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spk06: is being recorded. I would now like to introduce your host for today's conference, Mr. Matthew Dodds, LevaNova's Senior Vice President of Corporate Development and IT. Please go ahead, sir.
spk08: Thank you, Emily, and welcome to our conference call and webcast discussing LevaNova's financial results for the second quarter of 2024. Joining me on today's call are Vladimir Makatsaria, our Chief Executive Officer and member of the Board of Directors, Alex Schwarzberg, our Chief Financial Officer, Amit Tozel, our Chief Innovation Officer, and Zach Glazier, Manager 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 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.livanova.com. With that, I will now turn the call over to Vlad.
spk05: Thank you, Matt, and thank you everyone for joining us. Welcome to Live and Know's conference call for the second quarter of 2024. Let me start by addressing the judgment by the European Court of Justice that came out on Monday in connection with the SNEA litigation. The ECJ responded to a question raised by the Italian Supreme Court on European demerger law. While this is a complex matter and there are a lot more nuance here, The ECJ ruling effectively says that a company spun off in a demerger can still be responsible for liabilities prior to the spinoff. The ECJ also says it is up to national law to decide if a company can be held responsible for liabilities that arise after the spinoff. While we're disappointed with the ECJ decision, the case now goes back to the Italian Supreme Court for it to decide on all the appeals. While the timing of the decision by the Italian Supreme Court is uncertain, we do not expect a decision until at least 2025. Now, before turning to the results for the quarter, I'd like to provide an update on the three strategic imperatives we previously highlighted. First, maximizing the strength of our cardiopulmonary and epilepsy businesses. This quarter marks the sixth consecutive quarter of double digit revenue growth. Capitalizing on this momentum to achieve sustainable above market growth for both businesses remains a key priority. We also remain committed to margin expansion and improving cash generation. Second, setting the direction for the difficult to treat depression and obstructive sleep apnea programs. In difficult to treat depression, we announced the preliminary results for the unipolar patient cohort of the ReCOVER clinical study in June. Following additional in-depth analysis of the data and input from leading independent clinical, scientific, and reimbursement experts, we decided to continue to pursue CMS coverage. As we move forward, this decision includes the deployment of a new operating model that allows us to reduce investment in the program until a CMS coverage decision is made. This direction will improve Levonor's financial profile in 2025 and allow us to continue pursuing coverage for patient population with a significant unmet need. Alex will provide more detail on the financial impact of this decision later in the call. In obstructive sleep apnea, the Osprey clinical study achieved positive predictive outcome and concluded enrollment in March. We plan to review the entirety of the Osprey clinical data and set the direction for the obstructive sleep apnea program in the second quarter of 2025. Third, we continue to explore areas of high unmet clinical need in markets with high growth potential and aligned with our strengths and capabilities. Overall, we're pleased with our progress in this strategic imperative. And to enable our success, we will continue to focus on execution, innovation, and people. For the remainder of the call, I will discuss our second quarter results and opportunities in cardiopulmonary and epilepsy businesses. After my comments, Alex will provide additional details on our results and update 2024 guidance. I will wrap up with closing remarks before moving to Q&A. There are basically three key takeaways from our financial performance. First, we're marking our sixth consecutive quarter of double-digit growth. In the quarter, we achieved 10% revenue growth versus prior year. Excluding the impact of the ACS segment wind down, revenue increased 11% versus 2023. We achieved this while expanding margins. We're increasing our 2024 full year revenue and adjusted earnings per share guidance. Third, we expect our decision to difficult to treat depression to result in at least 30 cents of incremental adjusted EPS in 2025. Now turning to segment results. For the cardiopulmonary segment, revenue was $174 million in the quarter. An increase of 14% versus the second quarter of 2023. Chart long machine revenue increased over 25%, driven by essence. We are pleased to see a sequential ramp in essence placements and continuing strong price mix in the quarter. Oxygenator revenue grew more than 15%, driven by customer demand and price. The oxygenated business continues to see strong demand, and our efforts to continuously increase manufacturing capacity remain on track. We now expect cardiopulmonary revenue to grow 12 to 13% for the full year 2024. Our revised forecast incorporates continued HLM growth and demand for consumers. We see three key opportunities. to drive long-term growth in cardiopulmonary business. First, HLM upgrades. We estimate our global installed base of HLMs is roughly 3,000, and we have opportunity to upgrade them to Essence. While we do not provide unit sales numbers, as a point of reference, we expect that Essence will represent approximately 40% of our annual placements in 2024, and we're targeting 75% in 2025. Second, expanding our recurrent revenue capture rate, including servicing our equipment and software upgrades. As the essence installed base continues to grow, we will look to drive additional revenue growth through these opportunities. Third, consumable market share. We have a leading global market position in HLMs And we have the opportunity to gain share in oxygenators and other disposables. We're already gaining share in disposables behind our commercial execution and ability to supply. Any great organization starts with great talent. And on that note, I'm very pleased to announce that Franco Paletti has been appointed President of Cardiopulmonary Business. Franco has spent the majority of his career with Levanova, spanning from various geographies and functions. He most recently led the cardiopulmonary business on an interim basis. Under his leadership, the team has consistently delivered strong results while always putting patients and customers first. Turning to epilepsy, revenue increased 7% versus the second quarter of 2023. US epilepsy revenue increased 6% year over year with growth in both new and replacement implants. We achieved 886 new patient implants in the quarter, representing 6% growth versus the prior year. We realized 2066 replacement implants in the quarter, also representing 6% growth versus the prior year. Epilepsy revenue in Europe and the rest of the world grew 8% versus prior year. For the full year, 2024, we continue to expect global epilepsy revenue to grow six to seven percent. Our forecast continues to incorporate mid single digit growth for the U.S. new patients. We now expect mixing mid single digit growth for international revenue and low to mid single digit growth for the U.S. replacements. Today, we're the market leader in drug resistant epilepsy surgery. we see two key growth opportunities for the epilepsy business. First, we continue to drive increased procedure penetration through market access and clinical evidence initiatives. Second, we see growth opportunity driven by innovation. And to this end, we're pleased to welcome Holly Grammar, who is our vice president of research and development for neuromodulation. Holly has a proven track record of leading high performing teams and is an accomplished R&D executive with more than 25 years of experience. We're excited that Holy has joined Livanova to lead the acceleration of our innovation pipeline in neuromodulation.
spk12: With that, I'll turn the call over to Alex. Thanks, Vlad. During my portion of the call, I'll share a brief recap of the second quarter results, provide commentary on 2024 guidance, and comment on the financial impact of the difficult to treat depression decision. During the turning to results, revenue in the quarter was $319 million, an increase of 10% versus 2023. Excluding the impact of the ACS segment wind down, revenue increased 11% versus 2023. Foreign exchange in the quarter had an unfavorable year-over-year impact of approximately $3 million or approximately 1% of revenue. Adjusted gross margin as a percent of net revenue was 69% compared to 72% in the second quarter of 2023. A year-over-year decrease was primarily driven by the provision taken for the Italian payback measure as described in our press release. Adjusted R&D expense in the second quarter was $41 million, compared to $48 million in the second quarter of 2023. R&D as a percent of net revenue was 13%, down from 16% in the second quarter of 2023. The year-over-year decrease was largely driven by the closeout of the hard failure trial. Excluding the costs related to the hard failure program, our R&D investments increased 4% versus the prior year. Adjusted SG&A expense for the second quarter was $113 million compared to $113 million in the second quarter of 2023. SG&A as a percent of net revenue was 35% as compared to 38% in the second quarter of 2023. The year-over-year decrease was driven by improved operating leverage and was favorably impacted by the wind down of the ACS segment. Adjusted operating income was $67 million compared to $49 million in the second quarter of 2023. Adjusted operating income margin was 21% compared to 17% in the second quarter of 2023. This increase was primarily driven by higher revenue, improved operating leverage, and the wind downs of the hard failure program and the ACS segment. Adjusted effective tax rate in the quarter was 21% compared to 10% in the second 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 93 cents compared to 78 cents in the second quarter of 2023. Our cash balance at June 30th was $329 million, up from $267 million at year end 2023. Total debt at June 30th was $625 million, up from $587 million at year end 2023. This increase in total debt was driven by the closing of the $345 million private offering of convertible senior notes maturing in 2029, and repurchase of the $230 million of convertible senior notes. Net debt, including restricted cash, at June 30th was $99 million. Adjusted free cash flow for the quarter was $42 million, up from negative $10 million in the prior year period. The year-over-year increase was primarily driven by stronger operating results and working capital improvements. Capital spend in the first half of 2024 was $19 million, compared to $13 million in the prior year period. The year-over-year increase was driven by cardiopulmonary capacity expansion initiatives and IT investments. Now, turning to our revised 2024 guidance. As Ladd mentioned, based on our performance in the second quarter, we're increasing our full-year 2024 revenue and adjusted diluted earnings per share guidance while maintaining the range on adjusted free cash flow. We now expect 2024 revenue growth when a constant currency base is between 7 and 8% and between 9 and 10% when excluding the portion of the ACS business that we are exiting. In the first half of the year, we observed favorable comparisons, which are not expected to continue for the remainder of the year. We expect revenue growth to be lower in the second half of 2024 compared to the first half of the year. We continue to expect foreign currency 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 $3.10 to $3.20 with adjusted diluted weighted average shares outstanding to be approximately 55 million for the full year. Our forecast contemplates higher operating expenses in the second half of 2024 compared to the first half of the year as we invest to maintain above market growth in epilepsy and cardiopulmonary businesses. This includes a higher R&D investment based on our plans to accelerate innovations. Additionally, we expect SG&A as a percent of net revenue in the second half of 2024 to be more consistent with what we saw in the first quarter of 2024. 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 versus the prior year, which we forecast to be approximately $60 million. As a reminder, our 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. Now turning to the financial impact of the difficult to treat depression decision. In our 2024 guidance, we forecasted investing a net $40 million in DTD. We will maintain that level of investment this year as we optimize the program. The DTD investment will be reduced in 2025 while we continue to pursue CMS coverage. By optimizing program investments, we expect to deliver at least $20 million in pretax savings in 2025. which is equivalent to 30 cents in earnings per share accretion. We also expect additional savings that will be allocated towards select high-value initiatives in our cardiopulmonary and epilepsy businesses to sustain their growth and long-term value creation. These investments include new product development, manufacturing capacity, and IT systems infrastructure. In summary, I'm pleased with our team's continued execution, which has led to consistent growth and margin expansion. We remained well positioned to deliver our financial commitments in 2024, including roughly 350 basis points of operating leverage, over 30% growth in adjusted operating income, and approximately 12% growth in adjusted diluted earnings per share, despite the significant step up in our effective tax rate. And with that, I'll turn the call back over to Vlad.
spk05: Thank you, Alex. Just one correction to what I said earlier. Our installed base of HLMs is 8,000, of course, not three, what I said, which represents a significant opportunity for upgrades for us. So moving forward, we continue to execute on our three strategic imperatives. This quarter marks our sixth consecutive quarter of double-digit revenue growth. driven by strength in our cardiopulmonary and epilepsy businesses. Maximizing the strength remains our key priority. Deciding the path forward for the difficult to treat depression program represent a key step in the evolution of our company. As we continue to plan for the future, we're exploring areas of high and medical need in markets with high growth potential and aligned with our strengths and capabilities. our success will continue to be enabled by the quality of our execution, innovation, and people. And in closing, I would like to reiterate my gratitude for my colleagues around the world for their unwavering commitment to patients and customers. With that, operator, we're ready to open the call for questions.
spk06: Thank you. If you have a question at this time, please press the star, 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 and then two. As we enter the Q&A session, please limit yourself to one question and one follow-up question, and then return to the queue if you have additional follow-ups. Our first question comes from Rick Wise with Stifel. Please go ahead.
spk07: Good morning to you all. Good to see the quarter. Let me start off with guidance. You gave us a lot of detail, a lot of commentary, but after, as you emphasized several times, a strong, solid, double-digit first half growth outlook, you said it yourself, your guide for the second half implies a slowdown to more mid-single digits, and Alex highlighted as well, it sounded like, and I don't want to put the wrong words in your mouth, Alex, it sounded like sort of maybe more aggressive spending on investment on the SG&A side. Just to help us better understand your thinking and setting us up for the second half, and the degree to which we should view this as potentially or possibly conservative. Thank you.
spk12: Hey, Rick. Thanks for the question. So first half of 2024 had favorable comparisons. If you recall, we really started to ramp our essence revenues in the second half of the year. So we do expect we had a significant step up in the second half. of 2023, and so we expect slower sales growth in the back half of the year. As it relates to investments, we're really putting those investments towards critical capabilities to support innovation, growth, and infrastructure. And the related spend will be higher in the remainder of the year. Our goal is to continue to drive sustainable above-market growth while we expand our margin in both businesses. So we're targeting the spent to help us achieve that.
spk07: Gotcha. And there's so much to ask this quarter, but I guess I'll focus on the DTD decision. It's good to see that. And thank you for being so clear about the decision. But maybe help us better understand the decision. Are you, and I'm going to ask this sort of expansively, are you now negative on the DTE outlook or potential? How does the bipolar clinical trial arm figure into all this decision? And just I left with a sense from Alex's comments that there actually might be more upside to EPS if you weren't choosing to invest. Help us maybe better understand this whole package of decisions on DTD. Thank you again.
spk09: Amit Singer- Hi, Rick. This is Amit. I'll kind of summarize. what we have done since June when we first communicated our preliminary results. So as we communicated back then, we demonstrated through the pivotal trial that there's a statistically significant and clinically meaningful patient benefit in certain select endpoints, despite us not being able to show the primary endpoints being successful. So since then, what we have done is that we conducted additional analysis. We looked at um things like are there certain subgroups that perform better we investigated the high response rate in the control arm while we did our internal analysis we also worked with a consortium of external experts in clinical medical and reimbursement and we had them also do an independent assessment of the data. And it's important to emphasize that it was independently done. We fired all that group from the internal group. So we had an internal assessment and an external assessment of the comprehensive data. And what we saw from both the internal and external assessment was that there is a strong positive benefit for difficult to treat patients with BNS therapy. And because of this internal and external assessment and the strong unmet medical need, we decided to continue to pursue CMS coverage.
spk12: And Rick, with regard to the savings, as I said, it's at least $20 million on the pre-tax basis. As we look, it's still early in the year, we're looking at, and we're doing our planning for 2025 and our long-range planning. So as Ahmed settles in, coming in as our chief innovation officer, you know, we're looking at opportunities to invest behind our cardiopulmonary and epilepsy innovation programs. So, you know, we are at this point allocating some portion of the DTD savings Um, into kind of the, the core, uh, CP and epilepsy businesses.
spk09: Hey, Rick, this is all of it again. I forgot to mention about the bipolar since you asked, um, we had an independent 3rd party look at the data, um, as, you know, because the study is still enrolling, it will be inappropriate for legal Nova internally to look at the data carefully. But the external assessment had no reason to stop the trial. Therefore, we're continuing to enroll into that study despite a different operating model at a lower expense rate in terms of our recruitment.
spk07: Thank you.
spk06: Our next question comes from Matt Taylor with Jefferies. Please go ahead.
spk03: Hi, this is Mike Sarcona for MADD. Thanks for taking the question. Just a quick follow-up around the DTG expense, Dave. Could you elaborate a little more on kind of where specifically you're pulling back for next year?
spk12: Yeah, so a good portion of our spend this year is focused on getting us to a publication phase. So we, you know, we're obviously still recruiting the bipolar cohort, but the unipolar recruitment will be, is completed now. So there's savings in that portion. We're also scaling back sort of preparation investments for commercialization, which we expected towards the second half of this year. So, in large, it's really, you know, just getting us to a final CMS decision, which is what our primary focus in terms of our 2025 investments are currently targeted for.
spk03: Got it. Thank you. And then just, you know, another question on, OSA. I guess, how are you thinking about that strategically? And, you know, if it does come to the point where you're getting to commercialization, you know, what kind of investment spend do you have to have there, you know, to build out a commercial organization? Or just help us think about what that all looks like, you know, on the P&L as you get ready to maybe commercialize.
spk08: Sure, Matt. It's Matt. So, for OSA, you know, nothing's changed on the timelines. We're still In the follow-up phase, the seven-month data, again, one month plus six months of actual follow-up, we'll get that late in the year. That'll help, I think, directionally tell us where we are, because that's our primary endpoint, and that's what we will submit to the FDA. We also have to submit 12-month safety data, which is more around April 2025. And then also April 2025, we'll have the 12-month results. And that's really what I think will be the most likely comparator to the other two companies that have similar clinical trials in terms of length. So our decision is likely to come in the beginning of 25 when we get that 12 month data just to understand where we sit competitively. That'll have a big impact on where we expect to spend on the commercial side. So expect to see the more firm decision on that program. in early 2025. All right.
spk00: Thanks, Matt.
spk06: Our next question comes from Michael Pollack with Wolf Research. Please go ahead.
spk11: Hey, good morning. Thank you. I have a three-part follow-up on depression, so I'll just ask this one topic and then get back in queue. So on the unipolar data, when might we expect or when should we expect to see more of this data publicly? That's top question one. Two, on the path of CMS coverage, like timing, milestones, and as part of this decision to pursue coverage, have you had any preliminary engagement with CMS? If so, what does that sound like or look like? And then three, on the $40 million of net depression spend. So if I'm doing all the math correct for 2025, $20 million comes down to the bottom line, heard that loud and clear, which leaves another $20 million. Would it be fair to assume that $10 million of that is reallocated to epilepsy and cardiopulmonary intubation, and then $10 million is still needed to fund bipolar? Any color on that bridge would be great. Thank you so much.
spk09: So, this is Ahmed again. I'll try to answer your first two questions. First question was, when will you be able to see the data? So, what we are planning to do is that the pivotal trial data would be published in Q4 of this year. So, we will do the submissions, and at that point, you will have full access to the actual data from the primary and secondary endpoints. And our secondary analysis that we've done since June enabled us to produce really interesting results and we will submit them into for for publication. I can't speculate when they will be available to be public, but our submission plans are to be. to have them submitted in Q4, this additional analysis that I talked about. So, those are the two datasets. The primary data would be available in Q4 because the publications will be available, and the secondary analysis we have done, we will submit them in Q4. Now, in terms of CMS, the gating items are those publications. We do need to have those publications peer-reviewed, so that will be the scientific validation of the data. Once they're peer-reviewed and published, we will compile that data and submit to CMS. And in terms of timing, it'll be inappropriate for me to speculate CMS's timing.
spk12: And Mike, in terms of the capital allocation for DTD, you're right. We're targeting about $10 million of investment in DTD for 2025 and the $10 million balance reallocated to cardiopulmonary and epilepsy. Thank you so much.
spk06: The next question comes from Adam Meder with Piper Sandler. Please go ahead.
spk13: Hi, good morning. Thank you for taking the questions and congrats on the next quarter. Wanted to ask the first one on guidance and was just hoping to get some incremental color on quarterly cadence as we look to the back half of the year, both to the top line and EPS. And I show Q3 consensus revenue, I think of 297 million. Consensus EPS is 71 cents for Q3. You know, just any reaction to those figures and then I'd follow up. Thanks.
spk12: Adam, thanks for your question. Look, I think, you know, the street consensus looks reasonable for Q3. We don't guide quarters, but, you know, from my vantage point, Q3 looks very reasonable.
spk05: Maybe just to add one, so Adam, thank you for the question, and add a little bit of color to what Alex said, and also kind of go back to Rick's question on, I think you said the word conservative. We also made an assumption over the past few quarters, the industry witnessed a disruption from supply from the various competitors. And one of the assumptions that we've made in our view for the rest of the year is those competitors will come back on the market with a healthier supply. And obviously, that is maybe the element of conservatism in our view.
spk13: That's helpful color guys. Thank you for that. And then maybe just for the follow up, wanted to ask on the innovation front and curious if you can just give some more details in terms of what you're looking to improve upon in the epilepsy technology as well as cardiopulmonary. We found a couple of new trademarks for epilepsy that look interesting. you know, maybe just, yeah, anything you can share on kind of the plans to accelerate innovation there and what you're looking to achieve in the pipeline. Thanks.
spk05: Yeah. Adam, this is Vlad, and thank you for the question. I'll start and then turn it over to Ahmed. But, you know, as I said in my opening, innovation is, you know, one of the top three key priorities for us or enablers for our success. for me any great organization starts with great people. And so that has been a big focus of our leadership team is to bring in really top experts, top leaders on the innovation front. So we're very pleased that Ahmet made the decision to join us as Chief Innovation Officer. As I mentioned, Holly Grammar has joined us as VP of R&D for epilepsy. We have two really stellar leaders in global strategic marketing that joined us, you know, from with experience in really leading medtech companies prior to joining Livanova. And most recently we announced that Phil Kowalczyk is joining Livanova in August And Phil is joining us as head of strategy and business development. And again, incredible experience over many years in some of the eminent players in the tech industry. So, for me, the key focus was kind of complement our exceptional capabilities and scientists that we have at Livanova today. with new leaders that can really accelerate the innovation agenda.
spk09: So this is Ahmed again. As we are thinking about innovation in VNS therapy, just like any medical device, there's kind of three areas you can focus on. And this is general for medical devices, the safety of the device, the effectiveness of the device, and the convenience for both the patient and the physician in terms of how that device works. So, VNS therapy safety is well established. So, where we're focusing on is, are there things we can do to improve effectiveness? We have some ideas around improving the effectiveness. Obviously, they need to be tried. But where we have a real opportunity is the convenience factor for both the patient and the physician. And what I mean by that is that we are investing in accelerating our digitization of the therapy. we do want to work on things like remote patient programming, for example, that will have a significant improvement for both the patient and the physician as they use VNS therapy. So that will be on the neuromodulation side. On the CP business, very similar. There is a lot more we can do with the HLM system in terms of providing additional guidance, additional data to the perfusionist to achieve better outcomes. For that, we need to continue to accelerate our digitization of the HLM system as well. And we do see this as part of our ongoing innovation where we continuously upgrade Essence in terms of its performance. So Essence, as we move throughout the years, will have more and more benefits and feature sets as we digitize the technology.
spk06: Our next question comes from Anthony Petroni with Mizuho Group. Please go ahead.
spk01: Thank you, and congrats here on the quarter. Maybe I'll stick with a couple on guidance, one on CP. Maybe when we think about just some of the cost savings you laid out here in terms of just the depression path forward, maybe just to clarify as you engage in CMS, Paul Cecala, And bipolar still ongoing is their variability and timing as when a decision is going to be made from a commercial standpoint as to whether or not the company is going to pursue. Paul Cecala, This is a as a next indication in DNS so that would be one, in other words, what would be the variability going forward also from a bottom line perspective, whether costs are going up or down when the final decision is made on depression. And then on the CP business, maybe just a little bit in the second half guidance as it relates to the competitive landscape, maybe just an update there. It seems like the feedback from competitors is still that it's a little bit porous out there in terms of when they'll fully be back on to the market. So to what extent was the competitive landscape baked into the guidance for the second half for CP? Thanks.
spk05: Yeah. So why don't let me start, you know, with the first one on the CMS and the DDD decision. So right now our full energy is focused on partnering with CMS to get the reimbursement path forward. You know, and our commercial plans or our decision to build up, you know, you know, the commercial arm depends on that decision. So we will not ramp up any commercial activity until we get the CMS decision. So that's number one. On the second one, I think, you know, we've dialed in the return of the competitors. I think we don't want to make assumptions for our competitors, and I think it's healthy for the market if the market, has a healthy supply of products. And so we made an assumption that competitors are in full supply. If that doesn't happen and we have to step up, you know, there are two sides to that. One, obviously, an opportunity for us to grow faster. But the second one is also kind of a need for us to manufacture more. And at this point, like we've said in the previous calls, it's a two-step approach for us to improve our capacity. The first step is to take a current network and do better in terms of productivity with what we have today. And the original target for us was to go from the end of last year to the end of this year, a gradual improvement that would lead year-on-year improvement of 10% in terms of capacity, in terms of output. We're slightly ahead of the target right now, and that allows us to, you know, A, deliver lifesaving products to the market, but B, also accelerate our growth. The second step, which is more mid and long term, is we're looking at our manufacturing strategy and network strategy that will allow us to build significant yet flexible capacity moving forward. so that even if there are disruptions in the market, that, you know, our customers are receiving products. So that, I think, is more 25 and beyond.
spk01: Thank you. I'll hop back in.
spk06: Our next question comes from Mike Mattson with Medium and Company. Please go ahead.
spk10: Yeah, thanks. You know, just given the, TAB, Mark McIntyre, European Court of Justice decision, I know it's going to be moving to the tide spring quarter that'll be the next and final step, but can you just remind us on your balance sheet, I think you have cash to completely fund this. TAB, Mark McIntyre, But. TAB, Mark McIntyre, You know what I think you've also been excluding the interest expense so can maybe quantify what that would be either in terms of dollars or ups if you did have to start or stop excluding it from your from your adjusted earnings. And then, you know, I just want to see if you're comfortable with the cash balance you'd have, you know, once that is paid out, or would you want to maybe raise additional capital at that point?
spk12: Yeah, thanks for your question, Mike. So let me just make sure that we're clear on sort of the background of the ECJ decision. So in 2022, the Italian Supreme Court referred a question related to the European demerger laws to the ECJ. So, you know, the ECJ decision is focused on the EU demerger laws. It is not a ruling on Livanova, right? So it's up to the Italian Supreme Court to apply the ECJ decision to Levanova's decision as it works on the appeal process from us. So as Ladd said, we were disappointed by the decision, but the judgment really now goes back to the Italian Supreme Court to decide. As we've said, the timing on the decision from the Italian Supreme Court is uncertain. But we don't expect that until 2025. Now, as it relates to our capital that we've set aside for a potential negative ruling, we have 270 million euros or $300 million that's sitting in our restricted cash balance. We also have operating cash of roughly $330 million. And then we have access to $225 million in a revolver, which remains undrawn. So we have plenty of capital to deal with a, you know, potential demand for payment if it goes against us. Now, your final question was related to the interest expense. So the interest expense kind of on a gross basis is roughly $27 to $30 million on an annual basis. Now, today, we actually generate interest income that's related to the bank surety, this guarantee that's sitting in restricted cash. So that's roughly, call it $16 to $19 million. So the net range impact today is around $10 to $12 million. And that's, you know, if the ruling went against us, and we'd obviously be dealing with the interest expense as part of our, as part of the operating EPS, and we wouldn't be able to generate the interest income that I just described. Does that make sense?
spk10: Okay, got it. Yeah, yeah. So the change would essentially be the 10 to 12 million annually, roughly. The net change, if you have to pay it, in terms of what's hitting your EPS.
spk12: The net interest impact would be $27 to $30 million on the pre-tax basis, right? We wouldn't be getting the benefit of the interest income that we generate today on the bank guarantee.
spk10: Okay. All right. Got it. And then just in the epilepsy business, I mean, it's good to see that the business has kind of recovered into the high single digits. But, you know, that market is really underpenetrated. You know, there's a lot of folks out there where the drugs just aren't working well. And, you know, I've always wondered why that business can't grow even faster. So I guess question for Vlad, just I know that the business is headed in the right direction and there's been some changes made in the past in terms of how the products are sold and whatnot, but are there any additional strategic changes that you could potentially make there to drive even faster growth in epilepsy?
spk05: Yeah, no, it's a great question. And again, I'll maybe take it in two steps. One step is what can we do better today with the current portfolio and accelerate our growth. And that really comes down to two things, which you said correctly. You know, one is penetration, procedure penetration. Today, procedure penetration is below 5%. And obviously, there are other analogs in MedTech that are similar to this. And really, you know, education, patient awareness, clinical evidence, real-life evidence, you know, various market access activities around the world, they will help to continue to drive this procedure penetration up. So, you know, there's a playbook on how to do that, and we're very much focused on that. That is our number one driver. The second one is, and Ahmed alluded some to that, is once we make product, Once we bring new innovation to our current platform that will make the adaptional of the procedure even easier, you know, that is the second goal driver. And then the third one for me is then looking at the second step beyond our current portfolio, and this work is ongoing right now, is are there other ways for us to expand our portfolio in epilepsy or in neuromodulation. And that is when I refer to kind of our work in terms of what's next in terms of areas of high unmet clinical need and the high growth markets. So we intend to finish that work by the end of this year.
spk10: Okay, great. Thank you.
spk06: Our next question comes from David Resco with Bayer. Please go ahead.
spk02: Oh, great. Thanks for taking the questions. I just wanted to clarify that prior comment just on the difference between what the total kind of net interest income is versus the net interest income specifically toward that restricted cash. But my first question was going to be generally on Italy and the Italian litigation and that $6.6 million number that was in their pullout of net revenue. Just curious, If that's something that should be repetitive, meaning is that a net amount that should come out on a quarterly basis going forward? And then the second part to that entire kind of question here, you know, is on this 453, I think, was the euro number. Is that kind of the cap or max amount, or is there potential for higher liability associated with Italian kind of sentiment?
spk12: Yeah, so let me just take this in parts, David. Let's start off with this Italian payback measure. So we took a provision in the quarter. It's related to a recent ruling that was issued by the Italian Constitutional Court. So this is a MedTech industry issue goes all the way back to 2015. It's been litigated in Italian courts. Basically, what it is is the law that requires companies selling medical devices in Italy to repay a percentage of healthcare expenditures exceeding regional maximum caps. for medical devices. So this translates to anyone, any medtech company that participates in the Italian market. So we took a true-up provision of $6 million in the quarter. As I said, this is a true-up going back to 2015. So we have been accruing sort of, you know, on an ongoing basis, but this ruling sort of clarifies what, you know, what sort of level of provision that's required. So it's going to continue, but it's going to be a much lower rate on an incremental basis as we move forward. So that's on the Italian payback measure. Now going back to your clarifying question regarding the capital and the interest expense related to the SNEA litigation. So if you look at our balance sheet today, we have capital reserved sitting in restricted cash that's related to the bank guarantee, which was related to the appeal that we filed several years ago. And so that's the portion that is currently earning interest income, right? So if we were to pay this out, if there was a payment amount that was similar to what the lower courts or the Court of Appeals ruling was, which was 453 million euros several years ago. Obviously, that portion of cash would go towards that payment. We wouldn't be earning that interest income. So what we would be left with is interest expense. with an annual interest expense of 27 to 30 million dollars, which would be impacting, we would then include that as part of our operating earnings as we move forward because it would be part of our permanent capital structure. Does that make sense?
spk02: Yes, that's helpful. And then just on the 453, is that, based on your understanding, a capped or max amount, or is there additional pieces of that ruling that suggests that could go higher? Thank you.
spk12: Yeah, I'm not going to speculate on the amounts and the caps. I mean, that's a number that we know. The Court of Appeals ruled against us back in 2021. So, you know, that's really the number that we're sort of zeroed in on, but I'm not going to speculate on whether this is a, you know, a cap on the liability.
spk06: Our next question comes from Matt Mixick with Barclays. Please go ahead.
spk04: Hey. Matt, we cannot hear you. Good morning. I'm sorry about that.
spk05: You're on now.
spk04: Can you hear me now, Vlad? Oh, terrific.
spk05: Yes.
spk04: Thanks so much. Sorry about that. I'm just juggling calls here. William Boschelli, M.D.: : wanted to get a sense of. William Boschelli, M.D.: : On the core businesses. William Boschelli, M.D.: : Maybe as the exit this year and into next year, the kinds of investments, the kinds of actions, you can take you mentioned innovation and optimizing performance, particularly in the epilepsy business and I one quick follow up if I could.
spk05: William Boschelli, M.D.: : I mean I go back to kind of. the first imperative, and that is to maximize our performance in cardiopulmonary and epilepsy businesses. And success for me in those two businesses would mean to, in a sustainable way, grow faster than the market in both of those businesses. Look, and then I think the levers are pretty straightforward, you know, for cardiopulmonary, it's to continue to accelerate upgrade to essence. It's to bring our service and our software upgrades quality to benchmark. And then finally, you know, we have a significant opportunity to gain share in disposables and, you know, leading with oxygenators. And, you know, if you ask me where the key investments are going, I would say one is in commercial excellence across the world. Number two is in our ability to manufacture more products and supply the market in an uninterrupted manner. And number three, Ahmed talked about innovation. So I think those three levers will enable cardiopulmonary business to continue to grow faster than the market. And, you know, we're starting from the position of strength, which really makes me confident in our future there. epilepsy business. And again, our investments are heavily going into driving procedure penetration. So we're really focused on market access, on clinical evidence, on education, on one hand. And on the other hand, again, Amit talked about our innovation pipeline. And with Holly Grammar now on board, you know, she has a tremendous track record as an R&D leader in various businesses and technologies. And, you know, we count on her to come in and really help the team to accelerate our innovation. And so those are really the, that's kind of the areas of our key investments on both CP and Neuromod.
spk04: Thanks so much, Vlad. And it just, One follow-up, if I could, on some of the decisions you're making around specimens. You talked a bunch about them on the call. It sounds like, you know, as you've described, that the sleep apnea decision will come maybe a little further than originally, at least we had hoped. So, from this late this year into early next year. And I guess maybe help us understand the metrics of that decision. Just if you're about to open the 12-month safety data and try to make a decision, what are the key aspects of your program that you're looking for to decide whether you're going to move forward with that or reallocate that spend to something else in the portfolio? And thanks again for taking the time.
spk05: Thank you. Thank you for asking the question, Matt. And I'll start and then I'll turn it over to Matt to build on this. But first of all, let me start with obstructive sleep apnea is a massive unmet need. And this is the population that's growing and then the market that's growing. There's obviously, as you know, is one big player in the market today, and I think there's you know, massive opportunity for a number of companies to come in with innovative technologies and participate in that market. So I think the market is attractive, the space is attractive. And if you like, the fact that there's one competitor there makes it even more attractive to be in that market. Ultimately, our decision on how to enter this market is going to depend on the clinical results. And what we count on is equivalent or better clinical outcome to the current standard. And the degree of that difference will determine our commercial strategy. So I'll turn it to Matt maybe on some of the comments, maybe bring a little bit of color to my comments.
spk08: Sure. And Matt, nothing's changed on the timeline. Remember, our trial is randomized. The other two trials, competitor trials, were not. That's the data we're going to get at year end, six-month randomized data. But if you truly want to look head-to-head, and in OSA, it's much more simple than DTD. It's really age, eye reduction is the focus. We're going to have the 12-month data of therapy arm in April of 25, and that'll really tell us how competitive our data is versus the competition. And, you know, there's a meaningful swing there in terms of superior, in-line, inferior. And we'll also look at some of the subsets, including complete concentric collapse, which only our trial looked at those patients. So it's going to be two sets of data. I think the original data will be very informative, but in terms of the ultimate competitive profile, again, April 25 is when we'll have a lot more information. And then also, you know, we're building out our technology roadmap there as well. in terms of how we become more competitive and ultimately hopefully pass the competition on the actual technology side.
spk04: Great. Thanks so much for the color.
spk06: We have no further questions, and so I'll turn the call back to Vladimir Makasaria for closing remarks.
spk05: Emily, thank you. You did a great job facilitating the call. And thank you to everyone for joining today's call. On behalf of the entire team, we really appreciate your support and interest in Livanova. Have a great day or evening ahead. Bye-bye.
spk06: Good. Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.
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