LivaNova PLC

Thank you, Catherine, and welcome to our conference call and webcast discussing LevaNova's financial results for the fourth quarter and full year 2020. Joining me on today's call are Damian McDonald, our Chief Executive Officer, Alex Schwarzberg, our Interim Chief Financial Officer, and Melissa Farina, our Vice President of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any forward-looking statement. Also, the discussions will include certain non-GAAP financial measures with respect to our performance, including but not limited to sales results, which will all be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to our 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 and Events and Presentations at investor.livanova.com. With that, I will now turn the call over to Damian.

Thanks, Matt. And thank you for joining us. And I hope you and your families continue to remain safe and healthy during these challenging times. Welcome to our fourth quarter and full year 2020 conference call. As you're aware, we have a large employee population in Houston, all of whom were impacted by the storms last week. I'm relieved that everyone is safe and would like to thank all of them for their dedication and ingenuity to keep our operations running. Today, we will discuss our results and provide recent company updates, including guidance for 2021 and the first quarter. The COVID-19 pandemic has presented unique operating challenges. Many markets around the world have operated inconsistently or shut down for varying periods of time, and this dynamic has continued in the fourth quarter and thus far into 2021. I'm going to start off by discussing some recent updates to our business and board structure, then move to sales results, focusing on the primary growth drivers, epilepsy and ACS. Then I will discuss our strategic portfolio initiatives, DTD, heart failure and OSA. After my comments, Alex will provide you with additional details on the results and our 2021 guidance, which continues to include heart valves. Then I will wrap up with closing comments before moving on to Q&A. In December, Livanova entered into an agreement with Gyrus Capital for the sale of the heart valve business. This portfolio will benefit from the ownership of Gyrus and its ability to singularly focus on building a heart valve business. This will enable us to sharpen our focus on the primary cardiovascular and neuromodulation platforms. As you know, divestitures are complex, and we are currently discussing an amendment to the purchase agreement with JIRAS related to a deferred closing of a subsidiary that is responsible for site management services at the Solutia campus. We continue to expect the initial closing, consisting of the heart valve operations in Italy and Canada, to occur in the second quarter, followed by closings of the sales infrastructure in the second half of the year. In December, we announced a series of board leadership changes driven by the Nominating and Corporate Governance Committee. Included in those changes, Todd Schemmerhorn was appointed to the Board of Directors. Todd has 35 years of experience in global healthcare, including 27 years at CR Bard, where he held positions of increasing responsibility, which culminated with his nine-year tenure as Chief Financial Officer. He currently serves on the boards of Metabolon and also Traveller's Companies, where he is the independent lead director and chairs its risk committee. Todd will succeed Hugh Morrison as audit chair upon his retirement at the 2021 AGM. Additionally, we will be rotating the board and two committee chairs following the 2021 AGM. We believe all these changes underscore a commitment to leading corporate governance and to help further enhance the board's independent oversight. Now I'll discuss the core growth drivers, epilepsy and ACS. All net sales results will be stated on a constant currency basis. Epilepsy sales declined 4% globally versus the fourth quarter of 2019. This decrease is attributable to the impact of COVID-19 on both new patient and end-of-service or replacement implants. Importantly, sales rose sequentially and were in line with our full-year guidance range. US epilepsy declined in the mid-single digits and implants continued to improve sequentially over the third quarter. In the fourth quarter, epilepsy sales in Europe reached nearly 90% of our prior year levels with strong performance in the Nordic region and Spain. The rest of world region grew 11% as a strong growth in the Middle East and Australia as non-emergent procedures recovered. For the full year 2021, We expect global epilepsy sales to grow 15% to 20%, including strong growth in new implants as patients return to their positions. And we expect a tailwind in replacement implants related to the backlog created in 2020. We are pleased with the progress of the go-to-market initiative and still plan on adding three new dedicated teams in the US during 2021. ACS sales were $13 million in the quarter, an increase of 50% from the fourth quarter of 2019. Growth was driven by the adoption of LifeSpark and an increase in acute respiratory distress-related procedures. We continue to expect ACS to grow at least 20% in 2021. Turning now to DTD, sales in the fourth quarter were $1 million and $7 million for the full year. In 2021, We expect DTD sales of approximately $10 to $15 million from a combination of the RECOVER study and the replacement implants for CMS-eligible patients. We continue to expect to reach 250 unipolar patients and or 150 bipolar patients implanted in their respective RECOVER study arms by year-end. In heart failure, the Anthem HEP-REF US Pivotal Trial continues to progress with over 265 patients enrolled. We still expect to achieve 300 patients enrolled in the first half of 2021. We continue to make progress in OSA. The confirmatory study was submitted for IDE approval during the fourth quarter. We received some additional questions and still expect to start the study in mid-2021. For the cardiopulmonary business, sales were $122 million in the quarter, a decline of 10% versus the fourth quarter of 2019. Oxygenators declined in low double digits globally as a faster recovery in the procedure volumes in the US and the rest of world region was offset by procedure restrictions in Europe. HLM sales declined in the high single digits due to COVID-19 impacts on hospital budgets for capital equipment and all regions improved sequentially over the third quarter. Moving to heart valves, Sales for the segment were $24 million in the quarter, a decrease of 27% versus the fourth quarter of 2019, including another double-digit growth quarter in Japan, driven by Percival. Starting in the second quarter of 2020 and continuing through the year, we reduced costs to offset some of the decline in sales. We continue to reallocate resources to fund priorities. These actions have delivered approximately $65 million in savings in 2020. Specifically, these four key areas included the following. First, we instituted a hiring freeze, participated in government-sponsored work programs and adjusted employee-related expenses, including lower performance-based compensation and a significant reduction in executive leadership short-term incentive. Second, we reduced spend related to travel, marketing events and field presence and have shifted to working with our customers and stakeholders using remote methods. Third, we reduced other discretionary spend related to external consulting and temporary staffing. And fourth, we balanced our manufacturing output to coincide with the anticipated reduction in demand. We remain focused on disciplined control of expenses as we move through this next phase of the pandemic, while still investing in our pipeline initiatives. I'll now turn the call over to Alex for an overview of the financial results.

Thank you, Damian. I'm going to discuss the fourth quarter results in greater detail and then provide our 2021 guidance. Sales in the quarter were $270 million and declined 7.7% compared to the fourth quarter of 2019. Cardiovascular sales were $160 million, down 10.1% for the fourth quarter of 2019. Neuromodulation sales decreased were $109 million, a decline of 3.8 percent compared to the fourth quarter of 2019. Adjusted gross margin as a percent of net sales in the quarter was 67.2 percent, down 250 basis points from the fourth quarter of 2019. The margin decline was primarily driven by lower volume from sales and unfavorable manufacturing variances. Adjusted R&D expense in the fourth quarter was $39 million compared to $38 million in the fourth quarter of 2019. R&D as a percent of net sales was 14.5% versus 13.1% in the fourth quarter of 2019. R&D is increasing behind continued progress of the Anthem HEP-REF pivotal trial and the RECOVER study. Adjusted SG&A expense for the fourth quarter was $94 million, compared to $108 million in the fourth quarter of 2019. SG&A as a percentage of net sales was 34.7%, down from 37.4% in the fourth quarter of 2019. Adjusted operating income from continuing operations was $49 million, compared to $55 million in the fourth quarter of last year. Adjusted operating income margin from continuing operations was 18% compared to 19.2% in the fourth quarter of 2019. The adjusted effective tax rate in the quarter was negative 0.1% compared to 5.3% in the fourth quarter of 2019. The lower tax rate is primarily attributable to geographic income mix and partial valuation allowance in the U.S. Finally, adjusted diluted earnings per share from continuing operations in the quarter was 71 cents compared to $1 in the fourth quarter of 2019 and was within the full year guidance range. Moving to cash flow, The cash balance at December 31st, 2020 was $253 million, up from $61 million at December 31st, 2019. Net debt at quarter end was approximately $505 million, up from $272 million at year end 2019. These changes reflect the impact of the financing completed in the second quarter of 2020. Our adjusted free cash flow, excluding extraordinary items, through the fourth quarter of 2020 was $17 million. Capital spending for 2020 was $35 million, which was $10 million higher than 2019 related to initiatives to support manufacturing sterilization capabilities and to further develop our epilepsy digital innovation platform. As a result of the heart valve divestiture, we took a charge of $202 million in the fourth quarter related to the anticipated sale of the heart valve business. In addition, we have reserved $42 million for a provision for future obligation of our site management subsidiary related to hazardous substances from former operations at Seleucia, Italy campus. Now turning to 2021 guidance. We forecast 2021 sales growth between 8% and 13% on a constant currency basis, and this includes the full year of the hard valve business. If current exchange rates remain unchanged, the company's full year revenue guidance will be positively impacted by less than 1%. We anticipate the neuromodulation business to grow 15% to 20%. We estimate our cardiovascular franchise to grow in the low to mid-single digits, with strong growth from ATS largely offset by late-stage replacement cycle of HLM. We are projecting adjusted diluted earnings per share from continuing operations in the range of $1.40 to $1.90, the share count is expected to be approximately $49 million. Adjusted cash flow from operations excluding extraordinary items is expected to be in the range of $30 to $50 million. While we don't provide quarterly guidance, sales in the first half are assumed to be lower while expenses are generally more evenly spread out. For the first quarter of 2021, we expect net sales to be down 3% to 7%. The first quarter is expected to be the softest earnings quarter, and we forecast a range of $0.10 to $0.20 per share. With that, I'll turn the call back to Damian for some final comments.

Thanks, Alex. While 2020 did not go as expected, we have become stronger, more agile, and remain cautiously optimistic that our execution focus coupled with expectations of declining COVID-19 infections rates will lead to improving results throughout the year. As we transition out of the pandemic, we believe customers will continue to reward both our innovation and actions as valued partners with increased trust and market share. As procedures return, We believe the work we've been doing to improve margins will become clearer. We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value. And with that, Catherine, we're open for questions.

Thank you. If you have a question at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. As we enter the Q&A session, please limit yourself to one question and one follow-up question, and then return to the queue if you have any additional follow-ups. Our first question comes from Rick Wise with Stiefel. Your line is open.

Thank you, and good morning to all. Damian, maybe I'll start off just with recent trends. Obviously, we've all been hearing in recent years days and weeks about the weakness, COVID-driven weakness in general for everybody in late December and into January. Can you give us a little more color on recent trends and just what you're seeing? Have things stabilized? Are you seeing, is it getting worse or better as you're now two-thirds of the way through the first quarter? Just any additional color, if you could.

Yeah, first of all, good morning, Rick. How are you? Lovely to have you on. Fourth quarter. Look, fourth quarter was interesting year over year. October was the strongest. And then we faced headwinds like a lot of people in mid-November that carried into December, especially Europe. I mean, that was the noisiest for us. And you can see that in some of the commentary we just gave. Sales in the first quarter really continued that trend with the COVID-19 hospitalizations increasing. Comparisons start getting easier in March, but Q1 has been noisy, to say the least.

I'm sorry, noisy meaning can you give us any more color? Are you feeling a bit more optimistic? Many companies have talked about recovery or some have cited some signs of light at the end of the tunnel kind of thing. Anything else you can share?

Hey, Rick, it's Matt. So I would say what we're seeing is similar to what you've heard from a lot of other companies. It wasn't as bad in Jan-Feb as maybe it was last year in, like, April, May. The hospitals were just better situated, especially in the U.S. It has been a little tougher in Europe. You know, Europe didn't rebound as much. We have seen international, you know, remain in pretty good shape from what we came off of at the end of last quarter. And I would say, you know... There were slightly improving trends in February, but last week and the week before with weather and what happened in Houston, that looked like a temporary setback. So I'd say, you know, the next two weeks we'll know a lot more.

Okay. And turning to the recover trial enrollment timelines and milestones, if I heard you correctly, Damian, and please correct me if I'm wrong, the 250 unipolar or 155, 50 rather, or 55, did you say, bipolars by the end of 21. It sounds like enrollment, if I'm hearing you correctly, is very much in track, you know, sort of with expectations or guidance or comments we've heard in recent months. Am I understanding that correctly? And, you know, to what extent are we seeing headwinds there or are you concerned about these timelines?

Yes, you are hearing that right. Yes, 250 in the unipolar or 150 in the bipolar, all both. We actually thought that the bipolar was not going to recruit as fast because, you know, it's just harder to deal with those patients and track them. But it turns out that that has been a faster recruiting timeline than we anticipated. So it's tracking well. The implants are progressing well. The consents into the trial have been really progressing well. Again, the limiting factor is just clinics being open to implant, which as you know from some of the studies, neurology, psychiatry visit to clinics are lower, whereas a lot of the telehealth is progressing very, very well. So I like the progression there. The consents are definitely tracking extremely well, and I'm pleased with how the team's doing that study and following up on the existing patients that we've already implanted. We've not missed a titration or follow-up yet.

That's great. You said one and a half. I'll stop there. Thank you.

Thank you. Our next question comes from Anthony Patron with Jeffrey. Your line is open.

Great. Thank you, and good morning, everyone. I hope everyone's healthy. Maybe just a couple on guidance. The negative 8 to 13% all baked in. What is actually baked in there for heart valves? Just trying to get some math as we exclude that. And then in terms of the Neuromod Outlook 15 to 20, just trying to get a sense of how much COVID recovery is reflected in that versus new patient starts, and then even re-implants from the 100,000 existing base. How do you reflect re-implants in that as well?

Thanks. Christopher, let me just say welcome, Anthony. Great to have you tracking us. And I'll pass this to Alex.

Yeah, so from a sales perspective, HeartVals ended 2020 at roughly, call it $90 million in sales. We expect a recovery from hard valves, sort of low to mid-double digits, I would say. So that's kind of a good way to forecast the hard valve business. And right now, we have it in for the full year. But as we said, we expect to close the transaction sometime in the second quarter.

And it's, Matt, for Neuromod, the 15 to 20, I would say, look, a little bit of that is GTD. That's up year over year. If you look at epilepsy, what we've been saying is at least 5% underlying is our plan, hopefully a little better. Higher OUS because that's a global number. And then don't forget the U.S. is 75%. So it's mostly driven by the U.S., So if you take those pieces, you can kind of see what the difference is in terms of what we consider to be the snapback. And our thought right now is more that's going to come from the replacement or end of service than the NPI.

That's helpful. Thanks. Happy to be on board. I'll hop back in queue. Happy to have you.

Thank you. Our next question comes from Adam Bader with Piper Sandler. Your line is open.

Hey, guys. Thanks for taking the questions here. I wanted to start with just a couple housekeeping questions. Just first, it sounds like you gave an incremental update on the pending heartfelt divestiture, but I want to make sure I better understand that. And I know the divestiture isn't contemplated in the guide, but how do we think about any potential impact there in terms of dilution once that's final? And then the second housekeeping question is just, Any update or more color you can share on the CFO search and where that stands today? And then I had one follow-up. Thanks.

Hey, Adam. It's Alex. On the heart valve divestiture, as we stated previously, we expect the full-year impact to be about $0.10 to $0.15 dilutive. So that's That's the way, obviously, given the timeline, I would model it in that fashion, prorated as you see it.

And with respect to the CFO search, two things. First of all, the end of year is an interesting time to be recruiting for senior executives because it's bonus reporting, Ks and Qs for most companies. So that role has a stickiness that I think is interesting when you're recruiting. Having said that, our partner, which is a large global human resources partnership, have unearthed a really intriguing pack of candidates, many of whom we've met over the last several months. Having said that, I will say I'm fortunate, and I think we're fortunate as a company to have Alex being able to step into the role, and he's making a tangible and palpable difference to the function. And so as we continue the search, I'm convinced that we have the right person to be filling the seat.

Thanks, guys. That's very helpful. And then for the follow-up, just one on the 21 guidance, you know, the EPS guidance. to me was, I guess, a bit below I expect than I expected. And perhaps that's, you know, some mismodeling on my behalf. But, you know, the guidance range is pretty wide. So it would be helpful to kind of better understand kind of how you arrived at the top and the bottom end of the EPS outlook. And then, you know, maybe just talk about, you know, the cost initiatives that you had in 2020, the savings there. what's going to carry over into 2021 and then just talk a little bit about kind of employee, you know, morale and turnover. Thanks so much, guys.

Okay, Adam, so from a margin profile perspective, the gross margin is actually increasing in 2021. And then once hard valves are out of our P&L, we expect about 200 basis points of accretion. You know, relative to 2020, you know, gross margin is increasing on the basis of improved mix from BNS and increased volumes in CP. R&D as a percent of sales is going to increase in 2021. This is largely due to the RECOVER and the Anthem trials. Also, just to remind you, in 2020, we had sort of a depressed spending base, so there's a little bit of an increase there as well. SG&A as a percent of sales is going to decrease in 2021 versus 2020. It's just pure economies of scale as sales increase and we see some leverage there. Then I guess interest expense, we continue to look at $45 to $50 million and the tax rate in the range of 10 to 15%.

Adam, I'd say versus consensus, it's a little tricky because a couple of you have heart valves out. But when we really try to look at apples to apples, I'd say the major differences, to Alex's point, it's R&D and SG&A. That's where we see our numbers a little bit ahead of the street as a percent of sales.

Just on employee morale, it's a great question. So first of all, let me talk about data. Sequentially, we saw an improvement in our voluntary turnover rate quarter on quarter. So again, I'm pleased that we're heading in the right direction there. Secondly, we conducted our virtual growth and leadership conference, which brings together 150 of our senior leadership over three days in December and January. And reading the chat line of this virtual conference, I'm convinced we have a highly motivated senior leadership team. More broadly, I'd say the organization is faced into the challenges of 2020 and even the start of 2021 with the weather and continued COVID with extreme positivity. And again, I just look at how people reacted with ingenuity to the freezing weather in Houston. And I'm convinced that we've got a team that's highly motivated and really linked to our mission of patients first.

That's really helpful, guys. Thanks for taking all the questions and appreciate the fulsome response. Thank you. Thanks, Adam.

Thank you. Our next question comes from Michael Pollark with Baird. Your line is open.

Good morning, good afternoon. I have several follow-ups to some of the prior questions. Just a clarification, I heard in the slides, the slide deck says for cardiovascular revenue up mid to high single digits in 2021. And then, Alex, I think in your prepared comment, you said low to mid. My sense is the variance there is with and without heart valves, or perhaps I've So can you just clarify those two tidbits for me?

Yeah, so cardiovascular, we expect to grow low to mid-single digits, kind of in line with the normal growth that you would see from the marketplace. As I mentioned before, we expect the heart valve business to have a larger snapback So expect somewhere between, I would say, low to mid-double-digit snapback on hard valves. So, you know, that's kind of how we adjust for it.

Okay. The slide deck... Page 21 says cardiovascular up mid to high single digits. So I just want to... But that's the genesis of the question. I'm hearing differently from you than I see in the slides, but maybe we can take that offline. And I think I get the components. I just... Several moving pieces. I don't want to make sure we're anchored appropriately. On heart valves, the earnings... Uh, 10 to 15 cents of run rate dilution. You know, let's assume that does, you know, divest middle of this year as, as you, um, indicated. Does your, and I know it's in your revenue guidance today, but does your earnings guidance absorb, you know, that dilution when it finally hits? No, no, no. Okay. Okay. Um, In the slide deck on the free cash flow slide, slide 20, for the 2021 forecast, there's a dotted lined gray box, and I want to understand what is that. It seems to be an extraordinary item, and I want to understand what that is and what the number is.

Just the range, really. That's all it is.

Oh, got it. Okay. It's showing the 30 to 50 range. Okay. Okay. Okay. Understood. On R&D, I mean, look, I appreciate that comment. Clearly, Street was, and myself, under-modeling the spend in 2021, peak period for both of those important studies um can you put a finer point on what is the um what is the dollar investment expected or what is what are your r&d dollars in your model um in 2021 because i would imagine you know in 22 and beyond that we we back off um if if this is indeed peak spend year for for anthem and uh and recover. Um, so just trying to, you know, it's, it's a little bit of a pop in that number and then we'll, we'll fade. Um, I would imagine in, in the out years. So if you, if you could put a finer point on that, I think that would be helpful.

I'll quote a range of, uh, you know, 16 to 17% of sales. Okay.

All right. Last one. Um, the, uh, sounds like the, the, the recover, uh, um recruitment is is on track and then hear the comments clear does that keep you on you know does that keep you on pace for the the prior timing of you know the late 2022 early 2023 flip to registry my guess is yes um but i want to ask the question yes yes the short answer is yes okay all right thank you very much all right cheers

Thank you. Our next question comes from Scott Bardo with Barenberg. Your line is open.

Scott, how are you? Not too bad. Thanks, Damien. Thanks for taking the questions. Levenover, I think, used to provide some EBIT margin range implicit within your guidance. I know you've just, Alex, given some parts of the pieces. The nature of my question is your sales guidance looks to be, I think, quite encouraging, highlighting a return to more normalized activities. Yet, if I understand correctly, your earnings guidance implies something like a 13% to 16% margin guidance. I wonder, firstly, can you clarify whether that makes sense? And following up from that, One of your key strategic priorities, I think, is to optimize operating costs. And it seems a little perverse to me why, while your top line recovers as guided, why you're expecting margins to be materially below 2019, even without the divestiture of heart valves, which I think is margin accretive. So I just want to talk about these parts. And I think it is important because Damien, you've highlighted many, many times an aspiration to shoot towards a 20% margin bandwidth, which seems achievable given your gross margin. Of course, there's great uncertainty as to a timeline around that. So if you could please help us with those pieces, I think that's important. Thanks.

One moment. Speakers, please go ahead.

Hi, how are you? Sorry, we lost Scott there.

Okay, can you hear me okay?

Yeah, Catherine, we've got you back. So, Scott, sorry, we lost you there.

Oh, I'm sorry for that. Okay, so we'll summarise the question again. Your guidance implies good top-line dynamic and a bit of recovery of the top line, but it seems to me that your earnings guidance suggests that your margins are going to be below 2019, quite materially below 2019, and that seems a bit of a disconnect given your statement about trying to maximise operational profit and improve efficiencies. So I guess the nature of the question is can you help us understand why what margin is implied within your guidance, and when, in your view, we take the path towards back to a 20% margin, which is your current midterm guidance for 2022. Thank you.

Scott, thanks for your question. So our adjusted margin, we're expecting somewhere between 13% to 14%. That's kind of where we're coming in. Again, the major investments in R&D are kind of driving the, I guess you could call it the dilutive effect of these investments. We're making good progress in terms of reallocating costs. it's going to take us a little bit of time to work through some of the cost containment initiatives that we've highlighted in the past. So that's kind of the plan at this point.

Yes, Scott, it's Matt. Our plan is to improve, obviously, from 21 going forward each year. We're tentatively planning our capital markets day in the back half of this year, And we're going to give you a lot more color on, you know, the margin over a longer-term horizon. And then specifically, you know, that 20% number will be very clear on the year we expect to get back to that.

Thank you. But, I mean, following on from one of the questions before then, is it fair to say we are then at peak R&D on an absolute basis and that that should normalize going forward? Is that a fair statement?

Yes, exactly, Scott.

All right, and maybe just one last question on free cash flow, please. I think that it's encouraging, of course, to see that you're expecting some progression in free cash flow, but the free cash flow numbers being guided are still 25% of the adjusted free cash flow guidance that would have been given this time last year. So why is free cash flow so poor, and when do we actually see a convergence towards your historic free cash flow guidance? Thanks.

So, Scott, just want to remind you, in the third quarter, we changed the definition of free cash flow. Our free cash flow measure has changed. Essentially, we stopped taking out a number of adjustments and really streamlined it to a point where it's operating cash flows, less investing activities, and only adjusting for extraordinary items like the 3T settlements.

I mean, largely in response to a number of discussions we had with people about clarifying and not sort of exceptionalizing, and I think this is a much more robust definition. Year on year, it creates some muddiness, but I think we are at a place now where our cash flow is much more robust, and I think what you could calculate directly from GAAP

Okay, good. Very quickly then, I guess the underlying nature of that question was clearly then you're still seeing some material adjustments this year. When do we get a cleaner set of free cash flow? I mean, do you expect some of these adjustments to significantly abate next year? Can you give us some sense of that?

I think for the most part, you know, we've seen, you know, a lot of these adjustments coming out even in the latter part of 2020.

Again, I think if we look at that table in the chart, you know, you can see there that there's significant differences in in a number of the metrics there. And I think that, again, I hope provides a lot of clarity to people as they were modelling, you know, what we were taking out. And also, going forward, I think you can expect, you know, lower merger and integration costs, those sorts of things that have been, you know, pretty high for a number of years.

All right, thanks, guys. I'll jump back in the queue. Thanks, Scott.

Thank you. Our next question comes from Matt Taylor with UBS. Your line is open.

Good morning. Thanks for taking the question. So I wanted to follow up on an earlier question about assumptions behind the guidance and just see if you could give us some flavor or color on how conservative you think the guidance is with regards to recovery assumptions through the year and some of the different businesses. You know, have you baked in some haircut? And what does it assume in terms of overall utilization recovery?

So, I mean, in terms of the overall forecast, we think it's appropriate. Given the current COVID situation, there's still a lot of uncertainty. We're seeing that continue to read through in the first quarter. So, you know, we're We're thinking about the sales forecast in terms of showing glimpses of recovery in the second half. We're still modeling essentially a depressed market.

Q1 is the toughest comp, and then we gradually see progression throughout the year. I think I used the words cautiously optimistic. As procedures grow, the vaccine rollout continues, and patients feel willing to go back. A number of our disease states require willingness of patients to re-enter the clinics, like epilepsy, which skews pediatric, right? So there's 30% of our patients are pediatric, and you need the carer and the child to go into the clinic. So I think we're very cautious on Q1 with a gradual improvement throughout the rest of the year.

And the last thing I'd say, Matt, is on neuromod epilepsy in general, you know, that's the one that gets a lot of attention. What we're forecasting is that for NPI, the funnel's been delayed, not backlogged. So, you know, there's just been kind of a lag on that. But for replacement or end of service, we do think that, you know, there's going to be an OR backlog. So we're going to recapture patients in 2021. But we've even modeled some of them end up in 2022.

Okay, thanks, Matt and Damian. So one follow-up on epilepsy. I think everything you've said about the impacts here the last couple quarters has really been around COVID. I was curious, are you seeing any drug headwinds or impact from recalls or anything else that is hampering that business?

No, we included in our modeling the impact of drugs. We've continued to monitor all of that very closely. You know, we're not seeing specific headwinds in any specific geography for any drug impact.

Okay, and sorry, just one more follow-up. I wanted to be really explicit about this because I got a little confused by the comments. When you're giving this EPS guidance in midpoints 165, so that includes heart valve, this year, so basically you're saying if you do divest it in the second quarter, we should take out a prorated amount of 10 to 15 cents, so basically your underlying guidance midpoint is below the 165? That is correct. Okay, super. Thank you very much. Thanks, Matt. Cheers.

Thank you. Our next question comes from Mike Manson with Needham. Your line is open.

Yeah. Thanks. Good morning, everyone. This is David on for Mike. Thanks for taking our questions. Um, just a question. Yeah. Hey guys. Um, you listed some, um, cost containment measures you're taking, um, you know, hiring freeze, uh, executive comp, et cetera. Did you make any cuts to the Salesforce across any of the businesses? And, you know, with these measures, uh, continuing into 2021, What gives you confidence that it's not going to impact the growth profile over, call it, the next 12 to 18 months?

Yeah, good question. No, we didn't cut the sales force. That's not where headcount freezes have occurred. And going into 2021, we're actually increasing headcount slightly in those areas. ACS, for example, we've talked about hiring 20 additional people into the ACS team in the US. We've already started that in Q4, and that'll continue through the next couple of quarters. And similarly, in epilepsy, the pod teams, we committed to hiring at least another three of those in the year, and we've started recruiting for that. So the sales organization has not been impacted by this.

Okay, thank you. And then just a question on the balance sheet. I think you said you had just over $500 million of net debt, and you'll get some cash from the sale of heart valves. So, you know, how are you thinking about the balance sheet? And then if I could sneak one more in, you talked about a backlog of BNS replacements. It seems like you guys could probably have some visibility into that. So could you quantify that backlog? Thanks so much.

So from a balance sheet perspective, that's correct. We ended – 2020 with $250 million roughly in cash. We are obviously, we've stated this before, kind of in the cash preservation mode at this point in time. So there's no plans for any major capital deployment initiatives other than the normal investments behind base business and CapEx investments.

And then for the EOS backlog, it's not perfect math, but we're estimating that today there's about 1,000 to 1,500 patients in the U.S. who should have already come back for the replacement. And again, as we talked about before, we have a pretty high capture rate on replacement, so nothing's changed to suggest they're not coming back. It's more a matter of timing. And as we've said, You can wait at least six months, maybe a little longer, to have your battery replaced. But we're seeing some of the people that held off in 2020, in the first half of the year, kind of April, May, June, were coming back. So we feel pretty confident in that number. Great. Thank you.

Thanks, David.

Thank you. There are no further questions in the queue. I'd like to turn the call back to Damian for any closing remarks.

Well, thanks, Catherine. Thank you, everyone, for joining us. We look forward to updating you on our Q1 call in a couple of months. And I just want to thank all of the team globally for their continued passion for our business. And thank you for your interest in our company. Bye.