LivaNova PLC (LIVN) September 14, 2026 Conference Transcript

Perfect. I think we'll get going here. First, just an administrative thing, there is a disclaimer on the Morgan Stanley website, so please make sure to go look at that. I'm very happy to welcome back the Levinova team to the stage here. We have Vlad, Alex, and Phil to talk about all aspects of the business. So maybe to start us off, you can just ground us a little bit for those who are newer to the story about Levinova today and where you all are headed.

Well, Neha, first of all, thank you for the opportunity to join you, and thank you all for joining this morning and for your interest in Livanova. So for those of you new to the story, Livanova is a global medtech company with nearly 50 years of experience in some of the market-leading portfolios. Today we have our core business, which is our cardiopulmonary business, that it's a portfolio that is used during open-heart surgery, heart-lung machines, oxygenators, and other disposable technologies that help this life-saving surgery is possible. On the other side, we have... That business has about 70% market share globally on the equipment side and about 40% market share on the disposable side. On the epilepsy front, which is the second part of our core portfolio, it's neuromodulation technology used for treatment of drug-resistant epilepsy, and there were nearly 200,000 patients that have been treated with this technology. And also it's a market-leading technology in this space. At the same time, we are expanding our portfolio into high unmet need areas from patient point of view, areas of potentially higher growth and market size, and areas where we have the right to win. And the next chapter of our expansion comes in obstructive sleep apnea, where we have clinically differentiated technology. And then potentially we are looking at an expansion in difficulty with depression with a similar neuromodulation technology, and that is pending CMS approval. So that is a little bit about our portfolio. and then in terms of kind of recent news, we had a number of tailwinds across our businesses on epilepsy. Both new patient and replacement procedures received nearly 50% improvement and reimbursement earlier this year. At the same time, there's new clinical data that came out on treatment of drug-resistant epilepsy with neuromodulation that shows significant improvement versus the previous clinical studies that we had. So that's another step forward. On the oxygenator front, one of the barriers to growth in the market has been supply chain. So the market, the demand has been growing faster than the ability of the market to supply, and we had a major improvement in our supply with a long-term agreement. We signed with Thermo Fisher to unlock mid- and long-term supply opportunities. And then finally, on obstructive sleep apnea, we've completed our clinical trial and this new technology that we call PolySync. I think it's a titration algorithm that delivered 85% responder rate with patients with sleep apnea, which is significantly higher than the current incubator.

I mean, those are a lot of different growth vectors, and over the last few quarters, if we just look at the performance versus your weighted average market growth rate, you've significantly outpaced that. You know, how would you contextualize the outperformance and the drivers of the outperformance and also kind of the sustainability of that?

Yeah, thank you for that question. I mean, I think we focus on three things in terms of kind of improving our performance. Number one is on talent. You know, I strongly believe that any great organization starts with great talent and, you know, good teams drive good performance. And so we've focused a lot on building a strong culture, bringing great new talent. So over the last two and a half years, about 45% of our director and above team are new in the role, coming either from external hires or internal promotions. So that's number one factor. Number two is execution. On the execution front, we were able to grow faster than the market. and the main contributors of that were our developing competitive momentum in the business, improving our supply chain. And so execution has been a huge focus area. And then finally, innovation. We have significantly upgraded our skills in R&D and in external innovation and renewed our innovation portfolio, both in the core businesses where we have a few new product launches coming up as well as getting into new categories. Sleep apnea is an example of that. So people, execution, innovation have been improving our growth performance.

Why don't we unpack it a little bit more and starting off on the cardiopulmonary side. You know, you've continued to gain share in the oxygenators market while having a leading position in the heart and lung machine market. What's your current assessment of market dynamics and the competitive landscape?

So there are two things that we see in our cardiopulmonary business that is helping our growth. One is the market itself is growing with a healthy mid-single-digit growth. And it's an improvement from historic low-single-digit growth market. and that is driven by aging population. It is driven by the fact that patients that have undergone some minimally invasive procedures are coming back into open-heart surgery. So we see that this mid-single-digit market growth will remain and be sustainable. Number two is we are gaining share in that market, and the drivers of the share gain came from two areas. One is the launch of a new heart-lung machine that we had a couple of years ago. And then number two is our ability to gain share in oxygenators. And so over the last two years, we went from 30% to 40% share in oxygenators. That was supported by improved supply chain. And like I said, we recently signed a long-term agreement with Thermo Fisher that kind of removes supply as a governor of our growth moving forward.

Yeah, and potentially allows you to further the gain market sharing and growth over time. Okay, perfect. I mean, I think that the growth of the U.S. cardiopulmonary business last quarter got a decent amount of attention for being uneven. Can you talk about the sustainability of growth in the business and how people should really think about that on a go-forward basis.

So I think the performance in the U.S. specifically for the second quarter was 2% in cardiopulmonary business. It's not reflective of the durability of growth in our cardiopulmonary business. As you know, we've now guided that business from 9.5% to 10.5%. It's an improvement of 250 bibs of growth since where we started the year. And what makes me confident in our sustainable growth in cardiopulmonary business is it comes from a number of different levers. So one is upgrade from old to new heart-mung machine. The other one is the share gains in our oxygenator business. The third one is our ability to continuously improve our pricing. and number four is a launch of new technologies, for example, heater-cooler and air manager and they're kind of modular parts of every heart-lung machine and starting 2027, we will be launching those upgraded versions. So growth is coming from a number of different factors and the quality of that growth gives me confidence of its sustainability.

And you touched on a little bit of the pipeline within CP, but just to double-click on it, as you think about those next generation of products, what are the clinical benefits and how do you expect them to support the continued growth within CP?

Yeah, sure. Thank you. So it's an exciting pipeline for us in CP, and it's one that I think is unique in the marketplace. First, I'd start with oxygenators. So, Vlad described the supply dynamic and the share gains that we've had over the last few years. On the back of that, we'll be launching a clinically differentiated product in 2028. There's a number of different clinical parameters that a perfusionist cares about. In our preclinical testing, we meet or exceed every one of those. And so, for example, whether it's pressure drop or blood platelet preservation, what we see is strong outperformance that can translate to better clinical outcomes for the perfusionists, whether it's infection rates, bleeding, et cetera. And so really exciting to be able to introduce that into the market in 28, and we expect that will continue to drive those share gains for us. As we talked about and Vlad mentioned briefly on the Capital HLM side, there's a number. When we initially launched Essence, we launched it with a legacy modular component, so two of them being heater cooler and air manager. We've since been developing next generation versions of those products, and we expect them to launch in 2027. and that will be at approximately a 2x ASP from the legacy products. And so the launch of those as we go to upgrade around the world will be a driver of the durability of the cardiopulmonary growth over time.

Okay, great. I mean, maybe we'll switch gears and talk about epilepsy. BNS remains underpenetrated. how is the improved reimbursement and core changing behavior in the market and what does the next generation device add to that growth algorithm?

So you mentioned the underpenetration in epilepsy and I think it's important to put that into context. So there's about 3 million people in the U.S. that live with epilepsy. About 2 million of them take drugs and it manages them well. A million don't, and they're classified as drug-resistant epilepsy. Within those million in the U.S. of prevalence, less than 15,000 a year get some sort of advanced therapy. So that prevalence is growing. And so there's a real underpenetration right now of these advanced therapies in addressing the market. And, you know, our goal is to reach more patients and to reach them sooner in the care pathway Because right now, the average patient takes 15 years from being classified as drug-resistant to actually getting to an advanced therapy. And that's why we're really excited about the tailwinds that you mentioned. The first is around reimbursement. So at the beginning of this year, we received about a 50% increase both on our new patients for epilepsy as well as for the battery replacements. We call that EOS. and that's removing what had historically been a financial headwind into the decision of whether or not to implant a VNS therapy in the treatment of epilepsy. So we've been seeing some good signals in our business already around kind of the growth of our patient pipeline that's being driven by that reimbursement piece. Secondly, Core VNS, it's the largest real-world study, 16 countries, over 600 patients globally, that demonstrates the efficacy of VNS, and it really represented a step change from what maybe the historical perception of VNS therapy was to kind of today in the reality of what physicians and patients are experiencing. So, 77% median seizure reduction, and this is really starting to reshape how patients are thinking about VNS within their algorithm of treating patients, both from recommending it as well as where in the care pathway. So, both of those are, I think, really exciting dynamics that's going to help that underpenetration. And then maybe lastly, next year, we have our first product launch in almost a decade in the epilepsy business, and this is a Bluetooth-enabled, connected product that's going to allow for remote titration, and that's really important because if you look at your average epilepsy patient, this is somebody that on average drives 40 miles to get care, And in the first year after implant, Ken has to go back to the physician's office up to 12 times. And a lot of times they can't drive, or in the case of a pediatric patient, the burden on the adult caregiver. And so this is removing a very significant burden on a potential new patient as they think about making that decision to get a VNS therapy. So all of those we expect to really drive kind of the future of the business for us.

That's great. That's a very helpful qualitative color, you know, turning into a quantitative impact. If I just look at the guidance for the business, you know, you all improved to increase it to 7% to 8% up from 6% to 7%, which is also a step up, I'd say, from the mid-single-digit profile shared at Investor Day. How do you guys think about, you know, the drivers of that guidance increase?

Well, historically, we've been very prudent in terms of the way we guide for the year. We guide to what we see in the business. Vlad mentioned some of the tailwinds around reimbursement and the traction we've seen with the clinical evidence. So, you know, the initial sort of impact of the reimbursement change has manifested itself in terms of our realized price. So we saw that coming through in the first half of the year. We expect that to continue in the back half of the year. We feel confident in that component of growth. The next element is new patient implants. And what we've seen is our new patient funnel has continued to improve. That's kind of the leading indicator. We need to see that converted into implants. We're starting to see traction on that, and that gives us greater confidence in our ability to drive growth through that segment of the business. And then the third element is our end-of-service or replacement business. That's a historically kind of a low single-digit growth part of our epilepsy business. that's been performing according to plan and is a solid kind of annuity stream, value stream for us. So all in all, you know, new patient growth as well as the pricing elements gave us confidence to increase our guidance for the year. And then finally, I would just say our international business, our OUS business has performed extremely well in the first half of the year. We see that continuing in the second half. All those things combined is the reason we took guidance up, and we will continue to watch it and hopefully overachieve as we move along.

That's very helpful. And maybe we'll just switch to OSA now. How are you currently thinking about the market, and why will you be clinically differentiated when you do go to market?

Yeah. OSA is a really exciting opportunity for us and is one that really lives into the strategy that Vlad laid out, which is, you know, using the strength of our core businesses, both from a financial standpoint as well as from a capability standpoint, to get into new high growth, high unmet need markets. And this is a great example of that. You know, in the U.S., you have up to a million patients a year that are following off CPAP. And right now, the penetration of hypoglossal nerve stim in that group is less than 5%. So massive need and opportunity in that market for OSA. And so the question is, how do we win? And it really starts with the clinical differentiation that results from the architecture and the technology itself. So what we bring to the space is a six-electrode cuff that's placed on the proximal end of the nerve that allows for control of all of the major muscle groups in the airway. And the result of that is a few things. One, what we demonstrated in our pivotal trial was that we are able to address the most complex patients, higher BMI, higher AHI, and it's that architecture that allows for the ability to address that. Secondly, we're not contraindicated for CCC or complete concentric collapse. And this is about a third of the patients in the obstructive sleep apnea market that have this. Currently with the incumbent, they are screened out. Our technology is going to allow to treat those patients as well. And so as we think about kind of the ability to control all those muscle airways, it really does allow you to address a group that is currently being underserved in the market. And then finally, that six-electrode architecture allows us to really do a lot more in terms of the way we titrate, how much power we put in, the combination of electrodes, and it really makes it a solution that's more tailored to the anatomy of a patient. And the result of that that we saw in our polysynch data was an 85% cumulative responder rate, which is well above the clinical trial data that's been put out by both the incumbent and the other competitor today. And if you think about it, you know, the challenge in penetration in any neuromod technology is that decision to get surgery. And if you have a 65% responder rate, when a surgeon is going to talk to a patient, he says, well, we have a one in three chance that you're not going to have a great clinical response to this device. That's a very different conversation if it's an 85% responder rate. So that conversation is now you have a six in seven chance of having a great clinical response that can benefit you. And we believe that's going to drive a very different view of HGNS technology in the treatment of sleep apnea.

That's very helpful. You know, maybe give me an update on the latest of your commercial device PMA supplement submission so folks can think about timing appropriately there.

Well, so our timing is, as we laid out, that we expect to submit the supplement between the second half of this year and the first half of next year. So very much tracking to that schedule. That then leads into a commercial launch sometime in 2027 with kind of the meaningful ramp starting really in 2028.

Perfect. Maybe we'll go through the financials analysis. I'll stick with you. You raised full year guidance again after a strong first half of the year. We heard a little bit about your thought process on the epilepsy side, but if you could just generally talk about what's improved and what the sources of upside were versus conservatism that you had built in in the first half of the year, that would be helpful.

Yeah, so I'll start off with the cardiopulmonary business. We went into the year kind of with two questions in mind, you know, just continued upgrade cycle on the HLM. Will we see the same type of price mix effect that we've seen over the last two years? That's playing out and gives us more confidence going into the second half of the year. In terms of our supply chain and our ability to drive output through our manufacturing network, we had questions around our ability to continue to improve manufacturing output. And we have been successful in doing that in the first half of the year. We expect to continue that in the second half of the year as well. With epilepsy, again, the reimbursement improvements and the traction we've seen with the core clinical data, we wanted to see that starting to read through in terms of new patient implants. The reduction in discounts in terms of our pricing there, all of that is playing out as we expected. Again, giving us confidence to take guidance up for the full year. You know, if you look at our sort of first half, second half, uh, growth profiles, you know, it's, it's a, it's a comp story, right? So last year, uh, particularly in epilepsy, first half of the year, we, uh, we were dealing with a field safety notice. Uh, we, we, that played out with a, a strong recovery in the second half of the year. So the comps for us this year become tougher in the second half. So all in all, uh, we're, confident in how the year is playing out. Again, our objective is always to deliver on the strength of our business and hopefully overachieve our targets.

Okay, great. And maybe to wrap up, as you think about kind of the focus and the strategic capital priorities for Leavenover over the next two years, how are you thinking about reinvestment in the business versus M&A?

Yeah, so as we laid out our capital allocation priorities during our investor day, top priority for us is to continue to reinvest in the core business. It's the clearest path for us to value creation. We have two strong franchises that will continue to perform well, and we want to continue to ensure their sustainability of growth and margin expansion in those businesses. Second is our investments in OSA, entering an exciting category that has the potential to transform the growth for Libanova. We're going to invest in that. So we kind of drew the line in terms of margin expansion at, say, 20%, but the core businesses will continue to expand margins. We'll reinvest that into OSA to stand up an exciting new business for us, accelerating our growth profile into mid to long term. And then hopefully there's a depression story that plays out in the near term as well. The third, kind of the last priority for us is tuck in M&A. we feel it's an important tool for us as we build on the strength of our core businesses so high thresholds in terms of strategic fit and financial fit for us we don't need M&A to grow and to continue to create value for the business but it is an important tool that we see as part of our portfolio play So those are kind of the three key elements of our capital allocation priorities.

And how should investors think about the free cash flow conversion target that you all laid out of reaching 80% by 2028, given the investment you guys are making in the business this year, particularly on the CapEx side?

Yeah, CapEx has been elevated for us starting last year and into this year. We see that continuing into the following year. It's largely been consumed by our capacity expansion initiatives in cardiopulmonary. That's been kind of the top consumer of CapEx. Second, we are investing in our new ERP system that's coming online gradually. It's a phased approach for us. That will continue into next year, so we'll be fully implemented by 2028. And then the third element of our CapEx priority has been in our digital platform, which is kind of the foundation to digitize our entire portfolio. We're starting off with epilepsy, but obviously we have the ability to leverage that platform across OSA and even into cardiopulmonary. So those will sort of peak over the next 12, 18 months, and then we'll start to normalize as we go into kind of the latter parts of our LRP. And then we see that cash conversion really accelerating.

Okay. Very helpful. Vlad, maybe I'll turn to you for some closing remarks as we wrap up here.

No, I think thank you for the questions. I mean, if you look at Livanova, and maybe I'll finish where I started, It's a good combination of a well-performing core business in cardiopulmonary and epilepsy that creates a sustainable foundation for expansion of margin, generating cash. We are very focused on making sure that our growth in those businesses is sustainable and that we can reinvest it then to get into new categories in faster growth markets. And OSA is our next chapter of growth. And if you look at the business kind of mid to long term, the entrance in the OSA and the strength in our core will reshape our portfolio to be in a faster growth kind of category, both on the top and bottom line.

Wonderful. Well, thank you for taking the time.

Thank you. Have a great day, everybody.