Good day, ladies and gentlemen, and welcome to the LivaNova 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 Dodds, LivaNova'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 LivaNova’s financial results for the third quarter of 2024.

Joining me on today’s call are Vladimir Makatsaria, our Chief Executive Officer and member of the Board of Directors; Alex Shvartsburg, our Chief Financial Officer; Ahmet Tezel, our Chief Innovation Officer, Stephanie Bolton, President of Global Epilepsy; and Briana Gotlin, 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 in the Investors section of our website under News, Events and Presentations at investor.livanova.com. With that, I will now 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 US 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.

First, our markets remain healthy with both cardiopulmonary and epilepsy procedure volumes estimated to be growing mid-single digits. Second, we gained market share via our commercial execution and ability to supply cardiopulmonary consumables.

We estimate our oxygenator 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 and cardiopulmonary consumables, which contributed approximately 300 basis points of growth year-to-date.

And finally, we've benefited from a successful Essenz 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, Amit 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 full 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. Heart-lung machine revenue increased over 20%, driven by Essenz. We are pleased to see a sequential increase in Essenz placements and continued strong price/mix in the quarter.

As a point of reference, we expect Essenz 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 Ahmet 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 committee 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 road map, while we simultaneously advanced 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, Essenz 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 in-line blood monitoring capabilities utilizing sensor technologies.

This is designed to deliver additional real-time data to guide the perfusionists 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 in-depth 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 OSPREY 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, Ahmet. 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 a dollar basis included a onetime 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 as a 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 heart 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 phaseout of tax attributes that have contributed to our historically low effective tax rate. Adjusted diluted earnings per share, was $0.90 compared to $0.73 in the third quarter of 2023.

Our cash balance at September 30 was $346 million, up from $267 million at year-end 2023. Total debt at September 30 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 30 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 million 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 and 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. [Operator Instructions] 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 every -- 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, thank you for the question. Yes, it's been just over seven months, I think.

And look, I think first of all, kudos to the team that was -- 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.

Look, 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 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 investment in the human capital. Number two is setting directions for DTD and OSA. And like Ahmet said, we're pleased with the progress.

We're waiting for kind of the reimbursement piece on the DTD and then on the clinical data for OSA to make further decisions. But on the DTD front, for example, we're freeing up some of the investments planned for next year and 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 markets 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. I 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 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 we've 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 Essenz in the fourth quarter.

This was related to the launch of the additional software that we were working on throughout the year. So it's really a comparison 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, sort of goes hand-in-hand with the revenue commentary. But we are investing on a 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 above market rates, right? So we're investing in innovation programs. We're trying to accelerate our sort of core portfolio in CP and epilepsy. And we're still continuing to invest in DTD 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 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..

Yes. 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 those levers of growth, if you like, the 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 continues to be driving our growth. The third lever is continuous upgrade of our equipment fleet to Essenz. 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 -- 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 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 ups and downs as well in terms of the levers..

Understood. Thanks for indulging extra follow-up..

Our next question comes from Rick Wise with Stifel. Please go ahead..

Hi. 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 of the story into next year?.

Thank you, Rick, for the question. So, maybe just to 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. 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, 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.

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 to the benefit of our business, we were able to grow the capacity in 2024 in our estimate better than some of our competitors. And so, from our point of view, our first step was to do better with -- in terms of productivity with the footprint that we have today.

And we are on track to achieve a 10% -- at least 10% 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 influencing this year is that kind of on the competitive side, we don't see any movement, meaning 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 LivaNova.

Again, if this continues, gives us additional opportunity in 2025 for continued gain of share. But for us to achieve that 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 Ahmet 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. But 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 how the market is shaping up for the quarter and into 2025..

That's great. Maybe for Ahmet as my follow-up question. Ahmet, 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 these interesting products with data capture and some of the attributes you talked about starting in 2025? Or no, this is going to take two or three years.

And maybe specifically on DTD, you're saying once all of the publications are out there, you'll request CMS coverage. Any updated thinking about potential timing there as well? Thank you..

Good morning Rick. So, maybe I'll start with the depression piece. So, it is hard for us to predict the timelines with CMS. 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 purpose is 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 outlined, we will initiate that process right after the final publications, which we anticipate in early part 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 is they're not early stage, early feasibility programs. They are mid-to-late development programs. But beyond that, I don't want to share time lines with the exception of stating that these are not discovery research. They are not very high-risk programs.

They are engineering execution programs.

Sorry, Vlad, 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 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 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. I 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 relative to 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 there?.

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 modeling on the tax rate. That's why I highlighted that in my prepared comments.

We started looking at our geographic mix around the statutory tax rate. And hence, I wanted to provide that insight early on so you can update your models. But just broadly speaking, at the highest level, we intend to grow our margins at a faster pace than revenues in 2025..

Okay.

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

It will be inclusive of DTD drop-through as well as the benefits of the roll-off of the ATS business, which we're exiting this year..

Okay. And then maybe on DTD, it sounds like -- I heard the comments there. It sounds like maybe at least at the margin, slightly more positive sounding, at least in our view on the potential for that program to play out.

So can you just maybe help us think about some of the scenarios there around what the data should bring about, the submissions to the FDA or the CMS, and how you're thinking about that program, again, on a relative basis to maybe what some of the comments were earlier this year? Thank you..

Sure. This is Ahmet. 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 study, the 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 we disclosed 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, we -- 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..

Sounds great. Thank you..

Our next question comes from Michael Polark with Wolfe Research. Your line is open..

Good morning. I have a question on US epilepsy.

How do you handicap here into next week, the prospects of getting the coding moved up to Level 6 payment? And if that were to be achieved, how would you frame the impacts for us next year and beyond? You know is there a price opportunity if that were to happen? Is it more you would expect volume to react positively because procedure economics improved? Any puts and takes provisionally would be helpful..

Sure. Thanks, Michael. It's Step here. So, sort of, on a wider scale, LivaNova has had a reimbursement strategy in place for a number of years and being able to support drug-resistant patient access to our therapy 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 recommendation, we're very encouraged to see the unanimous support of our request.

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 implanting centers due to largely retiring economic headwinds faced by centers prescribing VNS to Medicare patients.

Overtime, what we hope to see is that the increase in reimbursement will drive greater VNS 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 6 will give us the potential for greater flexibility with future innovative products, which are in our pipeline..

Thank you..

And just maybe -- add to what you said, Michael, it's a great question. Just to add, this is Vlad. If you step back just from the clinical unmet need, there are over 1 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.

nd so if the improvement in reimbursement were achieved, that will obviously unlock -- it won't solve a complete puzzle, but it will unlock a very important area for us..

Thank you. Quick follow-up, another fishing expedition for 2025. I want to keep it simple. You're raising 2024 EPS by $0.20 at the midpoint. If I just knew that, next year's number might be biased higher by $0.20, but tax rate is going to step up again, if I do the math on Alex 24% to 25%, it's another -- it's a $0.15 headwind.

So the raise this year, plus 20%, the tax rate coming up minus 15%, it kind of leaves the Street unchanged, maybe up $0.05, $3.65, $3.70. That's 10% EPS growth year-on-year off this new 2024 EPS base. 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 BTD. 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 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 2025? Thanks for taking the questions..

Yes. Adam, thank you for the question. So I'll start and then Ahmet can maybe build on that. But if I step back and say 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 six to 12 or from seven to 13 months treatment. So we will be looking at the seven-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 will extrapolate it into the future.

But ultimately, the most important is what is our clinical result going to show at 13 months. And 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 third one 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 three big factors that we're going to take into consideration. But overwhelmingly, most important one is the clinical outcome and how it compares to other devices on the market..

Yes. Maybe I'll add a couple of quick points. One 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 will indicate that the device performed better than our original expectations that allowed us to truncate the study and move forward with a much smaller study than originally planned.

So maybe those will be the two points I will make. We are very excited about not requiring DICE because DICE adds 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 Petrone with Mizuho. Your line is 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 is -- outcome is positive, we will commercialize this technology for two reasons, really.

One is 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 kind of the market, the 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 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 3 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 2025, we will apply for the formal consideration. And the time lines are, I think, wide if you look at historically. But generally, it's about a year or less. But again, we can't control or commit to any time lines. It's a wide range if you look historically..

Thank you..

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

Yeah. Thanks. So just starting with Essenz. So I think you said it was around 40% of H1 sales this year. I'd assume that's a 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 Essenz in our total portfolio of placements. We assume at this point that we can keep improving by about 20% points every year, which will then kind of take about a three-year cycle for us to get to 100%.

The goal is to get one platform to 100% of our placements. And then the way I think about Essenz, 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 it. And so you can really get a hardware with various number of options.

And 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 2 different platforms on the market. So that's our strategy..

Okay. Got it. And then 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 imagine it's lower, just I think it's a younger patient population.

And then would this change -- if this change does happen in Medicare, could that have a spillover effect on the private insurers? Could it result in private insurer reimbursement increasing? Or is that totally separate? Thanks..

Yes. Thanks, Mike. So, we equate our Medicare population to be about 40% of our NPI numbers. And 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 Miksic with Barclays. Please go ahead..

Hi. Thanks for fitting me in. So, 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 and understanding that's a hypothetical based on the results in November and the safety results in the first quarter.

Maybe where is the puts and takes in terms of moving forward with investment, maybe slowing or sidelining investments and reassessing on OSA and/or on DTD. Thanks..

Thanks for your question, Matt. Right, so the big investments that you're probably thinking about are related to DTD and OSA. The way, as Vlad said, 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 we're -- that's the gate in terms of – and 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 some -- 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 it or other options. 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 where now? And just remind us maybe where the spend is up until decision point on OSA roughly?.

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

For DTD?.

For DTD, yes..

And for OSA?.

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

And just to add on the OSA front, like Ahmet said, we're targeting submission in the first half of 2025. So to your point, if we make a decision to commercialize or expand the investment, this is most likely not a 2025 story. This is 2026 and beyond..

Thanks so much and thanks, everybody..

Thank you. We have no further questions in the queue. So I'll turn the call back to Vladimir Makatsaria for any closing remarks..

Yes. Olivia, 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..