Karen King - VP IR Damien McDonald - CEO Vivid Sehgal - CFO.

Jason Hills - Canaccord Genuity Scott Bardo - Berenberg Bank Brooks West - Piper Jaffray Michele Baldelli - Exane.

Good day, ladies and gentlemen, and welcome to the LivaNova PLC Fourth Quarter and full year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded.

I would now like to introduce your host for today's conference Ms. Karen King. Madam you may begin..

Thank you and welcome to our conference call and webcast discussing LivaNova's financial results for the fourth quarter and full year 2016. My name is Karen King and I'm the Vice President of Investor Relations and Communications for LivaNova.

I am very happy to introduce to you today Damien McDonald, our new CEO who will be joining us on today's call along with Vivid Sehgal our Chief Financial Officer, who many of you know. This morning's press release, slide presentation and conference call include forward-looking statements.

Forward-looking statements may be identified by the use of forward-looking terminology including, but not limited to, may, believe, will expect, anticipate, estimate, plan, intend and forecast or other similar words. Statements are based on information presently available to us and assumptions that we believe to be reasonable.

Investors are cautioned that all such statements involve risks and uncertainties.

Our actual results, performance or achievements may differ materially from those expressed or implied by these forward-looking statements which are not guarantees of future performance and involve known and unknown risks and uncertainties and other factors that are, in some cases, beyond the Company's control.

For detailed discussions of the factors that may cause our actual results to differ, please refer to our most recent filing with the SEC and other regulatory filings. Included in the press release today are selected non-GAAP operating results.

In this press release, the management has disclosed financial measurements that present financial information not necessarily in accordance with Generally Accepted Accounting Principles or GAAP.

Company management uses these measurements as aides in monitoring the Company's ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against other medical technology companies.

Non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. These non-GAAP financial measures should be considered along with, but not as alternatives to the operating performance measured as described per GAAP.

To enhance the call; we have 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 communications to all.

You can find the presentation in the Investor Relations section of our website under the News & Events Presentations tab at www.livanova.com. With that, I will now turn the call over to Damian..

Thanks Karen. And good morning from Houston and welcome to our fourth quarter and year end 2016 conference call. I am extremely pleased to be at LivaNova and to be hosting my first conference call. I have been encouraged by what I have seen during my hundred days on boarding.

And even more excited to be heading this company today than when I accepted the road. I spent significant time on the road meeting hundreds of people. Visiting with customers of hospital and medical centers, working closely with senior management team and meeting with employees.

I have been to most of our manufacturing facilities, I have done a deep dive with every franchise and sales region and I have been trained on all of our products. I was most impressed by the passion I have seen across the organization and the dedication to making a difference in the patient's life.

2016 was our first year as a public company and with that came opportunities but also challenges. While we weren't able to grow our top line as fast as we liked, we have made significant improvements throughout the rest of the income statement, cash flow and balance sheet and hit the top end of our adjusted EPS guidance.

Our goal first and foremost was to ensure that we had a solid foundation in place from which to drive long term growth and we believe we accomplished that objective. So let's talk about that foundation. We ended the year with adjusted gross-margin in the mid-60s, a 150 basis points higher than in 2015.

We met our commitment of $19 million in merger synergies, we were able to keep adjusted SG&A relatively flat versus 2015 showing our ability to manage expenses while continuing to invest.

We restructured less profitable businesses, we reduced adjusted R&D as we eliminated duplication and accelerated our efforts to reprioritize investments in our growth drivers. We reduced our adjusted effective tax rate from mid-30s in 2015 to mid-20s through various tax planning initiatives.

We improved in channel inventory levels and enhanced distributor relationships. We maintained net debt at relatively low levels while undertaking restructuring activities funding our equity investments and delivering on our share buyback program.

And lastly we ended the year $3.05 in adjusted earnings per share which was at the high end of our guidance range.

I really see tremendous opportunity to increase share-holder value at LivaNova by maintaining our strong leadership positions, focusing on key drivers like executing on patient centric innovation like Neuro Modulation and disciplined investment in both organic and inorganic growth.

I look forward to sharing with you or thoughts and ideas on how we will advance LivaNova to the next level at our upcoming investor day in the third quarter of 2017. Before we move to our sales discussion, I wanted to touch on two recent announcements. A decision to delist from the London Stock Exchange and the 3T heater-cooler remediation plan.

Last week on 23 February we issued a press release where we announced our intent to delist from the London Stock Exchange over the next six weeks. We made the decision to apply for the voluntary cancellation primarily because of the low volume of shares being traded on the LSE and the fact that the majority of our shareholders were trading on NASDAQ.

I wanted to assure to you that this is not a reflection to our European investors. The majority of our management team & I work and live in the UK and other parts of Europe and are committed to all our investors. Additionally this morning we issued an 8-K and disclosing information regarding the 3T heater-cooler device.

We disclosed that we now have developed a 3T device remediation plan and as a result we recognized a liability in the fourth quarter which includes three key elements. First we implemented a learner program offering new 3T learners.

We prioritized and allocated these machines to customers with confirm bacterial contamination and machines manufactured prior to September 2014. This program started in the fourth quarter of 2016 in the US and is being rolled out to customers on a global basis. Second, we are approved by local regulatory authorities.

We are now offering a deep disinfection service, free of charge to customers who have confirmed bacterial contamination on machines manufacture prior to September 2014. We are also offering the services to other customers who requested the systems with the cleaning of their machines.

This service has been available for some time in many countries around the world and will be expanded to additional geography as approvals are received. And third, we have developed a design solution to address the issue of potential error solization.

Subject to final verification validation of these design changes we will begin implementing this solution in second quarter in Europe and progressively expand the implementation to other countries as we receive regulatory approvals. In the US we continue to work closely with the FDA on the remediation plan.

With the learner program and deep disinfection process in place and the design solution nearing implementation we are now able to provide an estimated cost of approximately $38 million which include costs already incurred in 2016. We have made assumptions on the timing of implementations due to various global regulatory timelines.

The device remediation plan assumes that the estimated costs which are all in cash will primarily be incurred over the next two years approximately 70% in 2017 and 30% in 2018. The plan assumes that all 3T heater-cooler devices currently in use will receive a design solution during that time frame.

As a leader in our industry we are committed to our customers and patients who rely on our devices. Our mediation plan continues clinical access to this important device that enables lifesaving cardiac surgery. I am now going to move to a discussion of our sales performance and Vivid will discuss details of our financials and 2017 full year guidance.

I will wrap up with closing comments and we move to questions. So turning now to our next sales results for the quarter. As a reminder, in our press release we provided table that shows both reported net sales growth and constant currency growth so you can see the impact of foreign currency fluctuations.

For discussion purposes, we are going to focus our comments on net sales results with constant currency growth. Net sales were 1.6% compared to the fourth quarter of 2015 primarily due to the decline in our cardio pulmonary business. For the full year net sales were up 1% versus full year 2015 primarily due to strong sales in UI modulation.

Let's look at each franchise. Cardiac-surgery decreased 3.2% for the quarter. Sales for the cardio pulmonary products were at $125 million for the quarter down 3.4% compared to fourth quarter of 2015 primarily to our 3T heater-cooler device and our heart lung machine in Europe. A majority of the decline was due to the 3T heater-cooler device.

As I mentioned previously, we started the learner program in the fourth quarter offering learners free of charge to customers in the US and we are rolling out the program on a global basis. As a result we have selling almost all devices and are allocating manufactured products to the learner program.

Also, as we anticipated last quarter we experienced softness in European Capital sales. We have heard from customers about delaying new purchases and holding onto their machines longer in anticipation of the next round of innovation.

In the US, we are not seeing the same type of behavior and in fact excluding heater-cooler devices sales in heart/lung machines were comparable to 2015. For the full year cardio pulmonary was relatively flat to full year 2015.

This was primarily due to declines mentioned offset by strong performance by share gains over the year in Inspire - our newest oxygenator. Sales for heart valves were $34 million in the quarter, a decrease of 2.2%. For the full year, the heart valves declined 1.6%.

Tissue Valve business increased 8% as a result of strong performance in Perceval, our new suture less valve particularly in the US. However, this was offset by the declines from mechanical heart valves. Turning to CRM, sales were $61 million during the quarter, an increase of 1.3% compared to the fourth quarter of 2015.

In high voltage we continued to see good interest in Platinium in both the US and Europe. Sales were hampered in the fourth quarter of 2016 in Europe due to a delay in the approval of our IS4 standard for our CRTV devices coupled with a challenging year over year comparison.

If you recall Platinium was launched in the fourth quarter of 2015 and had a particularly strong initial adoption. Our IS4 standards have since been approved in Europe. In Low voltage Pacemakers grew in the fourth quarter in low double digit range driven by growth in KORA 250 in Japan.

For the full year sales and CRM were down 4.7% primarily due to challenging year-over-year comparison as a result of the transition from KORA 100 to KORA 250 and delay in IS4 standard in Europe. Now let's turn to Neuro Modulation. Sales were $91 million, down slightly versus fourth quarter of 2015.

Growth in the US was offset by the declines in Europe and the rest of the world. While AspireSR continue to perform well, we had several unusual items in the US that contributed to lower sales growth than the rest of the year. First as previously discussed, it was an anticipated decline in selling days in 2016 versus 2015.

Second, the sales cycle changed from a fiscal to a calendar year and third, the fourth quarter of 2015 was impacted by an initial launch and conversion of AspireSR.

In aggregate we believe that these items negatively impacted the fourth quarter and the underlying growth would have been more in the mid-single digit range, a range we feel is more indicative of future growth. Innovation then becomes the accelerator to improve growth beyond that range.

In Europe and rest of the world, sales were down primarily as a result of in channel inventory management. As I mentioned in my opening remarks we are making progress and working with our distributors to optimize inventory levels and improve sales predictability.

For the full year sales in Neuro Modulation were up 8.8% primarily due to strong adoption and growth of AspireSR. Average new patient growth over the course of 2016 was approximately 7% which reflects the strong interest and demand for the device. I will now turn the call over to Vivid for an overview of our financial results.

Vivid?.

in Neuro Modulation we are planning to launch our next generation VNS therapy device in the second half of the year. This new innovative device which we will call Centiva combines a small size of our demi pulse with the advanced technology of our AspireSR. We believe this will be a significant addition to our Neuro Modulation portfolio.

In Cardiac Surgery we assume the Perceval continues to drive strong growth, both in the US and Europe and the tissue valve growth will offset continued softness in mechanical valves. In CRM we anticipate that KORA 250 will continue to gain share in Japan and we will see the benefits of the launch of our IS4 standards in Europe.

With our 3T heater-cooler devices we assume, we are successful in implementing our design solution starting in the second quarter in Europe and progressively expanding the implementation to other countries as we receive regulatory approval.

We also assumed that the sales in Europe and the rest of the world will be impacted as manufacturing capacity is switched to learner machines. As a result we expect continued sales deterioration in all markets resulting in global sales for 3T heater-cooler devices in 2017 to be well under 1% of total sales.

With that I will turn the call back to Damien for some final comments. .

Hey thanks Vivid. In summary, 2016 has been more challenging and had more moving pieces than we originally expected. However, it was a year of first for LivaNova.

It was our first year as a public company, our first year to bring together a dedicated and talented work force of over 4500 employees, our first year to build and create the solid foundation that will drive our growth and our first year of significant accomplishment and progress.

We made great strides in new product launches, executed finance synergies, implemented restructuring efforts to improve profitability, remained disciplined with our expenses, reprioritized our investments to focus on higher scope drivers, eliminated duplication in our R&D portfolio and optimized level of inventory in our channel, all while enhancing our distributorship in many of our emerging markets.

In addition, we have a solid remediation plan for the 3T heater-cooler devices. The list of accomplishments is a promising start however, as we close out 2016 and begin 2017 we know we have a lot of work to do and we are in no way satisfied.

The management team is committed to building this business, investing behind our growth drivers, funding our equity investments and leveraging our strong balance sheet. We are encouraged by our first year and are focused and committed to our goal of delivering sustainable growth and delivering long term shareholder value.

And with that Charlotte we are open for questions. .

[Operator Instructions] Our first question comes from the line of Jason Mills of CanAccord Genuity. Your line is now open. .

Great, thanks for taking the question.

Can you hear me okay?.

Yes Jason. .

So, wanted to start with your pipeline, you mentioned it briefly but didn't go into great detail with respect to your R&D pipeline. I know that it's been an area that investors have focused on with me and you had a full pipeline for quite some time but you have also talked about last quarter prioritizing that pipeline and focusing on a few areas.

Could you give us a bit of color there and anything might come out of that pipeline besides Centiva of course, which I will add a question on later, but anything else in the next couple of years?.

Yes, look I think two things. You picked on a thing which is most important this year for us which is Centiva and other aspects of Neuro Modulation that are coming to bear like MRI portfolio, pediatric indication, you know those things for me really are the pipeline starting to pay off.

A deeper dive on that is really I think the best place for that is going to be our Investor Day when we get to Q3. We are really bringing a lot of things together right now. I am deep diving with the entire group on making sure we have the right priorities across the whole portfolio. So I think the best place for us to really dig dive will be Q3. .

Okay, that's helpful and then with respect to your guidance.

Obviously you go back to the time of the merger, the expectations on the top line were a little bit higher than what the run rate has been so perhaps it's impacting your expectations on the bottom line to some extent because your leverage, your synergies has come through on adjusted basis in 2016 nonetheless, your growth expectations on the bottom line are a little lower than obviously what they were originally, so maybe talk us through the thought process there and what you see is your longer term growth rate.

One other thing on that question is the tax rate. I think there is a contemplation perhaps tax planning may help you reduce your tax rate a little bit more than your guide just on basis of this year, perhaps just as a part of it you could speak to that. .

Yes, I got the first part. Let's come back on the second part but I think it related to tax-rate.

So Jason I think that's a pretty fair question and over the last couple of months as I have been evaluating company and the portfolio and working with the management team, I have given pretty significant time to looking at our growth and what Vivid and I really landed on was, it was prudent to develop a near term plan that was something we could commit to and deliver.

I mean we come from cultures, Vivid from [indiscernible] and as we lay it out what the year looked like, we really believe that coming in with the numbers we have outlined today put something out there that we can commit to as a leadership team and I think that was important. .

And I also think Jason, I think your comments around the bottom line, with Damien we sat down as a management team and considered the credibility of making sure that we aim to hit our quarters but I think what is really important is an acceleration of top line growth and I think what we have to do importantly is to balance in competing priorities.

It's about obviously creating some bottom line EPS improvement but you are going to see we are going to invest in our key growth drivers right now and we are also putting back of focuses, as Damien said in terms of R&D.

So I think what we try to create hers is a credible plan for 2017 that allows investment, that allows bottom line growth, consolidates our balance sheet position but ultimately like I said allows R&D growth which we will talk about during the Investor Day.

And if you, we lost you a little bit, did you ask a question about tax Jason I am sorry we missed that one?.

Yes, apologies, I am travelling. I am on a cell phone that may have contributed to it. The tax question is just going back to you original commentary about some of the reducing your tax rate.

You obviously have done that quite a bit this year but I think there was an expectation that that would continue and the guidance this year doesn't reflect the significant leverage on the tax line so that was that part of the question and then I will just slip one more and then get back in queue to let others in.

On the top line specifically in heart valves, maybe talk a little bit about Perceval as supposed to Aortic Valve surgical market that doesn't seem to be growing the significant amount but maybe you could give a bit of color as to what you are seeing on the tissue valve side relative to what's going on and what are your expectations there for overall market growth, who do you expect to gain share, maybe you can give us some color, line extensions for the personal valve etcetera.

Thanks for taking the questions..

Okay. Just in terms of your question on tax, we have been extremely pleased with all the work that the team has done in relation to our tax rate.

As you rightly mentioned we have had some good leverage this year bringing the tax rate down from approximately mid-30s range in 2015 to md-20s range and that has driven lot of shareholder value and given us a definite boost in terms of our future plans. I think guidance right now is a very sensible approach from us.

I think the one thing in the current environment we are facing. I think putting out tax numbers that are not achievable and I have said on numerous occasions that we are trying to create a sustainable tax rate. I think it is the right thing for us to do.

So this is a fluid situation for us at the moment and we know that the world of tax is changing on a dramatic basis. So we feel very confident where we stand right now and we will keep everyone updated but I think our guidance today will reflect where our tax rate will be. .

Let's come back on that Perceval thing. It's pretty long discussion but let me try and do justice while we are on the phone briefly with you. So first of all Tavi's is growing but there is a huge unmet need in aortic valve replacement with traditional valves and that market is still 65% of all of the replacements done in the US.

And we really believe we have got a tremendous growth trajectory there with Perceval. We only recently launched it. We have talked about launching it in phases and we are through our sort of phase I but we talked a little bit about prioritizing our focus.

I really have pushed the team to make sure we increase our investment in Perceval, both in the US and Europe and I also believe we have the best product. We have the only truly sutureless valve that has the great application and honestly I think this also opens up the chance for more minimally invasive surgery using an aortic valve replacement.

So I think there is tremendous growth in the US and Europe and added to that we are planning to launch in the backend of the year in Japan so we really see tremendous opportunity from cardiac portfolio in this respect. .

Thank you for taking the questions. .

You are welcome Jason, travel safely. .

Thank you. Our next question comes from the line of Scott Bardo from Berenberg. Your line is now open.

Yes, thanks very much for taking my question.

So first question please, 100 days in Damien, I wonder if you could share some thoughts on how you see the organizational setup of the business across the major divisions, where there are huge gaping holes leading to obvious underperformance with respect to selling at market prices or if you were pleasantly surprised if you could share those thoughts please.

.

Look Scott, great question. Thanks for calling in today too. Couple of things and I think I mentioned this to you before. I was really pleasantly surprised as I looked across the organization where we have really pockets of what good looks like.

If it's in growth, I can see in the neuro-modulation team or Perceval team, an ability to drive high double digit growth. What that tells me is we know we can do it. I looked at R&D and particularly the neuro-modulation team, their ability to execute on R&D is really phenomenal. So we know we can do it.

And in ops as I looked at the organization and two of the plants, see the embers of really lean manufacturing so we know we can do it. The challenge for us is really templating and replicating this and you know the background I came from is very much about that and being focused on prioritizing our resources and then executing.

So I see pockets of good and we just need to be really good at replicating it across the organization. .

Thank you.

And given that the particularly, the capital side of your business caught everyone by surprise including I think leaving over management, it will be useful I think to give us a sense of how big is the capital side of LivaNova's business and if you can give us a sense of how much lung machines declined in absolute dollars and same from heater-coolers just so we can get a better sense from modeling going forward, that would be very helpful please.

.

Thanks Scott, its Vivid here. In terms of our, let me sort of try and give you a bridge to that question. I think what's important to understand is that if you take our cardiac surgery business which is obviously the largest part of our business which is in excess of 50% of our sales. That's sort of broken down into two parts.

We have the cardiac surgery business which is about three quarters of the business and the heart valve which is about a quarter 25% of the business.

Within that section in the cardio pulmonary we have about two-thirds of the business what we call the disposable business largely driven by the oxygenator and the Inspire range that we have that has traditionally being growing at 3% to 5% and we see that as a continuation of the momentum going up into 2017 which is the largest part of our cardiac surgery business.

And then we have a capital equipment side which represents about a third of the cardio pulmonary business.

That is obviously two areas of pressure in 2016 driven by the 3T heater-cooler and if you look at our heater-cooler sales compare to 2015, we are significantly down but we also had some pressure in relation to our lung machine in Europe so, I think what you are going to see from us is the capital equipment represents about a third of our cardio pulmonary business and two-thirds of it will continue to grow at a reasonable 3% to 5% and we will see some continued declines and struggles within the capital side largely driven by continued pressure on the 3T heater-cooler.

.

Thanks for reminding us of the structure but you didn't actually get to the discussion about how much that capital business is contracted? I think it's a sensitive issue here so I was wondering if you could give us a sense of how much that contracted in fiscal 2016 and also if you would follow on from that discussion to what is embedded actually in your 1% to 3% growth forecast.

I think we are only 12 months or 18 months progressed on capital markets day where you are looking to grow Neuro Modulations on 8% to 10%.

If that still holds your new product launch, it wouldn't imply too much for the rest of your legacy soring business which perhaps would be a surprise given where you are with Perceval, Inspire and your CRM products so I would like a bit more understanding of how you go about budgeting for the top line please?.

Okay. Maybe I just touch upon the heater-cooler Scott and we can obviously follow up after the call as well. Right now the numbers I am providing at the moment is numbers that we have given at public disclosures in the past. So let me try and give you a bit more color.

So heater-cooler which represents the capital side of our business right now, we have seen a significant decline in the cardio pulmonary for example in the US we did talk about up to 1% of sales being the number in 2016 but as a whole sales of heater-coolers were down almost 70% in the US on a year-on-year basis.

I mean on a worldwide basis sales were almost half of what they were in 2015. So, we have been impacted by this and we have just said as well we expect the same, only minimal sales will occur in 2017. So the capital equipment has seen decline in 2016 and relatively significant ones and we continue to see pressure in 2017.

So let me hand over to Damien on the sales. .

Yes, well I think so broadly, I mentioned that we have had a few more challenges in the year than I think we anticipated.

So you know that's why Vivid and I decided to give the guidance that we did and provide targets both internally and externally we believe that we can beat and that is an important thing for us as we look at the entire portfolio we really try to prioritize our options, our investments and where we are going to focus the organizations.

Back to cardiac surgeries where Vivid was, we do believe we have got continued growth in the consumables which is two-thirds of that business and it's a tremendous opportunity for us. We have market share gains; we have tremendous relationships with our heart lung machines and knowledge of accounts.

So our heart lung machine share is much higher than an oxygenated share and we believe that that's an important part of driving growth in the consumables part of it. Vivid talked about capital.

I think in heart valves, we saw tremendous growth in Perceval north of 50% and across the geographies last year and we continue to believe we have tremendous upside in Perceval as we expand our footprint there and we have lot of opportunity there as I mentioned in an earlier question to continue our penetration of the Aortic Valve replacement. .

You know finally Scott, I think what's important to understand is our guidance, I think reflects the reality of our 2016 performance and I think that's what we need to do right now.

I think it's important to understand that while sales is absolutely not where we would want them to be, we did hit every other line in the operating leverage side and our net debt was in the position that we expected to be so we exit the year in a good share in terms of bottom line and in good shape in terms of the balance sheet.

But I think one thing we're not going to try and do is this year we are going to reflect on this to make sure that again is we put down numbers that we show that we can hit and numbers that doesn't mean that we have to land up doing what we did last year and that's certainly not something we are planning for this year around..

Fully understand. I mean obviously you pushed it, what I'm trying to determine is what is the degree of conservatives and how the underlying drivers of the business materially challenged in last 12 months.

So Damien, have you - I appreciate you are going to give us some sort of mid-term goal in the Q3 but I mean do you feel this point and in the safety to walk away from you know, view that could be $80 million product, but near modulation has digit growth the CRM business primarily speaking should have some more modest growth.

I just wonder if you can help us give some feeling actually as to you know, whether the underline drivers of the business, have any new change since the last update. That's the last question for you..

Yes so I'll come back to where Vivid was. Clearly 2016 was you know, a different what everyone anticipated so in as much value coming off the direction previously I think look at the reality of 2016. Having said that, we really do believe that we've got tremendous opportunities in cardiac with auxies.

So there is a consumable player there that has a great return in revenue strength and CRM the quarter 250 expansion continue for -- so I think they are important drivers for CRM. In newer modulation you know, we are continuing to believe that new patient acquisition is round about that 7% range.

We still are at the end of the service and price driver you know, we previously outlined.

And as we talked about we have Sentiva, MRI, pediatric and I've also asked the team to you know, really explore additional resources in Europe for depression and we see tremendous opportunity for depression treatment in Germany in particular which in itself is interesting but it's also a pilot for us about expanding the TID indication more broadly as we work through the regulatory opportunities.

So, that's a longer answer than you probably wanted but it really gets to the point of we believe there are growth drivers that will give us the opportunity to hit our guidance..

Very good. And perhaps a cheeky last one if you may. Obviously we've been investing a lot into new venture programs and this has certainly been meted in the past as being potentially accelerator into higher growth for the organization.

Can you give us an update actually as to where we are with Mitral whether you introduce this being any sort of contributor to your midterm growth. Thank you..

I'm really excited about you know, a number of our investments there - equity investments is the word I was looking for, you know, Mitral is an exciting space.

I mean there is lot of hype which is always interesting but I think there is a lot of reality to that unmet need of patients in this space and we are excited about our equity investments in case on an high life. If you look at obstructive sleep apnea, I personally really love that market, I think it's a huge unmet need.

You know, if you really have seen a sleep app patient and what they have to go through, we think this tremendous patient unmet need there and we are excited about our equity investment in this area. And heart failures continues to be something that we have to monitor.

Clearly the trials that occurred last year you know, had a reset in terms of the entire market. But you know, again there is a huge unmet need in the heart failure therapy and we are very happy with what the team is working on in that respect. So, I remain really bullish about our equity investments and more to come..

And again I think again from a balance sheet and cash perspectives , Scott it's important to understand that all of our internal workings and going forward, you know, we are committed to the fully funding as Damien said, our equity investments and that's reflected in our financial numbers for 2017..

Thanks so much guys..

Great to have you on Scott too. Thanks..

Thank you, our next question comes from the line of Brooks West from Piper Jaffray. Your line is now open..

Thanks can you hear me?.

Yes Brooks. Good to have you..

Thanks Damien, good to speak to you again. I want to follow-up on the VNS business. Like the weakness in Q4 I think is explainable but I just want to understand if there is any other you know, competition, head wins, you know be it from other devices or some of the new pharmaceutical agents. Any more detail would be helpful..

I think VNS is really interesting. There is a huge patient pool that's identified and is an opportunity for VNS therapy.

And in the moving patients through that adoption pathway, you know, just takes time and we believe we've developed real competency in that in helping patients understand the pathway and working with the clinics to move patients through and that's why we continue to believe our patient adoption rate is at you know, more than 7%.

In having said that, every new drug that comes along, causes people to step back and reevaluate the drug and you know, we've talked before that that could cause a delay in 4 to 6 months in the decision of putting someone onto VNS.

We continue to believe that there is a large patient pool identified and our opportunity frankly is to crack the code on how to move patient through that faster but we remain very confident that VNS.

And as I said - I think you've seen the R&D investments paying off not only with Sentiva but the full body MRI that we are anticipating, pediatric application you know, an approval which we are anticipating and back to one of the earlier questions about what does the reorganization do, we think having a group of people focused on a geography, as we do now in new organizational structure gives us more focus on Europe and going after newer modulation in Europe both in epilepsy and TRD we think is a real opportunity..

Continuing on the thought, you know, traditionally been able to take you know, kind of 10% price on new product introductions. You sense that you are going to be able to get some price on you know, above and beyond the typical annual price increases on Sentiva.

And then can give us some sense of timing on the MRI and pediatric level of indications that have one follow-up, thanks..

So Brooks, let me touch on the pricing first of all. So as you are aware, as far as -- was affectively a real paradigm shift in the whole area for drug resistant epilepsy, we certainly believed that innovation does create opportunity for pricing and obviously that is something that with Sentiva that we are seeing is certainly available to us.

So, I don't think we can talk about the same level of pricing increase that we saw with [indiscernible] which we talked in sort of 8% to 10% range but absolutely we do see opportunities slightly slower level in relation to pricing when Sentiva comes out. And again, innovation demands premium and that's what we are going to see right now.

So, I think what you are going to see from us is normal pricing but we are going to look for reasonable annual pricing improvement plus innovation premium for Sentiva which we have dived into in 2017 guidance..

On timelines, so MRI should - we are hoping for midyear and page you know, towards the end of the year but we are actually very excited about that because in the US for example 40% of patients are children and we know that earlier intervention you know, has the better outcome with VNS and so we're particularly excited about that..

Okay. And then I guess for flats, Vivid you said $40 million in cash, are you confident that you have you know, the right amount of cash to I guess fund the venture opportunities and also run the business.

Obviously you are generating cash but is there anything you can say about your comfort with the level of cash you are carrying on balance sheet right now?.

I think, Brooks, cash is obviously a big focus for us. I look more that say at net debt because I well do ensure that other company, we've got our level of debt right and we'll be proactive at looking at both our cash balances and our net debt balances at the same time.

I think what's important for us is that we have delivered the net debt in cash balance which was in-line with our expectations despite some of the obvious softness that we had in our numbers and I think we've managed our position on the balance sheet extremely well for 2016.

In terms of going forward into '17, yes, I think right now again, I'm pleased with the level of cash and debt strength that we have. I believe right now that we have enough in our tank to be able to both keep our capital allocation strategies and options fully open as we discuss previously.

And that will include, like I said, organic internal growth, they could include further share buyback programs, it can conclude equity investment and MNA.

I think we're in good shape and as I said before, I think we have the capacity right now to go out if we require into the markets and basically I did talk about leverage potential and in my opinion, nothing has changed on that..

I think, Brooks, this is one of the things that Vivid in his statement really put us in a great position throughout this first year. Bringing a lot of discipline to the whole P&L and balance sheet has been I think one of the strengths of our first year and I think that sets us up really well for doing all sorts of organic investment.

But I think frankly great inorganic opportunities that are out there..

That's helpful. Thanks, guys..

Thanks, Brooks..

Thanks, Brooks. Cheers..

Thank you. Our next question comes from the line of Michele Baldelli from Exane. Your line is now open..

Hi. Hello for everybody. I got two questions. Two related to the products. If I didn't get the wrong way, the MRI compatibility then will be opted on the new epilepsy device? The second question relates to these product still.

International option was a way to get all sort of synergies from the merger, but that seems that the sales in Europe are all from the epilepsy devices are still weak.

Can you advice on what's your subject about these, please?.

Yes. Hi, Michele, how are you? Great question. On MRI, yes. It's a full-body MRI compatibility and that is as I've said, more mid-year. On the international expansion, I'll come back to our dissatisfaction with year one and things that we hoped would have gone better but didn't. I continue to believe that Europe is a great opportunity for VNS.

We perhaps didn't execute the way that we have hoped and I think doubling down there is a really important opportunity for us on epilepsy. But as I mentioned, in terms of treatment-resistant depression, in particular in Germany where the market conditions are very favorable for that.

Additionally, we made some changes in our market structure where in Canada or in Australia, we went direct and I think that will also give us some opportunities in terms of our U.S. growth. You called it, it's not like we had anticipated, but I'm not in any way backing off the global expansion there. I think that's one of our great opportunities..

Okay.

So let's say this strategy is a full launch of new products or importing sales force? But just to get a better feeling, what is the study on this?.

The answer is yes and I'm not being glib. I really do believe. The first thing is you're seeing our R&D investments pay off. So new products, new indications and that's a very key part of our growth. But related to that, sales force execution.

Again, those of you that I have spoken to know that I'm a big proponent of discipline and a very disciplined approach to process and driving behaviors. I think one of the key opportunities for us is in sales force effectiveness and I'm really excited about the way the team has approached those ideas.

Our investments in this area, I think again it pay off over the short and the medium term..

And Michele, I would just add, if you look at our income statement for 2016 versus 2015, we have made some really important choices in terms of investment that hopefully will drive growth in 2017.

If you look at our total operating expenditures for example, we've improved our operating expenses or reduced operating expenses in excess of $20 million from '16 versus '15. But in terms of the ability to bring those expenses down, we have certainly not backed off in terms of selected investments.

I think as Damian said, in terms of driving future growth, we have put more into R&D, we have put more and started to put more that Damian said in terms of sales force execution. I think we've done a decent job at balancing operating leverage while continue to actually pull up the investments in the future growth drivers..

These are not plans. These are actions that have already been put in place. In some instances, in Europe, we've already moved resources from one portfolio and in very specific geographies into the Neuromodulation space.

We've already increased our funding in Europe for the TID indication and have moved resources specifically into that and hired new external resources. I don't want you to just think – we're talking about this in the oxygen tent in the London board room with major decisions with the executives already acting on that, Michele..

Okay. Thank you very much.

And last, few quick questions on 2017 like what's the R&D expense [indiscernible] stable compared to 2016? And then an update on the scene of the target for 2017 and the losses on the equity investments that you expect this year?.

Sorry, Michele. Your phone line went a little strange. The question I believe was on R&D about whether we were increasing R&D spend in 2017.

Was that the first part of your question?.

Yes, compared to the sales, in the percentage of sales..

At the moment that's exactly right. I think we've given a range and obviously, the bottom-end of our range at '17 is more in-lined with our 2016 number. I think what that's really going to try and show is in 2016, if you think about it from an R&D perspective, we continue to focus on selective R&D areas.

We actually increase spends for example in Neuromodulation while we also took the opportunity to restructure part of our business as well, largely in the CRM side. We also had a number of launches that came out during 2016 as well.

We've never taken our eye off the R&D pipeline, but right now, we will let's say go back to normalized R&D spending and start spending more in-line with what we expect to be in the future as well..

And the other thing is we talked about it earlier, that incredible equity investments and I think that you got to look at that as also a part of our pipeline. We talk some – I think really great strategic bits and we expect some of those to pay off. That's an important part of our R&D strategy..

Yes. Just on terms of the equity investments, these equity investments that we have are going through some pretty important stages. We did talk in the past around for example our mitral assets and the investments we have about going through clinical phases right now.

So our 2017 guidance for example on the minority interest line does reflect our commitment in relation to support the funding of an important transition phase across the portfolio on equity investments and we're certainly making sure that we're funding those appropriately..

Okay.

So let's say it should be higher than last year? Let's say excluding the impairment done on Respicardia?.

I think if you look at overall way to investors as we see fit. I think we're going to an important part. So certainly, everything you're seeing in our numbers right now will show us fully and in terms of our investment profile..

So we're going to wrap up the call. We're past the top of the hour, but we thank everybody today for being on the call and we hope you have a wonderful day..

Thanks very much, everyone..

Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day..