Earnings Call Transcript - LIVN Q1 2026

Operator, Operator

Good day, ladies and gentlemen, and welcome to the LivaNova PLC First Quarter 2026 Earnings Conference Call. Operator instructions were provided. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Briana Gotlin, LivaNova's Vice President of Investor Relations. Please go ahead.

Briana Gotlin, Vice President, Investor Relations

Thank you, and welcome to our conference call and webcast discussing LivaNova's financial results for the first quarter of 2026. 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; and Ahmet Tezel, our Chief Innovation Officer. 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, revenue results, which will 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'll turn the call over to Vlad.

Vladimir Makatsaria, Chief Executive Officer

Thank you, Briana, and thank you, everyone, for joining us today. Welcome to LivaNova's conference call for the first quarter of 2026. In the quarter, LivaNova delivered 11% revenue growth with strength across all regions, driven by durable performance in our cardiopulmonary and epilepsy businesses. Our core businesses continue to serve as both the drivers of current performance and enablers of disciplined investments in innovation. We expect these investments to fuel the long-term durability of our core performance as well as expansion into high-growth, high-margin markets to build a more sustainable financial profile for value creation over time. One such market is obstructive sleep apnea. We continue to view the OSA market as attractive; up to 1 million patients drop out of CPAP treatment annually and hypoglossal nerve stimulation penetration into that population is less than 5%, which creates a significant opportunity. We recognize that there are current challenges in the HGNS market, but view the current dynamic and ambiguity in reimbursement as temporary and the long-term effect of GLP-1s on the market as net positive. With pHGNS, we have a clear right to win supported by rigorous clinical evidence and differentiated technology designed for broader and more complex patient populations and leading neuromodulation capabilities across LivaNova. We recently achieved key regulatory and clinical milestones establishing a strong foundation for our planned entry into the OSA market next year. The first of these milestones occurred in March when LivaNova received U.S. FDA premarket approval for the aura6000 system for the treatment of adult patients with moderate to severe OSA. Notably, this is the first and only hypoglossal nerve stimulation device approved by the FDA without a complete concentric collapse contraindication or warning. The second important OSA milestone is on the clinical evidence front, where the full 12-month results from our OSPREY randomized controlled trial were recently published in the Annals of Internal Medicine, demonstrating clinically meaningful responses and sustained improvements over time. Ahmet will share additional details later in the call on how we're leveraging these milestones to advance our OSA program. For the remainder of the call, I will discuss our first quarter segment results and provide updated top line guidance for 2026. After my comments, Ahmet will discuss key innovation updates including recent regulatory and clinical progress. Alex will then provide additional details on our results and updated 2026 guidance. I will wrap up with closing remarks before moving on to Q&A. Now turning to segment results. For the cardiopulmonary segment, revenue was $209 million in the quarter, an increase of 14% versus the first quarter of 2025. Heart-lung machine revenue grew in the high teens in the quarter, driven by an increase in Essenz placements on both a sequential and year-over-year basis and sustained favorable price premiums. The results for the quarter also included a modest benefit from the recapture of Essenz placements and tenders that were previously deferred from the fourth quarter of 2025. The performance was otherwise driven by underlying demand and the associated favorable price/mix effect. Cardiopulmonary consumables revenue grew in the mid-teens in the quarter, driven by market share gains, procedure growth and price. While demand for oxygenators continues to outpace the market's ability to supply, improvements in third-party component availability has enabled us to increase our manufacturing output. For the full year 2026, we now expect cardiopulmonary revenue to grow 8.5% to 9.5%, up from 7% to 8% previously. Our forecast reflects continued HLM growth as we drive Essenz penetration globally. We still expect Essenz to represent approximately 80% of annual HLM unit placement in 2026, up from 55% in 2025. This forecast assumes continued market share gains in consumables as we execute on our manufacturing expansion plans. Within this guidance, we expect our full year manufacturing output to increase by low double digits, driven by a new manufacturing line scheduled to go live in the second half of the year. This represents a significant acceleration versus 2025 levels. Additionally, we continue to work with third-party suppliers to increase component availability, which could enable additional oxygenator output growth beyond current assumptions. Turning to epilepsy. Revenue increased 8% versus the first quarter of 2025 with growth across all regions. Epilepsy revenue in the Europe and Rest of World regions increased a combined 12% versus the prior year period, while U.S. epilepsy revenue increased 7% year-over-year. Performance was driven by total implant growth and favorable realized price, supported by impactful clinical evidence, improved reimbursement and sustained commercial excellence. Consistent with what we have shared previously, the results from our core VNS study have been well received by key opinion leaders and have become an important component of our commercial engagement and education efforts. In recent conversations in our inaugural VNS Forum, which brought together approximately 150 clinicians, participants shared that the data is reshaping their perception of the effectiveness of VNS Therapy for epilepsy. They also indicated that the findings support broader adoption as they reevaluate VNS Therapy's role within their treatment algorithms. Notably, over 50 leading experts have requested permission to independently present the data. Effective January 1, 2026, U.S. Medicare reimbursement for VNS therapy procedures in drug-resistant epilepsy increased meaningfully with hospital outpatient payments rising approximately 48% for new patient implants and 47% for end-of-service procedures compared to 2025 levels. These U.S. reimbursement changes improve hospital economics for VNS therapy, creating a more sustainable model for providers and supporting expanded patient access. In the U.S., there are approximately 1 million DRE patients, yet fewer than 10% receive advanced treatment. The updated reimbursement rate reduced a known barrier to procedure penetration as historic Medicare rates did not fully cover VNS therapy procedure costs. As a result, we saw improved realized pricing in the first quarter, driven by less volume discounting as well as our normal annual list price increase. For the full year 2026, we now expect epilepsy revenue growth of 6% to 7%, up from 5.5% to 6.5% previously. This forecast is driven by improved growth rates in the U.S., Europe and the rest of the world. The improved outlook is supported by strong global acceptance of core VNS as well as both reduced volume discounting and the strengthening of the patient funnel in the U.S. driven by improved reimbursement. In summary, LivaNova's first quarter growth was driven by healthy markets, continued success of the Essenz upgrade cycle, share gains in cardiopulmonary consumables and strong epilepsy commercial execution. We expect these drivers to sustain through 2026, supported by continued execution in cardiopulmonary and the combination of compelling clinical evidence and improved reimbursement dynamics in epilepsy, which should expand patient access over time. As a result, we are now guiding full year 2026 revenue growth between 7% and 8%, up from 6% to 7% previously. This top line guidance implies performance at the high end of the 2025 to 2028 growth framework we outlined at Investor Day. Alex will provide additional details on our 2026 guidance later in the call. With that, I'll hand the call over to Ahmet to cover the strong momentum across our innovation agenda, including recent clinical, regulatory and digital advances across our portfolio.

Ahmet Tezel, Chief Innovation Officer

Thank you, Vlad. Innovation is central to LivaNova's next chapter of growth both fueling the pipeline while strengthening our core businesses. Starting with OSA. As Vlad mentioned, LivaNova recently received FDA premarket approval for the aura6000 system for the treatment of adult patients with moderate to severe sleep apnea. This is a transformative milestone both for the company and for patients who continue to face significant unmet needs. Importantly, FDA approval enables broader compliant engagement with clinicians through promotion, training and education and is an essential step to building awareness and supporting appropriate utilization over time. In parallel, we're advancing the development of a next-generation system designed to further benefit patients and support commercialization. We continue to expect to submit a PMA supplement for the commercial MRI-compatible device in the second half of 2026. This would support a limited market release in the first half of 2027, followed by a broader commercial launch in the second half of 2027, consistent with the timeline outlined at Investor Day. Our pHGNS Therapy was rigorously evaluated for safety and effectiveness in the OSPREY randomized controlled trial with 12-month results recently published in the Annals of Internal Medicine. The study demonstrated clinically significant responses and sustained improvements over time. Notably, OSPREY is the first and only randomized controlled trial in the HGNS space, bringing gold standard scientific rigor to the field. Moreover, it is the only HGNS study to evaluate several patient-reported outcomes or PROs, making the findings more comprehensive than prior pivotal FDA trials. OSPREY patients in the treatment cohort showed significant improvements in PROs, including the Epworth Sleepiness Scale, which measures daytime sleepiness, and the Functional Outcomes of Sleep Questionnaire, which assesses the impact of fatigue on daily activities. Collectively, OSPREY's data show that for patients with moderate to severe OSA, treatment led to meaningful improvements, not only in objective measures of disease severity, but also in daytime sleepiness and other PROs that matter most to patients and clinicians. As previously disclosed, OSPREY did not exclude patients with complete concentric collapse with approximately 45% of the participants considered high risk. The study enrolled a challenging patient population with higher baseline AHI and BMI compared to other pivotal U.S. trials yet achieved comparable responder rates. We are proud to bring the option of pHGNS to more patients as the first and only FDA-approved HGNS therapy without CCC-related contraindication or warning and without a pre-implantation drug-induced sleep endoscopy requirement. In addition, our PolySync evaluation is progressing. PolySync is our advanced titration algorithm that fully utilizes the six-electrode architecture of the PHS system, enabling greater selectivity and patient-specific optimization of therapy. PolySync demonstrated the ability to convert nonresponders into responders, both strengthening our competitive positioning versus existing HGNS therapy and having the potential to expand penetration in a broader range of patients. We're excited to share the complete PolySync results at the upcoming SLEEP conference in June. To date, our findings indicate that PolySync will convert over 50% of OSPREY nonresponders into responders. For context, our study originally included roughly 100 patients who were randomized into treatment and control groups and monitored until the seven-month primary endpoint. At that point, patients in the control group also began receiving therapy. Following the 13-month endpoint, we extended the opportunity to all nonresponders regardless of their original assignment to participate with PolySync. This approach led to a cumulative responder rate surpassing 80% across the entire OSPREY trial population. These results underscore the significant impact PolySync may have in improving outcomes within this patient group. As a reminder, PolySync will be available at launch enabling patients to benefit from the advanced algorithm starting with their initial titration. We continue to view OSA as a compelling, de-risked opportunity grounded in differentiated technology and clinical evidence as well as our established neuromodulation capabilities. Now turning to difficult-to-treat depression. We continue to believe VNS therapy is a differentiated option for this markedly ill patient population. While we remain in active engagement with CMS, we won't speculate on exact submission timing. We remain excited by the DTTD opportunity, and we'll continue to keep investors updated on material development as appropriate. In epilepsy, during the first quarter, we initiated a limited market release of our cloud-based clinician portal and application. As a reminder, this rollout is intended to validate workflows and deepen clinician engagement. The financial impact is expected to be limited this year. A full market release is planned for 2027 alongside the launch of our next-generation Bluetooth-enabled generator. This multiyear innovation roadmap is expected to streamline care delivery through remote titration, real-time access to patient insights and more digitally connected care pathways that remove barriers to access. At LivaNova, we have developed a unified digital health platform for our entire portfolio, allowing for a consistent technology user experience and data strategy across our different business units. For example, in epilepsy, the cloud-based clinician portal and app will enable capabilities such as remote titration. Lastly, innovation within our CP consumables portfolio continues to advance. For our next-generation oxygenator with the design finalized, we are now in the manufacturing scale-up phase of product development. In summary, we are encouraged by our recent progress across the portfolio, including regulatory and clinical evidence momentum in OSA and DTTD, the rollout of our connected care platform in epilepsy and the advancement of the DTTD program. Collectively, these milestones underscore the depth of our innovation pipeline and the opportunity to continue raising the standard of care. With that, I will turn the call over to Alex.

Alex Shvartsburg, Chief Financial Officer

Thanks, Ahmet. During my portion of the call, I'll share a brief recap of the first quarter results and provide commentary on our updated full year 2026 guidance, which reflects strong performance year-to-date and an improved business outlook. Turning to results. Revenue in the quarter was $362 million, an increase of 11% on a constant currency basis versus the prior year. Foreign exchange in the quarter had a favorable year-over-year impact on revenue of approximately $10 million or 3%. Adjusted gross margin as a percent of net revenue was 68% compared to 69% in the first quarter of 2025. Higher volumes and improved pricing were offset by unfavorable currency and product mix. Adjusted SG&A expense for the first quarter was $129 million compared to $116 million in the first quarter of 2025. SG&A as a percent of net revenue was 36% as compared to 37% in the first quarter of 2025. On a year-over-year basis, the reduction as a percent of net revenue was driven by fixed cost leverage. Adjusted R&D expense in the first quarter was $47 million compared to $38 million in the first quarter of 2025. R&D as a percentage of net revenue was 13% compared to 12% in the first quarter of 2025 with the year-over-year increase primarily reflecting planned investments in OSA. Adjusted operating income was $71 million compared to $65 million in the first quarter of 2025. Adjusted operating income margin of 20% was generally in line with the prior year period, reflecting higher revenue and operating leverage, partially offset by increased OSA R&D investments and unfavorable foreign currency impacts. Adjusted effective tax rate for the quarter was 23% compared to 24% in the prior year period, reflecting a modestly more favorable geographic mix of income. Adjusted diluted earnings per share was $0.98 compared to $0.88 in the first quarter of 2025. The increase was primarily driven by higher revenue, reflecting strong growth across both the cardiopulmonary and epilepsy businesses. Moving to our cash balance at March 31. Cash was $540 million compared to $636 million at year-end 2025. Total debt at March 31 was $288 million compared to $377 million at year-end 2025. The reduction in both cash and total debt was a result of the early repayment of the outstanding term facilities of $98 million, inclusive of accrued interest. Adjusted free cash flow for the quarter was $4 million, compared to $20 million in the prior year period. The year-over-year decrease was primarily driven by increased capital spend and higher working capital requirements aligned with revenue growth. As a reminder, the first quarter results are disproportionately low relative to our guidance due to the payout of the 2025 accrued short-term incentive bonuses. Capital spend was $14 million in the first quarter compared to $11 million in the prior year period. The year-over-year increase was driven by cardiopulmonary capacity expansion initiatives, the next-generation oxygenator manufacturing scale-up as well as investments in IT infrastructure. Now turning to our updated 2026 guidance. As Vlad mentioned, based on performance to date, we're increasing full year 2026 revenue and adjusted earnings per share while maintaining adjusted free cash flow guidance. We now forecast 2026 revenue growth between 7% and 8% on a constant currency basis, up from 6% to 7% previously. We continue to expect the impact of foreign currency to be a tailwind of approximately 1% based on current exchange rates. Consistent with our prior guidance, we estimate a tariff net impact of less than $5 million on adjusted operating income for the full year. At this point, we are not assuming a tariff refund benefit. However, we are working through the government's refund process. We believe LivaNova remains well positioned to manage the impact of tariffs. With respect to the conflict in the Middle East, we have incorporated an estimated full year impact of approximately $5 million on adjusted operating income, primarily related to higher shipping, logistics and fuel costs. As with tariffs, the situation remains dynamic, and we continue to monitor developments closely. Despite this impact, we continue to expect full year adjusted operating income margin to be in the range of 20% to 21%. Adjusted effective tax rate is still forecasted at approximately 23%. To reflect stronger operational performance, we now project adjusted diluted earnings per share in the range of $4.20 to $4.30, with adjusted diluted weighted average shares outstanding to be approximately 56 million for the full year. This EPS range represents approximately 9% growth at midpoint. Adjusted free cash flow is still expected to be in the range of $160 million to $180 million. This range includes $120 million in capital spending, a $40 million increase versus the prior year. This level of investment is consistent with our Q1 initiatives supporting cardiopulmonary capacity expansion and the next-generation oxygenator manufacturing scale-up as well as investments in IT infrastructure. In summary, we delivered strong first quarter with double-digit revenue growth, positioning us well for the balance of 2026. Our updated 2026 guidance aligns with the 2025 to 2028 framework presented at our Investor Day and reflects top line performance at the high end of our targeted mid- to high-single digit revenue CAGR. We continue to target annual adjusted operating margins above 20% with EPS growth roughly in line with revenue. Our adjusted free cash flow trajectory supports achieving 80% conversion by 2028. This outlook reflects healthy core business execution and continued disciplined investment, consistent with our capital allocation framework. With that, I'll turn the call back over to Vlad.

Vladimir Makatsaria, Chief Executive Officer

Thank you, Alex. In closing, LivaNova's strong operating model continues to generate durable growth, fueling both our performance today and our ability to invest for tomorrow. We also made important progress in OSA this quarter, achieving key regulatory and clinical milestones that position us well for entry into this high-growth, high-margin market. I want to thank our colleagues around the world for their focus and dedication to improving outcomes for patients and serving our customers. With a strong team and clear strategic priorities, LivaNova is well positioned for continued momentum in 2026 and beyond. With that, we are ready to open this call for questions.

Operator, Operator

Operator instructions were provided. First question comes from Rick Wise with Stifel.

Frederick Wise, Analyst, Stifel

It really is great to see such an excellent quarter across the board, very impressive, well done. And just to start off, maybe you could expand on your very encouraging comments on what seems like a new world for the epilepsy business post the reimbursement change? I mean, it was going to be important. It seems like it really is important, but talk to us about your commercial competitive life post this and this evident pickup in terms of selling, operating, contracting and how we think about the business going forward. I mean it's hard not to believe you're being very conservative in the guidance and outlook.

Vladimir Makatsaria, Chief Executive Officer

Yes, Rick, great to hear your voice, and thank you for the question. So I'll maybe start a little bit broader to say what I'm really pleased about in terms of our performance is the quality of our growth. If I look at it geographically, we have healthy growth across all regions across the world. If I look at it from the business growth drivers, all the cylinders were firing. We continue to see really strong momentum in the upgrade of Essenz. We are accelerating in terms of share gain on oxygenators, and we see strong growth in our epilepsy business driven by two factors. One is improved reimbursement as of January 1 and two, the dissemination of the clinical data that was an outcome of the Core VNS study. And now if I focus on the epilepsy front, what we expect from those two factors is number one: improvement in price, and that is a short-term improvement. It's driven by the fact that we are reducing some of the volume discounts that we've given in the past. And so you kind of see that uplift in price right away. Secondly, we see an opportunity for improved penetration of VNS procedures in epilepsy, basically, the volume increase of procedures, and that is going to be driven by this changing algorithm within practice of current epileptologists that are already doing VNS procedures and potentially opening new centers that will do VNS procedures because now the economic barrier has been removed. So it's too early to tell you what the long-term trends are. As we continue to build our experience in this new world, we will update investors on the progress.

Alex Shvartsburg, Chief Financial Officer

Rick, I'll just add a little bit more color. With the majority of the pricing changes taking effect on January 1, due to the timing of the reimbursement update in '25, pricing for many of the accounts was already established for 2026. So our team will identify a new tranche of customers for '27. So that element will continue. We've seen traction in new, expanded and reopened accounts to date. In the first half, the teams are focused on reengaging with our healthcare provider customers and really demand generation. So the volume-driven assumptions, including new expanded and reopen accounts, are expected to materialize in the second half.

Vladimir Makatsaria, Chief Executive Officer

Thank you, Rick. On cardiopulmonary, this is a critical priority for us to continue to drive our growth. We're very pleased with our recent progress in manufacturing output. And it comes from both improvements within LivaNova and improvements with third-party suppliers. As we said in the opening remarks, we're guiding to a low double-digit increase in oxygenator production output this year. We have very important milestones coming in the second half of the year where we are opening an additional manufacturing line within LivaNova to expand our manufacturing capacity and output even further. So it's been a positive experience for us. This is a source of additional growth for LivaNova. If I step back and talk about the market share dynamics, over the last couple of years, we were able to improve market share from approximately 30% to approximately 40%. You don't see that very often in such a mature market. But we continue to build our strategy to use market share as a key growth lever. And as we guided during Investor Day, we will increase oxygenator capacity by 60% by 2030 and improve market share further by 800 basis points. Our work on manufacturing is focused on executing versus that share gain.

Operator, Operator

We now turn to David Rescott with Baird.

David Rescott, Analyst, Robert W. Baird & Co.

Congrats on the strong start to the year here. Maybe on the VNS bucket, I appreciate the comments you provided on that already, and it certainly sounds like the commentary specifically around the core data and market interest was more constructive than we've heard in prior quarters. I know you've talked in the past about some of the limited impact maybe from Wiser. I know others have seen that impact out there. So just curious, if at all, in the quarter, you saw anything there? And if so, would it be fair to assume that maybe the delta versus the reported results could be entirely driven by price? Or are you starting to maybe see some of these benefits from utilization as early as Q1 so far?

Alex Shvartsburg, Chief Financial Officer

David, let me address the Wiser question. In the subset that we track where any patients have been denied access to VNS therapy, early indications suggest that the program has had no material impact on us so far. We'll continue to monitor the pilots that are ongoing across the six states. One other anecdote: we successfully managed several Wiser submissions to date and all of which have secured approval within a 48-hour window. So at the highest level, we're not seeing much impact. Finally, as a reminder, the majority of our Medicare patients who undergo VNS therapy are enrolled in Medicare Advantage Plans. As such, we're very familiar with and already subject to the prior authorization process. So again, we don't see much of an impact.

David Rescott, Analyst, Robert W. Baird & Co.

Okay. Perfect. Maybe on hypoglossal nerve stimulation for OSA and the longer-term strategy there? It sounds like maybe at this point reimbursement may not be fully ironed out until 2028. I know the prior goals were for a launch back half of 2027. So curious around how you're thinking about the evidence generation and development of that strategy in 2026, and as you get into 2027, if some reimbursement headwinds persist until 2028, how that influences your intermediate-term rollout.

Vladimir Makatsaria, Chief Executive Officer

David, thank you for the question. I'll start by saying that we will follow and recognize that there are currently some challenges in the HGNS market. However, we view that current dynamic as temporary. We still believe the market is very attractive, driven by a large patient population and high unmet clinical need. At the same time, we believe that we have the right to win with both our clinical and technological differentiation that we've discussed during Investor Day and other engagements. Our view on the market has not changed, and we're learning as we prepare for launch how to deal with some of the challenges that we believe are mainly driven by coding and reimbursement. I'll turn it over to Ahmet to talk a little bit more broadly on our market access approach.

Ahmet Tezel, Chief Innovation Officer

We continue our efforts to use the prevailing codes at the time of launch. With the incumbent removal of the sensor, the two technologies in terms of reimbursement are very similar. So we are confident that by the time we're in the market the reimbursement issue will be settled to a greater degree, and we will continue to work with AMA and other societies to ensure that we are doing this in a collaborative way. One last thing I would say is that reimbursement is a strength of LivaNova. We've demonstrated that with VNS. We have a very strong team that really understands this, so we will continue to work with that team and ensure that we pursue the appropriate codes at the time of launch.

Operator, Operator

We now turn to Adam Maeder with Piper Sandler.

Adam Maeder, Analyst, Piper Sandler

Congrats on a nice start to the year. Two for me. I wanted to start on HLM — a really good quarter for that product line, broad-based performance by geography. Maybe you can just expand on what went well in the quarter, and then also double-click on China specifically. Curious to understand how the Essenz launch is going in that geography. As we think about China and FY 2026, maybe contextualize that against the revised cardiopulmonary guidance? And then I had a follow-up on the Middle East.

Vladimir Makatsaria, Chief Executive Officer

Adam, great to hear your voice. I was in China with a team earlier this year. We have a very good organization there, a great leader, and the business is doing very well. The launch of Essenz is progressing well in the first quarter and progressing as planned. We're the market leader there, and we continue to be very optimistic about that market for us. In terms of HLM performance, while we don't disclose exact units sold in various countries, we plan to grow Essenz penetration to 80% in 2026 as a percent of all units placed, up from 55% last year, and China is going to play a significant role in that increase. On the broader HLM front, we're pleased with the high-teens growth in the quarter. This growth is driven by healthy volumes both sequentially and year-on-year. Customers are recognizing the clinical benefit of operating a machine that is fully loaded with optionality, and as a consequence, we are able to maintain significant price upside versus the previous version. This clinical value proposition gives me confidence moving forward that we will be able to maintain that price upside.

Adam Maeder, Analyst, Piper Sandler

Yes. Okay. That's very helpful, Vlad. For the follow-up, Alex, I heard the commentary in the prepared remarks on the Middle East. I think you said $5 million adverse impact on adjusted operating income from shipping and fuel costs. Any color from a revenue standpoint in terms of how you're thinking about the conflict? Which of the businesses are impacted? And maybe just help us better understand how you arrived at those assumptions?

Alex Shvartsburg, Chief Financial Officer

From a revenue perspective, Adam, Middle East represents approximately 4% of our total revenue base, so it's not a significant impact. We operate in segments that are essential for patients around the globe and will continue to supply the market as best we can. In terms of the impact on EPS, we dialed in approximately $5 million, or about $0.07 EPS impact. It's related to increases we anticipate in freight, logistics and energy costs. Those are the challenges that all companies are seeing at this time. We thought it was prudent to include that in our guidance. Overall, we believe we're in a good position relatively speaking to manage through this Middle East conflict.

Operator, Operator

Our next question comes from Michael Polark with Wolfe Research.

Michael Polark, Analyst, Wolfe Research

A follow-up question on oxygenators: I'm curious what you're seeing on the competitive landscape regarding capacity. It sounds like you're pushing to increase production volume. Do you think you're alone in making those investments? Or do you see evidence that competitors are trying to catch up?

Vladimir Makatsaria, Chief Executive Officer

We see a couple of things from the competitive landscape. This is our view: one, we observed competitors continuing to exit from this space. One competitor recently commented that they expect sales to decline from $27 million in 2025 to approximately $5 million in 2026; the majority of that will come from consumables, but also heater-coolers and HLM. We don't see capacity expansion or investment in innovation in the space from other competitors. At this point, we are focused not just on expanding output of current oxygenators, but also on innovation, and we believe that the next-generation oxygenator will be clinically differentiated from anything on the market today.

Michael Polark, Analyst, Wolfe Research

Helpful. For a follow-up, I'm interested in the comment on the New Technology APC assignment for VNS for epilepsy 1580. As we head into the summer rulemaking season, what's your base case that the code stays in that 50 assignment? Or do you think the chances of a Level 6 creation are elevated this year?

Alex Shvartsburg, Chief Financial Officer

Mike, our market access team continues to work on getting to a Level 6 reimbursement code. We're going to continue into next year. As far as our assumptions go at this point, we anticipate that the 1580 assignment will roll over into 2027.

Operator, Operator

We now turn to Anthony Petrone with Mizuho.

Anthony Petrone, Analyst, Mizuho Securities

Congrats on the quarter here. Maybe two parts on epilepsy. Last quarter, you called out new accounts that were not performing VNS as a potential upside driver, existing accounts where you can go deeper, and prior accounts that were using VNS that stepped away from it and potentially can come back in. Maybe an update on those three buckets and how you see that trending throughout the remainder of the year. And as a follow-up, on the generalized seizure front, potentially you have some competition coming in later this year. How do you think about the generalized seizure landscape with two neuromodulation players in it?

Vladimir Makatsaria, Chief Executive Officer

Anthony, I'll start with the first part and then turn to Ahmet to comment on the clinical side. On the three types of customers: for current users, that's where we will start seeing an impact right away both in terms of reductions in discounts and in some accounts we're already starting to see an improved pipeline for implants. That is due to the discount side and the fact clinicians are starting to see VNS as a more effective therapy and are changing the place of the therapy in their algorithm. So we're starting to see good leading indicators of this happening. For accounts that stopped doing VNS historically and potential new accounts, this will take some time because accounts need time to reopen and restart procedures. We remain confident this is a positive trend but will see it unfold over time.

Ahmet Tezel, Chief Innovation Officer

In terms of the generalized seizure indication, we are anticipating that the FDA will make a decision in the second half of the year. Just to remind everyone of the scale, only about one-third of epilepsy patients have generalized seizures and two-thirds have focal seizures; among those, fewer than 50% are generalized tonic-clonic patients. So we anticipate the impact would be limited, and we do not anticipate any direct effect to reimbursement for patients with a generalized indication as we can treat them today.

Operator, Operator

We now turn to Mike Sarcone on for Matt Taylor with Jefferies.

Michael Sarcone, Analyst (on behalf of Matt Taylor), Jefferies

Just wanted to start with a clarification on what's baked into the guide on the CP side. You talked about increasing your manufacturing capacity low double digits going live in second half '26 and also working with third-party suppliers to expand oxygenator capacity. Can you frame how those conversations are going? To the extent they're successful, what does that mean in terms of upside to the guide this year?

Alex Shvartsburg, Chief Financial Officer

Our updated guidance incorporates incremental improvements in consumable component supply. We've seen some of that read-through in Q1 and continue to work with our suppliers. We see potential for that to drive incremental output as upside relative to our current assumptions. Market demand continues to outpace supply and we're still operating in a back-order situation. As we improve component supply from third-party partners, we would like to rebuild some inventory levels because we're still operating hand-to-mouth. We'll continue to improve our own capacity throughout the year — we have a second line coming online in the second half of this year — and we will continue to partner with third-party suppliers to improve component supply. That's dialed into our guide.

Michael Sarcone, Analyst (on behalf of Matt Taylor), Jefferies

Got it. And then on DTTD, you mentioned you're in active engagement with CMS. Any more color on how you feel about those conversations and your level of confidence that you could get this over the finish line?

Vladimir Makatsaria, Chief Executive Officer

As you recall, we chose a collaborative approach in the submission with CMS rather than directly submitting; we wanted to engage with them through a draft application. We continue to collaborate very well with the agency and are looking forward to our next meeting. Our confidence is driven by the quality of the data, particularly the durability of treatment. At two years, over 80% of patients maintain their treatment response versus other therapies where patients often lose efficacy much earlier. Our confidence has not changed. We are continuing to collaborate well with the agency, and we will update once we have a formal application.

Operator, Operator

Our next question comes from Mike Matson with Needham & Company.

Michael Matson, Analyst, Needham & Company

With regard to the OSA launch and investments in terms of sales force hiring and things like that, can you give us an update on where things stand? It seems like you called out an impact to R&D in the quarter, but I didn't hear anything about sales and marketing. When do you expect to start hiring salespeople and any other investments you need to make there?

Alex Shvartsburg, Chief Financial Officer

Mike, our focus this year is squarely on product development and getting the next-generation device ready for launch in 2027. We expect a limited commercial release in the first half of 2027 and a full launch in the second half of 2027. As far as investments this year, they continue to focus largely on R&D with a small portion on market development as we progress toward launch. We'll start hiring sales representatives likely late this year or early next year as we get ready for the full market release in the second half of 2027.

Vladimir Makatsaria, Chief Executive Officer

Maybe just one comment: we're very pleased that the leader for our OSA business chose LivaNova and has joined the company. She is now forming the leadership team and the go-to-market strategy. The commercial team execution will ramp in 2027, but the preparation work is underway now.

Michael Matson, Analyst, Needham & Company

I also heard you call out some impact from spending on the ramp-up of the next-generation oxygenators. Can you remind us on the timing and how it will compare to the current offering and how it will be phased in? Will it be more of an immediate switch over or more of a gradual change like we've seen with Essenz?

Vladimir Makatsaria, Chief Executive Officer

In terms of development, we are in late-stage development. The design is complete and we are in manufacturing scale-up. We anticipate the next-generation oxygenator will launch in 2028. Regarding performance, there are about eight to ten different parameters perfusionists care about in the performance of an oxygenator, and we believe our next generation is superior or equal to the market leader across those parameters. We're excited about it and continue late-stage manufacturing scale-up.

Operator, Operator

That's all the time we have for questions. I'll hand back to Vladimir Makatsaria for any final remarks.

Vladimir Makatsaria, Chief Executive Officer

Well, thank you, everybody, for your engagement with LivaNova and for joining us today. On behalf of the entire team, we really appreciate your support and interest in the company. Have a great day.

Operator, Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.