LivaNova PLC (LIVN) Q1 2024 Earnings Call Transcript

Good day, ladies and gentlemen and welcome to the LivaNova PLC First Quarter 2024 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 and IT. Please go ahead, sir.

Thank you, Candice and welcome to our conference call and webcast discussing LivaNova's financial results for the first quarter of 2024. Joining me on today's call are Vladimir Makatsaria, our Chief Executive Officer and member of the Board of Directors; 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 financial 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, revenue 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. I would like to welcome Vlad to his first earnings call as LivaNova's CEO after starting March 1. Prior to joining LivaNova, Vlad most recently served as company Group Chairman at Johnson & Johnson MedTech, leading its global Ethicon surgery business. He's a respected leader in the medical technology industry with a 27-year track record of delivering results, driving innovation and leading high-performance teams. With that, I will turn the call over to Vlad.

Thank you, Matt and thank you, everyone, for joining us. It's my pleasure and privilege to welcome you to LivaNova's conference call for the first quarter of 2024 as LivaNova's Chief Executive Officer. First and foremost, on behalf of the Board and the executive leadership team, I would like to express our gratitude to Bill Kozy, Chair of the Board of LivaNova for a tremendous job leading the company on an interim basis. I would also like to thank the entire Board of Directors for the opportunity to serve as CEO and express my sincere gratitude and excitement for the future of LivaNova. During my first two months, I interacted with customers, met investors and engaged with my colleagues around the world. I can confidently say that the patient-first mentality thrives across every function and geography at LivaNova. It is an honor to work with a global organization that focuses on solving significant unmet patient needs in two very high-impact medical fields, neurological and cardiac health. I'm humbled to be in this role and grateful to our teams for their exceptional work and dedication to serving our patients and customers. Over the coming months, I will continue to listen, learn and complete a comprehensive review of the business. In doing so, I'm focused on three key areas: execution, innovation, and talent. Let me provide additional color on each. First, execution and performance. My view of success in this area is achieving sustainable above-market growth while improving profitability and cash flow and most importantly, delivering on commitments to our customers. The first quarter marked our fifth consecutive quarter of double-digit revenue growth. In Cardiopulmonary, we maintained above-market growth, driven by the strong launch of the Essenz heart-lung machine and our ability to fulfill the high demand for consumables. In epilepsy, we saw continued growth in both new and replacement implants, driven by disciplined commercial execution. Second, innovation and portfolio. Over the last year, the company has made progress in refining the business strategy and portfolio, including the wind down of the Advanced Circulatory Support segment and the Heart Failure program. These portfolio actions position us well for the future and enable us to have appropriate resources, focus, and investment to drive growth in the business. This includes reinvigorating our cadence of core innovation to meet our customers' most prevalent unmet needs. In both difficult-to-treat depression and obstructive sleep apnea, we anticipate results in RECOVER and OSPREY studies later this year. Looking ahead, we will evaluate those opportunities alongside a holistic view of all possibilities for innovation. At LivaNova, our commitment to pioneering innovation remains unwavering. And to this end, I'm very pleased to welcome Ahmet Tezel as LivaNova's Chief Innovation Officer, which we announced yesterday. Ahmet has a remarkable track record leading teams and developing a wide range of market-leading technologies. Ahmet will draw on his extensive experience to guide innovation at LivaNova. And finally, the third area of focus is people and culture. Any great organization starts with great people. And in my first two months at LivaNova, I have met many of our colleagues from Houston to Arvada, from Munich to Mirandola. As previously mentioned, I'm most impressed by the embodiment of the patient-first value. I was also struck by their deep expertise in the areas in which we operate. It is no wonder we are category leaders in heart-lung machines and epilepsy surgery. We will build on this foundation and continue to attract top talent to LivaNova. Focus on execution, innovation, and talent will lead to success as an organization. We're confident that by delivering in each of these areas, we will improve patient outcomes and create shareholder value. For the remainder of the call, I will focus on the first-quarter results and then turn to our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results and update 2024 guidance. I will wrap up with closing remarks before moving to Q&A. So in the first quarter, we achieved 12% revenue growth versus the prior year. Excluding the impact of ACS segment wind down, revenue increased 14% versus 2023. This performance included double-digit revenue growth in both Cardiopulmonary and Neuromodulation segments. We're encouraged by our team's continued strong execution as demonstrated by our performance in the quarter. Now turning to segment results. For the Cardiopulmonary segment, revenue was $156 million in the quarter. That's an increase of 16% versus the first quarter of 2023. Heart-lung machine revenue increased more than 20%, driven by Essenz. We are pleased to see continued Essenz placements and strong price mix in the quarter. Oxygenator revenue grew in low teens, driven by customer demand and price. As previously noted, the oxygenator business continues to see strong demand and our efforts to increase capacity remain on track. We now expect cardiopulmonary revenue to grow 8% to 9% for the full year 2024. Our revised forecast incorporates strong HLM growth and continued strong demand for consumables. Epilepsy revenue increased 11% versus the first quarter of 2023. The U.S. epilepsy revenue increased 13% year-over-year with growth in both new and replacement implants. We achieved 826 new patient implants in the quarter, representing 4% growth versus the prior year. We realized 1,941 replacement implants, representing 5% growth versus the prior year. Epilepsy revenue in Europe and the rest of the world grew 7% versus prior year. For the full year 2024, we continue to expect global epilepsy revenue to grow 6% to 7%. Our forecast incorporates a continued mid-single-digit growth rate in the U.S. new patients and a more normalized low single-digit growth rate in replacements. We now expect international revenue to grow in the high single digits. Difficult-to-treat depression revenue in the first quarter was $2 million. And for the full year, we continue to anticipate approximately $7 million revenue primarily coming from the RECOVER study. The RECOVER study continues to advance, and the bipolar cohort continues to enroll as expected. As a reminder, enrollment for the unipolar cohort of the study is now complete. We anticipate the 12-month follow-up data for the 500 unipolar patients in the second quarter. At that time, we will conduct an analysis and continue to expect publication of the full study results by late 2024. Now moving to obstructive sleep apnea. The OSPREY clinical study achieved a positive predictive outcome and concluded enrollment in March. This means that there is a very high probability that there will be a statistically significant result in the primary endpoint, which is 7 months AHI response rate. In accordance with the study protocol, once the last implanted patient completes the last follow-up visit, we will conduct a final analysis for the study. We are pleased to have achieved this positive milestone for the OSPREY study, and we will continue to work actively with clinical sites to manage the study patients.

Thanks, Vlad. During my portion of the call, I'll share a brief recap of the first-quarter results and provide commentary on 2024 guidance. Turning to results, revenue in the quarter was $295 million, an increase of 12% versus 2023. Excluding the impact of the ACS segment wind down, revenue increased 14% versus 2023. Foreign exchange in the quarter had an unfavorable year-over-year impact of approximately $1 million or less than 1% of revenue. Adjusted gross margin as a percent of net revenue was 71% compared to 69% in the first quarter of 2023. The year-over-year increase was driven by favorable product mix and pricing. Adjusted R&D expense in the first quarter was $43 million compared to $46 million in the first quarter of 2023. R&D as a percent of net revenue was 15%, down from 18% in the first quarter of 2023. The year-over-year decrease was largely driven by the closeout of the ANTHEM trial. Excluding the costs related to ANTHEM, our R&D investments increased 15% versus the prior year. Adjusted SG&A expense for the first quarter was $113 million compared to $108 million in the first quarter of 2023. The year-over-year increase was driven by targeted investments supporting Essenz, legal expenses and variable costs such as freight and commissions associated with increased revenues, offset by the reduction in ACS. SG&A as a percent of net revenue was 38% compared to 41% in the first quarter of 2023. Adjusted operating income was $53 million compared to $27 million in the first quarter of last year. Adjusted operating income margin was 18% compared to 10% in the first quarter of 2023. This increase was driven by improved gross margin and operating expense leverage primarily related to the wind down of the Heart Failure program and the ACS segment. Adjusted effective tax rate in the quarter was 21%, compared to 6% in the first quarter of 2023. The year-over-year increase is related to developments in the global tax landscape and is in line with our expectations. Adjusted diluted earnings per share was $0.73 compared to $0.43 in the first quarter of 2023. Our cash balance at March 31 was $309 million, up from $267 million at year-end 2023. Total debt at March 31 was $624 million, up from $587 million at year-end 2023. This increase in total debt was driven by the closing of a $345 million private offering of convertible senior notes maturing in 2029 and the repurchase of $230 million of convertible senior notes. Net debt, including restricted cash at March 31 was $120 million. Adjusted free cash flow for the quarter was $11 million, down from $20 million in the prior year period. The year-over-year decrease was driven by higher working capital needs and the ACS restructuring costs. Capital spend in the quarter was $6 million compared to $8 million in the prior year. The year-over-year decrease was driven by the timing of key investments. Now turning to our revised 2024 guidance. As Vlad mentioned, based on our performance in the first quarter, we're increasing our full-year 2024 revenue and adjusted diluted earnings per share guidance while maintaining the range on our adjusted free cash flow. We now expect 2024 revenue growth on a constant currency basis between 6% and 7% and between 8% and 9%, when excluding the portion of the ACS business that we are exiting. In the first quarter, we observed favorable comparisons, which will continue in the second quarter. While we do not provide quarterly guidance, we expect revenue growth to be lower in the second half of 2024 compared to the first half of this year. Foreign currency is now expected to be a 1% headwind based on current exchange rates. We continue to expect a full-year adjusted effective tax rate of approximately 21%. We now project adjusted diluted earnings per share in the range of $3.05 to $3.15 with adjusted diluted weighted average shares outstanding to be approximately 55 million for the full year. Adjusted free cash flow is still expected to be in the range of $95 million to $115 million, an increase of approximately 9% at midpoint versus the prior year. This range includes a meaningful step-up in capital spending, which we forecast to be approximately $60 million. As a reminder, our cash flow projections include costs associated with the ACS wind down in the range of approximately $15 million to $20 million, a majority of which occurs in 2024. From a phasing perspective, free cash flow generation in the first half of the year is lower than the second half. And as a reminder, LivaNova pays its prior year short-term incentive bonuses in the second quarter. In summary, I'm encouraged by the company's execution and financial performance in the first quarter. Looking to the rest of the year, we will continue to invest in critical capabilities to support innovation, growth and infrastructure. We remain well positioned to drive above-market growth and more than 300 basis points of operating leverage in 2024. With that, I'll turn the call back over to Vlad.

Thank you, Alex. And so to conclude, our first-quarter results were marked by double-digit revenue and operating income growth in both the Cardiopulmonary and Neuromodulation segments. Our performance in the quarter positions us well to build on this competitive momentum. Looking ahead, we will focus on execution, innovation, and talent. With this framework in mind, we are excited for the remainder of the year. Again, we will build on the strength of our core cardiopulmonary and epilepsy businesses, making investments to drive sustainable above-market growth. We will also gain clarity on the results from the RECOVER and OSPREY studies, which will allow us to strategically target our most compelling opportunities. Finally, we will continue to explore areas of high clinical unmet need in markets with high-growth potential to create long-term shareholder value. In closing, I would like to thank my colleagues across the organization for the warm welcome to LivaNova. Their hard work and passion underpin our success as an organization. I'm grateful for their continued dedication to serving customers and patients. And together, we will continue to advance our mission of improving outcomes for patients with neurological and cardiac health conditions around the world. So with that, Candice, I think we're ready for questions.

Our first question comes from Rick Wise of Stifel.

Vlad, I look forward to meeting you in person. Maybe to start off, you talked about the fundamental momentum and it's clearly visible in the outperformance. Maybe you could help us better understand just, first at a high level, the sustainability of the strong epilepsy growth that we saw and some of the drivers there, both on the new implant side and replacement. How are you thinking about the year unfolding and the drivers of that? And on the Oxy side, where are you with the capacity expansion? And are you seeing competitors come back? So again, addressing the sustainability and your thoughts about it as you look ahead to the full year?

Thank you for the question, Rick. I look forward to meeting you in person soon. The first priority, as I mentioned earlier, is to achieve sustainable growth above market levels in our core business, particularly in the Cardiopulmonary and Neuromodulation segments. In cardiopulmonary, sustainability is driven by ongoing upgrades to the Essenz heart and lung machine, which presents significant opportunities worldwide. As a market leader, these upgrades are crucial for maintaining growth momentum as we enhance both our customer base and the technology itself. We also have substantial opportunities to increase our market share in disposables, and this quarter, we benefited from some competitive disruptions that allowed us to capitalize on that momentum. The main short-term drivers will be expanding our capacity—something we are on track to achieve by optimizing our current footprint—and focusing on innovation to ensure our pace in developing oxygenators and other disposables remains strong. For the neuromodulation side, we are coming from a solid position as leaders in neuromodulator interventional and surgical procedures, and we will build on that strength. Innovation will be key for our sustainable growth. Our initial step is to invest in digitally connected technologies that facilitate procedures for physicians and improve patient outcomes. This will be a major factor in our long-term sustainability. In the short term, our focus is on enhancing our global commercial execution, which has improved significantly under Stephanie's leadership over the past year. I am encouraged to see that we have achieved five consecutive quarters of double-digit growth, and my primary responsibility is to ensure our team is equipped to maintain this positive momentum.

Yes, that's great. As a follow-up, you've mentioned innovation several times. I believe you mentioned a 15% growth in R&D, if I'm recalling correctly. Additionally, you've made an important hire as the Chief Innovation Officer. What are you expecting him to accomplish? What are his priorities and yours? What can we anticipate moving forward? You've touched on this a bit, but perhaps you could provide a more in-depth perspective.

Rick, thank you for bringing this up. It is very important for us. Ahmet has an impressive track record. His experience spans various companies, technologies, and clinical settings. He has led not only R&D but also comprehensive innovation functions alongside regulatory and medical affairs, as well as clinical and preclinical market access. That's a bit about Ahmet's background. Beyond his innovation capabilities, he is an exceptional leader and a valuable addition to our leadership team. Over the past two months, I have been actively engaging with teams around the world, learning and evaluating, and I am very impressed with the people, talent, and culture at LivaNova. Execution is quite strong, which is reflected in our results. Innovation is an area where we need to enhance the strengths of our core and really accelerate progress. My goal for Ahmet is to build and cultivate top talent while bringing in the best capabilities in areas related to innovation; this involves attracting top talent and developing our existing team at LivaNova. Additionally, we need to refine our processes for evaluating innovation in an end-to-end manner, including idea generation, product development, market access, and connections to the supply chain to enhance the overall innovation process. Lastly, we need his help in assessing and making decisions about the areas we should focus on. In the short term, we will face significant decisions regarding our OSA and DTD strategy, and having his perspective on this will be crucial.

The next question comes from the line of Matt Taylor of Jefferies.

I guess I actually wanted to ask one about the medium-term outlook for some of your businesses. It's a little bit challenging to try and forecast cardiopulmonary with some of the dynamics going on with Oxy this year. Can you help us understand, I guess, first, for oxygenators with your increase in capacity, combined with all the share you've gained and the potential for competitors to come back, how do you expect that business to grow over the next couple of years? And the same kind of question I have on the heart and lung machine launch. Obviously, that's done really well, and you're out of the gate. What happens when you start to comp the launch? What kind of growth would we expect through that period?

Matt, it's Alex. I'll take this one first. So in terms of the midterm outlook for the cardiopulmonary business, we're really excited about the opportunity that we have in the HLM replacement cycle. We said all along this is going to be a multiyear opportunity for LivaNova and we're capitalizing on the great technology and insights that we used to develop the product. We think that the HLM growth will continue to accelerate into the balance of the year. I said for the next couple of years. As far as the oxygenator business, as we've said all along, we reached our sort of peak capacity in oxygenators in the second half of last year. We've been really working hard to expand the capacity, and the team is doing a really good job at that. We're actually seeing some acceleration in those programs where we're really improving our processes at the Mirandola manufacturing facility and continuing to add some automation to enable that. So we expect some capacity expansion, primarily in the second half of this year, but we're probably going to see some benefits in the second quarter as well. So we feel good about the opportunity that we have there. Now we're monitoring the competitive situation because we're never sure what the competition will do in terms of coming back into the market, but we feel like we have a great opportunity to continue to enhance our market position and continue to capture market share.

The next question comes from the line of Michael Polark of Wolfe Research.

My first question is about the sleep program. There has been a positive update regarding the clinical trial predictions. This is a confirmatory study, and you are already familiar with this asset. Speculating about the timing, it seems that the team or LivaNova is geared up for obtaining FDA approval around the middle of 2025, which is possibly a year away from now. Therefore, I assume you would want to consider some commercial preparations, such as hiring a field team and other related activities. What is the current perspective on preparing for a sleep launch in 2025? Additionally, regarding the 2024 numbers, have you included any operational expenses related to early sleep preparations?

Mike, it's Matt. I will address those points for you. For the program, we expect to have around 105 patients implanted. Initially, we aimed for 90, but after discussions with the FDA regarding an early stoppage, we decided to implant all patients in the queue. We anticipate having the primary endpoint data at a 7-month reduction in AHI around the end of the year. Assuming the data is favorable, we may file in early 2025. It's important to note that we also need to provide the FDA with one year of safety data, which would likely be submitted around April, keeping our approval timeline in 2025 consistent with our current position. Regarding commercial preparation, I believe the 7-month data will be significant, but we won’t have that until year-end. The 13-month data, which will be compared to competitive data we have seen from two companies, is the critical information. I would advise taking a cautious approach to commercial activities until we receive both the 7-month and 13-month data. Therefore, we shouldn't expect much commercial spending in 2024.

I have a follow-up question regarding the Essenz launch. I'm interested in understanding what the Essenz mix looks like in the U.S. and Europe, where the product is available. Can you provide any information on unit sales and how they have increased compared to the latter half of last year? Additionally, what are the unit expectations for Essenz this year?

Mike, it's Alex. We're not sharing the actual unit numbers. What I will tell you is, typically, first quarter is kind of a lower volume quarter anyway for our heart-lung machine placements. We continue to anticipate that we'll have a steady increase in placements throughout the year.

The next question comes from the line of Adam Maeder of Piper Sandler.

Congrats on the nice start to the year. I wanted to follow up on Essenz and I believe you're fully launched in the U.S. and Europe but was hoping you could talk about potential timelines for the rest of the world. And then also wanted to better understand how the existing heart-lung machine installed base is kind of broken down by geography as we think about a potential replacement curve. And then I had a follow-up.

Yes. So Adam, again, as far as the Essenz, rest of world rollout, this is already starting to occur in select markets. As we saw in Europe and the U.S., we kind of start out slowly with kind of the limited commercial releases and then ramp as we get insights and feedback from our customers. So throughout the year, we'll see a continued flow of new markets coming online.

And Alex, any color on the existing heart-lung machine installed base and kind of how that looks between the U.S., Europe, and the rest of the world?

Sure, Adam, it's Matt. U.S., say, roughly 30%. Europe, about 20%. Rest of World 50%.

Okay. I got it. That's good color, guys. And then for the follow-up, I wanted to ask Vlad for your thoughts on the RECOVER program. And I guess, two-part question. First, what would you define as a successful RECOVER trial? Maybe to ask the question differently, what do you want to see to push forward and commercialize the program? And then I did want to ask about data disclosure. It sounds like you'll see the data in June, so next month. Will you top line that information to the investment community? Do you have approval to do that from CMS? Or is that still up in the air?

Yes. So Adam, thank you for the question. The outcome of the RECOVER trial is a very important milestone for us because not only will it make some opportunities potentially available for patients but it will also determine the direction of our strategy on this one. All the decisions will be routed and founded on the outcome of the clinical study. As you said, we anticipate the results before the end of this quarter. Once we have them, we will analyze and make it transparent at a high level to the community. That's important. Based on these clinical results, we will then determine the path and work with CMS, clinical sites, and the investment community on the best path forward. There will be transparency to data as we have it at a high level. The full data will be available by the end of the year with a scientific publication. It’s a complex trial because we are answering a number of questions in various clinical needs within difficult-to-treat depression. We will have to assess, together with CMS, the path for reimbursement depending on what clinical questions we are positively answering.

The next question comes from the line of Anthony Petrone of Mizuho Group.

Congrats to the team here on strong 1Q and Vlad, congrats on the new role, CEO with the company. Maybe to start with guidance and maybe just a little bit of math on the 1Q beat versus the guidance outlook. And so you look at the prior guidance versus revised guidance, top line is up by 200 basis points and midpoint of the range is up $0.10. You had a sizable 600 basis point beat top line and a $0.24 beat in 1Q. So there's a little bit of spread there. So hoping to just get a little bit of color on the extent of the 1Q beat and what's implied for guidance. And then one specific to guidance would be on capacity for oxygenators. What is actually assumed in there in the revised guidance of 4% to 6%, does that reflect a tailwind in the second half for that business specifically? And I'll have one quick follow-up.

Anthony, it's Alex. So the first quarter is typically a low quarter for us in terms of revenue and profitability. We had favorable comparisons, and we do not expect the same level of growth in the second half of 2024. We're still continuing to invest in critical capabilities to support innovation and growth and infrastructure. We expect spending to be higher for the remainder of the year. Additionally, we saw favorable pricing and product mix, which contributed meaningfully to our gross margin expansion in the quarter. So at the end of the day, it's still early in the year. The way we think about this is, we have significant opportunities, as Vlad talked about, in the innovation portfolio, etc. At this point in time, we're taking a prudent approach to the revised guidance.

No, that's very helpful. And go ahead. Sorry. Sorry, Alex.

No, go ahead.

That's helpful. Alex, maybe just a quick couple of follow-ups here and I'll get back in. One would be just to recap on the cost savings from ACS and when we think about depression, how do you think about the bipolar cohort here? So in other words, there's a go, no-go sort of option here for unipolar; how does that influence the bipolar cohort decision-making process?

I'll address the ACS question first. We previously indicated that the ACS savings and its effect on EPS would be around $0.10 at the start of the year, and we remain confident in that projection. Now, regarding your follow-up question, I'll hand it over to Matt.

Sure. So Anthony, for bipolar, we said last June, we had 150 patients enrolled, and we said roughly 25 patients a quarter, and we've said that's on track. For that one, the unipolar data could have an influence on it, but this is a very different patient group. If you look at some of the historical data that we've shown, generally VNS does better with the bipolar patients. There is still a path for bipolar regardless of where unipolar ends up, in our opinion.

And Anthony, just a follow-up on your question regarding capacity. We're continuing the program to expand our capacity in Mirandola. As I said, it's going really well. We incorporated that capacity expansion into our original guidance, and so we're kind of maintaining that assumption. We're going to see some favorable benefits, some tailwinds in the second quarter as we were able to achieve some success there earlier than anticipated. The expectation is that there's going to be some growth in the back half of the year due to our ability to expand the capacity.

The next question comes from the line of Mike Matson of Needham & Company.

Yes. Just, so on the Essenz launch, I mean obviously, it's driving really strong growth. But I was wondering, you are getting a pretty big price premium with Essenz. So how much of it is pricing? And how much of it is volume? I know you're not going to give us the volume number, but I guess I'm getting at is has volume picked up as the availability of Essenz driven more upgrades? Or has it really just been pricing so far at least?

Yes. Look, we're seeing a strong funnel with regard to units, and the placements have been tracking according to plan. Yes, obviously, the price-mix benefit, right? We have a substantial price premium in effect here, but we're also seeing customers sort of taking advantage of the newer technology and the features and benefits that are offered with Essenz that didn't exist with S5. We are getting some of that benefit. As I said, our funnel for unit placements looks strong for the balance of the year, and we're going to continue to see an acceleration of our placements.

The next question comes from the line of David Rescott of Baird.

Great. Vlad, I wanted to follow up on one of the comments I heard you make in the prepared remarks around evaluating RECOVER and OSPREY trials alongside what you called a holistic view around some of the areas for innovation. I'm wondering if you could expand a little bit on what some of the factors are maybe around that holistic approach. Specifically for RECOVER, I heard some of the comments earlier to a prior question but does the holistic view around RECOVER get accounted for or thought about maybe when we start to hear about some of the top line results? Or is that maybe more of a, hey, let's wait to issue the publication and think about the fit in the portfolio longer term?

Thank you, David. In the short term, investment choices will be important. Before discussing the RECOVER and OSPREY projects, it's worth noting some strong decisions made by the leadership team over the past couple of years, particularly the focus on our portfolio. The conclusion of the ACS and Heart Failure business allowed us to reinvest in our core areas, and we are seeing the positive results of these decisions through better execution. In the short term, our growth potential lies in reinvesting more in our core operations, including innovation, execution, and capacity expansion. This is one opportunity we are exploring. Looking longer term, we will need to wait for the clinical results from OSPREY and RECOVER, as these will help determine the company’s strategic direction. So, we are focused on more core reinvestment in the short term while awaiting the clinical outcomes for the long term.

Okay. Great. Maybe a question for Alex. If I look at the updated EPS guide for the year in the bridge relative to what you laid out after Q4, operational growth and leverage is where things kind of have moved to higher tax, cost inflation, infrastructure investments, the HF, ACS exits, all remained relatively the same as it relates to the contribution for the bridge to growth in EPS this year. My guess is that implies there's no real update on the latter thesis to the guide. If we think about maybe some levers for upside in the remainder of the year, is there any shift in potential for those three latter pieces or would or if there's more upside to be had on the EPS line, it's more going to be operational growth and leverage relative to those four other, three other kind of buckets?

Yes. I mean, as we looked at the components of EPS, we feel really good about the savings from the Heart Failure and the ACS wind down. The tax rate, we knew going into this year was a headwind but we're managing through it. So the majority of the upside here is really about operating leverage and our team being super disciplined and focused on driving growth and ensuring that there is an appropriate level of drop-through on the bottom line.

The next question comes from the line of Matt Miksic of Barclays.

Can you hear me okay?

Yes.

Great. Maybe just if I could follow up on the sort of scenarios and your decision process between OSPREY and RECOVER, that would be super helpful and which of those programs you're likely to move forward with.

Matt, it's Matt. For both, I mean, the data is obviously critical. As we said, with RECOVER, for unipolar, we get that data by the end of the quarter. And then for the OSPREY OSA program, around year-end. I'd say in terms of product development, there's a little bit of a difference with OSA. That's a component as well to look at. But generally, those are the core timelines when we get the clinical data to show basically where we would play in each one and what the value would be to patients and physicians.

Yes. And Matt, maybe just, I mean, obviously, we don't have the outcome of the decision. But what's important is the principle on how we make it. We are going to look at three dimensions. The first one is, what is the clinical benefit to patients, and that's #1. That's the most important one. The second one is how competitive is our technology in this space versus other available technologies in the marketplace. And the third one is looking at the end-to-end business model and how we can create value, not just for patients but also for the shareholders. So those will be the three parameters that we're going to use to decide how to prioritize between those two.

That's helpful. I have a follow-up question regarding the epilepsy market. Could you discuss the main factors that are influencing or hindering your operations there? Is it competition, adjustments in your go-to-market strategy, or general end-of-life cycles for your current and past implanted patients? What are the key factors we should look at to evaluate your performance this year?

Matt, it's Stephanie here. Let me tell you where our focus is for the remaining part of this year. For the U.S., it's going to be the continuation of that disciplined commercial execution, building very much on the foundations that we laid last year in '23. You touched on our sales force structure but we'll be maintaining our sales force structure and our territory design. We're also building a high-talent bench for those large influencing territories as well. But our strategy is a little broader than just our sales force structure. In combination with that, it's also making sure that we expand our efforts in regards to partnership with our physician base. We had a really successful recent scientific advisory board filled with great insights, and as we look towards 2024 in our end of service, our latest data indicates that the comparisons do get a little trickier throughout the rest of the year. However, we still are encouraged by our end of service performance and partnering with our physicians to identify patients in accordance with that all-important continuity of care. So those are the main aspects really: partnership with our physician base, ensuring that we can expedite care and the continuation of our territory structure, and as I say, key partnerships with our advisory board.

Next question is a follow-up from Anthony Petrone of Mizuho Group.

Just a quick follow-up on RECOVER and the messaging there. Is the go or not go forward decision, will that be on the headline readout in June, July time frame? Or will you wait for the final data set at the end of the year to make that decision?

Anthony, thank you for this. If the clinical data is negative, then it's a clear no-go decision. If the clinical data has elements of positivity, whether holistically or in certain clinical areas, then we will continue working with CMS to define a go and no-go decision. So that's the best scenario where we can continue to work with them to evaluate that.

As there are no additional questions waiting at this time, I'd like to hand the conference back over to Vladimir Makatsaria for closing remarks.

Thank you, Candice and thank you, everyone, for joining the call, for your feedback and very thoughtful questions. On behalf of the entire leadership team at LivaNova, we really appreciate your support and your interest in the company. We'll talk to you soon. Have a good day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.