to get started here. I want to welcome everyone to kick off of the Goldman Sachs 2020 Healthcare Conference in our last year in Miami. I am a variety of reasons, but very excited to host the management team here. So clearly a great opportunity here to cover a wide spectrum of topics. I will invite people from the audience, if you have a question, please raise your hand, and we'll get a mic to your webcast. Maybe I'll just start, kind of zoom out a little bit, and then zoom in. I think there are a lot of details that people would like to get to here, but we're kind of six months into, a little bit more than six months from having issued your LRP back in November. Maybe just give us some reflections on how things have gone relative to your expectations. What has, that way you had anticipated and worse in the year.
So first of all, good morning, and David, thank you for the opportunity to be here, and thank you, everybody, for joining this early morning. So to answer your question, maybe for those of you who are newer to the story, just to recap to what we said during the Investor Day, Libanova has two core businesses that have been leading in their markets for about 50 years. One of those businesses is cardiopulmonary, the other one is epilepsy. And the first chapter of our strategy is really to reinvest back into our core businesses to make sure that it is sustainable, that for years to come, it continues to drive above market growth. At the same time, we use the strength of our foundation, of our core businesses, to get into the areas of high unmet clinical needs, high growth, and in the markets where we have the right to win. So in our case, it's neuromodulation, and in our case, our next chapter is inobstructive sleep apnea. And then we have an optionality to have an additional opportunity with the difficulty. And I think when we execute the strategy, it puts us in the markets that are not just bigger and faster growing but also have a very attractive financial profile, and it creates an opportunity for us to sustain accelerated growth both on the top and bottom. So that's kind of, in a nutshell, is our strategy. Now, I was asked a question during the Investor Day, what are some of the upside to the plan that we put together? And I actually named two upsides. One is getting reimbursement on improvement on new patients for VNS therapy for treatment of drug-resistant epilepsy. And the second one was our ability to scale manufacturing of oxygenators faster. And actually, both of this came through in a very positive manner. So as of January 1st, there was almost 50%, nearly 50% improvement on reimbursement on new patients for epilepsy, removing the economic barrier penetration of VNS procedure. So that gives a very positive tailwind for us. And then secondly, we have gained significant confidence in our ability to manufacture faster in terms of oxygenators. So we've gained share from about 30% about two and a half years ago to 40% today. We put additional eight points of growth in our strategic plan, but today we see that we are actually able to scale our manufacturing significantly faster, and that's mainly driven by two factors, you know, our own expansion of capacity, but also our partners that are providing components to us are doing an incredible job in terms of scaling up as well. So both of the upsides have played positively so far, and, you know, we continue to execute on our story.
Good segue to the next time. in markets accelerate performance of business the past couple of years. Maybe you could just give us some perspective on how you think your market growth is evolving, what's driving that, and then what is enabling you to continue to outgrow these markets where you are effectively the category leader.
Yeah, no, thank you for how you framed this question. So on the market front, unfortunately, from a patient point of view, You can say fortunately from the business point of view. But these are very significant markets. If you look at cardiovascular disease, it's number one disease burden in the world. Neurological disorder is number two. So the markets are large. They're growing fast. Especially on the neurological side, it's a huge patient population, and it's a very under-researched space. So there's a huge opportunity for growth. So we believe from the market point of view, you know, there's significant unmet need, and that is going to drive innovation, and that is going to drive market, continuous market growth. From the second part of the question, I think there are maybe two dimensions about how we drive growth. One is on the what, and the other one is on the how. So on the what, we are fortunate to have portfolio that have multiple drivers of growth. So if you look at our growth, it's coming from multiple angles. And that gives us this high quality and high kind of confidence in sustaining that growth. So first of all, geographically, you know, it's well-balanced across different parts of the world. Secondly, from the portfolio point of view, you know, the growth is driven by price. So we're taking price in a healthy way. The growth is driven by market share gains and oxygenators. And we see that we can continue to do that in a sustained manner. The growth is coming from upgrade cycle on our essence, part lung machine. The growth is coming from improving low penetration of VNS procedures and epilepsy. So we've got multiple kind of engines to drive growth, and that gives us confidence and sustainability of growth. And the second one, and that's probably a more important one, is any great organization starts with great people. And we're very focused on bringing in top talent from across the world. We are very focused on developing our own talent. So I'll give you an example. In the last two and a half years, we've changed about half of our director and above leaders, both from bringing people from outside but also promoting folks from the inside. and shout out to our recent leaders who joined, you know, we just announced that we have a new chief legal counsel chief legal officer who is coming from and Liddy who is coming from Hologic and we also announced Succession where our legendary leader of cardiopulmonary business has been in the business and this is before some of you were born he started at Levanova And he is retiring this summer, and we're bringing in Stefano Foley. He is coming from a long-term career at Philips, so great leaders. So that's on the leadership front. And then on culture, you know, we are trying to drive the environment where people can flourish. And I'll give you a little point of maybe context. One of our cultural imperatives is called empowered accountability, where we empower the folks across the organization to make decisions, to drive results. And with that, empowerment comes accountability. And so we have kind of the entire company owning the results, working together. And we see this, and so we measure the engagement of the organization every year. And we see significant improvement in the engagement and the inspiration of the organization. And today we're among the benchmarks in the medtech industry in terms of how the organization is inspired and engaged to move forward.
And one more strategy question and then dive into the business here. Maybe if you think about just capital allocation, since the analyst meeting medtech valuations, you've had one of your big priorities to market that every data point appears to you worse than the prior one. So how do you think about continuing to invest in the OSA program versus potentially taking that capital and investing?
Well, let me start off by saying our capital allocation strategy hasn't changed since Investor Day. Our clearest line of sight to value creation continues to be our core, as Vlad mentioned, so we're going to continue to invest in that. OSA was number two, possibly DTD down the road. And thirdly, we said we'll use tuck-in acquisitions as a way to improve value creation. So from our strategy perspective, the opportunity is still the same, and we're going to continue to focus on those three areas. Phil, maybe you want to mention on how we feel about OSA at this point?
Yeah, I think part of your question there is the conviction on OSA. And in our mind, you know, this is still an incredibly attractive market, significant underpenetration. One in five patients today are diagnosed. What we're seeing with GLP-1s, with wearables, is that number is actually going. So the funnel of these OSA patients is getting bigger. In addition, you know, there's questions around GLP-1s for, you know, what that does for a patient. And we're seeing that people who engage on GLP loans are actually more likely data to go to an advanced therapy outside of that. So we're seeing the top of the funnel grow. I think some of the headwinds that the incumbent is experiencing today we see as transient. Obviously, the reimbursement and coding issue is one that's a complication that is not an ideal scenario today. But as we enter the market and we're able to partner and onboard accounts and be able to work with accounts to be able to appropriately code We feel like it's overcomable So overall we believe we have a differentiated technology with strong clinical results and the market is going to continue to grow And so we're well positioned to succeed long-term
Okay, maybe we'll come back to that but So we started on the neuromodulation business. We talked a little bit about two of the upsides that you had contemplated at the LRP being price in new patients on VNS. So maybe we just sort of start with, just remind people what went into effect January 1st, how you thought about it in your guidance, and what you've seen play out here today.
So going into Investor Day, we knew that we were going to receive improved reimbursement on the replacement segment of VNS. As Vlad said, we anticipated some favorable benefits from new patients who didn't know at that point in time. As of January 1st, new patient implant segment received improved reimbursement of nearly 50%. That went into effect. so we're seeing the the benefits of that reimbursement read through in the first quarter our realized price was nearly double what we normally get on kind of the the normal inflationary increases one to two percent a year we expect to see that continue throughout the balance of the year there are certain accounts that we kind of missed the window of renegotiation with them and so we'll see the residual effect next year and this is purely unrealized price this is not where we went and took extra price on ASPs we went back to these accounts and basically they they claim economic disadvantage in the past we've renegotiated volume-based discounts and rebates with them so that's what we're
seeing read through. Okay, so it's a realized price instead of being one to two percent being and that's a combination of entering new contracts but also going back to existing ones where you had rebates in place so you raised the price and that price still had this increase. So what percentage of the accounts were you not able to get to? Large majority we were able to get to
but like I said I think we'll see some residual effect next year. One of the things that we've
been trying to better understand on this, is there an incremental volume of it? So let me maybe build on what Alex said.
But just to build on what Alex said, think about what I've started with is epilepsy treatment with VNS is relatively underpenetrating. One of the barriers to that penetration was the economic barriers. So think about it. An average patient has four replacements in their lifetime. So you can say that a provider now gained $40,000 per patient based on that math. So that is a significant removal of a barrier. So that's number one. On the volume front, so in addition to the reimbursement improvement, we also have a clinical outcome coming from this real-life evidence study called CORE-PNS. And in that study, basically what it shows is while the least invasive, VNS shows comparable results to more invasive procedures. So the value proposition has significantly changed. And it is now, VNS has now taken a very different place in the treatment algorithm of epileptologists. So there's a combination of two tailwinds. One is on the reimbursement, the other one is on clinical data, and together we anticipate that the volume is going to increase. Now, we are taking a position that we want to take a couple of few quarters of evidence of what is happening before we go to the market and talk about it, just to see that, I mean, we obviously have seen leading indicators, but we want to see some evidence of legging indicators before we go and we talk about it. So this is a topic that we will be transparent about, that we will explain how and why volume is moving.
And what are some of those leading indicators that you're seeing?
So one is the price opportunity that we're renegotiating contracts. The other one is the pipeline of new patients has been the strongest we've ever had. And the third one, and again, it's more anecdotal, but so I'll give an example. There was a scientific meeting of 150 top epileptologists in the world that came together to look at the core data. And the first view on the data was like, it's too good to be true. And then after the meeting, about half of them came to us with a request to independently present the scientific data at different meetings. I mean, that gives me confidence that the scientific community is embracing the data, and so it's a very good leading indicator for us. So we are counting on both price and volume exactly how it's going to play out and what is our view on the future. We're going to reserve a little bit our opinion to kind of the legging.
And besides economics being one of the barriers, what are some of the other barriers still needed to knock down, and where are you?
I mean, the other big one outside of economics was this clinical perception risk. So the data from the approval trial decades ago showed a much lower median seizure reduction than we're seeing in the core data. So 76% median seizure reduction is the data that Vlad was quoting there. And so there's a perception. And the reason that data has improved, it hasn't just improved because we ran a different study. It improved because the technology has evolved over time. We have auto-STEM features. We have better programming algorithms, et cetera. And so, you know, this is kind of capturing the latest of what VNS is. Now, VNS has been around for 30 years, so it's going to take some time to engage with the clinician community and change the perception or bring the perception up to date, I guess. But that is kind of the other big barrier, and once we get that, we...
Before moving on to CP, maybe we just sort of talk about the emerging drug pipeline in epilepsy. I think people have, some have long memories for headwinds and short memories for tailwinds. So if you go back to, everyone has the 2019 example sitting in their head. I know there's some differences today, but maybe just sort of talk through how you're framing the potential around drug competition. And maybe what are some of the things you're doing internally to educate Salesforce and get people ready to respond to it?
Yeah. I mean, as Vlad touched on in the beginning here, this is an incredibly underpenetrated market where patients have long and arduous care pathway journeys to try to get to the right therapy. And so, you know, as a leading company in the space of epilepsy, we welcome all new therapies that can bring kind of relief to patients and good solutions. but kind of start there. Beyond that, as we look at the data of the new drug or as we kind of study drugs, you know, we don't expect a material change to the number of patients that are drug-resistant epilepsy that could benefit from BNS therapy. It has been about a third for the last few decades in terms of the number of patients that are drug-resistant, which is defined as failing two or more drugs, and we expect that number to kind of stay consistent. Now, to your question around what are we doing, the reality is we have a lot of positives to focus on with our sales force right now, training them on how to disseminate the core data, training them on how to partner around reimbursement. So a focus for our sales organization is not to sell against the drugs, but rather to sell the value proposition, which we believe will still be a very important solution in the care pathway for us.
And why wouldn't we see trialing of, there are two novel agents coming into market from Biohaven, and why wouldn't we see a year of disruption as those groups come to market as we did in 2019?
You likely will see some trialing of the drug. So the reality is we expect that to happen much earlier in the care pathway because that's where the largest TAM is for these companies. So we don't really see it as a competition to DRE. We also have to remember one of the nice things of our epilepsy business is the U.S. NPI percentage is actually only about 20% of the overall epilepsy business, right? And so the vast majority is in other areas that are relevant to the trial.
But it was interesting because when I just started with Livanova and I was educating myself and I went to the top clinicians and asked a similar question about different drugs. And the interesting answer is, you know, what I was told by clinicians and since the beginning of drugs to treat epilepsy, this ratio of two-thirds of drug treatment versus one-third of drug resistant, that ratio has not really changed over time. And what has changed are the side effects of the drugs, and they significantly improved. So from the safety point of view, it got better. So it doesn't mean that this is not going to change moving forward, but, you know, historically it really did not change.
I want to see if there are any questions in the audience before I move on. So maybe on CP, I think the way, let's start with Essence, it certainly has evolved. I think originally we all thought of Essence as, okay, it's an upgrade. Upgrade comes and goes, and the business cycles back to more normalized growth. But I think one of the things you've talked about now is software enhancements, future upgrades, maybe just sort of contextualizes how the Essence launch has evolved and how you're thinking about sort of runway of growth durability versus when you had originally kind of started down the process.
Yeah, so Essence is our hard-long machine. It's a piece of equipment, kind of a central piece of equipment in OR during the open-heart surgical procedures. It has about 70% market share. The first generation was called S5. It's been on the market for 17 years. So if you think about a normal upgrade cycle of equipment, it should be kind of 7 to 10 years. So it's way delayed and late in terms of which gives us an opportunity to upgrade faster. So I kind of think about Essence as a modern automobile that comes with a base option and then you can have different optionalities built to it versus the old version. It's like you get a car that has no power steering, nothing else, and that's the only way you can kind of drive it. When we launched Essence, we counted on kind of the naked, the no option version of it is about 30% price premium to the older version. However, fully loaded optionality is almost double price. And what we saw over this period since we launched it is physicians and perfusionists see incredible value, clinical value proposition from those options. And so far, majority of machines that have been ordered have been ordered with full optionality. And so as we increase the placement penetration of essence, that gives us significant price mix upside, and that drives double-digit growth, not just for machines, but for the entire cardiopulmonary business. And that upgrade cycle is going to continue through the investment fleet will be essence. Now, on top of that, we have an opportunity, obviously, to gain market share because of the machine itself. But also, you know, we have a huge, you know, several thousand machines placed there, and so it gives us an opportunity to improve the benchmark in terms of how we service it, benchmark in terms of how we upgrade software and make the machine smarter, and instead of, you know, kind of follow what the perfusionist does, ultimately actually advising perfusionists on what to do, and then becoming kind of this digital software. center of the ecosystem in the cardiovascular operating room. So the idea is to use the large fleet and the strength we have in this business to continue to upgrade each machine. And also, each machine has some additional pieces of equipment, heater, cooler, air manager that are kind of part of the machine, and those are still old versions. So we have an opportunity to upgrade those as well. So I see this as an opportunity for us to continue to drive growth. And obviously, also by being such a leader in the equipment side, it also gives us an opportunity to get into the OR and drive market share improvements in disposables.
And maybe talking about oxidators, I mean, you've been a great run for you the past couple of years. You're sitting at about 40% share. Where are you unmanufactured? How much market share could you manufacture today? The 40% could be what if you had sufficient, if you just...
That's a great question.
And then what will that be in a year?
So there are two drivers of share gain. One is our ability to manufacture fast. Everything we manufacture, we don't know where the limit is from that point of view. But we are gaining market share. And from the manufacturing point of view, think about it in three stages. The first stage is doing what we're doing, but just better. So improving the manufacturing process. And that's what drove improvements over the last few years. The second one is that in the second half of this year, our additional manufacturing line goes live. And then the third stage is really a long-term approach where we continue to build our own manufacturing capacity and partnering with our suppliers in order to be able to supply a majority of the market. So with 40% market share today, in the STRAT plan, we said we will improve our output by 60% and gain additional 800 bibs of share. However, what we see today gives us even more confidence and the ability to gain more share. I believe that today our cap is at 60% market share in terms of manufacturing. But if we execute what we think we can do, this will be increased. And the second lever of share gain is new product introduction. so we've said in 2028 we will launch a new oxygenator that is clinically differentiated and it's significantly better from the performance point of view versus anything on the market today so that is going to be another tailwind
for us in terms of thinking and anything from the competitors we are not taking
this for granted and we're monitoring closely what the competitors are doing So, I mean, there's nothing new from the point of view that some of them are leaving the market, so you saw that, and some of the others are kind of doing what they're doing, but they're not increasing their manufacturing capacity, neither they innovate in this space. So this is one of the markets where scale matters. So the more market share we gain, the broader scale of our manufacturing is in an arrogant way, but it's easier for us to compete.
Two last topics. I want to make sure that we cover TRD. Where are we on? Any updates on reverse, and what are you expecting in timing? And as you're waiting for this, what are the things that you're doing? Are you doing anything internally to kind of prime the pump or prep this?
So we are in talks and very close partnership with CMS. It's a very collaborative process where they've co-invested with us in the clinical trial. We're working very closely with them on next steps, educating each other on the clinical outcomes of the study. So it's a close partnership with CMS, and we will obviously update everybody when there's some material news that are coming out of this. So that's first. Internally, we have a team that focuses on the private pay market, and that team is also thinking about the strategy and looking at different scenarios of what the indication for reimbursement will be potentially. And so, yeah, we are not – we're thinking about different scenarios and then how we will address it if it comes to us.
Any latest news on timing?
I cannot speculate on timing just because it's now it's out of our hands a little bit
do they give you much of a heads up or you find out when we find out
they don't give us heads up on timing but we are we're not disconnected it's a very connected closely tied relationship in a way that how we're working on the the clinical data and the potential consequences.
We will announce, when we do file, we'll announce that.
Okay.
When you file for the request. Okay. Should we look at other NCDs, if you look at the early TAVR NCD, it was about a year from when they submitted their request to when the NCD was open, is that a good benchmark to use?
So unlike FDA, CMS doesn't have exact timelines in the process. You're right. A year is about the average, I think. And one of the latest examples was with Medtronic with Reno. Yeah, Reno Denervation.
That was, I believe, nine months. Maybe we should close on margins. One of the things that I think had positively surprised investors at the analyst meeting was your ability to sort of retain margins while investing in OSA. And, you know, someone, I think, had asked me prior to the meeting, so are they going to torch the P&L to invest in OSA, which obviously is not how you sexualize things. Maybe where – talk just about kind of the puts and takes that allows you to have confidence that you're investing sufficiently against the OSA opportunity while also being able to continue 20% margin short-term, and then obviously you have the longer system.
Yeah, so remember, it took us a while to get to 20% operating margin. So that was an important metric for us as a company. We drew the line at continuing to deliver at least 20% operating margin as we continue to invest in OSA. Today, we're largely investing in product development to get to commercialization. Next year, we'll have a limited commercial release in the first half and a full commercial release in the second half. We're going to continue to maintain that floor minimally of 20%. We think it's a disciplined way to run the company. So we're going to focus on continuing to drive margin expansion in our core business and fund OSA in tandem. So that's what we should expect.
And everything with OSA on track from a PMA supplement perspective?
Yeah, we expect to file a PMA supplement in the second half of this year. That would get us to an approval sometime in the first half, which will enable us to do a limited commercial release and then we'll follow several months later with a full commercial release.
And then Howard, so the last question on just the P&L topic is sometimes I know it's tempting that you set out these plans to invest and hire people. You don't hire people. You beat numbers, which is good in the short term, but it comes because the pace, and then you talk about things about timing of OPEX and everyone thinks you're being conservative. where are you in that cycle? Have you hit your OSA in investment milestones and how are you seeing the different trade-offs play out?
If you look at our first half, we were just about slightly below the 20% threshold. It's the timing of revenue relative to OPEX. Typically our first half is lighter sales. Second half usually I think it's something like 48.52 historically from a phasing perspective. And our OPEX was heavier, and we expect it to be heavier in the first half and sort of kind of level off for the second half of the year. So that's where we expect to see the margin pick up, and we'll deliver on our commitments.
Maybe from a team perspective, we have Lucille Blaze, who's the leader. She's built out a core kind of leadership team. we started to engage we'll have a much more significant presence at sleep this year now that we do have an approved product even though it's not the commercialized product and then the hiring plans will start to scale up you know
it's a good place to wrap up we're out of time I want to thank you again for kicking off the conference of your time and looking forward to updates in July thanks for having me everybody