This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Good day ladies and gentlemen and welcome to the Levenover plc second quarter of 2023 earnings conference call my name is Emily and I'll be coordinating your call today after the presentation you will have the opportunity to ask a question by pressing start followed by the number one on your telephone keypads as a reminder this conference call is being recorded I would now like to introduce your host for today's conference Mr Matthew Dodds Levenover's Senior Vice President of Corporate Development and IT please go ahead sir
spk01: Thank you, Emily, and welcome to our conference call and webcast discussing Leva Nova's financial results for the second quarter of 2023. Joining me on today's call are Bill Cozy, our Chair of the Board of Directors and Interim Chief Executive Officer, Alex Schwarzberg, our Chief Financial Officer, Stephanie Bolton, President of Global Epilepsy, and Brianna Gotland, 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 complementary 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.Levanova.com. With that, I will now turn the call over to Bill.
spk07: Thank you, Matt, and thank you everyone for joining us. Welcome to Levanova's conference call for the second quarter of 2023. Before discussing results for the quarter, I'd like to recount some firsthand observations introduce Stephanie Bolton and provide a brief update on the CEO search. Since taking on the role of interim CEO in April, I've been firmly focused on our patience, performance, and execution. I've engaged with many of our global customers and colleagues. That ongoing customer focus, commitment to quarterly results, and shaping our 2024 strategic plan will remain as top priorities. In May, we named Stephanie Bolton as Levanova's President of Global Epilepsy. The assignment of global responsibility for this key business aligns well with our commitments to leveraging an integrated worldwide business strategy with a continued focus on local execution. Steph has a 12-year record of achievement at Levanova. She started as a territory manager before taking on leadership roles in epilepsy and cardiopulmonary. Most recently, Steph served as president of International, where she led both businesses to commercial success. We're excited to have Steph's commitment to company performance and passion for helping epilepsy patients. Steph, we look forward to your participation in the Q&A. Now allow me to provide a brief update on the CEO search. The board and I are currently in the process of reviewing our first slate of potential candidates. Our process of slate review interview selection, and board assessment remains on track. We're committed to selecting the right individual to lead our team. For the remainder of the call, I will discuss our second quarter results and then turn to our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results and updates to 2023 guidance. I'll wrap up with closing remarks before moving on to Q&A. In the quarter, we achieved 16% revenue growth, marked by strength in the cardiopulmonary and neuromodulation businesses across all regions. We were encouraged by the continued strong performance in the rest of world and Europe regions and were particularly pleased with the U.S. commercial execution, which drove strong double-digit revenue growth and helped improve profitability in the quarter. Now turning to segment results. For the cardiopulmonary segment, revenue was $151 million in the quarter, an increase of 21% versus the second quarter of 2022. Oxygenator revenue grew in the mid-teens, led by the U.S., driven by higher demand and steady supply chain execution. Heart-lung machine revenue increased more than 30%, primarily driven by S5 placements in the rest of world region and initial Essence installations in Europe and the U.S. The commercial rollout of Essence is progressing, and we're encouraged by early customer feedback. Following the clearance of our blood gas monitoring software integration later in the year, we still anticipate increased contribution. We now expect cardiopulmonary revenue to grow 11% to 13% for the full year 2023. Our revised forecast incorporates the strong first half performance in oxygenators and HLMs. As previously stated, we continue to expect a ramp in essence revenue through the second half of the year, with much of that coming after our next wave of software launches. Alex will comment on some underlying factors that impacted the second quarter results in cardiopulmonary. Epilepsy revenue increased 14% versus the second quarter of 2022, with strength across all three regions, including growth in both new and replacement implants on a year-over-year and sequential basis. U.S. epilepsy revenue increased 15% year over year, driven by higher total implants, realized price, and favorable product mix. Notably, we achieved 838 new patient implants in the quarter, representing 13% growth versus the prior year, and achieved 1,947 replacements, representing 8% growth versus the prior year. Epilepsy revenue in Europe grew 10% versus prior year, led by the Nordics and the UK. The rest of world region achieved 15% growth, led by Turkey and China. For the full year 2023, we now expect global epilepsy revenue to grow 6% to 8%. Our revised forecast incorporates the strong first half performance in replacement implants. Alex will comment on some underlying factors that impacted the strong second quarter result in epilepsy. ACS revenue was $9 million in the quarter, an increase of about 1% versus the second quarter of 2022, reflecting growth in cardiac case volumes and partially offset by respiratory case declines and product mix. We now expect ACS to be flat year over year. Turning now to the strategic portfolio initiatives. DTD revenue for the second quarter was $1 million. For 2023, we now anticipate DTD revenue of approximately $6 to $8 million, primarily from the RECOVER study. The RECOVER study continues to advance. Enrollment for the unipolar cohort of the study has been completed and we await the results of the 12-month follow-up. As a reminder, we randomized the 500th unipolar patient into the trial in March and subsequently completed all implants in May. Upon receipt of the 12-month follow-up data for the 500 unipolar patients in June of 2024, We will conduct a final analysis and expect a publication of the study results by late 2024. The bipolar cohort is similar to the unipolar cohort in that the randomized controlled study is designed with frequent interim analyses that will assess if predictive probability of success or futility was reached or if the study should continue enrolling. In June, the interim analysis for the 150th patient in the bipolar cohort was completed. This milestone was achieved faster than previously communicated, and we were pleased with the success we had in refocusing our recruitment efforts from unipolar to bipolar patients. Moving to OSA, the Osprey trial continues to progress, and as of earlier this month, all 25 study sites are actively recruiting patients. And heart failure, the closeout of the Anthem clinical study is progressing as expected. We fully defined most of the accelerated costs in 2023, the majority of which occurred in the first half of the year. We continue to expect the overall R&D spend related to heart failure this year to be approximately $24 million. With that, I will turn the call over to Alex.
spk09: Thanks, Bill. During my portion of the call, I'll share a brief recap of the second quarter results and provide commentary on 2023 guidance. Turning to results, revenue in the quarter was $294 million, an increase of 16% versus 2022. In the quarter and first half, we observed favorable comparisons. In addition, Growth was impacted by pricing programs implemented in the second half of 2022, higher than expected U.S. epilepsy replacements, and tailwinds from oxygenator share gains due to competitor supply chain challenges. Accordingly, we cannot expect the revenue growth in the second half of 2023 will reflect the growth experience in the first half of the year. Foreign exchange in the quarter had an unfavorable year-over-year impact of approximately $2 million, or 1% of revenue. Adjusted gross margin as a percent of net revenue was 72% compared to 69% in the second quarter of 2022. Adjusted gross margin was impacted by favorable realized price, higher volume, which drove positive fixed overhead absorption, as well as lower inbound freight costs which offset component cost inflation. Adjusted R&D expense in the second quarter was $48 million compared to $42 million in the second quarter of 2022. R&D as a percent of net revenue was 16% in line with the second quarter of 2022. The year-over-year increase on a dollar basis was driven by continued investment in our strategic portfolio initiatives and costs associated with closing out the Anthem trial. Adjusted SG&A expense for the second quarter was $113 million, compared to $101 million in the second quarter of 2022. SG&A as a percent of net revenue was 39%, down from 40% in the second quarter of 2022. The year-over-year increase on a dollar basis was driven by higher sales and marketing expenses. These include essence launch expenses and variable costs such as freight and commissions associated with increased revenues. Adjusted operating income was $49 million compared to $33 million in the second quarter of last year. Adjusted operating income margin was 17% compared to 13% in the second quarter of 2022. Adjusted operating income was driven by improved gross margins and operating expense leverage. Adjusted effective tax rate in the quarter was 10% versus 5% in the second quarter of 2022. The higher tax rate is primarily attributable to changes in geographic mix. Adjusted diluted earnings per share was 78 cents compared to 53 cents in the second quarter of 2022. Our cash balance at June 30th was $223 million, up from $214 million at year end 2022. Total debt at June 30th was $587 million, up from $542 million at year end 2022. The increase in total debt was driven by delayed draw of $50 million on the term loan aid facility that we put in place in July of 2022. Net debt, including restricted cash, at June 30th was $101 million. Adjusted free cash flow for the quarter was negative $10 million, up from negative $14 million in the prior year period. As a reminder, LevaNova pays its short-term incentive bonuses in the second quarter. The year-over-year improvement was driven by operating income offset by higher HLM inventories. Capital investments were $13 million in the first half compared to $11 million in the first half of 2022. Now, turning to our revised 2023 guidance. As Bill mentioned, based on our performance during the first half, we're increasing our full year 2023 guidance. We now expect 2023 revenue growth on a constant currency basis between 8% and 10%. and continue to assume approximately a 1 percent tailwind from exchange rates. We now expect adjusted diluted earnings per share in the range of $2.55 and $2.75 with adjusted diluted weighted average shares outstanding to be $54 million for the full year. Adjusted free cash flow is now expected to be in the range of $85 to $105 million. In summary, I'm encouraged by the first half execution contributing to financial performance. Continued emphasis on new patient acquisition and epilepsy, maintaining our cardiopulmonary market position, as well as price and expense discipline are key factors to delivering margin expansion. With these factors in mind, we remain positioned to drive modest operating leverage by year end. And with that, I'll turn the call back over to Bill.
spk07: Hey, thank you, Alex. As a company, we've demonstrated progress across the portfolio through the first half of 2023 and are well positioned to deliver on our full year guidance, pipeline commitments, and operating leverage by year end. This would not be possible without the hard work and commitment of our employees across the globe. I'll certainly take this moment to thank them for their continued focus on our patients, performance, and execution. These three areas underpin our dedication to serving patients worldwide, focus on long-term innovation, and shareholder value creation. With that, Emily, we are now ready to open the call for questions.
spk05: Thank you. If you have a question at this time, please press the start, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, Please press star followed by two. As we enter the Q&A session, please limit yourself to one question and one follow-up, and then return to the queue if you have additional follow-ups. We will just take a brief pause to assemble our Q&A roster. Our first question comes from the line of Rick Wise with Stifel. Rick, your line is now open.
spk06: Thank you. Good morning, Bill. Just starting off, maybe, good morning to you. It's nice to see the quarter, and your comments are very clear about some of the factors, favorable comps, price, and the better than expected replacement. I'm hoping you can dig into the latter two a little bit. Can you give us a sense of the price benefit in the second quarter growth? Is that fully done now? Is there any benefit likely or possible or included in the second half? And at the same time as part of this, maybe you could talk about or Stephanie could talk about the better than expected replacement volumes and what created that and why wouldn't we assume that continues in the second half?
spk07: Sure, let me take the front end, Rick, and I will then pass to Steph on the end of service volumes. As you well know, it's a pretty complex analysis and recognition of these underlying factors, but for sure price, end of service revenues, and oxygenators as kind of a cluster of products, as best we can tell, clearly contributed somewhere in the 6% or so range and that's an about 6%. We recognize that our oxygenator competitors who we anticipated coming back to the market in the second quarter did not happen. We do know for sure that they're right now shipping product and having just been with a customer here in London on Monday, I know for a fact. that they are shipping products. So that's one factor we got our eye on. Alex mentioned that most of the price activity was kicked off in the third quarter of last year. So we started to get some of those benefits in third and fourth quarter of last year. So we don't see a big carry over there. Now, if I could, Steph, may I ask you to comment on Rick's question related to end of service revenues?
spk00: Sure. Rick, it's good to hear you. We continue to believe that we're seeing an increased benefit from the programs that we've had in place. And those programs have really been driving to help physicians identify end-of-service devices and ensure that all-important continuity of care for patients. Moreover, sort of casting our mind back, we entered the market in 2017 with Centiva. And Centiva includes a key feature called scheduled programming, and that enables patients to reach an optimal therapy quicker. In fact, we see patients reaching an optimal therapy in six months versus 12 months. That in itself drives a higher replacement rate. And as a continuation to that, we are starting to see the first wave of replacements from those patients who were initially treated with Centiva. So if I come to your second part of your question, which is why do we potentially see that slowing in the second half of the year? So we're continuing to monitor this, and we're continuing to monitor the impact of Centiva on our end of service rate. The current forecast that we have is based on our latest data, which takes into consideration our revised expectations. I'll probably have a better answer for you as we move through the coming quarters. In fact, you can come back to me and cue one next year. Thank you.
spk06: Okay. And just to thank you, as a follow-up and sort of on Bill in the same kind of sense, the epilepsy business, I'm sorry, the neuromod business did very well. Maybe talk about growth, NPI growth, a mix of NPI versus replacement, and just what's happening on the sales side that's driving that. Again, particularly thinking about looking ahead from second quarter trends.
spk07: Yeah, very good question. Steph has spent the bulk of her time since starting in this new role on that, so I'm going to push it. Steph, would you mind?
spk00: Sure, sure. We're really pleased about the results we've seen this quarter, as I know are the epilepsy team. Our focus is firmly on NPI, and the team are working tirelessly with our physician base to identify the right patient at the right point of their treatment journey and creating that all-important urgency to treat. My focus has been on implementing clear operating mechanisms, focusing not just what we're doing, but how we're doing it and being consistent and disciplined about it. And that's what will set us up for the future. An example of this is the clear commitment to collaboration that we have between our sales organization and our case management group. Another clear contributing factor to our Q2 results were fewer surgeries being rescheduled at the end of the quarter due to those improved workflows that we've put in place between our case management group and also our providers as well.
spk01: And then just quickly, Rick, Bill gave the NPI and EOS numbers this quarter. It's 3070 NPI to EOS, which is pretty consistent with the most recent quarters.
spk06: Gotcha. Thanks, Matt.
spk05: Eric, thank you. Our next question comes from the line of Matt Taylor with Jefferies. Matt, please go ahead. Your line is now open.
spk10: Hi, and thanks for taking the question. Congrats on a good quarter. So I wanted to ask you maybe a little bit about the other side of the house and Sure. And talk a little bit about the CP trend. I guess what I was curious about was you did call out some of these contributions from the Essence launch and the rest of the world and Europe getting some initial orders there. So I was hoping you could help us think a little bit more about the funnel there and how that could ramp and just give us some more color on how the launch has gone so far and what to expect in some of the coming quarters.
spk07: Sure, we're in commercial launch mode. As you know, all essence activity is focused on Europe or the US. There is no essence efforts going on outside those areas. And so all the revenues, what you heard about earlier, the rest of the world were S5, and they were quite healthy too. Our pipeline is building. When I use the term commercial launch, remember that we are creating many, many evaluations. Nobody will purchase an essence until they have personally tried it in their cardiac surgical suite. We have a nice load of those activities underway right now. We have a number of activities in major institutions, both in the EU and in the US. We are quick to recognize that the software upgrades that are continuing to roll out are important to many of our bigger customers. The reason I keep mentioning the bigger customers, okay, remember that they won't buy one or two machines. Their cardiac care facilities tend to be much larger. We've got evaluations going on right now in some institutions that could buy as many as 10 to 12 in a single purchase order. So that's gonna take some time. They're gonna wanna test the upgrades. But we did get some nice signals, if you would, from the efforts that we made in the quarter. The 30% HLM growth overall encouraged us. And though Essence was a small part of that, in the US, we actually had a modest decline in S5. So it was Essence that perked us up in the US. And we also had some good penetration in the Europe very early stage. There's no question that we expect the fourth quarter to be the more critical quarter in terms of the ramp starting to take off. And our forecasting as well as our production alignment are really teed up for that window of 4Q and leading into 24.
spk10: Got it. Thanks for clarifying that. Maybe I'll just ask one follow-up. I just wanted to know, is there anything to call out in the quarter that was a discrete benefit? I think last quarter you called out some minor inventory stocking benefit, and I know some of your competitors have had some supply issues. Is there anything that you would call out that helped this quarter?
spk07: Yeah, the call out, we didn't get it explicit, but there's three things that we noted. I mean, I Hey, let me tell you, do I wish we were a 16% growth company? Yes, of course I do. But we know that we had this year-on-year favorability of price, which started in the third quarter of last year. We know that we had end-of-service epilepsy sales that were much better than anticipated. And the oxygenator volume continued to really support cardiopulmonary. Those three things collectively And by the way, this math is not perfect. We do the best we can within a complex P&L to identify that. But think about those three things being somewhere around 6% impact on the quarter. Know that the price will not carry out until the second half of the year. Steph, very, very direct on the EOS. We got our eyes on that. We got a pleasant surprise this quarter. We've got to watch that for a couple quarters, see what happens there. oxygenators, our competitors are back. And their product is hitting the dock.
spk09: Matt, I just want to clarify something. So we'll continue to see price carry forward into the second half of the year. But it's the comparative relative to when we started to implement our pricing programs, which were in Q3 of last year. So we're getting the favorable comp in the first half.
spk10: Great. Thanks for all that clarity. I appreciate it.
spk07: Hey, thanks.
spk05: Our next question comes from Michael Pollack with Wolf Research. Michael, please go ahead. Your line is now open.
spk03: Hi, good morning. Thank you. I have one on epilepsy and then one for Bill Big Picture. On epilepsy in the US NPI 838, can you remind us what was that number in like the second quarter of 19? I just am interested in where we are relative to pre-COVID baseline and the strategic question on epilepsy is over the last nine months, you had mentioned some key changes to obviously leadership and the sales team, some of which were described as involuntary. As you sit here today and look at execution and team in the field, is it heads down, block and tackle? And you're pleased with... the team currently, or would you anticipate more changes over the next day, six to 12 months, Stephanie, as you kind of settled in your new role?
spk07: Let's switch the first one, and let me make sure I got the question right. You're interested in 2Q19 NPI placements.
spk03: Correct. Yeah, U.S.
spk07: Seth, by chance, do we have that in the room? I'm not sure. I don't have it.
spk03: Or do you think you're above or below or in line with pre-COVID baseline? I guess that's the question.
spk07: You know what? Let us promise to get back to you. I'll hook up with Brianna when we're done, and we will get you an answer to that question. Let me commit to that. Is that okay? Because we just don't have that number here in front of us. Just to give you some other context real quick, though, trying to get a view on things. Remember that 22 NPIs year-on-year to 21 were down 6%. And we're encouraged by what we've seen thus far in the first half of the year. Steph, anything else to add?
spk00: Yeah, I think, Michael, I'd like to address some of your other points as well about some of the talent that we've brought into the organization. I'd also like to talk a little bit about the culture that I've seen coming in, a culture of a hugely passionate and committed team. So, you'll excuse me for the early days of this, so I started in this role 12th of May. It will always be etched on my brain. I've spent over half my professional life working with this amazing therapy and advancing the adoption of it. So this is a wonderful opportunity for me and I have to say the team that I'm now leading have been incredibly welcoming and the culture is one of wanting to win, wanting to execute and do as well as they can and we are for sure benefiting from some of those talent upgrades that we've seen in the recent months and year.
spk03: Helpful. The bigger picture one for you, Bill, is just as you've gotten closer to the business in this new role, what surprised you most in this first kind of 90 days?
spk07: In terms of surprises, I guess there's a pleasant surprise here. We had the opportunity to take advantage of a couple tailwinds. You know, every once in a while you get a tailwind, and the important thing for the organization is is to see that tailwind coming and to react. One of my favorites to your good question is the way our plant in Mirandola, Italy, is running flat out, making every oxygenator that they possibly can. Remember that these are going into cardiac surgical suites. And this product is instrumental to people's health and lives being saved. So that's been one nice surprise. equally impressed with the effort of Steph's team and the discipline that is now starting to be displayed, and this is how we approach our physicians. This is also how we collaborate with physician-patient complexity, which is a hard thing in the revenue production of this product. Those two things right now are probably at the top of the list, and I really did want to I thank you for the question because we certainly wanted the chance to recognize our Mirandola team because you talk about heads down. You'd have to see this to see the effort that they've made six, seven, eight months running now to get that type of, remember, you guys know CP well. It's a 5% grower. They've done well. And so I give them all credit for seeing the tailwind and taking advantage. Thank you. Thank you.
spk05: Our next question comes from Adam Maeder with Piper Sandler. Adam, please go ahead. Your line is now open.
spk02: Hi. Good morning, everyone. Thank you for taking the questions, and congrats on the nice quarter. A couple from me wanted to start on the adjusted EPS guidance. You know, obviously a big beat here in Q2. You took up the full year EPS guide by $0.05, I believe. So maybe just kind of reconcile that for us and talk about the key considerations or puts and takes, and then add a follow-up. Thanks.
spk09: Sure. So I think we feel really good about the first half, but it ultimately comes down to the revenue component. You know, we overachieved the first half. We do expect, you know, volumes to be impacted in the second half, particularly on the cardiopulmonary side with the oxygenator business, as we expect the competitors to come back into the market. So we saw the significant improvement in gross margin in the second quarter, first half, but we expect to we're not going to enjoy the same level of benefit that we had in the first half. I think that, you know, as we look at the investments that we have to make to drive productivity and, you know, as well as improve some of our innovation on the core business, we're going to make those investments in the second half. So that will have a bit of an impact on our expenses as well. But, you know, we've largely de-risked the year, and that's why we feel good about where we're guiding.
spk02: Okay. Appreciate the color there, Alex. Thank you for that. And for the follow-up, wanted to ask about the RECOVER trial and specifically the bipolar cohort. You guys had 150 patients randomized, I believe, in mid-June. You know, talk about pace of enrollment going forward. When should we start to see interim looks there? And then maybe level set expectations for the street. You know, should we expect this cohort to run to the full 500 patients? Or do you think we can potentially transition to registry earlier? Thanks for taking the questions.
spk01: Sure, Adam. It's Matt. So for bipolar, the interim looks obviously started earlier. At 150, part of that is we assumed that the average follow-up would be a little longer when we got there. But also, as you've seen from all the prior data, the bipolar group generally performs a bit better than unipolar. So we're expecting there's only about a third of the patients are bipolar, two-thirds are unipolar. So we do expect it will enroll slower. Our current estimate is about 25 a quarter or so. The interim looks this time are going to occur more around the lines of quarterly. And as Bill told you earlier, same as unipolar, it's either going to be stop early, transition to the kind of the prospective reimbursement or futility or keep going. So no different there. I would say overall our working assumption is the full 500. That will, if you look at the 25, a quarter will take a while. But as you can see from the public paper, you know, that's been published in the past, you know, there are estimates on when the trial potentially could complete.
spk12: Thanks, Matt. That's helpful.
spk05: Our next question comes from Mike Mattson with Needham & Co. Mike, please go ahead. Your line is now open.
spk11: Yeah, thanks. Just a couple more on Essence. So I guess I was wondering what you're seeing with regard to the Essence customers, either ones that are just trialing it or actually purchased it. How many of those are kind of upgrades from the S5 versus older units? In other words, do you think this is driving earlier upgrades than what you would have seen in the past?
spk07: Well, we had commented, I think, in the last call that we had over 7,000 machines that were out there that were over 10 years old. And so there's been an admitted focus on our part to get back into those accounts. And by the way, no surprise, all of those accounts have some degree of interest. Now, as I mentioned a little bit earlier, in rest of world, they're more interested in S5 and the availability of Essence is just not there right now. we've got our first kind of replacement focus on the EU and the US. The sales force goes through, just like I mentioned, pretty extensive trial period. We don't have any customers who aren't going to try this on any less than four or five patients before they'll give us a thumbs up on going forward. And that's where we're at right now in many, many accounts in both geographies.
spk11: Okay, got it. And then I know, or I believe Essence is priced at a premium to the S5. So is this going to be kind of immediately accretive to gross margin? Or is it, you know, I know sometimes with these new product launches, especially with something as complicated as this, you know, the volumes, the production volumes kind of have to ramp up before you start to, you know, end up with a better gross margin on it than your older products.
spk07: Yeah, yeah, good question. I think Alex is going to remember this question because I've asked him many times, but let me have him go ahead.
spk09: The gross margin currently on Essence is comparable to the S5, but as we scale the volumes and really start to impact absorption and component cost, the gross margin will improve. So, the cost base is higher relative to the premium we're charging for Essence. As we start to ramp the Essence volume relative to the oxygenator mix, it should have a positive impact on the overall mix of our gross margin profile for the company.
spk11: Okay. Got it. Thank you.
spk05: Our next question comes from Matt Mixick with Barclays. Please go ahead. Your line is now open.
spk12: Hey, thanks, and congrats on a really strong quarter here. A couple of follow-up questions, one on epilepsy. You're very welcome, Bill, and one on just kind of your margin and investments going forward. So on epilepsy, just to understand The programs that were put in place that sort of drove this identification of end-of-service patients, you know, it sounds like that was part of the positives here in the second quarter. Just maybe some sense of how long that continues to sort of drive those through. And then on NPIs, just sounds like that the efforts you put in place there to lift that number uh have not yet kind of yet to sort of show a meaningful impact you know some impact but you know is that is that a fair statement and and then if so when when do we sort of see that a more significant lift if that's what's to come and then as i mentioned that one follow up steph please yeah thanks matt for the question
spk00: So if we look specifically at the programs that we've had in place and have been building on since, I would say, the back end of last year. So we have the battery life follow-up program that we're working through, and we also have the physician portal that we've rolled out to allow our customers to get information full end-to-end view a full cohort if you like of their implanted patient database so we'll continue to see that ramp up throughout this year and obviously as we move into the future so it's early days and I'm looking forward to coming back with some more specifics of what that uplift looks like but at the moment what the feedback that we get from our customers is it this is very much appreciated And then when I look forward to NPI, so NPI is all about how we do this in terms of the discipline and the rigor that we have in our operating mechanism. And I've seen this already start to read out. The daily, the weekly, the monthly will all lead to the quarterly. And so that really is what we're spending our efforts on is establishing that operating mechanism and ensuring that we start to see that lead through future quarters.
spk12: Terrific. Thanks. And then maybe on sort of leverage and sort of investment, reinvestment, if there is to be reinvestment or drop through of the 24 million from the hard failure study. So I think you talked about modest leverage by year end. If maybe you could highlight what some of the puts and takes there are in gross margin and OPEX and how you're thinking currently about that roll off of that clinical program and where that spend goes, the reinvestment or just to further leverage. Thanks.
spk09: Thanks for your question, Matt. We did target modest leverage for the year. I mean, when we started this year, we said we're going to deliver modest leverage to our P&L. That remains the goal. Now, given the better performance that we're seeing in the first half and how we're projecting the rest of the year, we're taking the opportunity to make some incremental investments in our core business to strengthen our manufacturing capabilities as well as our IT capabilities. We're also looking at reinvigorating the innovation programs within epilepsy as well as cardiopulmonary. So those are some of the incremental investments where we're taking the opportunity to put back in the business to drive future growth and value creation. Not coming off our goal to deliver modest leverage. Now, your follow-up question on The heart failure program, as I said before, we have about $24 million of investment planned for this year. About 70% of that occurred in the first half of the year. So we're still on track with the closeout of the program. I feel good about where we are at this point.
spk07: And we will address that heart failure 2024 question as we work through our strat plan and budget. And more to come on that over the next couple quarters. We've got two things to do. Number one, we've got to figure out what do we have to still maintain in 24 specifically to support heart failure. You know, these things are quite never done done. And we want to make sure we've got both eyes on that as we plan 24. And then we want to take a look at the programs that Alex was mentioning and the timing of benefit to those as we move into the year. But trust me, the heart failure topic is on our planning and budget agenda, and we will not miss it in the next couple of quarters and to be more definitive to your question.
spk12: Thanks so much.
spk07: Hey, thanks.
spk05: Our next question comes from Anthony Patrone with Mizuho Group. Anthony, please go ahead. Your line is now open.
spk08: Thanks. Congrats on a quarter here and two operational and then one on the recovered trial. So just thinking on cardiopulmonary, you're welcome, Bill. Just on the 7,000 machines 10 years or older, just curious how many of those have actually turned over to Essence. you know, what the economics are around an upgrade as opposed to a new sale. And when you think about your competitors being out of the market here for a few quarters, how much share and new sites has Levenova gained? And then I'll have one on epilepsy. Thanks.
spk07: Let me take the share question first. We're trying to chase that down. The answer is we don't know exactly how much share we have gained because a lot of these orders that we're getting are substitute orders. An account gets some from somebody else. They don't get them. We go back in with another order. But it's quite clear from a market that even with the hospital upturn, a market that was historically growing at 1% is right now a little more favorable than that. And so that market's probably at 2%. We don't have a hard estimate on the share gain. I would probably say it's somewhere in the 2% range of share gain. But I got to tell you that one to three with two is the midpoint. There's no external data on oxygenators or the disposables, the tubing sets. So we can't really give you a hard fact on that one. We just know what we're making and moving out the door. And Alex, you had a question?
spk09: Yeah, so just to clarify the install base, Anthony, so 7,000 units out there, we believe that about 40% of those units are over a sort of the 10-year useful life cycle. So that's kind of the immediate focus. That's what we're going after.
spk08: And then operational on epilepsy. Mike Wilberg , MD, Mix right now 30% MPI, 70% end of stage replacement patients. Where do you think that mix can go over the next two years? And let's say MPIs get to, I don't know, 50% mix. Can epilepsy be a sustainable low double digit grower?
spk07: Let me ask Steph to comment. I'd like to open up first. We are doing a significant amount of strategic planning work for the 24 to 26 business plan on that topic. And let me just throw a couple of big questions at you. You've heard these before, but number one, we've got to understand more deeply. There's 22,000 or more DRE patients coming in every year. Only 8,000 of those people are getting treated. So there's some really heavy lifting being done by Steph and her team to say, what is going on here? How can it be that these people aren't getting treated? And she's leading a team to really address that. Within that exercise, I'm going to suggest, Steph, please comment, therein lies the answer to this question. Right now, today, Tell me, I don't have a view yet on where that can go. And so I think a very good question. We're probably a little too early for us to guesstimate or estimate even today. But jump in here, please.
spk00: Anthony, I think it's a really good question and one I'm asking the team during our strategic planning process at the moment as we look towards the future. The one thing that we do know about this patient population is that when we think about drug-resistant epilepsy, it continues to be 30% of this population. So when we look at the treated incidence pool every year, we are not getting close to treating that incidence on a yearly basis, let alone the overarching prevalence within the market. So that's where we're sharpening our pencils, is to understand how we can ensure that more patients come through the right pathway to access the right treatment. And we are absolutely one of those treatment options. So it's probably a long-winded answer to your question, but it's a well-timed question. And these are the things that we're challenging ourselves currently during our strategic planning process.
spk07: And let me add just a little color, and Steph, if you want to, just so you know some of the work that's going on. Number one, Steph and team are heavily engaged with multiple key opinion leaders that are out there. These are both epileptologists and surgeons. These are some of the people that I'm spending time with, too. Number two, she has a kind of re-energized department in the area of reimbursement. and healthcare economics and a team is in place now to deeply analyze how those factors. So we are taking a multifactorial kind of assignment here and really trying to break it down as we move to strat plan. It would be obviously our hope that within that broad base of work, we're gonna find additional insights that take us up the higher performance path, not today though.
spk08: That's very helpful. I'll hop back in. Thank you.
spk07: Sure. Thanks.
spk05: Our next question comes from David Rescott with Baird. Please go ahead, David. Your line is now open.
spk13: Hi. Thanks for taking the questions, and congrats on the strong quarter. Maybe first on epilepsy and just diving a little bit more into some of the prior questions. I think broadly across MedTech, we've kind of heard about maybe some of these elevated inpatient hospital admission levels and maybe the benefits for epilepsy are a little bit further downstream, but you've also made some of the changes or investments on the Salesforce side. So I'm wondering if you'd be able to maybe parse out at least what the relative contribution in the quarter or the first half of the year at least have been maybe from that broader kind of market recovery or backlog versus the Salesforce investments and then I guess just based on that response, you know, if it is maybe more Salesforce-driven, you know, is that something that does or potentially could accelerate in Q3 and into the back half of the year?
spk00: I think, David, if we could take that in two parts, I'll let Matt answer in regards to utilization. I'll answer first in terms of Salesforce execution. So something that we've spoken about at length in the past is our go-to-market territories. So I'd like to make a few comments about that, if I may. So we have overall 19 designated go-to-market territories. And we see the performance of that group in line with our base business. However, we have four open territories. And so part of my job, I think, coming into this is to dig into this, to look at the strategy. And about 15 fully staffed go-to-market territories, we see an outperformance both in the quarter and also in H1. So we continue to be committed to that strategy. And we're also going to be having two more operational territories in Q3. So I think we can for sure say that our strategy around working with our customer base with this current sort of direction of travel is the right one. Matt, can I hand to you for the overarching?
spk01: Sure. For epilepsy surgery, a couple things I'd say. You know, we track now the EMU capacity. In the second quarter, it was about 85%. That was similar to what we told you in the first quarter, and that was up from the fourth quarter. There's a six-month lag, so that's encouraging, but it didn't improve from the last quarter. And then I'd say in terms of overall neurosurgeries, which is where we primarily have our implants, I'd say anecdotally slightly better, but nothing stood out as being like, you know, a meaningful change in capacity or, you know, OR scheduling in the quarter.
spk00: Thank you, David.
spk13: Okay, great.
spk05: Our next question comes from Michael Pollack with Wolf Research. Michael, please go ahead. Your line is now open.
spk03: Thank you for taking the follow-up. Can we get an update on Italy, please? Any change to timing from the European Court of Justice and expectations for, say, mid-next year for the Supreme Court to weigh in?
spk07: Yeah, here's the latest at what we've got. While the timing of the decisions by ECJ and then subsequently, remember that goes back to the Italian Supreme Court, it's just, it's uncertain. We don't have specific information to share. We do not anticipate nor should we anticipate any final decision until at least 2024. We're still carrying the cash burn. To finish off the question, it's on SNEA, it's about 15 to 20 million dollars a year. That's all inclusive legal fees and cost of guarantee. So we have our eyes on it. We continually pay attention. Our general counsel is highly focused on this particular activity. And all we can offer you right now is that we are going to obviously we're going to keep you informed.
spk02: Thank you. Yeah, thanks.
spk05: Our next question is a follow-up from Anthony Patrone with Mizuho Group. Anthony, please go ahead. Your line is open.
spk08: Thanks. I appreciate that. Just had a follow-up on RECOVER just as it relates to unipolar and the duration of treatment effect and just looking to sort of clarify a few points there. So, obviously, we have a 12-month endpoint on improvement in moderate scores. But when you look at the enrollment cycle, it dates back to 2020, 2021. So in theory, there are patients in there that, you know, have, you know, been on treatment 24 months, you know, potentially longer than that. So what has been the overall dropout of the study? And when we look at just the average treatment duration of the patients enrolled today, you know, where does it sit? And probably the better question will be, where will it sit, you know, come March 2024 next year ahead of the final readout? Thank you very much.
spk01: Sure, Anthony. So if you just look at, you know, the overall numbers, the dropout rate, you know, the published paper, you know, we showed scenarios between a 20% dropout, 10% dropout. We said in the past nothing's changed. you know, we're well below the 20. So, you know, nothing to read into there in terms of, you know, any issue with dropouts. In terms of percent completion, you know, that number, it's really based on, I'd look at it as scores. You know, you look at the number of patients that have been implanted, each one gets 10 scores. It's a matter of, you know, what percentage of scores we have. And as you can imagine, since we're now in the final follow-up, that percentage has gotten quite high. So, you know, there, you know, we still, we're blinded and won't see the data until May of 2024. But in terms of overall scoring, we're pretty far along. And I think, you know, to your point, full data set in May of 24 will analyze everything. There's 13 total endpoints. Time and response is the primary.
spk04: Yes.
spk05: Our next question is a follow-up from David Rescott with Baird. David, please go ahead. Your line is open.
spk13: Hey, again, I think my follow-up question might have got cut off, so I'll ask it again. But just, you know, it was on kind of the bigger picture. You know, when you think about the overall portfolio, you know, and CP and Neuromai kind of have these durable growth drivers here, newer market opportunities, you know, with OSA DTD longer term. And then, you know, there are some segments that are, you know, a little bit profit dilutive. So I guess, you know, kind of thinking about this near and longer term view and how you think the portfolio of the company shapes up over time. I mean, how do you think about prioritizing maybe those investments, at least relative to these, you know, three or four different kind of potential drivers or shifts within the portfolio overall? Thank you.
spk07: Sure, let me take a shot at that. As you said, the SPIs we're fully committed to, they're fully funded, and with the open understanding that heart failure is stopped, DTD and OSA continue to go forward. What Alex mentioned, and it's worth maybe restating, is that we know that we want to create some iterative and impactful innovation within the core product portfolio of both CP and epilepsy. And we are starting to build out that capability on both sides. You might recall at the last meeting I had mentioned, let's take epilepsy as an example. We talked about a two-day technology strategy and planning meeting to be held in Houston. Staff and her team and several of the senior managers were there. And the purpose of that was to start to further develop kind of view with that core product innovation portfolio for the epilepsy business. We've got that activity going on in the strat planning process across the company. That's being backed up by the modest investment that Alex mentioned so that we can get that work started in 2023. That's where our head is. And in terms of a fundamental strategy to ensure, number one, high customer acceptance, improved and better products. That's where we'll continue to go, and that's on both sides. That's on CP, and that's on epilepsy.
spk05: Those are all the questions we have time for today, so I'll turn the call back to Bill Cozy for closing remarks.
spk07: Thank you, everyone, for joining today's call. On behalf of the entire team, we really appreciate your support and interest in Levanova, and we'll look forward to speaking more. Thanks.
spk05: Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.
Disclaimer