LivaNova PLC

Good day, ladies and gentlemen, and welcome to Livanova PCL Second Quarter 2020 Earnings Conference Call. At this time, all participants are listen-only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, this conference is being recorded. I would like to introduce your host today's conference, Mr. Matthew Dodge, Livanova Senior Vice President of Corporate Development. Please go ahead, sir.

Thank you, Crystal, and welcome to our conference call and webcast discussing Leva Nova's financial results for the second quarter of 2021. Joining me on today's call are Danny McDonald, our Chief Executive Officer, Alex Schwarzberg, our Interim Chief Financial Officer, who will be appointed as our Chief Financial Officer effective August 1, and Lindsay Little, our Senior Director of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent 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 complimentary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the investor section of our website under news events and presentations at investor.livanova.com. With that, I will now turn the call over to Damian. Thank you, Matt.

And thank you to everyone joining us today. Welcome to our conference call for the second quarter of 2021. First, I'd like to officially welcome Alex Schwartzberg as our newly appointed CFO. Alex has served as our interim CFO since October 2020 and brings more than 25 years of industry experience to our team. Alex, congratulations on the appointment. Thank you. I'll start off by discussing some recent updates, move to sales results, and then review our strategic portfolio initiatives. After my comments, Alec will provide you with additional details on our results and increases to our 2021 four-year guidance. Then I'll wrap up with closing remarks before moving on to Q&A. The neuromodulation and cardiovascular businesses continue to recover from the depressed levels of activity that began early in 2020 related to COVID-19. After a slow start in 2021, trends improved in March and showed good momentum in the second quarter, especially in the US. While some regions continue to be impacted, we saw sequential progress in case volumes and less apprehension by patients seeking treatment. Although we anticipate continued impact from COVID-19, we expect procedure volumes in the second half to show further improvement in the US and globally. Moving to recent events, On June 1, we completed the initial closing of our heart valve divestiture, including both manufacturing sites. Further closings related to the sales infrastructure in various geographies around the world will follow in the second half of the year. Financial results for the heart valve business are deconsolidated effective June 1. Also, during June, we received investigational device exemption, FDA approval to proceed with our confirmatory clinical trial in obstructive sleep apnea, or OSA. The Osprey trial will seek to demonstrate the safety and effectiveness of the Aura 6000 system, our implantable hyperglossal neurosimulator intended to treat adult patients with moderate to severe OSA. After receiving approval, we immediately launched the start-up phase of the Osprey study and anticipate enrolling our first patient later this year. Osprey is a randomized controlled trial and will include approximately 20 sites across the United States and enroll a maximum of 150 adult patients who do not achieve results from traditional CPAP therapy or have declined its use. Now I'll discuss our core growth drivers, epilepsy and ACS. Epilepsy sales increased 102% globally versus the second quarter of 2020, with growth across all three regions. This increase from the year that was experienced in April of 2020 reflects improved market dynamics resulting from increased hospital access and patient willingness to return to clinics. U.S. epilepsy sales increased 108% versus the second quarter of 2020. Total implants improved versus the prior year, driven by replacements, which have benefited from a catch-up in the procedure deferred in 2020. Importantly, new implants grew 40% year over year and 13% sequentially. Our progress in U.S. epilepsy is being bolstered by our go-to-market initiative, which currently encompasses 12 dedicated teams three of which were formed during the second quarter. The nine established teams accounted for approximately 16% of US sales, up from approximately 10% in Q1. These teams are delivering sales and implant growth that is trending above the baseline business compared to the second quarter of 2020, as well as in comparison to the second quarter of 2019 levels. Epilepsy sales in Europe grew 105% versus prior year, led by the UK, Italy and Germany. Meanwhile, we achieved growth of 65% in the rest of world region, led by Asia-Pacific, as non-emergent procedures continue to recover. Based on performance in the first half of the year, we now expect global epilepsy sales to grow 25% to 30%, up from our prior guidance of 15% to 20%. Our forecast includes sequential growth in new implants as patients and their caregivers return to in-person physician visits. In addition, we anticipate a continued tailwind in replacement implants related to the backlog created in 2020. ACS sales were $13 million in the quarter, an increase of 120% from the second quarter of 2020. Growth was driven by the continued adoption of LifeSpar and an increase in procedure volumes. Given our performance in the first half of the year, we now forecast ACS to grow at least 25% in 2021, up from our prior guidance of at least 20%. Turning now to DPD, sales in the second quarter were $3 million. In 2021, we continue to anticipate DPD sales of approximately $10 to $15 million from a combination of the RECOVER study and replacement implants for CMS-eligible patients. During our investor event held last month, we provided initial key metrics for the RECOVER study around site activation, patient consent, and patient implants. We've continued to make progress since this update. Based on the sequential acceleration of patients consenting into the study, we continue to expect to implant 250 unipolar patients and or 150 bipolar patients in their respective RECOVER arms by year-end. In heart failure, the Anthem HepRef US Pivotal Trial continues to advance after reaching a key milestone of 300 patients enrolled in April. As previously discussed, we expect to start analyzing the functional endpoint data in the first half of 2022. For the cardiopulmonary business, sales were $118 million in the quarter, an increase of 12% versus the second quarter of 2020. Oxygenator sales increased in the high teams globally, with the US and Europe leading the growth. Heart-lung machine sales decreased in the mid-to-high single digits. This unfavorable variance was primarily impacted by the timing of hospital capital equipment purchases, largely in the Middle East and LATAM. These impacts were partially offset by better-than-expected sales in the US. Moving to heart valves, sales for the quarter were $15 million, which was a decline of 22% compared to the sales for the second quarter of 2020. It should be noted that this comparison only includes heart valve sales through June 1 in the second quarter of 2021 versus a full quarter of heart valve sales in the second quarter of 2020. I'll now turn the call over to Alex for an overview of the financial results. Alex? Thank you, Damian. I'll discuss our second quarter results in greater detail and then provide an update to our revised 2021 guidance. Sales in the quarter were $265 million, an increase of 41% versus the second quarter of 2020. Sales in the quarter, excluding the heart valve business, were $250 million, an increase of 48% as compared to the same quarter of the previous year. Cardiovascular sales were $146 million, up 13% from the second quarter of 2020. Neuromodulation sales were $118 million, an increase of 102% compared to the second quarter of 2020. Adjusted gross margin as a percent of net sales in the quarter was 70%, up from 61% in the second quarter of 2020. The margin increase was primarily driven by product and geographic mix. Adjusted R&D expense in the second quarter was $44 million, compared to $35 million in the second quarter of 2020. R&D as a percentage of net sales was 16.5%, down from 19.3% in the second quarter of 2020. Overall, R&D on an absolute dollar basis is increasing behind continued progress in the Anthem HEPRA pivotal trial and the RECOVER study. Adjusted SG&A expense for the second quarter was $102 million, compared to $80 million in the second quarter of 2020. SG&A as a percentage of net sales was 38.4%, down from 43.7% in the second quarter of 2020. The dollar increase in SG&A is primarily due to commercial related variable and discretionary spending last year as a result of COVID-19. Adjusted operating income from continuing operations was $39 million compared to an adjusted operating loss from continuing operations of $4 million in the second quarter of last year. Adjusted operating income margin from continuing operations was 15% compared to a loss of 2% in the second quarter of 2020. The adjusted effective tax rate in the second quarter was 14.7%, compared to 2.8% in the second quarter of 2020. The higher tax rate is primarily attributable to geographic income mix. Adjusted diluted earnings per share from continuing operations in the quarter was 52 cents compared to an adjusted diluted loss per share from continuing operations of 15 cents in the second quarter of 2020. The cash balance at June 30th, 2021 was $329 million, up $77 million from the cash balance of $253 million at year-end 2020. Net debt at quarter-end was $426 million versus $505 million at year-end 2020. The decrease in net debt is driven by our increased cash balance. Our adjusted free cash flow for the second quarter of 2021 was $20 million. Capital spending for the first half of 2021 was $15 million, which is $3 million lower than the first half of 2020. Now, turning to our revised 2021 guidance. As Damian mentioned, based on our performance during the first half of 2021, we are increasing our previously announced full-year sales, EPS, and adjusted free cash flow guidance. Overall, we anticipate the momentum of the newer modulation business to continue, and we're now forecasting 2021 sales growth between 5% and 10% on a constant currency basis, which assumes 1% tailwind from exchange rates. This is up from our prior guidance of 0% to 5% growth. We are projecting adjusted diluted earnings per share from continuing operations in the range of $1.60 to $1.90, up from our prior guidance of $1.31 to $1.81. We assume our share count to be approximately 50 million. Adjusted cash flow from operations is expected to be between 35 to 55 million, up from our previous guidance of $30 million to $50 million. With that, I'll turn the call back to Damien for some final comments. Thanks, Alex. In summary, we built good momentum during the first half of the year, and we are optimistic regarding the growth outlook for the remainder of the year. And taking this into consideration, we increased the midpoint within all our guidance ranges. While we acknowledge that we continue to live with changing market dynamics resulting from the pandemic, we remain focused on execution to deliver our pipeline commitments and our updated four-year guidance. And with that, Crystal, I'll open the line up for questions.

Thank you. So if you have questions at this time, please press start, then the number one key on your telephone, touch down. If your question has been answered or wish to remove yourself from the queue, please 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-up. So your first question comes from the line of Mr. Rick Weiss from Speedo. Sir, your line is open.

Good morning, everybody. Nice to see the solid quarter. Thanks for that. Damian, let's start off with Neuromod with epilepsy. I mean, it's great to hear that all three regions showing improved performance. And maybe you could talk in a little more detail just about what you're seeing. and what we can expect both on the new implant side and the replacement side. I mean, tremendous momentum on new implants. Is that, to what extent is that the new sales team approach, you know, versus, you know, new accounts? Just help us better understand what's happening there.

Yeah, great question. Good to hear from you, and good morning, Rick. We're very pleased with how the team is executing and getting us back to what I think looked more like 2019 levels of performance. Total U.S. implants rose 70% year on year, which is very strong performance. performance for the team. The epilepsy implants in the quarter also grew slightly from 2019. And I think, again, that's a really important signal for that business bouncing back to 2019 level. In the past few quarters, end of service has recovered faster than NPI. We've been talking about that tailwind from the backlog of procedures from 2020. They grew about 85% year-on-year and nearly 20% sequentially, which I think is a big sign too. NPIs grew about 40% and low teens sequentially. So... Again, end of service really leading the way there. I think a lot has to do with the new go-to-market strategy. You know, as I pointed out in the script, you know, they've gone from around 10% of the US sales to 16% of the US sales. And that is important for us because we believe that's how we're going to continue to make changes in our awareness and impact on new patient implants over time. I don't know, Matt, if you wanted to... Add anything on that?

No, I would say that, Henrik, the U.S. is the majority of the business, but we're also seeing a lot of good trends in areas in Europe and some of the other international markets as well. In the quarter, we just know most of the focus is on the U.S., so we gave a few more nuggets there.

Yeah, great. Maybe two more. You've made encouraging comments about the DTD trial, And I think your words, Damian, we've made good progress in the quarter toward that 250, 150 by year end. Can you give us any sense of, you know, as things are reopening, recovering, hopefully returning to normal, Was enrollment in line? Did it accelerate? It sounds like you're more confident in reaching your year-end targets, but any more detail there you can share?

I think since the education event we hosted, we've seen the progress in line with our forecast. And we noted in May that over three quarters of our sites were activated, over half of our target number of patients have consented. And just so everyone's aware, the consent is like a technical precursor to the implant stage. And then over one third of the target number of patients have implanted. And that's continued to progress, and we've seen that basically running on our model since then.

Okay. Alex, congratulations to you, and I give you full credit for the excellent print already. But maybe you could help us think through the second half in a little more detail. How do we think about the third quarter, fourth quarter, sales cadence i mean i mean i sort of think about the third quarters and normally in life and medtech life as being sequentially softer because of seasonality and vacations uh or no that's not it could be more flat up this year because of the business trends you're seeing and new sales initiatives and recovery and how do we think about splitting up and thinking about the second half thank you

Yeah, so you're right, Rick. First of all, thanks for the congratulatory remarks. I would say, look, the trends, the seasonal trends, we expect to be similar as we've seen historically, Q3 sort of being a slower quarter relative to Q4. One thing I will remind you is that hard valves are out of our sales trajectory for the second half of the year, so that's going to have an impact in terms of comps. We feel good about the sales trajectory, and as Damien said, we're expecting sequential growth in the second half. uh now that we've reached the midpoint to the year we're more comfortable updating our guidance um and and you know putting all of our eps upside generated into our uh new guidance range um just continue just uh if i could interrupt just and so as we think about the third quarter x heart valves does it match the first quarter revenue levels is that

the right way to think about it as we get ready for the fall?

Yeah, at least, yeah. Okay. Yeah, look, we, you know, I think we feel pretty good about the second half of the year. We continue to see unpredictable impact of COVID, especially in pockets of APAC, Middle East, and Latin America. The U.S. trends have obviously improved, but, you know, not yet quite back to normal on epilepsy, particularly on MPIs or new patient implants. So, you know, as we look for the back half of the year, you know, we're assuming it's delivering the same level of EPS as we delivered in the first half.

Gotcha. Thanks for all that, Colette.

Thanks, Rick.

Your next question comes from the line of Mike Madison from Midham and Company. Sir, your line is open.

Hi, good morning. Thanks for taking my questions. I guess I want to start with neuromodulation. So obviously, good performance there. But I want to ask about the strength of replacement. You did mention there's a bit of a backlog there. So is there a risk that that slows down? the replacement part of the business. And, you know, maybe we see air packet before the new implant sort of continue to pick up. You know, I guess, in other words, how much confidence you have or visibility you have in the backlog that that that part of the business can be sustained replacement portion?

Hey, Mike, it's Matt. So on the replacements, like we said before, that in 2020, we thought there were about 1,200 replacements that, based on our modeling, should have occurred that did not. We've eaten into that a little bit, but we still think there's at least 1,000 of those replacements that are still out there and available. So we did burn a little bit in the first and second quarter. But just thinking about that math, that should carry into 2022. So I don't think it's anything you need to worry about through this year. And then in terms of the new implants, as Damian said, we did actually show nice growth sequentially. And our expectation is that we'll show growth sequentially again in the third quarter. So not quite back to what we call baseline, but getting there.

Okay, thanks. That's helpful. And then I just had a couple on the Osprey trial. So is this, in fact, a pivotal trial? In other words, will it support FDA approval of ORAS 6000? I was a little confused because the slides called it a confirmatory trial, so I wasn't really sure what that meant. And then I wanted to get a better understanding of the timing. What's the follow-up period for the endpoint in the trial, and when could we see results?

Yeah, so great questions, Matt. So the things for us that are important here is that we finished the THN-3 trial. I weren't happy with how that was executed as we took that over, and so we're calling it a confirmatory trial, but yes, it does support as a pivotal the FDA approval cycle for a PMA. So... That is correct. It is a PMA pivotal approval trial. And as far as follow-up, it's a six-month follow-up.

And then timing, Mike, we're assuming approval in 2024 right now. Okay, got it.

Thanks. I'll let some others get on. Thanks, Mike.

Your next question comes from the line of Adam Meader from Piper Sandler. Sir, your line is open.

Hey, guys. Thanks for taking the questions. Congrats on the results and to you, Alex, on the appointment to permanent CFO. Maybe just one kind of short-term question to start. I guess I was just hoping to get a little bit more color on Q2 and how the business progressed. um over the course of the quarter um or by month and just just trying to get a better sense for the recent trajectory there and exit momentum that you have and then if you're seeing any kind of early impact from the delta variant and and recently excited a couple follow-ups thanks hey adam uh thanks for uh for your question yeah look as damian mentioned in his remarks uh you know we started to see strengthen our trajectory in march and it continued throughout the quarter So we came out at the end of Q2 with really good trends. So really happy with the type of trends that we saw. In epilepsy, U.S. in particular, across the board, across all franchises, we saw some really strong trends. So that made us feel pretty good about the balance of the year second half. So Also, in terms of beyond the sales trend, we saw some good progress in terms of gross margin. And we're seeing leverage across the rest of the P&L. So all positive. In terms of Delta, you know, like I'm sure everyone is doing, we watch this carefully. You know, some time ago, we started internal monitoring through Matt's CEDA team, and, you know, we've been tracking that, you know, by geography extremely closely. And then on our Focus Friday calls, we talk about this with the teams every week to look at where we see pockets and hot spots. You know, LATAM is... an issue, Middle East, Africa still being an issue. And in the US, you know, we're tracking pretty carefully this whole Florida, Georgia, Louisiana spike. That's important too for us. You know, the East is an important geography for us in all the franchises. So we're watching it. Again, I'm sure like everyone else that we're confident at the moment that we're going to be able to execute to the goals we just laid out. That's really helpful. Thanks, guys, for that color. And then for my next question, just on CP, I think you said that it's expected to grow low to mid-single digits this year. You talked a little bit about capital being soft, but maybe you were hoping to get a little bit more color or put some takes there. And then I know you're not giving, obviously, guidance for 22 at this time, but just conceptually, I wanted to ask about the CP business when the new HeartLung machine is launched. You know, what's the right way to think about the growth trajectory of that business? What type of impact did Polaris have? And just, you know, how do we think about kind of the stage rollout timing? And then I had one quick follow-up. All right, Adam, so on your question around CP, in oxygenators, we continue to see progress in the quarter. We had approximately 12% sequential growth, which was positive. In terms of the capital cycle, the HLM sales tend to be kind of lumpy, so it's You know, we're not seeing anything that we hadn't predicted in our forecast earlier this year.

And then in terms of 2022, you know, we've said this is a low single-digit market. So, you know, with Polaris coming online, you know, I would say at least for now maybe think mid-single digits until we get more visibility on the exact timing. Got it. Okay.

Thanks, guys. And then to sneak in one more, if I may, just to ask about obstructive sleep apnea. You just want to learn a little bit more about the technology itself. You know, this next-gen device kind of relative to the previous generation, Aura 6000, you know, what changes have been made to the design and the feature set? You know, how do you kind of view the value proposition versus the other available technologies? Thanks so much, guys.

So in terms of the technology, not a lot of changes to the device overall in terms of what it does, the number of electrodes on the lead, really just I think refining and enhancing the components for reliability. I'd say two of the big differences versus the current therapy out there, Inspire, we don't have the second lead right now. It's just a single lead. And we have more electrodes. We have six electrodes. They sit further back on the nerve than Inspire. So you can theoretically recruit additional muscle fibers, and you can sort of adjust the shape of the tongue a bit better versus just stick it out. So, you know, that's kind of a core component. We think that that will actually help a little bit more with complete concentric collapse, which is about a third of patients. So there is some differentiation, I think, in the way it works. But in terms of the device, I wouldn't call this like an enhanced device from a therapy effect. Got it.

Crystal clear.

Thanks, Matt.

Your next question comes from the line of Anthony Petrone from Jefferies. Sir, your line is open.

Hey, Anthony. Maybe we're having trouble getting you on. Crystal, do you want to jump to the next one, and we'll come back to Anthony if he can get back in? Sure.

So your next question comes from the line of Mr. Michael Pollack from Beard. So your line is open.

Hi, good morning.

Can you hear me? Yeah, how are you?

Hey, very well. Question for probably Alex on just gross margin into the second half. Obviously, we pull heart valves out, which just should be an accretive exercise to the gross margin. I previously did some math last year when you first announced it.

Probably 200 basis points of lift just from stripping heart valves out of the model on gross margin. Is that in and around the ballpark?

That's right, Mike. We expect gross margins to increase in this year relative to 2020 by about 300 basis points. So the outlook is, you know, trying to get to 70 and beyond. All of that, you know, positive trend is really driven by the product mix, right, as we saw more neuromodulation. Also, the increased volumes on cardiopulmonary, that will drive, will definitely drive some upside there. always trying to model or frame the shape of this curve. I know you're investing in a lot of important initiatives. Are we at a quarterly run rate or a quarterly number here, $44 million? Is this going higher, kind of flat here for the next few quarters? How do you see this playing out the rest of this year into next? Yes, we see a little bit of a step up in the second half, especially as we enroll the OSPRI trial. Um, so, you know, a bit of a, a bit of a step up, but you're, you know, we're, we're sort of in the ballpark there with, uh, with our first half trend on the other trial and, uh, we're to the base. Yeah. And then, and then on Osprey, that's, this is my last one.

Um, on the, the math, the CCC comment, are you, is the protocol for this study designed such that all these patients go through the drug induced sleep endoscopy and you, you,

pull the triple C patients out and then run a trial kind of consistent with the current FDA indication for hypoglossal nerve stimulation?

Or are you expecting that this study is going to have, you know, a triple C and a non-triple C subgroups?

So you got me on the endoscopy. I'm going to have to get back to you on that one. The CCC, it's going to include the CCC patients. I don't think they're going to be separated from the other patients in the trial, but if that's wrong, I'll let you know. But they are definitely going to be in the trial.

Yeah, you run the dice to identify the nature of the airway, so I presume that's part of the protocol then.

I'll check on that. Okay. Thank you. Thanks, Mike. Thanks, Mike.

Your next question comes from the line of Mr. Anthony Petrone from Jefferies, so your line is open.

Hi, good morning. Apologies, we're hopping between calls. So apologies if some of these got asked. My first question would be on DNS backlog. You mentioned last quarter there was still about 1,000 patients, you know, really that were backlogged, and I believe those were replacement patients. So just wondering if there's an update there and how long of a tailwind does that represent? I think last quarter you mentioned into 2022. And then on the margin side, just trying to quantify, there was certainly an outperformance both at the gross and operating level versus our estimate. Certainly the outsized revenue beat helps there. Just sort of trying to work through that, how much of that was the revenue beat versus just cost savings and And if you can, Alex, maybe just some high-level thoughts on where you see the adjusted operating margin profile trending, you know, perhaps over the next several years. Thank you very much. Congratulations on a good quarter.

Thanks, Anthony. It's Matt. It's still over 1,000 patients. The way that works is we probably reduced the 2020 number by about 150 to 200, but we're still not back to normal, I would say, in U.S. epilepsy in terms of market trend. So there were some additional ones added. So the net is still, I would say, north of 1,000.

Anthony, in terms of the margin profile, so gross margin, yes, it was It was sort of outperformed on basis of sales volumes, but it's kind of a mixed phenomenon, right? As we sell more neuromodulation, which carries a higher gross margin than the rest of the fleet. you know, that really helps. I mean, we're trending at, you know, somewhere in the 70% range and we expect to maintain that or improve that in the back half of the year and into 2022. In terms of the operating margin, you know, we feel pretty good about where we landed in Q2. You know, I would say it's going to be pretty similar in the second half Our goal, I think we've stated all along that we're striving to get to 20%. Not sure we can get there in 2022, but we're certainly going to give it a try.

That's very helpful. Thank you. Congrats again.

Thank you.

Your next question comes from the line of Mr. Matt Taylor from UBS. Your line is open.

Hey, Matt. How are you? Hey, good, Damien. How are you doing? Thanks for taking the question. So I wanted to ask more about the epilepsy dynamics. Just as a follow-up on replacement versus de novo, could you talk about how that mix looks today in different geographies and how you expect it to change? over time, you know, when might you be able to recapture those thousands that are still out there? And any more color on the trends would be really helpful.

Hey, Matt. It's Matt. For U.S., we're currently getting closer to 70% now. A year and a half ago, we were closer to the 60% range. So no surprise, you know, it's slowly gone up. We do expect it, you know, to eventually start to go down next year. Internationally, in Europe, it's about – our split's about 52% NPI, 48% EOS, so not quite as high as the U.S., but, you know, almost 50-50. And then in the other markets, international markets, it's like 85% NPI. And, again, all of them over time, you know, we do expect the end of service to move up.

Okay, great. And what have you seen in the recapture versus your modeling? How are those coming along? And what's the pace that you could recapture those thousands that are out there?

So, again, it's not perfect math, but we think 150 to 200 were captured in the second quarter. There were some captured in the first quarter. We'd expect it to continue to go up in the back half of the year. What we don't know is how long the tail lasts because with the therapy and the settings, it really depends by patient. Even when you get the alert that your battery is below 17%, you could potentially go a year. So we don't have a perfect window on when a patient's going to come in by month. But, you know, within a year period, we have very high confidence. So what we think right now is more in the third and fourth quarter. Some will spill over into 2022. And then by 2023, you know, we're largely back to normal.

Got it. Okay. And I just wanted to ask a question. hypothetical question on recover you know assuming that you do hit your enrollment goals for the cohorts by the end of the year and you know based on what you have seen in the registry data previously could you just clarify some some goal posts about when you might be able to see you know separation of the curves enough to make a signal that you know you have a high success chance for a positive result? You know, how long, I guess, could that take in a reasonably good scenario?

So, Matt, right now we're assuming it's sometime in the back half of 2022. Again, you know, it's Bayesian. We get to look a lot. You know, for each arm, we get to look every 25 patients. So we don't have long intervals of waiting. But based on, you know, the statistics it was designed on, you it's somewhere in the back half. And again, you know, we've committed to late 22, early 23 from a shift to registry. That just gives, you know, some time for CMS to decide. And then also, you know, where in the back half, you know, we think the odds are the highest. So that's how we're currently looking at it.

Okay, and just on the softer side of things, you know, what can you do ahead of time, I guess, to start to raise awareness and see the market? What are you doing now and what can you do next year to start to get the psychiatry community excited about this?

I think our real focus is just on recover, but we've also done, I think, a very good job in working with a publications company subgroup of the investigators to map out a publication strategy and so we are actively publishing in the area and engaging more with interventional psychiatrists. We're also working to make sure we've got capacity to implant, so whether that's a neurosurgeon, ENT or general surgeon. and so that, you know, we can make sure that the flow works from interventional psychiatrist to the implant and back to the interventional psychiatrist. So they're two of the steps we're taking among the many aspects of what the team is doing. And very focused, too, on mapping using DRG data, you know, where the centres are and how we would think about a commercial expansion strategy once we get to certain milestones with CMS.

Okay. Thank you very much, guys.

We have our last question from the queue. We have Mr. Scott Barger from Burbridge Company. Your line is open.

Scott, how are you doing? Thanks. You'll be pleased to know I'm from Barenburg, not Burbridge. I wondered if you'd changed jobs recently, sir. Yeah, thanks guys and congratulations Alex for the permanent tenure. So the first question please just relates to operating margin this quarter, which I think came in pretty reasonable at 14.9%. Now, of course, you know, that margin is somewhat benefiting from the revenues that you book for heart valves for a couple of quarters. So I wonder if you can give us a sense, Alex, as best you can, what you think the underlying margin for your cardiac pulmonary disease advanced circulatory support and neuromod business was this quarter. If you were to completely net out sales and costs from heart valves, that would be helpful. I guess follow on question, SG&A trending up to about 105 million now that you've exited heart valves. There's an awful lot of folks there within that business. or remains flat, goes up, in some sense there would be helpful. Second question just relates to cardiopulmonary, please. I think, correct me if I'm wrong, but your guidance or the outlook for that is being somewhat moderated and you were flowing to weak capital trends on top of what was already a weak capital year the year before. Are you confident that you're not losing market share here? We know that getting there has now entered the market with a heart-lung machine and claiming strong momentum. I wonder if you can comment there. And furthermore, then, some sense of the timings for both Polaris and your new VRS device, please. Thanks, Mark.

Right, so let's take this one at a time. So our operating margin, excluding heart valves, largely the same, Scott, because as you know, the heart valve business carries a lower gross margin relative to the rest of the fleet. So taking that out of the mix, the operating margin isn't drastically affected. Recall when we announced the divestiture, we said we were going to be dealing with some stranded costs in the back half of the year. So that's absorbed in our guidance, in our margin for the balance of the year. And, you know, that's... We're working on costs to get those out as soon as possible, but we're supporting the transitional services agreement with Corsum, which requires us to continue to spend from an SG&A perspective. Now, I believe your second question was on cardiopulmonary, and in particular, the HLM cycle. So in the quarter, we saw some really good trends in the US. The rest of the world, I would say it was pretty lumpy. We had forecasted during the year that the HLM business, the capital business, would be down versus 2020 because, remember, we're coming up on the end of the S3 to S5 conversion cycle. So the HLM business, we are not losing share. We believe that it is in line, the business is running in line with our forecast.

A couple more things, Scott. It's Matt. Last year, we thought the HLM business would do worse than it did. Capital didn't fall as much as we thought. It was down about 15% last year for the full year. In terms of the getting HLM, we certainly know it's out there. We know they launched it. We check with the CP team all the time. They have just not said much about that product having an impact yet. And then in terms of the timing of Polaris, no change. We've still said first half in Europe, around mid-year in the U.S., and then in some of the other markets in the back half of the year.

That's helpful, guys. And maybe just one clarification, please, and Alex, just to fully understand what you're saying on selling and marketing costs. So this $105 million that you're booking in the quarter, do you expect that to remain stable, if you like, into the second half of the year until you work down some of these stranded costs? I'm just trying to understand, you know, what sort of costs come out of the business now you've exited Hartveld.

That's correct, Scottie. Remember, we're still investing behind our go-to-market initiatives in neuromodulations and ACS.

Understood. Maybe last one from me. Very much appreciate all of these investor education sessions you've done on the various different divisions. They're helpful. But I think what would be most helpful is a mid-term framework for margin and growth to get some sense of, you know, your operating costs, your expected delivery of your pipeline and so forth. You've talked a little bit about CMD. Have we now got a definitive date in the diary for fiscal 21?

We're still looking at the fourth quarter. We were hoping to be live. In fact, our plans... had been to be live. Of course, the issues with border crossings and, you know, who's been vaccinated and who hasn't is just complicating our planning. But our current plan is mid-fourth quarter. Got it. Thanks so much, guys. Cheers.

We have a follow-up question from Mr Rick Weiss from Stifel. Sorry, line is open.

Hi, sorry for the follow-up. I just wanted to hear you comment publicly, if you would, a little bit on tandem life and life spark part of it. Obviously, terrific year-over-year numbers, but if I'm looking and understanding the numbers correctly, sort of flattish in terms of dollars sequentially. Just, you know, what's going on? Where are we in the rollout? What's next? How do we think about the second half, et cetera, et cetera? Thanks a lot.

Yeah, Rick, you know, look, we still expect ACS to accelerate its growth in the second half of the year. You know, we like the trajectory. I mean, the comps versus last year, if you recall, in the quarter, basically, as LightSpark was anticipated in Q3, you know, there was a sort of a slowdown in placement. So, you know, I would say we're looking at the business sequentially. We like the sequential progress we're making in terms of procedure volumes as well as, you know, the capital placement.

And, Rick, it's accelerated growth on an absolute basis, not a percent basis.

Right. And we've talked about previously what are we doing. It's about account acquisition, and those plans are right on track with the team through the midpoint, which is terrific. We also committed to putting on up to 20 heads this year. We're about halfway through, and we're about halfway through the recruiting. We like what we're seeing in terms of talent attraction too. We've been able to, I think, really up the talent that we're bringing in to the team, and I think that'll ultimately read through into, you know, faster uptime of those people in the field. And, you know, we're really pleased with how this is progressing.

So don't put words in your mouth, Damien, but we should anticipate further sequential dollar acceleration or third, fourth quarter into next year. It's going the direction you want. Thank you. Correct. That's correct. Yes.

Again, ladies and gentlemen, if you want to ask questions, please press star 1. Very no question over the phone, sir. Please continue.

Okay. Thank you, Crystal. And thank you, everyone, for your time and the whole series of questions and your interest. On behalf of the entire team, I appreciate your support for Livanova, and we look forward to speaking to you next quarter. Thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.