to be recruiting for senior executives because it's bonus reporting for most companies. So that role has a stickiness that I think is interesting when you're recruiting. Having said that, our partner, which is a large global human resources partnership, has unearthed a really intriguing pack of candidates, many of whom we've met over the last several months. Having said that, I will say I'm fortunate, and I think we're fortunate as a company, to have Alex being able to step into the role. And he's making a tangible and palpable difference to the function. And so as we continue the search, I'm convinced that we have the right person to be filling the seat.

That's very helpful. For my follow-up, I have a question about the 2021 guidance. The EPS forecast seems a bit lower than I anticipated, which might be due to my own modeling. However, the guidance range is quite broad, so I would appreciate a clearer explanation of how you determined the upper and lower limits of the EPS outlook. Additionally, could you discuss the cost-saving initiatives implemented in 2020 and what savings will continue into 2021? Lastly, I would like to hear your thoughts on employee morale and turnover.

Okay. So from a margin profile perspective, the gross margin is actually increasing in 2021. And then once heart valves are out of our P&L, we expect about 200 basis points of accretion. Relative to 2020, gross margin is increasing on the basis of improved mix from VNS and increased volumes in CP. R&D as a percent of sales is going to increase in 2021. This is largely due to the RECOVER and the ANTHEM trials. Also, just to remind you, in 2020, we had sort of a depressed spending base. So there's a little bit of an increase there as well. SG&A as a percent of sales is going to decrease in 2021 versus 2020. It's just pure economies of scale as sales increase, and we see some leverage there. Then, I guess, interest expense, we continue to look at $45 million to $50 million and the tax rate in the range of 10% to 15%.

Yes, Adam, I'd say, versus consensus, it's a little tricky because a couple of you have heart valves out but what we really try to look at apples-to-apples, I'd say the major differences to Alex's point, it's R&D and SG&A. That's where we see our numbers a little bit ahead of the Street as a percent of sales.

Just on employee morale, it's a great question. So first of all, let me talk about data. Sequentially, we saw an improvement in our voluntary turnover rate quarter-on-quarter. So I'm pleased that we're heading in the right direction there. Secondly, we conducted our virtual growth and leadership conference, which brings together 150 of our senior leadership over 3 days in December and January. And reading the chat line of this virtual conference, I'm convinced we have a highly motivated senior leadership team. Yes. More broadly, I'd say the organization has faced into the challenges of 2020 and even the start of 2021 with the weather and continued COVID with extreme positivity. And again, I just look at how people reacted with ingenuity to the freezing weather in Houston. And I'm convinced that we've got a team that's highly motivated and really linked to our mission of patients first.

Our next question comes from Michael Polark with Baird.

I have a few follow-up questions regarding some earlier points. Just to clarify, I noticed in the slides that cardiovascular revenue is projected to grow in the mid- to high single digits for 2021. However, Alex, in your prepared remarks, you mentioned low to mid. I suspect the difference might relate to whether heart valves are included, or I may have misunderstood. Could you please clarify those two points for me?

Yes. So cardiovascular, we expect to grow low to mid-single digits, kind of in line with the normal growth that you would see from the marketplace. As I mentioned before, we expect the heart valve business to have a larger snapback. So expect somewhere between, I would say, low to mid-double-digit snapback on heart valves. So that's kind of how we adjust for it.

The slide deck indicates that cardiovascular is expected to grow in the mid- to high-single digits. I notice a discrepancy between what you're saying and the slides, so perhaps we can discuss that later. I understand the components but want to ensure we have a clear understanding with all the moving parts. Regarding heart valves, there is an anticipated dilution of $0.10 to $0.15 in the run rate. Assuming that divestiture occurs in the middle of the year as you mentioned, does your earnings guidance take this dilution into account when it happens?

No. No, it does not.

In the slide deck, on the free cash flow slide, Slide 20, there is a dotted line on the gray box for the 2021 forecast, and I want to understand what that represents. It seems to be an extraordinary item, and I would like clarification on what it is and the associated number.

It's just a range, really. That's all it is.

Oh, got it. Okay. So the purple...

It's showing the 30 to 50 range.

Yes.

I appreciate the comment regarding our R&D investment. It seems that both the market and I have underestimated the spending in 2021, which is a peak period for these crucial studies. Could you provide more detail on the expected dollar investment, specifically your R&D budget for 2021? I assume that in 2022 and beyond, we will likely reduce spending if this is indeed the peak year for ANTHEM and RECOVER. I'm trying to understand this spike in the numbers and how it will decrease in the coming years. Any clarification on this would be very helpful.

I'll quote a range of 16% to 17% of sales.

Okay. Last one. It sounds like the RECOVER recruitment is on track, and the comments are clear. Does that keep you on pace for the prior timing of the late 2022, early 2023 foot to registry? My guess is yes, but I want to ask the question.

Yes, yes. So the short answer is yes.

Our next question comes from Scott Bardo with Berenberg.

LivaNova, I think, used to provide some EBIT margin range implicit within your guidance. And I know you've just, Alex, given some parts of the pieces. But the nature of my question is your sales guidance looks to be, I think, quite encouraging, highlighting a return to more normalized activities. Yet, if I understand correctly, your earnings guidance implies something like a 13% to 16% margin guidance. I wonder, firstly, can you clarify whether that makes sense? And following up from that, one of your key strategic priorities, I think, is to optimize operating costs. And it seems a little perverse to me why while your top line recovers as guided, why you're expecting margins to be materially below 2019 even without the divestiture of heart valves, which I think is margin accretive. So I just want to talk about these parts. And I think it is important because Damien, you've highlighted many times, an aspiration to shoot towards a 20% margin bandwidth, which seems achievable given your gross margin. Of course, there's great uncertainty as to a timeline around that. So if you could please help us with those pieces, I think that's important.

Scott, thanks for your question. So our adjusted margin, we're expecting somewhere between 13% to 14%. That's kind of where we're coming in. Again, the major investments in R&D are kind of driving the, I guess, you could call it, the dilutive effect of these investments. We're making good progress in terms of reallocating costs. It's going to take us a little bit of time to work through some of the cost containment initiatives that we've highlighted in the past, so that's kind of the plan at this point.

Yes, Scott, it's Matt. Our plan is to improve, obviously, from '21 going forward each year. We're tentatively planning our Capital Markets Day in the back half of this year. And we're going to give you a lot more color on the margin over a longer-term horizon. And then specifically, that 20% number, we'll be very clear on the year we expect to get back to that.

But I mean, following on for 1 of the questions before then. Is it fair to say we are then at peak R&D on an absolute basis and that, that should normalize going forward? Is that a fair statement?

Yes, exactly, Scott.

All right. And maybe just 1 last question on free cash flow, please. I think that it's encouraging, of course, to see that you're expecting some progression in free cash flow. But the free cash flow numbers being guided are still 25% of the adjusted free cash flow guidance that would have been given this time last year. So why is free cash flow so poor? And when do we actually see a convergence towards your historic free cash flow guidance?

So Scott, I want to remind you that in this third quarter, we redefined free cash flow. Our calculation for free cash flow has changed; we eliminated several adjustments and streamlined it so that it reflects operating cash flows minus investing activities, with only extraordinary items, like the 3T settlements, being taken into account.

I mean, largely in response to a number of discussions we had with people and about clarifying and not sort of exceptionalizing. And I think this is a much more robust definition. Year-on-year, it creates some muddiness. But I think we are at a place now where our cash flow is much more robust. And I think what you could calculate directly from GAAP.

Okay. Good. Very quickly then. And I guess the underlying nature of that question was, clearly then, you're still seeing some material adjustments this year. When do we get a cleaner set of free cash flow? I mean, do you expect some of these adjustments to significantly abate next year? Can you give us some sense of that?

I think for the most part, we've seen a lot of these adjustments coming out even in the latter part of 2020. So...

And again, I think if we look at that table in the chart, where you can see there that there's significant differences in a number of the metrics there. And I think that, again, I hope provides a lot of clarity to people as they were modeling what we were taking out. And also going forward, I think you can expect lower merger and integration costs, those sorts of things that have been pretty high for a number of years.

Our next question comes from Matt Taylor with UBS.

So I wanted to follow up on an earlier question about assumptions behind the guidance and just see if you could give us some flavor or color on how conservative you think the guidance is with regards to recovery assumptions through the year in some of the different businesses. Have you baked in some haircut? And what does it assume in terms of overall utilization recovery?

In terms of the overall forecast, we find it appropriate considering the current COVID situation. There's still a lot of uncertainty, which we expect to carry into the first quarter. We anticipate the sales forecast will reflect signs of recovery in the second half, but we are still modeling a largely depressed market.

Yes, Q1 is the most challenging comparison, but we expect gradual improvement throughout the year. I mentioned being cautiously optimistic. As procedures increase and the vaccine distribution continues, patients are becoming more willing to return. Some of our disease categories depend on patients being ready to visit clinics, such as epilepsy, which has a significant pediatric component. About 30% of our patients are pediatric, and both the caregiver and the child need to go to the clinic. Therefore, we are approaching Q1 with caution while anticipating gradual progress for the remainder of the year.

And the last thing I'd say, Matt, is on neuromod epilepsy in general. That's the one that gets a lot of attention. What we're forecasting is that for NPI, the funnel has been delayed, not backlogged. So there's just been kind of a lag on that. But for replacement or render of service, we do think that there's going to be an OR backlog. So we're going to recapture patients in 2021. But we've even modeled some of them end up in 2022.

Okay. Thanks, Matt and Damien. So 1 follow-up on epilepsy. I think everything you've said about the impacts here the last couple of quarters has really been around COVID. I was curious, are you seeing any drug headwinds or impact from recalls or anything else that is hampering that business?

No, we included in our modeling, the impact of drugs. We've continued to monitor all of that very closely. We're not seeing specific headwinds in any specific geography or for any drug impact.

Okay. And sorry, just 1 more follow-up. I wanted to be really explicit about this because I got a little confused by the comments. When you're giving this EPS guidance, midpoint is $1.65, so that includes heart valve this year. So basically, you're saying if you do divest it in the second quarter, we should take out a prorated amount of $0.10 to $0.15. So basically, your underlying guidance midpoint is below the $1.65?

That is correct.

Our next question comes from Mike Matson with Needham.

This is David on for Mike. I have a question regarding the cost containment measures you mentioned, such as the hiring freeze and changes to executive compensation. Did you reduce the sales force within any of the businesses? Additionally, as these measures are set to continue into 2021, what gives you confidence that they won't negatively affect the growth outlook over the next 12 to 18 months?

Yes. Good question. No, we didn't cut the sales force. That's not where headcount freezes have occurred. And going into 2021, we're actually increasing headcount slightly in those areas. ACS, for example, we've talked about hiring 20 additional people into the team in the U.S. We've already started that in Q4, and that will continue through the next couple of quarters. And similarly, in epilepsy, the pod teams, we're committed to hiring at least another 3 of those in the year, and we've started recruiting for that. So the sales organization has not been impacted by this.

From a balance sheet perspective, that's correct. We ended 2020 with approximately $250 million in cash. We are currently in a cash preservation mode. Therefore, there are no plans for any major capital deployment initiatives aside from normal investments related to our core business and capital expenditures.

And then for the EOS backlog, it's not perfect math, but we're estimating that today, there's about 1,000 to 1,500 patients in the U.S. who should have already come back for the replacement. And again, as we talked about before, we have a pretty high capture rate on replacement. So nothing's changed to suggest they're not coming back. It's more a matter of timing. And as we've said, you can wait at least 6 months, maybe a little longer to have your battery replaced. But we're seeing some of the people that held off in 2020, in the first half of the year, kind of April, May, June, were coming back. So we feel pretty confident in that number.

Thank you. There are no further questions in the queue. I'd like to turn the call back to Damien for any closing remarks.

Well, thanks, Catherine. Thank you, everyone, for joining us. We look forward to updating you on our Q1 call in a couple of months. And I just want to thank all of the team globally for their continued passion for our business, and thank you for your interest in our company. Bye.

Ladies and gentlemen, that concludes our conference call for today. Thank you for participating, and you may now disconnect. Everyone, have a great day.