LivaNova PLC (NASDAQ:LIVN) This autumn 2022 Outcomes Earnings Convention Name February 22, 2023 8:00 AM ET
Firm Members
Matthew Dodds – Senior Vice President, Company Improvement
Damien McDonald – Chief Government Officer
Alex Shvartsburg – Chief Monetary Officer
Convention Name Members
Rick Sensible – Stifel Monetary
Michael Polark – Wolfe Analysis
Matthew Taylor – Jefferies LLC
Adam Maeder – Piper Sandler
Mike Matson – Needham & Firm, LLC
Matt Miksic – Barclays Capital
Operator
Good day, women and gents, and welcome to the LivaNova PLC Fourth Quarter and Full-Yr 2022 Earnings Convention Name. [Operator Instructions]. As a reminder, this convention name is being recorded.
I might now prefer to introduce your host for as we speak’s convention, Mr. Matthew Dodds, LivaNova’s Senior Vice President of Company Improvement. Please go forward, sir.
Matthew Dodds
Thanks, Emily. And welcome to our convention name and webcast discussing LivaNova’s monetary outcomes for the fourth quarter and full 12 months of 2022.
Becoming a member of me on as we speak’s name are Damien McDonald, our Chief Government Officer; Alex Shvartsburg, our Chief Monetary Officer; and Briana Gotlin, Director of Investor Relations.
Earlier than we start, I want to remind you that the discussions throughout this name will embrace forward-looking statements. Elements that might trigger precise outcomes to vary materially are mentioned within the firm’s most up-to-date filings and paperwork furnished to the SEC, together with as we speak’s press launch that’s obtainable on our web site. We don’t undertake to replace any forward-looking assertion.
Additionally, the discussions will embrace sure non-GAAP monetary measures with respect to our efficiency, together with, however not restricted to, gross sales outcomes, which can all be acknowledged on a relentless forex foundation. Reconciliations to essentially the most instantly comparable GAAP monetary measures might be present in as we speak’s press launch, which is out there on our web site.
We have now additionally posted a presentation to our web site that summarizes the factors of as we speak’s name. This presentation is complementary to the opposite name supplies and needs to be used as an enhanced communication instrument. You will discover the presentation and press launch within the Traders part of our web site underneath Information, Occasions and Displays at investor.livanova.com.
With that, I will now flip the decision over to Damien.
Damien McDonald
Thanks, Matt. And thanks everybody for becoming a member of us. Welcome to our convention name for the fourth quarter and full 12 months of 2022. I am going to focus on our fourth quarter and full-year outcomes, present 2023 income steerage and assessment our strategic portfolio initiatives. After my feedback, Alex will present extra particulars on our outcomes and 2023 steerage. I am going to wrap up with closing remarks earlier than shifting on to Q&A.
Within the quarter, we achieved 6% income development. This was pushed by the Cardiopulmonary and Neuromodulation companies throughout all areas. Superior Circulatory Help remained unfavorably impacted by a major decline in extreme COVID instances. I am pleased with our crew for persevering with to maneuver the enterprise ahead in opposition to macro challenges, together with inflation and provide chain complexities.
Now, turning to section outcomes. For the Cardiopulmonary section, income was $137 million within the quarter, a rise of 9% versus the fourth quarter of 2021. Oxygenator income grew low-double-digits, pushed by continued process quantity restoration throughout all areas. Coronary heart lung machine income elevated mid-single-digit, led by development in the remainder of world area.
Cardiopulmonary income for the total 12 months was $500 million and grew 11%. We anticipate the Cardiopulmonary income to develop 3% to five% for the total 12 months 2023. Our forecast contains the staged rollout of the following era HLM Essenz.
In February, we initiated our restricted industrial launch in choose facilities all through Europe, following profitable scientific instances in two main hospitals in This autumn. Wanting forward, we anticipate a gradual ramp in Essenz gross sales all year long.
Epilepsy income elevated 7% versus the fourth quarter of 2021, with development throughout all three areas. This efficiency was primarily pushed by alternative implants within the US and double-digit development outdoors the US for each new and alternative implants. US epilepsy income elevated 4% year-over-year. Just like final quarter, complete implant development was pushed by replacements.
Within the US, we’re persevering with to advance our go-to-market industrial technique in Complete Epilepsy Facilities, which included 15 devoted groups. These groups accounted for about 21% of US implants within the quarter as in comparison with 22% on a similar account foundation through the prior 12 months. Epilepsy income in Europe grew 18% versus prior 12 months, led by the UK and Nordics. The remainder of world area achieved 18% development led by Brazil. For the total 12 months, epilepsy income elevated 7%. For the total 12 months 2023, we anticipate the worldwide epilepsy income to develop at 3% to five%.
ACS income was $10 million within the quarter, representing a lower of 30% from the fourth quarter of 2021. Outcomes continued to be impacted by the year-over-year discount in extreme COVID instances, and partially by product combine, which was partially offset by development in non-COVID instances. Our discipline information suggests ACS case volumes associated to COVID declined greater than 90% year-over-year as fewer hospitalized sufferers progressed to a severity that required ECMO remedy. Nonetheless, ACS non-COVID instances elevated greater than 20% versus 4Q 2021, pushed by an easing of hospital capability constraints.
ACS income for the total 12 months was $39 million, representing a decline of 29%. For 2023, we anticipate ACS to develop at 4% to six%. Our forecast contains the return to development as soon as we anniversary the COVID affect after the primary quarter.
Turning now to the strategic portfolio initiatives. DTD income for the fourth quarter was $3 million, and for the total 12 months was $8 million. For 2023, we anticipate DTD income of roughly $8 million to $10 million, primarily from the RECOVER examine.
The RECOVER examine continues to advance. The randomized managed examine is designed with frequent interim analyses that may assess if predicted likelihood of success has been reached or if the examine ought to proceed enrolling. Our interim evaluation for the 450th affected person within the unipolar cohort was not too long ago accomplished and confirmed the examine’s continuation. The subsequent interim look is at 475 sufferers, at which level we will both transition to the potential longitudinal examine or full enrollment to 500 sufferers for the unipolar cohort.
Earlier this week, Dr. Conway, the principal investigator for the RECOVER examine, delivered a poster presentation on the Fifth Worldwide Brainstem Convention detailing the baseline unipolar demographic information for the RECOVER examine contributors collected to date. The vast majority of these sufferers are severely depressed and are extremely remedy resistant having failed extra aggressive remedies resembling ECT, TMS and ketamine.
In coronary heart failure, we enrolled the five hundredth sufferers within the ANTHEM-HFrEF US pivotal trial final quarter, which triggered the second interim evaluation. The evaluation decided that the US FDA early submitting circumstances weren’t met, and the DSMC really useful that enrollment proceed in accordance with the present examine protocol. Nonetheless, our additional analysis of the examine information has not revealed a sufficiently constructive affect on practical or mortality endpoints, and it’s unlikely that the examine will reveal such an affect. Because of this, we’re stopping enrollment, starting the method to shut the scientific examine and winding down the guts failure program.
It is vital to notice that the choice to cease enrolling was not related to any security considerations. We would prefer to thank the sufferers who participated within the trial and in addition thank the investigators, examine committees and workers for his or her dedication to this program.
Transferring to OSA. The OSPREY trial continues to progress. In January, we acquired approval from the FDA to incorporate an extra 5 websites, one in every of which has already been activated. We nonetheless assume FDA approval in 2024.
And with that, I am going to flip the decision over to Alex.
Alex Shvartsburg
Thanks, Damien. Throughout my portion of the decision, I am going to share a short recap of the fourth quarter outcomes and supply commentary on 2023 steerage.
Turning to outcomes, income within the quarter was $275 million, a rise of 6% versus 2021. Overseas alternate had an unfavorable year-over-year affect of roughly $12 million or 4% of income.
Adjusted gross margin as a % of internet income was 69% in comparison with 70% within the fourth quarter of 2021. Adjusted gross margin was unfavorably impacted by inflationary pressures, provide chain challenges, and product combine, partially offset by pricing enhancements.
Adjusted R&D expense within the fourth quarter was $43 million in comparison with $41 million within the fourth quarter of 2021. R&D as a % of internet income was 16% versus 15% within the fourth quarter of 2021. Whereas sequentially flat, the year-over-year enhance was pushed by continued funding in our strategic portfolio initiatives.
Adjusted SG&A expense for the fourth quarter was $100 million in comparison with $107 million within the fourth quarter of 2021. SG&A as a % of internet income was 36%, down 40% for the fourth quarter of 2021.
Adjusted working earnings was $47 million in comparison with $40 million within the fourth quarter of final 12 months. Adjusted working earnings margin was 17% in comparison with 15% within the fourth quarter of 2021.
Adjusted efficient tax charge within the quarter was destructive 3% in comparison with 14% within the fourth quarter of 2021. The decrease tax charge is primarily attributable to full 12 months modifications in geographic earnings combine.
Adjusted diluted earnings per share was $0.81 in comparison with $0.57 within the fourth quarter of 2021. Adjusted diluted earnings per share for the total 12 months was $2.39.
Our money stability at December 31, 2022 was $214 million, up from $208 million at year-end 2021. Whole debt at year-end 2022 was $542 million versus $240 million at year-end 2021. The rise primarily pertains to the $300 million time period mortgage facility that we executed in July.
Internet debt together with restricted money at year-end was $85 million.
Adjusted free money circulate for the quarter was $31 million and was $75 million for the total 12 months. Free money circulate era was unfavorably impacted by stock construct and inflationary pressures, partially offset by enhancements in working capital. The free money circulate conversion ratio was 58%.
Capital investments have been $27 million throughout 2022 in comparison with $26 million within the prior 12 months.
Now, turning to 2023 steerage. We forecast 2023 income development on a relentless forex foundation between 3% and 5% and assume roughly a 1% tailwind from alternate charges. We’re projecting adjusted diluted earnings per share within the vary of $2.45 and $2.65, with adjusted weighted common shares excellent to be 54 million for the total 12 months.
Adjusted free money circulate is anticipated to be within the vary of $80 million to $100 million. We forecast capital spending within the vary of roughly $35 million to $40 million.
With that, I am going to flip the decision again over to Damien.
Damien McDonald
Thanks, Alex. Our 2022 efficiency was balanced by our numerous portfolio. Whereas some macro challenges might linger, our pipeline stays strong, and we stay dedicated to delivering differentiated merchandise and therapies to sufferers and physicians.
Within the 12 months forward, we’ll proceed to make use of the strategic triangle as our information for purpose setting and execution. With high quality on the heart, we stay centered on three key areas – development, pipeline and profitability. We imagine this focus, underpinned by the LivaNova enterprise system, positions us to create worth for all stakeholders.
And with that, Emily, we’re open to questions.
Query-and-Reply Session
Operator
[Operator Instructions]. Our first query comes from a line of Rick Sensible with Stifel.
Rick Sensible
Perhaps they’re form of associated questions in a manner. However let’s begin off with the steerage, and possibly assist us higher perceive your pondering in offering the information, each from – how conservative is it truly or optimistic relative to what you are seeing. However possibly extra particularly, the highest line information is properly under the long run aspirational targets you laid out again in December of 2021 on the Analyst Day. How would you will have us give it some thought, the information, the outlook, your long run aspirations? After which I am going to have a comply with up associated to that.
Damien McDonald
I believe on the Investor Day, we laid out 5% to eight%. And we thought we would ramp over time. I’ll say, I believe, 2022 was a stronger 12 months than we anticipated in our ramp. And there have been a lot of causes for that. And we may cowl that. I believe 2022 was proper in the course of that vary. For 2023, we’re simply issues just like the transition 12 months for the top of service to NPI driver, the Essenz transition. And let’s be trustworthy, the ACS plan is behind after the COVID disruption. However we’re assured that that is going to get again to a development trajectory.
So, the CP market, we predict, is stabilized and again to pre-COVID ranges. Usually, that market grows 3% to five%, and we’re anticipating to be in that vary with this portfolio and as we have transitioned to the Essenz. So, I like the best way we’re approaching this 12 months. Do we predict there’s upside? Sure, we do, if oxygenators and the remainder of world HLMs proceed to run like they’ve been, if the neuromod NPIs ramps, if the non-COVID case ramp and ACS takes off as we in the end hope it can. However we predict that is confirmed steerage and provides us an opportunity to ship on our guarantees.
Rick Sensible
Separate, but additionally associated. Are you able to discuss in regards to the coronary heart failure trial shutdown, the ANTHEM-HFrEF shutdown? What may the R&D financial savings be from winding it down and the money implications? What’s that contributing, that financial savings contributing to the EPS outlook, Damien?
Damien McDonald
As you would possibly suspect, we’re dissatisfied that we’re ending this program after an extended dedication. However as we noticed the, the 500-patient interim evaluation did not give us the sign for the early FDA submitting.
And whereas the DSMC – their protocol following the evaluation is to advocate one in every of three choices, and so they really useful persevering with to enroll. However we simply took a glance underneath the hood. And the additional evaluation was not revealing a sufficiently robust constructive affect on the practical or the first composite endpoint. And it was fairly unlikely that the total examine would reveal that affect.
We’re actually early within the cycle of this close-down. And so, we will assume that it takes us a while to work via the method. We’ll work with the FDA and the investigators to make sure that we’ve the suitable course of for sufferers.
And when it comes to math, on common, we spend about $30 million a 12 months on this program. And as we work via the method, we’ll set up how a lot of that’s through which bucket.
Rick Sensible
No early colour, possibly even looking a 12 months, about what annual financial savings may very well be?
Alex Shvartsburg
Rick, that is Alex, As Damien mentioned, our burn charge was roughly $30 million a 12 months. By 2024, we should always begin to recoup, and even perhaps earlier, someday this 12 months, as we determine the way to wind down this system.
Operator
Subsequent query comes from Michael Polark with Wolfe Analysis.
Michael Polark
First one, gross margin in 2023, some sequential and year-on-year weak spot within the fourth quarter, one thing we have clearly seen from others as [indiscernible] take care of inflation and provide chain snafus and forex and whatnot. I suppose, what is the baseline for that adjusted gross margin metric in your 2023 outlook?
Alex Shvartsburg
Yeah, I believe you are proper. It is comparatively flat. The enhancements that we’re seeing is when it comes to productiveness and value nonetheless being impacted by the inflationary pressures that we have seen over the past 18 months. Once more, we’re anticipating that to proceed.
Michael Polark
69% appear to be a very good enter for now?
Alex Shvartsburg
Sure.
Michael Polark
The follow-up. Intrigued by the point out of the Dr. Conway poster presentation. I suppose I’ve not seen that information. Is there something in there that is new to you that sort of tells you about how the RECOVER unipolar cohort could also be shaping up right here late within the enrollment course of?
Matthew Dodds
It is Matt. So, you had a poster that got here out once more earlier this week. And we will make it obtainable. It was the primary have a look at the unipolar sort of, name it, demographics underlying affected person numbers. So, you may see issues just like the modular rating, common age, different therapies they have been on. And what we predict is attention-grabbing about it’s the common age is older, there’s much more what we name, Damien known as it aggressive therapies like ECT, TMS, even ketamine, sufferers have failed on this trial. That is not regular in a pharmaceutical trial, even you have no sufferers with these sorts of therapies in there. And so, you may see simply much more baseline demographics of how distinctive this trial is to some other, I believe, despair trial that has been undertaken thus far.
Operator
Our subsequent query comes from Matt Taylor with Jefferies.
Matthew Taylor
I had a comply with up on despair. I suppose, Matt, possibly I am going to simply begin with – may you’re taking that thought one step additional and assist us perceive primarily based on the distinctive composition of a number of the sufferers on this trial, do you suppose that may have any implications for the probability of success or the energy of the remedy affect or what do you suppose which means for the last word outcome?
Matthew Dodds
I might say, general, the impression we have got is that this isn’t sudden when it comes to what the age was, the modular rating was, the folks on these aggressive therapies, the variety of prescription drugs that they have been on over lifetime. What I believe it helps with is, when you have a look at timing response, which is a comparatively weak endpoint, after we discuss general response charges, the preliminary design exhibits decrease percentages than, I believe, lots of people have come to anticipate in a few of these prior despair research. And that is an instance of why they’re general doubtlessly decrease, however nonetheless might be extremely highly effective. Simply because this affected person inhabitants has by no means had a remedy that sort of suits the place they’re of their depressive state.
Matthew Taylor
One follow-up on despair. So, clearly, final interim look didn’t transition into registry or present early stoppage success. I suppose the query I believe lots of buyers have is, now that we’ve extra information factors, extra water underneath the bridge versus your preliminary expectation at 350 that you could possibly present early stoppage, does this have any implications for the general energy of the remedy impact within the energetic arm? Which means, can we see a weaker remedy impact due to the shortage of early stoppage? Or is that studying an excessive amount of into what is going on on right here?
Matthew Dodds
It is in all probability studying an excessive amount of into what is going on on as a result of, once more, it is all blinded. It may imply that. It may imply that the management arm is doing higher. However the remedy arm can also be doing higher.
What we’re assured in is there’s a futility curve on the underside of this, and that continues to go up each look. So, we all know we’re seeing some profit. We simply have not gotten to that stage that may permit us to cease early.
However the different factor I might say, Matt, is information can truly enhance over time, particularly whenever you exit to months 7, 8, 9, 10, 11, 12, the place we imagine that the remedy arm could have a extra pronounced impact than the management arm. So, you could possibly not hit an early stoppage, however truly see information enhance over time earlier than you get to the ultimate quantity. In order that’s why we’re nonetheless actually assured general.
Damien McDonald
Which is what [Multiple Speakers] within the Aaronson paper. This entire examine relies on six prior research, 1,400 sufferers, however notably the Aaronson papers confirmed that at month six, you began to see the separation and it continued to separate and enhance over time. So, I believe the purpose Matt is making is kind of legitimate that the longer this runs – in actual fact, the trial was set as much as run to 500 sufferers. So we proceed to be believers on this exhibiting a major response to deal with these sufferers.
Operator
The subsequent query comes from Adam Maeder with Piper Sandler.
Adam Maeder
I wished to start out with a two half query on Neuromodulation. I suppose actually epilepsy. So, first, I hoped you could possibly give a little bit bit extra colour on the epilepsy efficiency in This autumn and breakout efficiency by NPIs and replacements. Questioning if NPI had development, both year-over-year, sequentially.
As we have a look at the steerage, the Neuromod steerage for 2023, the three% to five% vary, possibly simply sort of stroll via the totally different assumptions there on the NPI and alternative aspect in addition to by geography. After which, I had a follow-up.
Damien McDonald
Let’s take from the highest. US implants grew low-single-digits, and so they have been above the 2019 ranges, I believe, which was vital for us to see that sign. Unit gross sales have been flat, and we have been up mid-single-digits with a mixture of value and blend. The top of service outpaced the NPIs. They usually grew mid-single-digits. NPIs within the quarter declined year-over-year. And sequentially, they have been flat.
For us, we checked out this from a number of totally different angles. We appeared on the macro, we checked out that storm in December, we appeared on the share, and the underside line is we simply did not execute. The crew, I believe, has some work to do. December actually simply did not drive in NPIs like we anticipated and the crew have to actually dig into their efficiency administration and industrial execution. And we have elevated oversight of their funnel processes, eliminated the underside 10% of the performers, we have appeared on the development profile of the assorted companies that we’ve, that we’re overlaying within the CECs. So we’re anticipating a change in that efficiency.
For 2023, this 3% to five% is absolutely a decline in finish of service as we beforehand mentioned as we anniversary into this – the backlog of the COVID delayed instances, after which we’re anticipating sequential enchancment within the NPIs all year long.
Alex Shvartsburg
For worldwide, once more, it is a small piece, however double-digit development in worldwide. So, that ought to provide you with sufficient variables to get there.
Adam Maeder
For the follow-up, related steerage query, however switching over to Cardiopulmonary. CP grew double-digits in 2022. The steerage for 2023 is 3% to five%. The final time that you simply launched a brand new coronary heart lung machine, you bought a pleasant elevate to development. And I believe you referenced the CP market sort of rising in that 3% to five% vary. So, I suppose, once I take that every one collectively, why is – 3% to five% steerage for the CP enterprise in 2023, why is that the suitable vary at this juncture?
Alex Shvartsburg
For CP, sometimes, the best way we take into consideration the market is within the developed markets, it is in all probability a low to mid-single-digit development enterprise. Two-thirds of our enterprise is in consumables. Clearly, 2022, the expansion was implausible. It’s primarily based on lots of the restoration from the surgical procedures popping out of COVID. So we nonetheless imagine that it is the we will develop at a form of a market charge from a consumables perspective.
And from a capital perspective, that is sort of a transition 12 months. We anticipate our restricted industrial launch to be efficient. And as we begin to ramp Essenz gross sales within the again half of the 12 months, we should always anticipate a step up in development, however we’re being prudent about the best way we’re forecasting this enterprise.
Operator
Our subsequent query comes from Mike Matson with Needham & Firm.
Mike Matson
I’ve one in your covenants. I believe the covenant requires an curiosity protection ratio 3 to 1. I used to be curious if that features or excludes the curiosity on the SNIA mortgage. After which, are you snug you may keep inside that – compliance with throughout 2023?
Alex Shvartsburg
Yeah. We’re effective on our compliance with our covenants. We have stress examined them and we’re in good condition.
Mike Matson
Simply so far as the OSPREY trial goes, I hear you on the potential approval in 2024, however when do you suppose we may see information from the trial? Is it potential we may see it late this 12 months or is it going to be actually extra 2024?
Damien McDonald
I am going to take that one. It is 2024. It is a pivotal FDA ID, so we have to full the examine, file the info after which search to publish or podium that. So, it will not be till 2024.
Operator
Our subsequent query comes from Matt Miksic with Barclays.
Matthew Dodds
We would have misplaced him, Emily.
Operator
In the intervening time, we’ve no additional questions registered. I am going to flip the decision again to Damien McDonald for closing remarks.
Damien McDonald
Thanks, Emily. And thanks, everybody, for becoming a member of us on the decision as we speak. And on behalf of the complete crew, we admire your assist and continued curiosity in LivaNova and we’ll discuss to you on the primary quarter name. Thanks very a lot.
Operator
Thanks, everybody, for becoming a member of us as we speak. This concludes our name and chances are you’ll now disconnect your traces.
