LivaNova PLC (LIVN) Q2 2023 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the LivaNova PLC Second Quarter of 2023 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. 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 and IT. Please go ahead, sir.

Thank you, Emily, and welcome to our conference call and webcast discussing LivaNova's financial results for the second quarter of 2023. Joining me on today's call are Bill Kozy, our Chair of the Board of Directors and Interim Chief Executive Officer; Alex Shvartsburg, our Chief Financial Officer; Stephanie Bolton, President of Global Epilepsy; and Briana Gotlin, 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 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, which will all be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the Investors section of our website under News Events and Presentations at investor.livanova.com. With that, I will now turn the call over to Bill.

Thank you, Matt, and thank you, everyone, for joining us. Welcome to LivaNova's conference call for the second quarter of 2023. Before discussing results for the quarter, I'd like to recount 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, I've 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 as LivaNova's 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. Steph has a 12-year record of achievement at LivaNova. She started as a territory manager before taking on leadership roles in epilepsy and cardiopulmonary. Most recently, Steph served as President of International, where she led both businesses to commercial success. We're excited to have Steph's commitment to company performance and passion for helping epilepsy patients. Steph, 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, interview 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 the 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 Cardiopulmonary segment, revenue was $151 million in the quarter, an increase of 21% versus the second quarter of 2022. Oxygenator 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 S5 placements in the Rest of World region and initial Essenz installations in Europe and the U.S. The commercial rollout of Essenz 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 in oxygenators and HLMs. As previously stated, we continue to expect to ramp in Essenz 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 the second quarter results in 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 1,947 replacements, representing 8% growth versus the prior year. Epilepsy revenue in Europe grew 10% versus prior year, led by the Nordics and the U.K. The Rest of World region achieved 15% growth led by Turkey and China. For the full year 2023, we now expect global epilepsy revenue to grow 6% to 8%. Our revised forecast incorporates the strong first half performance in 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. Enrollment for the Unipolar cohort of the study has been completed, and we await the results of the 12-month follow-up. As a reminder, we randomized the 500th Unipolar patient into the trial in March and subsequently completed all implants in May. Upon receipt of the 12-month follow-up data for the 500 Unipolar patients in June of 2024, we will conduct a final analysis and expect the publication of the study results by late 2024. The Bipolar cohort is similar to the Unipolar cohort in that the randomized controlled study is designed with frequent interim analysis that will assess if predictive probability of success or futility was reached or if the study should continue enrolling. In June, the interim analysis for the 150th patient 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 Unipolar 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 costs 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.

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 addition, growth was impacted by pricing programs implemented in the second half of 2022, higher-than-expected U.S. epilepsy replacements, and tailwinds from oxygenator 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 investment 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 Essenz 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% compared to 13% in the second quarter of 2022. Adjusted operating income was driven by improved gross margins and operating expense leverage. 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 $0.78 compared to $0.53 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 30 was $587 million, up from $542 million at year-end 2022. The increase in total debt was driven by a delayed draw of $50 million on the Term Loan A facility that we put in place in July of 2022. Net debt, including restricted cash at June 30 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, LivaNova pays its short-term incentive bonuses in the second quarter. The year-over-year improvement was driven by operating income offset by higher HLM 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 8% and 10%. And continue to assume approximately a 1% tailwind from exchange rates. We now expect adjusted diluted earnings per share in the range of $2.55 and $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'm 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.

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. I'll certainly take this moment to thank them for their continued focus on our patients, performance, and execution. These three areas underpin our dedication to serving patients worldwide, focusing on long-term innovation and shareholder value creation. With that, Emily, we are now ready to open the call for questions.

Our first question comes from the line of Rick Wise with Stifel.

It's nice to see the quarter, and your comments are very clear about some of the factors, such as favorable comparisons, price, and the better-than-expected replacement. I'm hoping you can elaborate on the latter two. Can you provide insight into the price benefit in the second quarter growth? Is that fully completed now? Is there any potential benefit expected in the second half? Additionally, could you or Stephanie discuss the better-than-expected replacement volumes? What contributed to that, and why wouldn't we expect that to continue into the second half?

Sure. Let me take the front end, Rick, and I will then pass to Steph on the end-of-service volumes. As you well know, it's a pretty complex analysis and recognition of these underlying factors. But for sure, price, end-of-service revenues and oxygenators 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 oxygenator competitors who we anticipated coming back to the market in the second quarter did not happen. We do know for sure that they're right now shipping product and having just been with a customer here in London on Monday, I know for a fact that they are shipping products. So 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 the third and fourth quarter of last year. So we don't see a big carryover there. Now if I could, Steph, may I ask you to comment on Rick's question related to end-of-service revenues?

Sure. Rick, it's good to hear you. We continue to believe that we're seeing an increased benefit from the programs that we've had in place and those programs have really been driving to help physicians identify end-of-service devices and ensure that all important continuity of care for patients. Moreover, sort of casting our mind back, we entered the market in 2017 with SenTiva, and SenTiva includes a key feature called scheduled programming, and that enables patients to reach an optimal therapy quicker. In fact, we see patients reaching optimal therapy in 6 months versus 12 months. That in itself drives a higher replacement rate. And as a continuation to that, we are starting to see the first wave of replacement from those patients who were initially treated with SenTiva. So if I come to your second part of your question, which is why do we potentially see that flowing in the second half of the year. So we're continuing to monitor this and we're continuing to monitor the impact of SenTiva on our end-of-service 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. As a follow-up regarding Bill, the Neuromod business performed very well. Can you discuss the growth, NPI growth, and the balance of NPI versus replacement? Also, what is driving sales, especially in light of trends from the second quarter looking ahead?

Yes, very good question. Steph has spent the bulk of her time since starting in this new role on that. So I'm going to push it to Steph, would you mind?

Sure, sure. Rick, we're really pleased about the results we've seen this quarter, as I know are the epilepsy team. Our focus is firmly on NPI and the team are working tirelessly with our physician base to identify the right patient at the right point of their treatment journey and creating that all-important urgency to treat. My focus has been on implementing clear operating mechanisms, focusing not just on what we're doing, but how we're doing it and being consistent and disciplined about it. And that's what will set us up for the future. An example of this is the clear commitment to collaboration that we have between our sales organization and our case management group. Another clear contributing factor to our Q2 results were fewer surgeries being rescheduled at the end of the quarter due to those improved workflows that we've put in place between our case management group and also our providers 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.

Congrats on a good quarter. I wanted to ask about the other side of the house and discuss the CP trends. I'm curious about the contributions from the Essenz launch in the Rest of World and Europe, as you mentioned some initial orders there. Could you provide more insight into the funnel and how it might ramp up, as well as share more details about how the launch has progressed so far and what we can expect in the upcoming quarters?

Sure. We're in commercial launch mode. As you know, all Essenz activity is focused on Europe or the U.S. There are no Essenz efforts going on outside those areas. And so all the revenues, what you heard about earlier, Rest of World were S5, and they were quite healthy, too. Our pipeline is building. When I use the term commercial launch, remember that we are creating many evaluations. Nobody will purchase an Essenz 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 in major institutions, both in the EU and in the U.S. We are quick to recognize that the software upgrades that are continuing to roll out are important to many of our bigger customers. The reason I keep mentioning the bigger customers, okay, remember that they won't buy one or two machines. Their cardiac care facilities tend to be much larger. We've got evaluations going on right now in some institutions that could buy as many as 10 to 12 in a single purchase order. So that's going to take some time. They're going to want to test the upgrades. But we did get some nice signals, if you would, from the efforts that we made in the quarter, the 30% HLM growth overall encouraged us. And though Essenz was a small part of that in the U.S., we actually had a modest decline in S5. So it was essence that perked us up in the U.S. And we also had some good penetration in the Europe, very early stage. There's no question that we expect the fourth quarter to be the more critical quarter in terms of the ramp starting to take off. And our forecasting as well as our production alignment are really teed up for that window of 4Q and leading into '24.

Got it. Thanks for clarifying that. Could I just ask 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, we noticed three key factors. First, I wish we were experiencing 16% growth, but we recognize the year-on-year increase in pricing that started in the third quarter of last year. Second, the sales related to end-of-service epilepsy were much stronger than expected. Third, the oxygenator volume has been sustaining our cardiopulmonary sector. Together, these three factors likely contributed around a 6% impact on the quarter. However, keep in mind that the pricing benefit will extend into the second half of the year. We’re closely monitoring the end-of-service situation, and we were pleasantly surprised this quarter. We need to observe that over the next couple of quarters to see how it develops. Regarding oxygenators, our competitors have returned, and their products are being delivered.

Matt, I just want to clarify. So we'll 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.

I have a question about epilepsy, specifically regarding NPI 838 in the U.S. Can you remind us what the number was in the second quarter of 2019? I'm interested in understanding where we currently stand compared to the pre-COVID baseline. Additionally, regarding epilepsy, over the last nine months, you mentioned some significant changes in leadership and the sales team, some of which were described as involuntary. As you assess the current execution and team in the field today, do you feel that the team is focused and performing well, or do you expect further changes in the next six to twelve months as you adjust to your new role?

Let's switch the first one, and let me make sure I got the question right. You're interested in 2Q '19 NPI placements.

Correct. Yes, U.S.

Steph, by chance, do we have that in the room or I'm not sure. I don't have it.

Do you think you're above or below or in line with pre-COVID baseline? I guess that's the question.

We'll make sure to follow up on that. I'll connect with Briana when we're finished, and we will provide you with an answer to that question. I want to commit to that. Is that alright? We don’t have that number available right now. Just to offer some additional context quickly, the 2022 NPIs were down 6% year-on-year compared to 2021. However, we're optimistic about what we've observed in the first half of the year. Steph, do you have anything else to add?

I think, Michael, I'd like to address some of you of the points as well about some of the talent that we brought into the organization. I'd also like to talk a little bit about the culture that I've seen coming in, a culture of a hugely passionate and committed team. So you'll excuse me for the early days of this. So I started in this role on 12th of May. It will always be etched on my brain. I've spent over half of my professional life working with this amazing therapy and advancing the adoption of it. So this is a wonderful opportunity for me. And I have to say the team that I'm now leading have been incredibly welcoming and the culture is one of wanting to win, wanting to execute and do as well as they can. And we are, for sure, benefiting from those talent upgrades that we've seen in the recent months and years.

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 this first kind of 90 days?

In terms of surprises, there has been a pleasant one. We had the chance to benefit from a couple of favorable conditions. Occasionally, you experience a supportive trend, and it's crucial for the organization to recognize it and respond accordingly. One highlight is the operation of our plant in Mirandola, Italy, which is running at full capacity, producing as many oxygenators as possible. These devices are vital in cardiac surgical suites, playing a key role in saving lives and improving health. That has been a positive surprise. I'm also impressed with Steph's team and the discipline they are demonstrating in how we engage with our physicians. This also extends to our collaboration with physicians on patient complexity, which presents challenges in generating revenue for this product. Currently, these two aspects are at the forefront, and I appreciate the question as it gives us the opportunity to acknowledge our Mirandola team. Their consistent dedication over the past six to eight months has been remarkable. You are familiar with CP, which typically sees 5% growth, and they have performed commendably. I credit them for identifying and leveraging the supportive trend.

Congrats on the nice quarter. A couple from me. I wanted to start on the adjusted EPS guidance. Obviously, a big beat here in Q2. You took up the full year EPS guide by $0.05, I believe. So maybe just kind of reconcile that for us and talk about the key considerations or puts and takes? And then I have a follow-up.

Sure. We are quite pleased with the performance in the first half, but the focus will ultimately be on revenue. We exceeded our expectations during this period. However, we anticipate that volumes will be affected in the second half, especially in the cardiopulmonary segment with our oxygenator business, as we expect competitors to re-enter the market. While we experienced considerable improvement in gross margin during the second quarter and the first half, we do not anticipate seeing the same level of benefits moving forward. As we evaluate the investments necessary to enhance productivity and foster innovation in our core business, we will proceed with those investments in the second half, which will also impact our expenses. Nevertheless, we feel we have mitigated risks for the year, and that contributes to our confidence in our guidance.

Okay. I appreciate the color there, Alex. And for the follow-up, I wanted to ask about the RECOVER trial and 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 interim looks there? And then maybe level set expectations for the Street? Should we expect this cohort to run to the full 500 patients? Or do you think we can potentially transition to registry earlier?

Sure, Adam, it's Matt. For the Bipolar cohort, the interim analysis began earlier with 150 patients. We anticipated that the average follow-up would be somewhat extended. The data indicates that the Bipolar group tends to show slightly better outcomes than the Unipolar group. Given that approximately one-third of patients are Bipolar and two-thirds are Unipolar, we expect enrollment to proceed at a slower pace. Our current projection is to enroll about 25 patients per quarter, which means the interim analyses will likely be conducted quarterly. As previously mentioned by Bill, similar to the Unipolar group, the study could either stop early, transition to the anticipated reimbursement phase, determine futility, or continue as is. Our general assumption is to complete the full enrollment of 500 patients, which, based on our estimate of 25 patients per quarter, will take some time. However, published data provides insights into possible timelines for completing the trial.

Just a couple more on Essenz. So I guess I was wondering what you're seeing with regard to the Essenz customers, either ones that are just trialing it or actually purchased it? How many of those are kind of upgraded from the S5 versus older units? In other words, do you think this is driving earlier upgrades than what you would have seen in the past?

Well, we had commented, I think, in the last call that we had over 7,000 machines that were out there that were over 10 years old. And so there's been an 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, in Rest of World, they're more interested in S5, and the availability of Essenz 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. We don't have any customers who aren't going to try this on any less than 4 or 5 patients before they'll give us a thumbs up on going forward. And that's where we're at right now in many accounts in both geographies.

Okay. I understand. I believe Essenz is priced higher than the S5. Will this positively impact gross margin right away, or do new product launches like this typically require an increase in production volumes before we see an improved gross margin compared to older products?

Yes, yes, good question. I think Alex is going to remember this question because I've asked him many times, but let me have him go ahead.

The gross margin currently on Essenz is comparable to the S5. But as we scale the volumes and really start to impact absorption and component costs, the gross margin will improve. So the cost base is higher relative to the premium we're charging for Essenz. As we start to ramp the Essenz volume relative to the oxygenator mix, it should have a positive impact on the overall mix of our gross margin profile for the company.

Congratulations on a very strong quarter. I have a couple of follow-up questions, one regarding epilepsy and another about margins and future investments. Firstly, I'd like to understand the programs that were implemented to identify end-of-service patients in epilepsy, as it seems that contributed positively in the second quarter. Can you share how long we might expect that to continue influencing results? Secondly, concerning NPIs, it appears that your efforts to increase those numbers have not yet yielded a significant impact, although there has been some effect. Is that a fair assessment? If so, when can we expect a more substantial increase, if that's anticipated? Additionally, I have one more follow-up question.

Steph, please?

Yes. Thanks, Matt, for the question. So if we look specifically at the programs that we've had in place and have been building on, so if I would say the back end of last year, so we have the battery life follow-up program that we're working through. And we also have the physician portal that we've rolled out to allow our customers to get a full end-to-end view, a full cohort, if you like, of their implanted patient database. So we'll continue to see that ramp up throughout this year and obviously, as we move into the future. So it's early days, and I'm looking forward to coming back with some more specifics of what that uplift looks like. But at the moment, what the feedback that we get from our customers is that this is very much appreciated. And then when I look forward to NPI, so NPI is all about how we do this in terms of the discipline and the rigor that we have in our operating mechanism. And I've seen this already start to read out, the daily, the weekly, the 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 bleed through future quarters.

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 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 epilepsy as well as cardiopulmonary.

And we will address that heart failure 2024 question as we work through our strat plan and budget. And more to come on that over the next couple of quarters. We've got two things to do. Number one, we got to figure out what do we have to still maintain in '24 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 plan '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.

Congrats on the quarter. I have two operational and then one on the RECOVER trial. So just thinking on cardiopulmonary. Just on the 7,000 machines 10 years or older, just curious how many of those have actually turned over to Essenz, what the economics are around an 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 LivaNova gained? And then I'll have one on epilepsy.

Let me take the share question first. We're trying to chase that down. The answer is we don't know exactly how much share we have gained because a lot of these orders that we're getting are substitute orders and account gets 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 at 1% is right now a little more favorable than that. And so that market is probably a 2%. 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 1% to 3% with 2% as the midpoint. There's no external data on oxygenators or 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.

To clarify the installed base, there are 7,000 units in total, and we estimate that around 40% of those units have exceeded their 10-year useful life cycle. This is our immediate focus and what we are targeting.

And then operational on epilepsy, mix right now, 30% NPI, 70% end-of-stage replacement patients, where do you think that mix can go over the next 2 years, and let's say, NPIs get to, I don't know, 50% mix. Can epilepsy be a sustainable low double-digit grower?

Let me ask Steph to comment. But 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 big questions at you. You've heard these before, but number one, we've got to understand more deeply. There's 22,000 or more DRE patients coming in every year. Only 8,000 of those people are getting treated. So there's some really heavy lifting being done by Steph and her team to say, what is going on here? How can it be that these people aren't getting treated? And she's 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 a little too early for us to guesstimate or estimate even today, but jump in here, please.

Anthony, I think it's a really good question and one I'm asking the team during 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 drug-resistant epilepsy, it continues to be 30% of this population. So when we look at the treated incidence pool every year, we are not getting close to treating that incident on a yearly basis, let alone the overarching prevalence within the market. So that's where we're sharpening our pencils is to understand how we can ensure that more patients come through the right pathway to access the right treatment. And we are absolutely one of those treatment options. So 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.

Let me provide some additional details, and Steph can add more if she wants. Currently, Steph and her team are actively connecting with various key opinion leaders, including epileptologists and surgeons. I'm also spending time with some of these individuals. Additionally, Steph has revitalized the department focused on reimbursement and healthcare economics, and there is now a team dedicated to thoroughly analyzing how these factors play a role. We're approaching this with a multifaceted strategy and are working to break it down as we progress in our strategic planning. Our goal is to uncover valuable insights from this extensive work that could lead to improved performance in the future, although that won't happen immediately.

Congrats on the strong quarter. Maybe first on epilepsy and just diving a little bit more into some of the prior questions. I think broadly across Medtech, we've kind of heard about maybe some of these elevated inpatient hospital mission levels. And maybe the benefits for epilepsy, a little bit further downstream, but you've also made some of the changes or investment from the sales force 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 at least have been, 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?

I think, David, if we could take that in two parts. I'll let Matt answer in regards to utilization. I'll answer first in terms of sales force execution. So something that we've spoken about at length in the past is our go-to-market territories. So I'd like to make a few comments about that, if I may. So we have overall 19 designated go-to-market territories. And we see the performance of that group in line with our base business. However, we have 4 open territories and so part of my job, I think, coming into this is to dig into this, to look at the strategy and about 15 fully staffed go-to-market territories, we see an outperformance both in the quarter and also in H1. So we continue to be committed to that strategy. And we're also going to be having 2 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 is the right one. Matt, can I hand to you for the overarching?

Sure. For epilepsy surgery, a couple of things I'd say. We track now the EMU capacity. In the second quarter, it was about 85% and that was similar to what we told you in the first quarter, and that was up from the fourth quarter. There's a 6-month lag. So that's encouraging, but it didn't improve from the last quarter. And then I'd say in terms of overall neurosurgeries, which is where we primarily have our implants. I'd say anecdotally slightly better, but nothing stood out as being like a meaningful change in capacity for OR scheduling in the quarter.

Can we get an update on Italy, please, any change to timing about from the European Court of Justice and expectations for, say, mid next year for the Supreme Court to weigh in?

Yes. Here’s the latest update we have. The timing of decisions by the European Court of Justice and subsequently the Italian Supreme Court remains uncertain. We don’t have specific information to share at this time. We do not expect any final decision until at least 2024. We are currently experiencing cash burn costs related to SNIA, which are approximately $15 million to $20 million per year, including legal fees and guarantee costs. We are monitoring this situation closely, with our General Counsel particularly focused on it. We will keep you informed as things progress.

I wanted to follow up on RECOVER in relation to Unipolar, specifically regarding the duration of treatment effects and to clarify a few points. We have a 12-month endpoint for improvements in modular scores, but considering the enrollment cycle goes back to 2020 and 2021, some patients may have been on treatment for 24 months or even longer. What has been the overall dropout rate for the study? Additionally, what is the average treatment duration for the patients currently enrolled, and where do we expect that to be by March 2024, ahead of the final readout?

Sure, Anthony. If you look at the overall numbers, the dropout rate from the published paper showed scenarios with a 20% and 10% dropout. As mentioned previously, we're well below the 20% dropout rate, so there's no reason to be concerned about any issues with dropouts. Regarding completion percentage, I would consider it in terms of scores. Each patient that has been implanted receives 10 scores, and we assess what percentage of those scores we have. Since we are now in the final follow-up, that percentage has increased significantly. We are still blinded to the data and will not see it until May 2024. However, in terms of scoring overall, we are progressing well. As for the full data set expected in May 2024, we will analyze everything then, and the primary endpoint is the timing response among 13 total endpoints.

I think my follow-up question might have got cut off, so I'll ask it again. But just was on kind of the bigger picture. When you think about the overall portfolio and CP and Neuromod kind of 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. So I guess kind of thinking about 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 advertising maybe those investments, at least relative to these 3 or 4 different kind of potential drivers or shifts within the portfolio overall?

Sure. Let me address that. We are fully committed to the SPIs, and they are completely funded. We understand that while heart failure has halted DTD, OSA continues to progress. As Alex pointed out, it’s important to reiterate that we aim to foster iterative and impactful innovation within the core product lines of both CP and epilepsy. We are actively developing that capability on both fronts. For instance, in our last meeting, I mentioned a two-day technology strategy and planning session in Houston, attended by Steph and her team along with several senior managers. The objective was to further advance our core product innovation portfolio for the epilepsy segment. This initiative is part of our strategic planning process across the company, supported by the modest investment Alex referenced, enabling us to initiate this work in 2023. Our focus is on ensuring high customer acceptance and enhancing product quality, and we will maintain this direction for both CP and epilepsy.

Those are all the questions we have time for today. So I'll turn the call back to Bill Kozy for closing remarks.

Thank you, everyone, for joining today's call. On behalf of the entire team, we really appreciate your support and interest in LivaNova, and we'll look forward to speaking more. Thanks.

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.