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.