LivaNova PLC

Good day, ladies and gentlemen, and welcome to the LevaNova PLC Third Quarter 2024 Earnings Conference Call. My name is Lydia, and I'll be your operator today. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Matthew Dodd, LevaNova's Senior Vice President of Corporate Development and IT. Please go ahead, sir.

Thank you, Lydia, and welcome to our conference call and webcast discussing LevaNova's financial results for the third 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, Ahmet Tezel, our Chief Innovation Officer, Stephanie Bolton, President of Global Epilepsy, and Brianna Gotland, Director of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any forward-looking statement. Also, the discussions will include certain non-GAAP financial measures with respect to our performance, including but not limited to 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 presentations at investor.livanova.com. With that, I will turn the call over to Vlad.

Thank you, Matt, and thank you everyone for joining us. Welcome to Livanova's conference call for the third quarter of 2024. Our 11% revenue increase marks the seventh consecutive quarter of double-digit growth. Our performance is well balanced across geographies and business segments with 12% organic revenue growth year to date. Geographically, we achieved 15% in the U.S. and 9% in the Europe and rest of the world regions. By business, we achieved 15% in cardiopulmonary and 9% in epilepsy. This strength is supported by the following key growth drivers. our markets remain healthy with both cardiopulmonary and epilepsy procedure volumes estimated to be growing mid-single digits. Second, we gain market share by our commercial execution and ability to supply cardiopulmonary consumables. We estimate our oxygenated market share percentage has grown from the low 30s in early 2023 to the mid-30s today. contributing more than 100 basis points of growth year to date. Third, we've leveraged pricing strategies in epilepsy in cardiopulmonary consumables, which contributed approximately 300 basis points of growth year to date. And finally, we've benefited from a successful essence launch, which contributed approximately 400 basis points of growth so far this year. On the innovation front, We're pleased with the progress we have made in our cardiopulmonary and epilepsy pipeline development, as well as in difficult-to-treat depression and obstructive sleep apnea programs. In difficult-to-treat depression, or DTD, we continue our efforts in pursuit of CMS coverage. If any reimbursement is granted, it could represent a transformative opportunity for critically ill patients with DTD while further diversifying our portfolio. In obstructive sleep apnea, or OSA, in November we expect all patients to complete seven months of follow-up for primary endpoints for safety and effectiveness. These growth drivers, our innovation agenda, and focus on talent support the sustainability of above-market growth. For the remainder of the call, I will discuss our third quarter results, and after my comments, Ahmed will discuss our innovation pipeline, and Alex will then provide details on our results and updates for 2024 guidance. I will wrap up with closing remarks before moving to Q&A. In the quarter, we achieved 11% revenue growth versus the prior year. Excluding the impact of the ACS segment wind down, revenue increased 12% versus 2023. This growth was achieved while also significantly expanding operating margin. Based on these results, we are increasing our 2024 four-year guidance. Now turning to segment results. For the cardiopulmonary segment, Revenue was $172 million in the quarter, an increase of 15% versus the third quarter of 2023. Hard long machine revenue increased over 20%, driven by a sense. We are pleased to see a sequential increase in essence placements and continuing strong price mix in the quarter. As a point of reference, We expect Essence will represent approximately 40% of our annual HLM unit placed in 2024. Oxygenator revenue grew approximately 15%, driven by customer demand and price. The oxygenator business continues to see strong demand outpacing global supply, and our efforts to increase manufacturing capacity remain on track. We now expect cardiopulmonary revenue to grow 13 to 14% for full year 2024. Our revised forecast incorporates strong demand for consumables and continued HLM growth despite difficult comparisons versus the fourth quarter of last year. Now turning to epilepsy. Revenue increased 9% versus the third quarter of 2023. U.S. epilepsy revenue increased 10% year over year. Versus prior year, we achieved approximately 10% growth in new patient implants and realized about 8% growth in replacement implants. Epilepsy revenue in Europe and rest of world grew a combined 3% versus prior year, with double-digit growth in rest of world offset by a decline in Europe. For the full year, 2024, we now expect global epilepsy revenue to grow 7 to 8%. Our 2024 forecast continues to incorporate mid-single-digit growth for U.S. new patients and low to mid-single-digit growth for U.S. replacements, which assumes U.S. replacements volume to be flat beginning of the fourth quarter. We now expect the combined Europe and rest of world regions to grow in the low single digits. With that, I will turn the call over to Amit to discuss our innovation pipeline.

Thank you, Vlad, and good morning. As Vlad mentioned, innovation is a key growth driver for Livanova. Since I joined in May, our innovation community has focused on four key areas, which are processes and governance, operational model, talent, and our innovation culture. We targeted these areas to drive our core portfolio roadmap while we simultaneously advance our depression and OSA programs. Let me provide a few examples, starting with our CT business. Furthering our leading market position in heart-lung machines Essence will serve as a foundational platform for our future innovation, particularly around future upgrades, including data capture and analytics. For example, we're investing in our inline blood monitoring capabilities, utilizing sensor technology. This is designed to deliver additional real-time data to guide the perfusionist during the procedure to further optimize patient-tailored outcomes. In our consumables business, we are developing a next-generation oxygenator with a unique design targeting a best-in-class feature set and performance standards. In epilepsy, we're focusing our work on the next-generation VNS therapy system that includes enhanced features such as connectivity that enables remote programming, offering value to both patients and physicians in a connected environment. Similar to CP, we are also investing in data capture and analytics, which has the potential to combine treatment, detection, and prediction of seizures to improve patient outcomes. In difficult to treat depression, we continue our efforts in pursuit of national coverage by CMS. We expect five critical publications over the coming months. the first two pivotal manuscripts on the unipolar cohort data from the RECOVER study should be published in a peer-reviewed journal this quarter. These publications will provide details on the primary and secondary endpoints of the study. Based on the subsequent index analysis, we anticipate the next three supporting manuscripts will be submitted in the fourth quarter and are expected to be published in the first quarter of 2025. We look forward to discussing the findings with CMS to define a path forward for coverage for critically ill patients with difficult to treat depression. Once all manuscripts are published, we will make a formal request to CMS for coverage. In OSA, we are encouraged by the early stoppage in enrollment of the OSPRI study in March. which was based on a determination that there is a 97.5% or greater chance that there will be a statistically significant result in the primary endpoint for effectiveness. We continue to expect all patients to reach seven months of follow-up in November, and this is, again, the primary endpoint. This data is part of our PMA submission, which is expected in the first half of 2025. In summary, we are pleased with our progress in core innovation as well as difficult to treat depression and OSA programs. With that, I will turn the call over to Alex.

Thanks, Amit. During my portion of the call, I'll share a brief recap of the third quarter results and provide commentary on 2024 guidance. Turning to results, revenue in the quarter was $318 million. an increase of 11% versus 23. Excluding the impact of the ACS segment wind down, revenue increased 12% versus 2023. Foreign exchange in the quarter had a negligible year-over-year impact. Adjusted gross margin as a percent of net revenue was 71% in line with the third quarter of 2023. Adjusted R&D expense in the third quarter was $47 million compared to $42 million in the third quarter of 23. R&D as a percent of net revenue was 15% in line with the third quarter of 2023. The year-over-year increase on the dollar basis included a one-time charge associated with the DTD program, as well as higher investments in the epilepsy business. This increase was partially offset by the closeout of the heart failure trial and the wind down of the ACS segment. Adjusted SG&A expense for the third quarter was $116 million compared to $115 million in the third quarter of 2023. SG&A as a percent of net revenue was 37% as compared to 40% in the third quarter of 2023. The year-over-year decrease of the percent of revenue was driven by improved operating leverage and was favorably impacted by the wind-down of the ACS segment. Adjusted operating income was $64 million compared to $45 million in the third quarter of 2023. Adjusted operating income margin was 20% compared to 16% in the third 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 23% compared to 10% in the third quarter of 2023. The increase is related to developments in the global tax landscape. Looking ahead, we're anticipating a 24 to 25% effective tax rate in 2025, driven by geographic mix and the phase out of tax attributes that have contributed to our historically low effective tax rate. Adjusted diluted earnings per share was 90 cents compared to 73 cents in the third quarter of 2023. Our cash balance at September 30th was $346 million, up from $267 million at year end 2023. Total debt at September 30th was $626 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 the $230 million of convertible senior notes. Net debt, including restricted cash at September 30th, was $61 million. Adjusted free cash flow for the quarter was $47 million, up from $26 million in the prior year period. The year-over-year increase was primarily driven by stronger operating results and working capital improvements. Capital spend was $37 million in the first nine months of 2024, compared to $22 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 Vlad mentioned, based on our performance in the third quarter, we're increasing our full-year 2024 guidance. We now expect 2024 revenue growth on a constant currency basis between 8.5% and 9.5% and between 10% and 11% when excluding the portion of the ACS business that we are exiting. Foreign currency impact is expected to be negligible based on the current exchange rates. We forecast a full-year adjusted effective tax rate between 21% and 22%. We project adjusted diluted earnings per share in the range of $3.30 to $3.40 with adjusted diluted weighted average shares outstanding to be approximately 55 million for the full year. Our forecast contemplates higher operating expenses in the fourth quarter compared to quarterly run rates year to date. This includes higher R&D investments based on our plans to accelerate innovation. Additionally, we expect SG&A to peak in the fourth quarter of 2024, driven by commercial activities to support growth and enabling infrastructure for scalability. Adjusted free cash flow is now expected to be in the range of $110 million to $130 million, an increase of approximately 25% 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. In summary, I'm pleased with our team's continued execution, which has led to consistent growth and margin expansion. We remain well positioned to deliver our financial commitments in 2024, including more than 400 basis points of operating leverage, over 40% growth in adjusted operating income, and approximately 20% growth in adjusted diluted earnings per share, despite the significant step up in our effective tax rate. With that, I'll turn the call back over to Vlad. Thank you, Alex.

To conclude,

We're pleased with the progress we've made over the first three quarters of this year, including double-digit revenue growth and significant operating margin expansion. Importantly, this performance was achieved while positioning Livanova for future success. Our growth is supported by strong business drivers, as well as well-balanced across geographies and the portfolio. This foundation gives us confidence in the sustainability of our cardiopulmonary and epilepsy businesses. Additionally, we continue to make progress on our innovation efforts in the core as well as the DTD and OSA programs. We look forward to building on this momentum in the fourth quarter and in 2025, driven by our continued focus on performance, innovation, and talent. Finally, our success would not be possible without the strength of our team's ongoing execution and steadfast commitment to serving customers in their patients. And for that, I say a big thank you. With that, Lydia, I will turn it over to you for questions.

Thank you. If you have a question at this time, please press the star, then number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star followed by two. As we enter the Q&A session, please limit yourself to one question and one follow-up, and then return to the queue if you have any additional follow-ups. Our first question today comes from David Roman with Goldman Sachs. Please go ahead. Your line is open.

Thank you, and good morning, everybody. I wanted just to start, Vlad, maybe on a higher-level strategy question and then I had a follow-up related to the outlook for the balance of the year. You've been in the CEO role kind of a year when you kind of get into 2025. And can you maybe just help us reflect a little bit on how you're approaching portfolio management and maybe more specifically as it relates to R&D deployment and the balance between investment in some of the higher risk programs like DTD and OSA versus incremental innovation to support continued share gains and momentum in the core business.

David, good morning, first of all, and thank you for the question. Yeah, it's been just over seven months, I think, and look, I think, first of all, kudos to the team that made some really strong portfolio decisions before I arrived, which was really to focus and refocus our portfolio in the areas where we have better execution and have the right to win. So I think wind down on ACS is an example of that, one of those decisions. The way I kind of look forward. And we are in the middle of working on the longer-term strategy to shape how Livanova is going to look for the next decade. And, you know, we look forward to communicating that strategy in 2025. But I think the key chapters within that is, number one, is maximize our core businesses, epilepsy and cardiopulmonary. And we are Like Alex said, we are reinvesting into the core R&D and making sure that those businesses have sustainable innovation pipeline. You see that not just in dollar investments, but also in investments in the human capital. Number two is, you know, setting directions for GTD and OSA. And like Ahmed said, you know, we're pleased with the progress. We're waiting for kind of the reimbursement piece on the GTD and then on the clinical data for OSA to make further decisions. But on the GTD front, for example, we freed up, we're freeing up some of the investments planned for next year. you know, dropping some to the bottom line and reinvesting some back into the core. And then the third chapter would be what's the next growth portfolio for Livanova, getting in a faster growth market in the markets where there's significant unmet clinical need, but also in the markets where we have the right to win, leveraging either our commercial or R&D capabilities. And like I said, I look forward to communicating that and getting the feedback from the investment community in 2025.

Great. Appreciate all the detail there. And maybe, Alex, just a follow-up here, trying to put some of the pieces together with the commentary around the momentum in the business, what you've seen year-to-date, and the kind of guidance for the rest of the year. Can you maybe help us think through kind of the assumptions here and on the fourth quarter, and is there anything specific related to maybe timing of capital sales or any other drivers that would produce kind of the implied slowdown in revenue growth in Q4, as well as kind of the sequential step down in earnings, and then any initial comments that you're willing to offer on how we should think about that as setting the base for 2025?

Thanks for your question, David. So, you know, seen tremendous performance in the first three quarters of the year. The slowdown in revenue that we're contemplating is really a function of our strong performance in the fourth quarter of 2023. If you recall, we had accelerated our placements of essence in the fourth quarter. This was related to the launch of the the additional software that we were working on throughout the year. So it's really a comparisons issue that appears to be showing a slowdown in growth. The fundamentals are there. We're well positioned to deliver on continued performance for the balance of the year. As far as the margin component goes, it sort of goes hand in hand with the revenue commentary. we are investing on an sort of incremental basis in the fourth quarter relative to our run rate over the first three quarters of the year. And that's really just sort of positioning ourselves to continue to drive growth at about above market rates, right? So we're investing in innovation programs. We're trying to accelerate our our sort of core portfolio in CP and epilepsy. And, you know, we're still continuing to invest in DPD and OSA. So that's the response on the margin.

Okay. And sorry, are you willing to make any comments as it relates to kind of 2025? I think you had made it in some public forms, setting sort of some view around high single-digit growth or the comment about above-market growth. If markets are kind of mid-single digits, is that a reasonable starting point for next year, that high single-digit growth number? Or how should we think about 2025? And then I'll jump back in queue.

Yeah. So, David, at this point, we will not give any indication for 2025. And as for the comments about high single-digit growth, The comments I made, and I kind of went through the growth drivers that we have in a similar manner that I tried to do in my opening comments. And, you know, those levers of growth, if you like, their market growth and. Kind of in 2024, we see a very healthy, maybe a bit above what we expected in terms of market growth. Pricing is the second lever that, you know, continues to be driving our growth. The third lever is continuous upgrade of our equipment fleet to essence. And so that's another major growth driver that will continue into next year. And then finally market share and here Kind of on the plus, we would see, you know, we anticipate to see continued market share gains in our CP disposables. On the minus, what we also anticipate is the slowdown in the replacement procedures for epilepsy. So, my comment in that forum was saying, you know, if all those levers, fire in a positive way, we will be looking at, obviously, at a high single-digit growth. But there will be, I'm sure there will be some, you know, ups and downs as well in terms of the levels.

Understood. Thanks for indulging the extra follow-up.

Our next question comes from Rick Weiss with Stiefel. Please go ahead.

Good morning, everybody. And nice to see a really solid quarter. Very impressive. Thank you. I want to dig into two things. First, Vlad, for you, maybe you can unpack with a little more detail the oxygenator outlook. Talk to us about any update on the competitor return to market or not, or you're thinking about it. Maybe give us a little more color about your capacity, which you talked about being you're sort of on track for your capacity expansion. Where are we in that process? And again, just the sustainability of this excellent performance in this story into next year.

Thank you. Thank you for the question. So maybe just a step back on Why are we facing the situation of market constraint or supply constraint in the oxygenators? It really is driven by two factors. You know, one is the procedure growth we estimate is above historic average and above what we anticipated for this year as an industry. What is driving this is, first of all, growth of procedure in emerging markets, which by nature, you know, the starting point is low penetration of cardiovascular procedures. And so that's probably the biggest driver that we see in terms of procedures. And from that point of view, I don't have any indication to kind of assume that the market will slow down. You know, we see a healthy growth. of the market and reaching more patients. The second factor that contributed to this deficit of products is that the entire industry is kind of, because of the way we plan for market growth and it's faster than kind of we planned, the entire industry is facing capacity constraints. and you know to the to the benefit of our business we were able to grow the capacity in 2024 in our estimate better than some of our competitors um and so from our point of view our first step was to do better with the in terms of productivity with the footprint that we have today and we are on track to achieve a 10 percent at least 10 percent uh volume growth in terms of manufacturing output from the end of 2023 to the end of 2024. And it's been a gradual increase throughout the year. And so we've learned a lot and we still have some room to keep improving that beyond kind of the end of this year. So, and keep driving our productivity. The second factor that is influenced in this year is that they're kind of on the competitive side, we don't see any movement in terms of improvement. So we see the capacity constraint and kind of flat supply, if you like, of oxygenators on the market overall outside of Levonola. Again, if this continues, it gives us additional opportunity in 2025 for continued gain of share. But for us to achieve that, you know, beyond just improving the productivity with what we have today, we are also looking in terms of how do we expand our capacity for the long term. And that has two factors in it. One, launch of new products that Ahmed talked about, and B, continued supply of our legacy oxygenators. So the team is developing and designing a plan to build that long-term capacity. Alex, maybe you can have a few.

Rick, I would just add to your second question about the competitor dynamics. Our understanding is that our major competitors resumed full operations in the U.S. and increased, have increased supply in several countries around the world. You know, despite that, we see that the customer demand is continuing to outpace global supply. In fact, we're still, we still remain in the back order. So, we feel pretty good about, you know, how the market is shaping up for the quarter and into 2025.

That's great. Maybe for Ahmed, as my follow-up question, Amit, you highlighted your, I think, very thoughtful, well-articulated plan and outlook and the innovation progress you're making in each of the areas you detailed. Maybe help us understand from an innovation perspective what the timelines associated with some of these initiatives. I know it's not perfect, but I mean, are these, are we going to see Robert Marlayson, These interesting products with data capture and you know some of the attributes you talked about starting in 25 or no, this is going to take two or three years. Robert Marlayson, And maybe specifically on DTD you're saying once all the publications are out there you'll request them as as coverage any updated thinking about potential timing there as well, thank you.

Good morning, Rich. So, maybe I'll start with the depression piece. So, it is hard for us to predict the timelines with CMS. You know, the general rule of thumb is from the point that you do your formal application, it is about a year. But there's definitely some variance there. What makes us hopeful is that this patient cohort has a very high unmet need. There are not a lot of alternative therapies, so we believe that will help us collaborate with CMS Quickly, we believe, because there is no alternative therapies. That CMS primary purposes to serve this patient population. And they will look at the data with us together quickly, but generally. The rule of thumb is about a year we will as I outline, we will initiate that process right after. The final publications, which we anticipate in early parts of 2025. In terms of overall timelines for competitive reasons, we don't share our timelines. However, many of the programs that I mentioned, they are not what I can share. They're not early stage, early feasibility programs. They are mid to late development programs. But beyond that, I don't want to share timelines with the exception of stating that these are not discovery research. They are not very high-risk programs. They are engineering execution programs. Sorry. Oh, do you want to make a comment on the OSA? And OSA, so we will have our primary endpoint is the seven months for both effectiveness and for safety. We will have our last patients exit the study from that primary standpoint and primary endpoint standpoint in early November, and then that data will be utilized for the PMA submission, and we plan to have a press release in November with the preliminary top-line data of the seven-month safety and effectiveness endpoints for OSA, and move forward with our PMA application in the first half of 2025.

Thank you very much.

Our next question today comes from David Rescott with Baird. Please go ahead.

Oh, great. Thanks for taking the questions and congrats on the quarter here. Wanted to follow up a little bit more on some of the 2025 comments, more so on the EPS kind of margin expansion line. I think you called out 20% plus EPS growth this year. You have a benefit from some drop through from prior trials. A little bit of a tax headwind this year as well. It sounds like there might be an incremental, maybe even smaller tax headwind next year or also this year, the DTD program kind of dropping through as well. So can you help us maybe think about how some of those pieces play out next year as well as just the ability to expand margins, grow margins above whatever that top line growth number shakes out at?

Yeah, so thanks for your question, David. Again, it's premature to talk about 2025 guidance. Our stated goal has and will continue to be to grow our margins faster than our revenue base. That is our objective as we move into 2025. We started our our modeling on on the tax rate. That's why I highlighted that in. In my prepared comments, we started looking at our geographic mix around. You know, the statutory tax rates, and hence I wanted to provide that. to grow our margins at a faster pace than revenues in 2025.

I guess to clarify, would the margin growth above revenue be inclusive or exclusive of the DTD kind of drop-through?

It would be inclusive of DTD drop-through as business, which we're exiting this year.

And then, you know, maybe on DTD, it sounds like, you know, heard the comments there, sounds like maybe at least at the margin, you know, slightly more positive sounding, at least in our view, on the potential for that program, you know, to play out. So, can you just maybe help us think about some of the scenarios there around what the data, you know, should bring about, the submissions to the FDA or the CMS, sorry, and how you're thinking about, you know, that program, again, on a relative basis to maybe what some of the comments were earlier this year. Thank you.

Sure. This is Ahmed. So, I mean, there's a few key points that makes us fairly optimistic. One is something that I mentioned earlier. This patient population has a very high unmet medical need that doesn't have other therapies available to them today that works. For example, in our patient population in the study, mean duration of depression was more than a decade. The mean number of failed therapies was more than 10. So the fact that there is a very high unmet medical need is something that CMS would like to resolve for. So that is one reason that we are feeling optimistic. The second is When, you know, we disclose the primary and secondary endpoints, if you recall, while the primary endpoints weren't met, certain secondary endpoints were met. And we know that CMS looks at the totality of the therapy and the trial. They do not single out, for example, just looking at the primary endpoints and moving on to the secondary endpoints if those are successful like an FDA trial does. And then the third piece is that we have done secondary analysis and tried to answer key questions like why did the control arm perform better than anticipated? Why was the placebo effect better than anticipated? And are there certain subgroups and cohorts that respond differently? So, when we looked at everything and worked with experts in the world that have worked with CMS in the past, That's why we decided to pursue our path. And once the publications are out, that is the strategy that we will take and initiate our formal application with CMS. So, just to summarize, the fact that there is a very high unmet medical need, the fact that in our trial, we were able to demonstrate that VNS therapy has a very positive impact on this very ill patient group. We are feeling optimistic to progress with our application to CMS.

Great. Thank you.

Our next question comes from Michael Pollack with Wolf Research. Your line is open.

Good morning. I have a question on U.S. epilepsy. How do you handicap here into next week the prospects of getting the coding moved up to level six payment? And if that were to be achieved, how would you frame the impacts for us next year and beyond? Is there a price opportunity if that were to happen? Is it more you'd expect volume to react positively because procedure economics improved? Any puts and takes provisionally would be helpful.

Sure. Thanks, Mark. So, sort of on a wider scale, Levenover has had a reimbursement strategy in place for a number of years, and being able to support our drug-resistant patient access to our therapies has obviously been central to that mission, and Level 6 is very much part of that. A couple of points on the process. So, while CMS is not obligated to follow the hot panel recommendations, We're very encouraged to see the unanimous support of our requests. To come to sort of how we quantify the potential impact, there are a number of different factors involved here, but we do believe that it will make a meaningful difference to implants and centres due to largely retiring economic headwinds faced by centres prescribing BNS to Medicare patients. Over time, what we hope to see is that the increase in reimbursement will drive greater BNS therapy utilization to this very underserved drug-resistant epilepsy population. From a pricing standpoint, we intend to continue with our annual inflationary price increase strategy. But obviously, level six will give us the potential for greater flexibility with future innovative products, which are in our pipeline.

And then just maybe what you said, Michael, it's a great question. Just to add this as well, if you step back just from the clinical unmet need, you know, there are over a million patients with drug resistant epilepsy there that are untreated today. And while, and the procedure penetration, if you look at that patient population is very low, it's below 5%. So, there's still significant opportunity to grow the procedure penetration. And one of the barriers to that growth is reimbursement. And so, if the improvement and reimbursement were achieved, That will obviously unlock, it won't solve the complete puzzle, but it will unlock a very important barrier for us.

Thank you. Quick follow-up, another fishing expedition for 2025. I want to keep it simple. You're raising 2024 EPS by 20 cents at the midpoint. if I just knew that, you know, next year's number might be biased higher by 20 cents, but tax rates going to step up again. If I do the math on Alex 24 to 25%, it's another, it's a 15 cent headwind. So, so the raise this year, plus 20, the tax rate coming up minus 15, it kind of, it kind of leaves the street unchanged, maybe up a nickel 365, 370. That's 10% EPS growth year on year off this new 24 EPS base. Um, How does this sound? Thank you.

I appreciate the fishing expedition, Mike. I mean, you're always good with your modeling, so I'll just leave it at that.

Okay. Thank you.

Our next question comes from Adam Maeder with Piper Sandler. Your line is open. Please go ahead.

Hi, good morning. Thank you for taking the questions, and congrats on the nice quarter. One quick clarification for me on DTD. Just wanted to confirm that there's no change to your plans for the cost savings next year. I think you talked about $20 million plus of pre-tax cost savings. That will go back into models in 2025 on last quarter's call. So is that correct? And then I had a follow-up. Thanks.

Adam, that is absolutely correct. 20 million pre-tax drop-through on 2025 earnings.

Okay, perfect. Thanks for that, Alex. And then I wanted to pivot over to obstructive sleep apnea. So, you know, it sounds like we'll get the seven-month data in November. I guess the question is, what do you think is a good result for your hypoglossal nerve stimulation technology? Obviously, we have this 97.5% predictive probability of success that's hanging out there, but what's a good result in your opinion? What do you need to see to kind of ultimately push the program forward commercially? And how do we think about the importance of the seven-month data that we'll get in November versus maybe the 12-month data that we'll get in the first half of 25? Thanks for taking the questions.

Yeah. Adam, thank you for the question. So, I'll start and then Ahmed can maybe help build on that. But if I step back and see what success looks like, I think it all starts with the clinical data first, right? And what success from that perspective would look like is a competitive data to the current standard of care in the neuromodulation treatment of OSA. What we also know from the previous research is that the clinical outcome improves from 6 to 12 or from 7 to 13 months treatment. So, we will be looking at the, you know, at the 7 month result, we will be looking at how that compares with current standard of care or current devices performance at the same time, and then we'll, you know, extrapolate it into the future. But ultimately, the most important is what is our clinical result going to show at 13 months and, you know, for our success will be to be at least comparable with the data of competitors. So that's number one. Then beyond that, obviously, we're also working to make sure that our device from a technology point of view is competitive in terms of ease of use and just technology that kind of is in the device. So the second one is more engineering compatibility with the current competitors. And then the 3rd, 1 is the decision on how we're going to commercialize it. And again, there are different options for us moving forward. So those are the 3 big factors that we're going to take into consideration. But overwhelmingly most important 1. Is the clinical outcome and how it compares to other devices on the market.

Yeah, maybe I'll add a couple of quick points. 1 is. With our device and our trial design, if you recall, there is no DICE requirement and complete concentric collapse CCC will not be a contraindication. So, we feel very excited about that. And the second point I'll make is that you asked about the performance of the trial. Obviously, we haven't seen the final seven-month data. However, we truncated the study back in March. Based on the results that we saw that, you know, will indicate that the device performs better than our original expectations that allowed us to truncate the study. And move forward with a much smaller study than originate plan. So maybe those will be the 2 points I will make. We are very excited about the not requiring dice because dice as a significant. treatment pathway obstacle for patients. It prolongs the process. It's not a very well-reimbursed process. So, we think that has a significant advantage with our technology.

Thank you.

Our next question comes from Anthony Paterone with Mizuho. Your line's open.

Thanks, and congrats on the quarter here. Maybe back to DTD. The study is comprehensive with 12 additional endpoints, and when we had the press release earlier in the year, there was indication that certain of those endpoints saw some benefit. The overall composite endpoint wasn't met, but certainly it warranted further analysis on the data. So maybe just a little bit on the secondary endpoints that we should be looking at to gauge success. Is it the suicide attempt endpoint? Is it time to first remission, time to rate of response, et cetera? So maybe just a little bit as we go through the details in these publications as they come out on which secondary endpoints really will drive the decision on whether or not to go ahead with depression. And I'll have one follow-up. Thanks.

Thank you, Anthony, for the question. So, what I would say is both the primary and secondary endpoints, they would be published very soon. So, I do not want to comment prior to the publications because that won't be appropriate for the publications. But at that time, you would be able to very clearly see. And as I mentioned during my speech, we anticipate those publications for primary and secondary endpoints, the first two publications, to be available in fourth quarter of this year.

Right. And when we look at those endpoints, are there any that jump out as being more heavily weighted as it relates to the company's decision on whether or not they would move forward to commercialize depression. In other words, when the data comes out, how should we be thinking about which of these 12 secondary endpoints will really be the drivers in the decision-making process to commercialize depression?

So, Anthony, thank you for this again. If we take it from the point of view of decision to commercialize it will be driven by the outcome of the reimbursement. And so from our point of view, our current assumption is if the reimbursement outcome is positive, we will commercialize this technology for two reasons, really. One is, you know, there are many critically ill patients that don't have another option in terms of treatment. But also the consequences of that is that the market of business opportunity is significant for us, and it will really expand our portfolio. So the decision to commercialize is not driven by which primary, secondary points we're looking at. It will be purely driven by the reimbursement decision of CMS.

Very helpful. And then just their process, just to round that out. I'm sure CMS will dig into the data after publication, but is there any update just on, you know, how long the CMS process itself will take? Thanks again. Congrats on the quarter.

Thank you. Again, so the first two publications will come out in Q4, and our secondary analysis, which we looked at the data very carefully, we are, they're going to generate three publications. And we believe the totality of the data that CMS should review together with us is those five papers, not just the primary and secondary endpoint analysis. So, once they come out, which we anticipate in Q1 of 25, we will apply for the formal consideration. And the timelines are, I think, wide if you look at historically. Generally, it's about a year or less, but again, we can't control or commit to any timelines. It's a wide range if you look historically. Thank you.

Our next question comes from Mike Mattson with Needham. Please go ahead.

Yeah, thanks. So just starting with Essence, so I think you said it was around 40% of HLM sales this year. I'd assume that the global number, is that right? And then where do you think that sort of peaks? I mean, can it get to 100% eventually, or are you going to continue to sell the older system in some of the developing markets?

Yeah, Mike, thank you for the question. You're right, the global number this year will be around 40%. penetration of essence in our total portfolio of placements. We assume at this point that we can, you know, keep improving by about 20 percent points every year, you know, which will then kind of take about a three-year cycle for us to get to 100 percent. The goal is to get, you know, one platform to 100% of our placements. And then, you know, the way I think about Essence, it really gives a wide range of opportunities for upgrades. It's a bit like you get a car and you have different options within that. And so, you can really get a hardware with various number of options. to your comment between emerging and developed markets or kind of more economically wealthy customers versus less, the differentiator will be in those options that they can get with the machine. And rather than having two different platforms on the market, you know, so that's our strategy.

Okay, got it. I just want to ask one on epilepsy, following up on Mike's question on this potential reimbursement change. So can you just tell us the portion of epilepsy patients that are on Medicare currently? I'd imagine it's lower, I think it's a younger patient population. And then, you know, would this change, if this change does happen to Medicare, Could that have a spillover effect onto private insurers? Could it result in private insurer reimbursement increasing, or is that totally separate?

Thanks. Yeah, thanks, Mike. So, we equate our Medicare population to be about 40% of our MPI numbers. The team is still working at the potential spillover effects, so we'll have more information as time goes by, but that is a possibility, yes.

Great, thanks.

And our final question today comes from Matt Mixick with Barclays. Please go ahead.

Hey, thanks for getting me in. I wanted to, I know we've covered a bunch of questions around 2025 and around the portfolio, but maybe if you could just talk a little bit about the puts and takes to the P&L. depending on which direction you decide to go, understanding that's a hypothetical based on the results in November and the safety results in the first quarter, where is the puts and takes in terms of moving forward with investment, maybe slowing or sidelining investment and reassessing on OSA and or on DTD? Thanks.

Thanks for your question, Matt. Right, so, you know, the big investments that you're probably thinking about are related to DTD and OSA. The way, as Ladd said, you know, we're going to continue to run the program sort of at its bare minimum in terms of investments. Up until the point we get the positive signal from CMS. So, that's the gate in terms of expanding our investments in commercializing the asset. On the OSA front, we have to, obviously, the gating item here is the PMA submission and approval from the FDA. If positive, that gives us an opportunity to think about commercializing the asset. Again, we have lots of options in how we go to market with this asset. So, we can choose to commercialize it ourselves. We can choose to partner. So, we're trying to create as much optionality as we can to create value.

Sure. And just to put numbers around those, the baseline minimum investment level for DTD is kind of at where now? And just remind us maybe where the spend is up until decision point on OSA, roughly.

Yeah. At this point, as we said in last quarter's call, we were thinking about $10 million in 2025.

For DDD?

For DDD, yes.

And for OSA?

And for OSA, yeah, OSA is, you know, we're sort of coming up on the completion of the trial. So, you know, we're now starting to focus more on the, on the medical affairs side. So it's more preparatory, you know, to make sure we're in a good place to potentially commercialize the asset.

And just to add on the OSA front, you know, like Amit said, you know, we're targeting submission in the first half of 2025. So to your point, if we make a decision to commercialize or extend the investment, this is most likely not a 2025. uh story this is beyond this is 26 and beyond got it thanks so much glad and thanks everybody thank you we have no further questions in the queue so i'll turn the call back to vladimir maketsaria for any closing remarks yeah so lydia thank you for helping us facilitate the call and thank you everyone for joining the call today and more importantly for your support and interest in Livanova. Have a great day ahead. Thank you.

This concludes our call. Thank you very much for joining. You may now disconnect your lines.