LivaNova PLC

Good day, ladies and gentlemen, and welcome to the Livanova PLC First Quarter 2024 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Matthew Dodds, Livanova's Senior Vice President of Corporate Development and IT. Please go ahead, sir.

Thank you, Candice, and welcome to our conference call and webcast discussing Livanova's financial results. for the first quarter of 2024. Joining me on today's call are Vladimir Makasaria, our Chief Executive Officer and member of the Board of Directors, 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 can cause actual results to differ materially are discussed in the company's most recent financial 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 revenue 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. I would like to welcome Vlad to his first earnings call as Levanova's CEO after starting March 1st. Prior to joining Levanova, Vlad most recently served as company group chairman at Johnson & Johnson MedTech, leading its global Ethicon surgery business. He's a respected leader in the medical technology industry with a 27-year track record of delivering results, driving innovation, and leading high performance teams. With that, I will turn the call over to Vlad.

Thank you, Matt, and thank you everyone for joining us. It's my pleasure and privilege to welcome you to Livanova's conference call for the first quarter of 2024 as Livanova's chief executive officer. First and foremost, on behalf of the board and the executive leadership team, I would like to express our gratitude to Bill Cozy, chair of the board of Livanova. for a tremendous job leading the company on an interim basis. I would also like to thank the entire board of directors for the opportunity to serve as CEO and express my sincere gratitude and excitement for the future of Livanova. During my first two months, I interacted with customers, met investors, and engaged with my colleagues around the world. I can confidently say that the patient first mentality thrives across every function and geography at Livanova. It is an honor to work with a global organization that focuses on solving significant unmet patient needs into very high impact medical fields, neurological and cardiac health. I'm humbled to be in this role and grateful to our teams for their exceptional work and dedication to serving our patients and customers. Over the coming months, I will continue to listen, learn, and complete a comprehensive review of business. In doing so, I'm focused on three key areas, execution, innovation, and talent. Let me provide additional color on each. First, execution and performance. My view of success in this area is achieving sustainable above-market growth while improving profitability and cash flow, and most importantly, delivering on commitments to our customers. The first quarter marked our fifth consecutive quarter of double-digit revenue growth. In cardiopulmonary, we maintained above-market growth driven by the strong launch of the Essence Heart-Lung Machine and our ability to fulfill the high demand for consumables. In epilepsy, we saw continued growth in both new and replacement implants, driven by disciplined commercial execution. Second, innovation and portfolio. Over the last year, the company has made progress in refining the business strategy and portfolio, including the wind down of the advanced circulatory support segment and the heart failure program. These portfolio actions position us well for the future and enable us to have appropriate resources, focus, and investment to drive growth in the business. This includes reinvigorating our cadence of core innovation to meet our customers' most prevalent unmet needs. In both difficult to treat depression and obstructive sleep apnea, we anticipate results in RECOVER and OSPRI studies later this year. Looking ahead, we will evaluate those opportunities alongside a holistic view of all possibilities for innovation. At Livanova, our commitment to pioneering innovation remains unwavering, and to this end, I'm very pleased to welcome Amit Tezel as Livanova's Chief Innovation Officer, which we announced yesterday. Ahmed has a remarkable track record leading teams and developing a wide range of market leading technologies. Ahmed will draw upon his extensive experience to guide innovation at Livanova. And finally, the third area of focus is people and culture. Any great organization starts with great people. And in my first two months at Livanova, I have met many of our colleagues from Houston to Arvada, from Munich to Mirandola. As previously mentioned, I'm most impressed by their embodiment of the patient first value. I was also struck by their deep expertise in the areas which we operate. It is no wonder we are category leaders in heart lung machines and epilepsy surgery. We will build on this foundation and continue to attract top talent to Livanova. Focus on execution, innovation, and talent will lead to success as an organization. We're confident that by delivering in each of these areas, we will improve patient outcomes and create shareholder value. For the remainder of the call, I will focus on the first quarter results and then turn to our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results and update 2024 guidance. I will wrap up in closing remarks before moving to Q&A. So in the first quarter, we achieved 12% revenue growth versus prior year. Excluding the impact of ACS segment wind down, revenue increased 14% versus 2023. This performance included double-digit revenue growth in both cardiopulmonary and neuromodulation segments. We're encouraged by our team's continued strong execution as demonstrated by our performance in the quarter. Now turning to segment results. For the cardiopulmonary segment, revenue was $156 million in the quarter. That's an increase of 16% versus the first quarter of 2023. Heart-lung machine revenue increased more than 20% driven by a sense. We are pleased to see continued sense placements and strong price mix in the quarter. Oxygenator revenue grew in low teens, driven by customer demand and price. As previously noted, the oxygenator business continues to see strong demand, and our efforts to increase capacity remain on track. We now expect cardiopulmonary revenue to grow 8% to 9% for the full year 2024. Our revised forecast incorporates strong HLM growth and continued strong demand for consumables. Epilepsy revenue increased 11% versus the first quarter of 2023. U.S. epilepsy revenue increased 13% year over year with growth in both new and replacement implants. We achieved 826 new patient implants in the quarter representing 4% growth versus the prior year. We realized 1,941 replacement implants representing 5% growth versus the prior year. Epilepsy revenue in Europe and the rest of the world grew 7% versus prior year. For the full year 2024, we continue to expect global epilepsy revenue to grow 6% to 7%. Our forecast incorporates a continued mid single digit growth rate in the US new patients and more normalized low single digit growth rate in replacements. We now expect international revenue to grow in high single digits. Difficult to treat depression revenue in the first quarter was $2 million. And for the full year, we continue to anticipate approximately $7 million revenue primary coming from the RECOVER study. The RECOVER study continues to advance and the bipolar cohort continues to enroll as expected. As a reminder, enrollment for the unipolar cohort of the study is now complete. We anticipate the 12-month follow-up data for the 500 unipolar patients in the second quarter. At that time, we will conduct an analysis and continue to expect publication of the full study results by late 2024. Now moving to obstructive sleep apnea. The Osprey clinical study achieved a positive predictive outcome and concluded enrollment in March. This means that there is a very high probability that there will be a statistically significant result in the primary endpoint, which is seven-month AHI response rate. In accordance with the study protocol, once the last implanted patient completes the last follow-up visit, we will conduct a final analysis for the study. We are pleased to have achieved this positive milestone for the Osprey study, and we will continue to work actively with clinical sites to manage the study patients. With that, let me turn the call over to Alex.

Thanks, Vlad. During my portion of the call, I'll share a brief recap of the first quarter results and provide commentary on 2024 guidance. Turning to results, revenue in the quarter was $295 million, an increase of 12% versus 2023. Excluding the impact of the ACS segment wind down, revenue increased 14% versus 2023. Foreign exchange in the quarter had an unfavorable year-over-year impact of approximately $1 million or less than 1% of revenue. Adjusted gross margin as a percent of net revenue was 71% compared to 69% in the first quarter of 2023. The year-over-year increase was driven by favorable product mix and pricing. Adjusted R&D expense in the first quarter was $43 million, compared to $46 million in the first quarter of 2023. R&D as a percent of net revenue was 15% down from 18% in the first quarter of 2023. The year-over-year decrease was largely driven by the closeout of the Anthem trial. Excluding the costs related to Anthem, our R&D investments increased 15% versus the prior year. Adjusted SG&A expense for the first quarter was $113 million compared to $108 million in the first quarter of 2023. The year over year increase was driven by targeted investments supporting essence, legal expenses, and variable costs such as freight and commissions associated with increased revenues offset by the reduction in ACS. SG&A as a percent of net revenue was 38% compared to 41% in the first quarter of 2023. Adjusted operating income was $53 million compared to $27 million in the first quarter of last year. Adjusted operating income margin was 18% compared to 10% in the first quarter of 2023. This increase was driven by improved gross margin and operating expense leverage primarily related to the wind down of the heart failure program and the ACS segment. Adjusted effective tax rate in the quarter was 21% compared to 6% in the first quarter of 2023. The year-over-year increase is related to developments in the global tax landscape and is in line with our expectations. Adjusted diluted earnings per share was 73 cents compared to 43 cents in the first quarter of 2023. Our cash balance at March 31st was $309 million, up from $267 million at year end 2023. Total debt at March 31st was $624 million, up from $587 million at year end 2023. This increase in total debt was driven by the closing of a $345 million private offering of convertible senior notes maturing in 2029 and repurchase of $230 million of convertible senior notes. Net debt, including restricted cash at March 31st, was $120 million. Adjusted free cash flow for the quarter was $11 million, down from $20 million in the prior year period. The year-over-year decrease was driven by higher working capital needs and ACS restructuring costs. Capital spend in the quarter was $6 million compared to $8 million in the prior year. The year-over-year decrease was driven by timing of key investments. Now turning to our revised 2024 guidance. As Vlad mentioned, based on our performance in the first quarter, we're increasing our full-year 2024 revenue on adjusted diluted earnings per share guidance while maintaining the range on our adjusted free cash flow. We now expect 2024 revenue growth on a constant currency basis between 6% and 7%, and between 8% and 9% when excluding the portion of the ACS business that we are exiting. In the first quarter, we observed favorable comparisons, which will continue in the second quarter. While we do not provide quarterly guidance, we expect revenue growth to be lower in the second half of 2024 compared to the first half of this year. Foreign currency is now expected to be a 1% headwind based on current exchange rates. We continue to expect a full year adjusted effective tax rate of approximately 21%. We now project adjusted diluted earnings per share in the range of $3.05 to $3.15 with adjusted diluted weighted average shares outstanding to be approximately $55 million for the full year. Adjusted free cash flow is still expected to be in the range of $95 to $115 million, an increase of approximately 9% at midpoint versus the prior year. This range includes a meaningful step up in capital spending, which we forecast to be approximately $60 million. As a reminder, Cash flow projections include costs associated with the ACS wind down in the range of approximately $15 to $20 million, the majority of which occurs in 2024. From a phasing perspective, free cash flow generation in the first half of the year is lower than the second half. And as a reminder, LevaNova pays its prior year short-term incentive bonuses in the second quarter. In summary, I'm encouraged by the company's execution and financial performance in the first quarter. Looking to the rest of the year, we will continue to invest in critical capabilities to support innovation, growth, and infrastructure. We remain well positioned to drive above market growth and more than 300 basis points of operating leverage in 2024. With that, I'll turn the call back over to Vlad.

Thank you, Alex. And so to conclude, our first quarter results were marked by double-digit revenue and operating income growth in both the cardiopulmonary and neuromodulation segments. Our performance in the quarter positions us well to build on this competitive momentum. Looking ahead, we will focus on execution, innovation, and talent. With this framework in mind, we're excited for the remainder of the year. Again, we will build on the strength of our core cardiopulmonary and epilepsy businesses, making investments to drive sustainable above-market growth. We will also gain clarity on the results from the RECOVER and Osprey studies, which will allow us to strategically target our most compelling opportunities. Finally, we will continue to explore areas of high clinical unmet need in markets with high growth potential to create long-term, shareholder value. In closing, I would like to thank my colleagues across the organization for the warm welcome to Livanova. Their hard work and passion underpin our success as an organization. I'm grateful for their continued dedication to serving customers and patients. And together, we will continue to advance our mission of improving outcomes for patients with neurological and cardiac health conditions around the world. So with that, Candice, I think we're ready for questions.

Thank you. If you have a question at this time, please press star, then the number one 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 the number two. As we enter the Q&A session, please limit your questions to one question and one follow-up, and then return to the queue if you have any additional follow-up. Our first question comes from the line of Rick Wise of Stifle. Your line is now open. Please go ahead.

Good morning, everybody, and good morning to you, Vlad. I look forward to meeting you in person. Maybe to start off, you talked about the fundamental momentum, and it's clearly visible in the outperformance. Maybe you could help us better understand just first at a high level the sustainability of the strong epilepsy growth that we saw in some of the drivers there, both on the new implant side and replacement. How are you thinking about the year unfolding and the drivers of that? And on the Oxy side, you know, where are you with capacity expansion and are you seeing competitors come back? So again, addressing the sustainability and your thoughts about it as you look ahead to the full year?

Yeah, well, Rick, thank you for the question. And likewise, I look forward to meeting you in person soon. Look, I think the first order of business, as I said earlier in my comments, is to build a sustainable above market growth in the core business. And I think it both in cardiopulmonary and in neuromodulation segments. On the cardiopulmonary side, the sustainability comes from continuous upgrade to the essence heart and lung machine, which still around the world will have major opportunities. And as a market leader, I think that upgrade is our biggest driver for that growth momentum as we continue to upgrade the customers, but also to upgrade the technology itself. On the disposable side, you know, we have a significant opportunity to increase our market share still. And obviously we were helped in this quarter and the previous quarters with some of the competitive disruptions. So we have capitalized on that momentum. And the key drivers there will be short-term, will be expansion of our capacity, which we are on track. And we are using our current footprint to really improve the way the work is done. So that's number one. And then number two is, going back to innovation, is making sure that our cadence in innovation in the oxygenator and other disposable businesses is following. So that's on the cardiopulmonary side. On the neuromod side is similar drivers. Obviously, we're coming from the position of strengths. We're currently the leader in the technology in the space of neuromodulation, interventional procedures, surgical procedures, and we will build on that strength. The key driver there for sustainable growth will be innovation. And so our first step is to invest in digitally connected technologies that will make procedures easier for the physicians and better outcomes for patients. So that is going to be the major driver of our long-term sustainability. And short-term is really about our commercial execution around the world. With STEP's leadership over the last year, we have significantly improved. So that's that. And I'm really encouraged because it's now I look back, it's five quarters of double-digit growth. And, you know, obviously my key role here is to make sure organization is enabled to continue this momentum.

Yeah, that's great. And maybe just as a follow-up, You've highlighted innovation repeatedly. I think I'm correct in saying you said R&D growth X, whatever, 15%, if I'm saying it correctly. Anyway, you've made an important hire with the chief innovation officer. What are you charging him with? What are you asking him to do? What are his priorities? What are your priorities? What can we expect to see? You've touched on it a little bit. Maybe you can give us a little deeper perspective. Thank you.

Rick, thank you for highlighting this. I think it's a big deal for us. Ahmed comes with just an incredible track record, and you can obviously look at his background in various companies, various technologies in clinical states. And he led not just R and D, but a holistic innovation functions with regulatory and medical affairs, clinical preclinical, uh, market access. Um, so, so that's a little bit on, on Ahmed's background. And I think just outside of your innovation capability, he is an extraordinary leader. And I think just a great addition to our leadership team. Um, you know, And to go back on the why and what needs to get done, it's been two months for me, and I've been kind of deeply engaged with teams around the world and learning and assessing. And like I said, I'm extremely impressed with the people and talent and culture of Livanova. Obviously, execution is very strong, and you see this in the results. You know, innovation is one area where we need to build on the strength of our core and really accelerate. And my ask for Ahmed is to come in and continue to develop top talent and bring top capabilities in functions that are surrounding innovation. So bring top talent and develop our current talent at Livanova. That's number one. Improve our processes on how we look at innovation from end-to-end state, you know, inside generation, product development, market access, links to supply chain. So improve the entire process of innovation end-to-end. And then finally, help us assess and make decisions on spaces in which we should work. You know, short-term, this will be some major decisions that we will have to make with our OSA and GTD strategy, and I think it will be important to have his voice on this.

Thank you very much.

The next question comes from the line of Matt Taylor of Jefferies. Your line is now open. Please go ahead.

Hi. Thank you for taking the question. I guess I actually wanted to ask one about the medium-term outlook for some of your businesses. You know, it's a little bit challenging to try and forecast cardiopulmonary with some of the dynamics going on with oxys this year. Can you help us understand, I guess, first for oxygenators with your increase in capacity combined with all the share you've gained and the potential for competitors to come back, how do you expect that business to grow over the next couple years? And same kind of question I have on the heart and lung machine launch. Obviously, that's going really well. You're out of the gate. What happens when you start to comp the launch? What kind of growth do we expect through that period? Thank you.

Hey, Matt. It's Alex. I'll take this one first. So in terms of the midterm outlook for the cardiopulmonary business, we're really, really excited about the opportunity that we have in the HLM replacement cycle. We said all along this is going to be a multi-year cycle. opportunity for Levanova, and we're capitalizing on the great technology and the insights that we use to develop the product. So, we think that DHLM growth will continue. It will continue to accelerate into the balance of the year. And we project that for, as I said, for the next couple of years. As far as the oxygenator business, as we've said all along, we reached our sort of peak capacity in oxygenators in the second half of last year. We've been really working hard to expand the capacity, and the team's doing a really good job at that. We're actually seeing some acceleration in those programs. We're really improving our processes at the Mirandola manufacturing facility and continuing to add some automation to enable that. So, we expect some capacity expansion, primarily in the second half of this year, but we're probably going to see some benefits in the second quarter as well. So, I feel good about the opportunity that we have there. Now, we're monitoring the competitive situation. I'm never sure what the competition will do in terms of coming back into the market, but we feel like we have a great opportunity to continue to enhance our market position and continue to capture market share.

Great. Thanks for the call, Alex.

The next question comes from the line of Michael Pollack of Wolf Research. Your line is now open. Please go ahead.

Hi, good morning. Thank you for taking the question. My first question is on the sleep program. Obviously, a positive update here from the clinical trial prediction work. You know, this is a confirmatory study. You know a lot about this asset already. Uh, if I just speculate on timing, um, kind of steam set up, uh, or leave a Nova set up to get an FDA approval, call it middle of, of 2025, maybe one year away from today. And so I'd imagine, um, you would want to think about doing some commercial prep here, hiring a field force, that sort of thing. So, so what is the state, um, uh, what is the view on that prepping for a sleep launch in 2025? And, uh, And maybe as it relates to 2024 numbers, do you have anything built in here from an OpEx perspective on early sleep prep?

Hey, Mike, it's Matt. I'll go through those for you. So for the program, we are going to have around 105 patients implanted. You know, we took the look at 90, but as we were discussing with the FDA on early stoppage, all patients in the queue were implanted. So we're going to have the primary endpoint data that's seven months reduction in AHI around year end. And to your point, we'd probably file then assuming the data is there in early 25. And just so you're aware, we do have to give the FDA one year safety data as well. That'd probably be in like April. So it's still a 2025 approval based on where we are today. It didn't change that much. In terms of the commercial prep, I think the seven-month data will be directionally very important, but again, we're not going to get that until year-end. The 13-month data, which will compare to the competitive data we've seen from now two companies, that's the really important data. So I would say commercially, we're going to take this very slow until we see A, the seven-month data, and then B, the 13-month data. So there's really not much in 2024 in terms of commercial spend.

Helpful. And then my follow-up on the Essence launch. I'm just curious, in the US and Europe where this product is available, what is the Essence S5 mix, any color on units, and how it is ramped versus the back half of last year, and what Essence unit expectations might be for this year? Thanks so much.

Hey, Mike. It's Alex. We're not sharing the actual unit numbers. What I will tell you is typically first quarter is kind of a lower volume quarter anyway for our heart lung machine placements. And we continue to anticipate that we'll have a steady increase in placements throughout the year.

Thank you. The next question comes from the line of Adam Leader of Piper Sadler. Your line is now open. Please go ahead.

Hi, guys. Good morning. Congrats on the nice start to the year, and thank you for taking the questions. I wanted to follow up on Essence. And, you know, I believe you're fully launched in the U.S. and Europe, but was hoping you could talk about potential timelines for rest of worlds. And then also wanted to better understand how the existing heart-lung machine install base kind of is broken down by geography as we think about a potential replacement curve. And then I'd follow up.

Yeah, so Adam, again, as far as the Essence rest of world rollout, this is already starting to occur in select markets. As we saw in Europe, And the U.S., we kind of start out slowly with kind of the limited commercial releases and then ramp as we get insights and feedback from our customers. So throughout the year, we'll see a continued flow of new markets coming online.

And Alex, any color on the existing heart-lung machine install base and kind of how that looks between the U.S., Europe, and rest of the world?

Sure, Adam. It's Matt. U.S., say roughly 30%. Europe, about 20%. Rest of the world, 50%.

Okay. I got it. That's good color, guys. Thank you for that. And then for the follow-up, I wanted to ask, Vlad, you know, for your thoughts on the RECOVER program. And, you know, I guess two-part question. First, you know, what would you define as a successful RECOVER trial? You know, maybe to ask the question differently, you know, what do you want to see to push forward and commercialize the program? And then I did want to ask about, you know, data disclosure. It sounds like you'll see the data in June.

next month um will you top line that uh information to the investment community do you have approval to do that from cms or or is that still up in the air thanks again for taking the questions yeah um so adam adam thank you for the question it's obviously the the outcome of the recover trial is a very important milestone for us because i mean not only it will most more importantly make some opportunities potentially available for, you know, patients, but also will kind of determine direction of our strategy on this one. So it's an important milestone. All the decisions will be routed in or founded on the outcome of the clinical study. And like you said, you know, we anticipate the results before the end of this quarter. And once we have them, we will analyze and we will, A, make it transparent at the high level to the community. So that's important. And two, based on those clinical results, we will then determine the path with work with CMS, with the clinical sites, and with the investment community on what is the best path forward. To your point, there will be transparency to data as we have it at the high level. And then the full data will be available by the end of the year with the scientific publication. And then the way I look at it, it's a complex trial because we're answering a number of questions in various clinical needs within difficult to treat depression. So, we will have to assess together with CMS on path to reimbursement depending on what clinical, you know, questions we're positively answering.

Thank you.

The next question comes from the line of Anthony Patron of Mizuzu Group. Your line is open. Please go ahead.

Thank you and congrats to the team here on Strong1Q. And, Vlad, congrats on the new role of CEO with the company. Maybe to start with guidance and maybe just a little bit of math on the 1Q beat versus the guidance outlook. And so you look at the prior guidance versus revised guidance top line. is up by 200 basis points and midpoint of the range is up 10 cents. You had a sizable 600 basis point beat top line and a 24 cent beat in 1Q. So there's a little bit of spread there. So hoping to just get a little bit of color on, you know, the extent of the 1Q beat and what's implied for guidance. And then one specific to guidance would be on capacity for oxygenators, you know, what is actually assumed in there.

the revised guidance of four to six percent does that reflect the tailwind in the second half for that business specifically and i'll have one quick follow-up thanks hey anthony it's alex uh so the first quarter is is typically a low quarter for us in terms of revenue and um and and profitability so we had favorable comparisons and um We just do not expect the same level of growth in the second half of 2024. We're still continuing to invest in critical capabilities to support innovation and growth and infrastructure. And we expect spending to be higher for the remainder of the year. Additionally, we saw favorable pricing and product mix, which contributed meaningfully to our gross margin expansion in the quarter. So look, at the end of the day, it's still early in the year. And the way we think about this is we have some significant opportunities, as Vlad talked about, the innovation portfolio, et cetera. And I think it's at this point in time, we're taking sort of a prudent approach to the revised guidance.

No, that's very helpful. Go ahead. Sorry. Sorry, Alex. No, go ahead. That's helpful to me. Thank you, Alex. Maybe just a quick follow-up here and I'll get back in. One would be, you know, just to recap on, you know, the cost savings from ACS and when we think about depression, How do you think about the bipolar cohort here? So, in other words, you know, there's a go, no-go sort of option here for unipolar. You know, how does that influence the bipolar cohort decision-making process?

Thank you. I'll take the ACS question first. As far as the – we guided the ACS savings and the impact on EPS to about approximately 10 cents. the beginning of the year, we still feel good about that. Now, with your follow-up question, I'll turn it over to Matt.

Sure. So, Anthony, for bipolar, we said last June we had 150 patients enrolled, and we said roughly 25 patients a quarter, and we've said that's on track. For that one, the unipolar data could have an influence on it, but this is a very different patient group. And if you look at some of the historical data that we've shown, generally, BNS does better with the bipolar patients. So, you know, there is still a path for bipolar regardless of where unipolar ends up in our opinion.

And Anthony, just follow up on your question regarding capacity. We're continuing the program to expand our capacity in Mirandola. And that's, as I said, it's going really well. We incorporated that capacity expansion into our original guidance. And so we're kind of maintaining that assumption. We're going to see some favorable benefits, some tailwinds in the second quarter as we were able to achieve some success there earlier than anticipated. But the expectation is that there's going to be some growth in the back half of the year. as a result of our ability to expand the capacity.

The next question comes from the line of Mike Mattson of Needham and Company. Your line is now open. Please go ahead.

Yeah, thanks. Just so on the Essence launch, I mean, obviously it's driving really strong growth, but I was wondering, you are getting a pretty big price premium with Essence. So, you know, how much of it is pricing and how much of it is volume? I know you're not going to deal with the volume number, but I guess I'm getting at it. Has volume picked up? Has the availability of Essence driven more, you know, upgrades? Or has it really just been pricing so far at least?

Yeah, look, we're seeing a strong funnel with regard to units and the placements have been have been tracking according to plan. So, yeah, obviously the price mix benefit, right? We have a substantial price premium in effect here, but we're also seeing customers sort of taking advantage of the newer technology and the feature and benefits that are offered with Essence that didn't exist with S5. So, we are getting some of that benefit. But as I said, our funnel for unit placements looks strong for the balance of the year and we're gonna continue to see an acceleration of our placements.

Okay, got it. And then with the earlier sort of end of enrollment and hot spray, is there any cost savings associated with that? I think on the last call you said you expected to spend a little more than the $27 million that you spent in 23 on that program. So, would that spending be down as a result of that or is it kind of not impacting it? Thanks.

It's roughly the same, Mike, because the majority of the cost was associated with managing the patients throughout the trial. throughout the study. So, while there's some savings in perhaps the recruitment costs, the majority of the costs reside in sort of the active management of patients throughout the trial process.

Okay, got it. Thank you.

Thank you.

The next question comes from David Prescott, off-air. Your line is now open. Please go ahead.

Oh, great. Thanks for taking the questions. Vlad, I wanted to follow up on one of the comments I heard you make in the prepared remarks around evaluating recover OSPRI trials alongside what you called a holistic view around some of the areas for innovation. And I'm wondering if you could expand a little bit on what some of the factors are maybe around that holistic approach. And then specifically for RECOVER, I heard some of the comments earlier to a prior question, but does the holistic view around RECOVER get accounted for or thought about maybe when we start to hear about some of the top line results? Or is that maybe more of a, hey, let's wait till we see the publication and think about the fit in the portfolio longer term?

Yeah. So, so, uh, thank you, David. I think short-term investment choices, uh, you know, we'll yeah. And I'll start maybe before, before the recovery and Osprey comment, you know, but if you look at some of the really good decisions that the leadership team made over the last couple of years, you know, one was to focus the portfolio. So where the wind down of, uh, the ACS and then the hard sale business that gave us opportunity to reinvest in the core. And partly you see the kind of the outcome of the decisions and improve execution and improve results in the core business. So short term potential kind of for short term growth will be to reinvest more in the core, both on the innovation front execution front expansion of capacity and so forth so that's one opportunity we're looking at uh longer term you know in terms of strategic directions we're going to have to wait until we see what clinical results osprey and recover bring because obviously that will there will be a fork if you like in the strategic direction of the company so um so that's that's a little bit how we're thinking about it short term more reinvest in the core long-term see what direction would take on DTD and LSA.

Okay, great. Maybe a question for Alex. If I look at the kind of updated EPS guide for the year in the bridge relative to what you laid out after Q4, operational growth and leverage is where things kind of have moved higher. Tax, cost inflation, infrastructure investments, the HF, ACS exits. all remained relatively the same as it relates to the contribution for the bridge to growth in EPS this year. My guess is that implies that there's no real update on the ladder kind of pieces to the guide. If we think about maybe some levers for upside in the remainder of the year, is there any shift in potential for those three ladder pieces or would, or if there's more upside to be had on the EPS line, it's more gonna be operational growth and leverage relative to those four other buckets. Thank you.

Yeah, I mean, as we looked at the components of EPS, we feel really good about the savings from the hard failure and the ATS wind down. Tax rate, we knew going into this year was a headwind, but we're managing through it. So, you know, The majority of the upside here is really about operating leverage and our team being super disciplined and focused about driving growth and ensuring that there's an appropriate level of drop through on the bottom line.

Great. Thank you.

The next question comes from the line of Mike. Of my sick of Barclays, your line is open. Please go ahead.

Thanks so much. Can you hear me OK?

Yeah.

Great. Thanks for taking the question. Maybe just if I could follow up on. the sort of scenarios and your decision process between Osprey and RECOVER, that would be super helpful, and which of those programs you're likely to move forward with. Thanks.

Hey, Matt. It's Matt. So for both, I mean, the data is obviously critical. You know, as we said, with RECOVER, for Unipolar, we get that data by the end of the quarter, and then for the Osprey OSA program, you know, around year end. I'd say, you know, in terms of product development, there's a little bit of a difference with OSA. You know, that's a component as well to look at. But generally, you know, those are the core timelines when we get the clinical data to show basically, you know, where we would play in each one and what the value would be to the patients and physicians.

Yeah, and that may be just, I mean, obviously we don't have the outcome of the decision, but I think what's important is the principle on how we make it. And we were going to look at three dimensions. You know, the first one is what is the clinical benefit to patients? And that's number one. That's the most important one. The second one is how competitive is our technology in this space versus other available technologies on the marketplace? And then the third one is looking at the end-to-end kind of business model, if you like, and how we can create value not just for patients, but also for the shareholders. So those will be the three kind of parameters that we're going to use to decide how to prioritize between those two.

That's helpful. If I could just one follow up on the epilepsy market, you know, if you could maybe talk about the biggest sort of factors driving or maybe you know, enabling or restraining your execution there and ability to operate? Is competition? Is it some of the changes in your sort of go-to-market strategy? Is it, you know, just general sort of, you know, end-of-life cycles in your current and previous kind of, you know, implant to patients? Maybe just what are the most significant factors that we can look at to measure that performance this year. Thanks so much.

Hi, Matt. It's Steph here, sure. Let me tell you where our focus is for the remaining part of this year. For the U.S., it's going to be the continuation of that discipline, commercial execution, building very much on the foundations that we laid last year in 23. You touched on our Salesforce structure, but we'll be maintaining our Salesforce structure and our territory design. We're also building a high talent bench for those large influencing territories as well. But as I mentioned on the last call, our strategy is a little broader than that, than just our Salesforce structure. And in combination with that, it's also making sure that we expand our efforts in regards to partnership with our physician base. We had a really successful recent scientific advisory board full of great insights. And also as we look towards 2024 and our end of service, so that's based on our latest data, but the comparisons do get a little more tricky throughout the rest of the year. But we still are encouraged by our end of service performance and partnering with our physicians to identify patients. in accordance to that all important continuity of care. So those are the sort of main aspects, really. Partnership with our physician base, ensuring that we can expedite care, continuation of our territory structure, and as I say, key partnership with our advisory board.

The next question is a follow-up from Anthony Patron of Mizuku Group. Your line is open. Please go ahead.

Thanks, Flad. Just a quick follow-up on RECOVER and the messaging there. Is the go or not go forward, you know, decision, will that be on the headline readout in June, July timeframe, or will you wait for the final data set at the end of the year to make that decision? Thanks.

And thank you for this follow-up. Just, you know, if the clinical data is negative, then it's a clear no-go decision. If the clinical data has elements of positive, whether holistically or in certain clinical areas, then we will continue working with CMS to define a go or no-go decision. So I, you know, and that is for me the best scenario where, you know, we can continue to work with them to evaluate that.

Yeah.

As there are no additional questions waiting at this time, I'd like to hand the conference back over to Vladimir Maskasaria for closing remarks.

Thank you. Thank you, Candice. And thank you, everyone, for joining the call, for your feedback and very thoughtful questions. And on behalf of the entire leadership team at Livanova, we really appreciate your support and your interest in the company. And we'll talk to you soon. Have a good day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.