STIFEL 2026 HEALTHCARE CONFERENCE - LIVANOVA PLC

Okay. Rick Wise here once again, and I'm thrilled, truly thrilled to welcome Vlad Makatsaria, Chief Executive Officer of Levenova, and Phil Kowalczyk, Chief Strategy and Corporate Development Officer. You know, Vlad, I was reminding myself early this morning, I mean, in February, it's gonna be three years since you got to leave Inova. And sort of, I've just been reflecting what an amazing three years it's really been. Steady innovation cadence, top-notch operating performance, clearly more to come, yet you have annoyingly conservative guidance all the time that you insist on beating and exceeding. I think that's the way I was supposed to say it. And but in each of your businesses improved fundamentals improved cadence of innovation ahead It's an exciting time and you reported a terrific quarter. So Just at a high level starting us off How sustainable we're gonna get into the details but at a higher level how sustainable is the kind of performance? Am I right in what I'm saying? Can it continue? First of all, thank you for the opportunity to join me today and for your advice and for you're interest in Livanova. And thank you, everybody, for joining this morning. Look, I mean, our philosophy is that right now we're pleased with our performance, but we're not satisfied. I think there's much more we can do moving forward. And I think this attitude of not getting complacent and keep driving the agenda of talent, of innovation, of execution is at the forefront of what we do. In terms of sustainability, what I'm really pleased with the trend that we're achieving, especially this year, is the quality of growth. and that growth, what I mean by that is the growth is very well balanced across different dimensions. Geographically, it's well balanced across the world. It's now really well balanced between the business units, so epilepsy is double-digit growth last quarter, and so was cardiopulmonary, but even within each business unit, like if you look at cardiop pulmonary, we were over-reliant on growth of HLMs, heart-lung machines. Now oxygenators are growing double-digit. Heart-lung machine are growing in double digits. Then if you look at epilepsy, price, volume, new patients, replacement, all kind of contributing to growth. And because of that high quality, our confidence in sustainability of growth quite high no again it seems like it should be let's let's dive right into the the businesses cardiopulmonary capacity innovation and share gains talk about converting the now expanded oxygenator manufacturing capacity into sales your new line is operational you're expecting double-digit output expansion in 27, is the opportunity primarily filling unmet demand? Is there unmet demand at existing accounts or increasing your share in those accounts or opening up new accounts? How do you, would you have us think about each of those and where's the best growth opportunity for you? Yeah. So focusing on Oxygenator, right? Yeah. Just Oxygen for now. Yeah. I mean, I would start with the fact that the market growth has accelerated. So this was a low single-digit growth procedure market. Now open-heart surgery is growing at mid-single digits. And so from the demand point of view, it's getting higher. So that's one dynamic. And then the other dynamic in the market that's worth pointing out that one of the competitors, so there are four companies that manufacture oxygenators that are main competitors. as one out of them exited the market, and so that created additional opportunity for us. So now, if I look at this business also, it's interesting because in this business, scale really matters. It's very high volume, relatively low value, and high capital intensity portfolio. And so, from that point of view, the bigger we get, the, I would say, there are more tailwinds in the way we compete in the marketplace. And over the last two years, we gained approximately 10 points of share. We went from 30 points to 40 points of shared. And we still operate in a situation where we have back orders. So everything we manufacture, we deliver to customers. So our strategy to continue gaining share is threefold. One is just commercial excellence, which is, I think, basic commercial excellence. Number two is innovation, and I'm sure we'll talk about it. But in 2028, we're launching a new clinically differentiated oxygenator. And number three, it's improvements in our manufacturing and supply chain. And the two big factors on supply chain came from our long-term partnership with Thermo Fisher, which gives us access to more critical components and kind of removes that as a governor of growth. And then the big news internally is that recently we started manufacturing with our additional manufacturing line, and that gives us, again, an opportunity to increase capacity by double digits in 2027. You highlighted the new oxygenator as a more efficient gas transfer, lower pressure drop, better platelet preservation. Are perfusionists and surgeons going to react to this? Do you have to show data? Is this a seamless try our new one and they're going to light up and say, yes, this is what I want? Yeah, yeah, sure. So as Vlad mentioned, kind of that shift from 30% to 40% has really been driven by our investment. in capacity, and while there's still more runway there as we further invest in capacity in the thermo deal, innovation will be the next phase of that growth in a way. And it surprised me a little, I'd say when we first started and we meet with customers and say, where should innovation take place, I had an initial assumption that maybe oxygenators were a little more of a commodity. What we heard loud and clear from the clinical community is there is absolutely opportunity and value in innovation in oxygenators, and they were asking for it. Really the balance in innovation and oxygenator is maintaining blood's contact with the fiber so you get that high quality oxygenation, but in a way that doesn't damage the platelets. all the preclinical testing that we've done, we've created a design that across the 10 or so parameters that matter to a perfusionist, we are at par or better across every dimension. Historically, you were making some trade-offs between one or the other. We feel like we've really created a step change in innovation for the product. And the result is, we think, an opportunity to continue to drive not only in our current accounts, but also in competitive accounts as well. And so we're excited about that coming in 2028, and it's going to be an important innovation for our commercial organization to drive going forward. It sounds compelling. On the HLM side, the heart, lung, machine side, Essence continues to be a success story, Obviously, I think you recently highlighted that Essence still is only 20% of your installed HLM base, so a lot more to go there. But how much longer do you benefit from this upgrade cycle? When are you at 100%? And when does your oxygenator share catch up with your HLN share? Well, I'll start with the second one. Feel free to give us some concrete specific projections here. Yes, I mean, I think on the oxygenator share, obviously, the goal is to continue improving share. And, you know, we've guided during the investor day additional 800 bps of share gain over the strat plan horizon. However, and we're building manufacturing capacity to be significantly higher than that. So that's an opportunity for us, obviously. that we're focusing on on and and what you see in already is that oxygenators are contributing proportionally more to the growth of cardiopulmonary business and with the launch of new oxygenate i think that will even accelerate even further on the hard lung machine um we're pleased with our progress and so uh today we we plan to finish this year with 80 placement penetration of essence and then in 2027 get to close to 100 percent and so beyond 2027 that price mix effect goes away but what still remains as an opportunity in hlms is twofold you know one is like you said we have approximately 10 000 units of hlm's in the market about 20 percent of them today are essence so there's still significant upgrade cycle opportunity there and i can make an argument that you know normal capital cycle is about 10 years you know seven to ten years depending on type of capital s5 which is the previous generation has been there i mean it will be approaching 20 years and so i can make an agreement that there is a more urgency to upgrade that so units growth is still a potential opportunity and then beyond that when we launched essence it's it's a obviously new technology it had two old components it had old heater cooler and air manager and so we still have an opportunity to upgrade heater cooler in air manager for every essence unit that is placed in the market turning to epilepsy lad um yesterday you your long-term epilepsy growth framework called for of mid to high single digit growth in new patient implants. And if I think I'm remembering correctly, low single digit in replacement implants. Given your solid epilepsy growth, how are those two components tracking against the framework you thought about then? Yeah, maybe I'll start and then turn it over to Phil. But I mean, we're very pleased with performance in epilepsy. I think last quarter was 11% growth. and you know what during the invested day we had one factor which we didn't know what happened later and that is improved reimbursement on new patients and so that reimbursement improved by about 50% so currently we have three tailwinds in our epilepsy business one is improved reimbursement. So on both NPI and replacements, we had about 50% improvement in reimbursement, and the good news for us is on NPIs, CMS just confirmed the same rate of reimbursement for 2027, and on replacements it's 11% growth in reimbursements, so it's gotten even better. The second tailwind is that we have new clinical data that came out from our core VNS study, And that is the first time we studied clinical data using the new technology in our epilepsy device. And basically, the outcome of the study is that with significantly less invasive procedure versus alternatives, the clinical outcome is comparable to a much more invasive procedure. So it changes value proposition of VNS therapy. So that's the second big driver. And then the third driver is still to come. We are launching new IPG, new product next year. It's a digitally-enabled product, creates significant opportunity for us, and maybe I can ask Phil to talk a little bit more about it. But it's the first launch we had in our epilepsy business in eight years. And so we want to have a littlebit of kind of time behind our kind of a little bit more experience before we, you know, guide longer term. but the progress is there, and maybe, Phil, you can continue. Yeah, sure. So one of the exciting things in our innovation pipeline is around the digital enhancement of our portfolio, and we've already have FDA-approved digital health cloud platform that's going to be applied across the portfolio. The first step of that is in our epilepsy business. So next year, we'll be launching our first new IPG with these enhanced digital features, the biggest of which is remote programming. So if you think about an epilepsy patient, on average, they're driving 40 miles to see a provider, and they have to come 10 to 12 times in the first year to get kind of the programming and titration up to get the clinical effect. It's a huge burden on a patient population that often doesn't drive. We have, from a provider side, you have physicians that are very full, schedules are very tight, scheduling very far out. This is going to improve workflows, and we think will have a big impact on the whole clinical experience. I think the thing that maybe is underappreciated about this new device is the clinical benefit as well. So one of the things we know about VNS therapy is getting to an appropriate therapeutic dose and as fast as possible is an important part of getting optimizing the clinical effect. By removing the headwind and the barrier of having to come back and making sure you're there, you're actually kind of improving the ability and the speed by which that you can get to that optimized therapeutic dose. And we think that's going to be really exciting in terms of the effect that we're going to have for our patients. Talk about the competitive lineup there. Do others have some of these features? Are they doing it now? How big a challenge is it going to be to help the clinical and patient community understand what this benefit could mean? Yeah, I mean, the patient community is and the physician community is very clear that this is going to be a huge time saver for them that a lot of times, you know, they might lose track of patients for a little bit and they don't have that visibility to where they are in that dosing. This is going to give them that patient management information holistically in one spot in a cyber secure way that allows them to say, you know, I know where you are today and where you need to be in the future. And obviously, our value prop is still that this is a minimally invasive procedure with great clinical efficacy that we're demonstrating in the core data. And, you Know, leaning into kind of that piece for us is going To be an important part for the next week of growth. these capabilities? It's not quite the same, but obviously, we're vagal nerve, they're brain, and so that's obviously. And in terms of the installed base, if you will, of patients who have other devices, is this something they're going to swap out? It is all going to be de novo, or how do we think about that? Yeah, so we are introducing the new device. We will still continue to sell the old device too, but over time we expect that shift to evolve. And then this isn't just de novo. So as new patients come in for their battery replacements, the replacement will be with the new Bluetooth-enabled IPG as well. Great, great. Medicaid reimbursement, just to the best of my memory, Medicaid patients make up a large portion of the population here. I know this is a complex topic. I don't want to get to the nightmare of the complexity, but where are you in terms of getting the elevated payment on the Medicaid side of things? Yeah, sure. So just to kind of baseline for everyone within our epilepsy business, 20% private, 80% public. And then within that 80% public, 40% Medicare and 40% Medicaid. Within that 40% Medicaid. There's 12 states that are fee-for-service that follow Medicare directly. They've followed these new increased reimbursement rates that Vlad mentioned, both on MPI and EOS, and we've made progress with a number of other states as well. I think the high-level comment is we're not seeing a lot of divergence from Medicare for those other Medicaid states too. Turning to OSA, Vlad, you've talked about a target of 400 million by 2030. I'm sure you've noticed we're about to be in 2027. Time's cranking along here. Just as I reflect on watching medtech markets evolve for my, gosh, 35 years as a medtech analyst, often the initial company pioneer in a space will retain dominant share, and it's hard to penetrate. Talk about why you think you have an opportunity to win here and the potential for adoption just at a high level first. Well, there are many analogs, I'm sure that we both know, in MedTech where differentiated innovation accelerates adoption And even if you're the follower in the market with innovative products and with clinically differentiated products, you can really win in the marketplace. You know, we believe we have that. And it comes from a number of dimensions. You know the first one is that our technology is not counterindicated from complete concentric collapse patients. and it is estimated that approximately 30% of OSA patients have complete concentric collapse. So when we enter the market, we expect that the pool of patients is going to increase significantly. Number two is when we guided to that, we did not have complete data set on our polysync technology. And now we do, and so there's a publication on that, And basically, it shows 85% responder rate on that bigger pool of patients. And so I think the combination of broader patient population, significantly improved clinical outcome, and third, the fact that we have neuromodulation capabilities within Livanova. So we are not building a new company. we are adding a product portfolio to the backbone that already exists because of our presence in epilepsy, and we leverage those neuromodulation capabilities. So we believe those kind of three factors contribute to our winning proposition in this market. And talk about a couple of weeks ago, a new Category 1 code covering your OSA technology. I think not expected to take place on January 1, 2028, if I understood correctly, subject to finalization. How much could this greater coding clarity restore growth or is it a unique opportunity for you beyond the code itself? What needs to happen with coverage and payment, you know, to be for that benefit to materialize? Yeah. Yeah. We think this is an important step for the market. And, you know, we were pleased to be part of that application and pleased to see kind of the announcement of the new Category 1 codes that, as you mentioned, will go into place January 1st of 2028. That creates a single standardized coding environment that I think will remove some of the headwinds that have been created over the last year with some ofthe ambiguity in the coding process. And so, you know, the next steps here, it's currently in the RUC process. The next milestone will be we'll find out what the physician payment will be around July of next year. And then, you Know, as we start the launch in 27 and really start to see scale in 28, you know, we'll have that single framework that will be an important enabler for our growth, but market growth overall as well. As well. I was listening in to a conversation you had earlier this week at a lesser sell-side event. I try to restrain myself. But I didn't appreciate something you talked about was the OSA device synergy between IPG and epilepsy and here. And I thought it's an interesting nuance that I had not appreciated. Talk about that a little bit, if you would, and how do I think about the implications for margins going forward? I mean, and that's the double click on what Vlad just said about these neuromodulation capabilities of Levanova that confer on us kind of a right to win. So one of the big ones is that digital health platform. So that cloud environment that's enabling the remote programming capabilities in epilepsy starting next year, That's the exact same technology that will be applied in OSA to provide those same capabilities of remote programming. It's a really important leverage point for us. We have the same teams, the same know-how that are applying that across, and we're getting efficiencies of scale, of expertise that other companies that aren't in our position won't have. I'd also want to call out, in addition to innovation, take market access. The same team that had been advocating and helped kind of establish the new codes in epilepsy that have gotten us this significant increased reimbursement tailwind were the same ones that helped with the societies to create the new Category 1 codes on the OSA side. So this is the same capabilities that we have on supply chain. These are cans. These are leads. These are batteries. These are things we know well, epilepsy, OSA, potentially depression. It's an area that there are so many synergies that I think are a little underappreciated because the reality is, yes, we do need to build a new ENT and sleep channel, but there is so much of that underlying engine that's an important piece for us achieving kind of the framework that we laid out for long-term guidance. So my margin assumptions are too low, you're saying. Okay. Moving right along. I don't think I said that. Just in our last five minutes here, I wanted to touch, as always, on depression as a potential upside beyond the current plan. Your investor day targets obviously excluded difficult-to-treat depression. Third quarter call, you said CMS is reviewing additional data you submitted, including 36-month results. But you haven't yet moved to a formal submission. What's next here? What are the next concrete milestones? Yeah. so we are look we published 36 months data like you said if you didn't have a chance please take a look at them they're very impressive results that we have we put them in the public domain there's also also a quite interesting podcast by our lead investigator that is describing those results are kind of qualifying them a little bit so we shared that data with CMS part of the questions that they asked us in the previous round was about 36 months data and so we are in the dialogue with them to kind of addressing the questions that they have they're mainly focused on those 36 months data so the next milestone is to receive feedback from them on that data and and and that will determine the next steps in the process. But, you know, we are pleased with where we are with them, but more importantly, I mean, the opportunity for patients that in many cases don't have an alternative, it's a very important topic for us just purely from a health care point of view and the contribution we can make to patients. You're committed to sustaining this and just following it as far as you can. Absolutely. Yeah. And just a bigger picture, you know, just listening to the conference call and hearing the conversation earlier in the week, it just made me reflect how frisky, Vlad, are you feeling on the capital allocation front? You have so much going on. You have such in the pipeline. Are there opportunities to add? I'm not thinking something major, but tuck-in deals or technology, transactions or partnerships that we may not be thinking about that, as you look at the bigger picture over the next few years, could be important. Well, I can start and then I'll turn it over to you. He doesn't want to talk about himself. But number one, we are building very strong capability inside of Libanova to prepare ourselves or to have options to do this kind of things, whether they're partnerships, opportunities. Actually, the partnership with Thermo Fisher is an example of this kind of this type of an external partnership as well. But we have, under Phil's leadership, we have a strong team that is assessing different opportunities, building the capabilities in case they come. And then we have fairly, very clear capital allocation priorities. Number one is to invest in our core businesses. And that foundation needs to be strong, needs to be sustainable growth in both cardiopulmonary and epilepsy, needs to continue to expand margins and bring cash. And that gives us opportunity then to get into faster growth markets with high unmet need where we have the right to win and then OSA for us then becomes that priority. And like you said, depression then is an optionality that we want to build ahead of that and so that is kind of the way we prioritize but Phil maybe you can yeah I mean maybe the only thing I'd add to what Vlad said is we don't need M&A to achieve the growth targets that we've set out there's obviously good optionality in our pipeline today but if you look across benchmark med tech there's always a nice balance of growth both organic and potential for inorganic. And so what we're looking at is making sure we understand the external landscape very well, that we take a very disciplined approach from both a strategic lens as well as a financial return lens. But if the right opportunity arises, we're also open and looking. So that's kind of our approach at this stage. That's great. I think we'll leave it there. exciting and again congratulations on all you've achieved and uh very impressive truly thank you for being here thank you