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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to our conference call and webcast discussing LivaNova's financial results for the Third Quarter of 2020. Joining me on today's call are Damien McDonald, our Chief Executive Officer; Alex Shvartsburg, our Corporate VP of FP&A and International, who will be appointed our Interim Chief Financial Officer, effective November 1; and Melissa Farina, our Vice President 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, sales results, which will all be stated on a constant currency basis. Reconciliations to the most recent directly comparable GAAP financial measures can be found in today's press release that 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 Investor Relations section of our website under news and events, presentations at investor.LivaNova.com. With that, I will now turn the call over to Damien.
Thank you, Matt, and thank you for joining us, and I hope you and your families continue to remain safe and healthy during these challenging times. During the third quarter, our team remained focused on execution toward realizing the full potential of our portfolio.
On a global basis and across all business segments, sales improved compared to the second quarter, with September having the strongest results, as hospitals and local governments continue to navigate the pandemic. The impact from COVID-19 has been ongoing and the pace and scale of recovery remains varied across regions. Before we get into quarterly results, I'd like to take a moment to update you on the actions underway to deliver our strategic plan. Over the past few years, the Board and management team have taken a number of initiatives to shape our portfolio and structure the organization to ensure that LivaNova is best positioned to serve our patients and drive shareholder value.
LivaNova has two compelling platforms, neuromodulation and cardiovascular, both of which have growth opportunities beyond what we have achieved to date. We recognize there is more work to be done and remain highly focused on ensuring that they are set up to deliver the underlying value embedded in their businesses. To that end, we are targeting 3 key areas: first, enhanced execution to deliver on our primary growth drivers, U.S. epilepsy and advanced circulatory support, or ACS; second, delivering on our pipeline; and third, improving profitability and cash generation.
With respect to growth drivers, we are focused on achieving consistent profitable revenue growth in our core. We are in the process of implementing and will continue expanding a new go-to-market strategy targeting DRE patients and clinical research supporting VNS therapy as the standard of care. For ACS, we expect to continue at least 30% growth in 2020 and at least 20% growth in 2021, driven by our recent launch of the LifeSPARC platform. For pipeline execution, we expect to make significant near-term advancements in depression, heart failure and heart-lung machines or HLMs.
For depression, that includes transitioning the RECOVER study to registry by late '22 or early 2023. For heart failure, we plan to achieve our first clinical milestone of 300 patients enrolled in the first half of 2021. The next-generation HLM program is a key initiative that will support our market leadership position and continues to make progress towards commercialization, which is expected in 2022.
While driving growth and innovation are fundamental to any world-class medical technology company, we also plan to improve our operational excellence by increasing cash generation, along with operating profitability. To that end, we have taken a number of recent steps to right-size the cost structure, improve margins and focus our investments on our core growth drivers. We believe these initiatives will result in expanding operating margins closer to benchmark levels.
To be clear, as we position ourselves for near- and long-term growth, we are committed to segments where we have or plan to have leadership positions in underserved markets that drive margin expansion and multiple pipeline opportunities to accelerate growth. As part of our ongoing dedication to investors, we are committed to intensified communication on key elements of our therapeutic area strategy and why we believe investing in these areas of large unmet need will drive enhanced shareholder value. Accordingly, over the coming months, we will share updates on each core business and detail the respective growth opportunities, go-to-market strategies, and near-term product pipelines.
Lastly, before reviewing the quarterly results, I want to acknowledge the dedication of our nearly 4,000 team members who, during this pandemic, have continued to execute and deliver for patients towards our goal of long-term growth. I will now review the results of our primary growth drivers, epilepsy, and ACS, then I'll move to our pipeline and finish with the results of our remaining businesses.
After my comments, Alex will provide you with additional detail on the financials, reaffirm our 2020 full-year sales and EPS guidance, and update our free cash flow guidance. Epilepsy sales declined 14% versus the third quarter of 2019. This decrease is attributable to the impact of COVID-19 on both new patient and end-of-service or replacement implants. Epilepsy sales in the US declined 11% in the quarter. Importantly, the business grew significantly over the second quarter with sequential improvement in both new patients and end-of-service implants.
In the third quarter, epilepsy sales in Europe reached 96% at prior-year levels, with strong performances in Germany and the Nordic region. The rest-of-world region declined 37% as a result of continued impact of COVID -19, particularly in the LATAM and the Middle East regions. For the full year, we still expect our U.S. epilepsy business, which excludes DTD, to decline 15% to 25% due to the impact of COVID-19 on non-emergent procedures. That said, at this point, we anticipate continued sequential progress across the fourth quarter.
ACS now represents nearly 10% of cardiovascular sales, or $13 million in the quarter, an increase of 92% compared to the third quarter of 2019. In July, we commenced the full U.S. commercial release of LifeSPARC. As we mentioned on our second quarter call, some orders were deferred into the current quarter. We are pleased with the team's ability to drive uptake in both new and existing accounts. We continue to expect our ACS business to grow at least 30% in 2020.
Turning now to difficult to treat depression, sales in the quarter were $2.5 million. Consistent with our previous expectations, we anticipate DTD sales of approximately $5 million to $10 million for the year. Despite the pause caused by COVID-19, just over half our target RECOVER sites have now been activated. In heart failure, our ANTHEM-HFrEF U.S. pivotal trial was temporarily paused in March due to COVID-19, after enrolling just over 200 patients. During the third quarter, the team was able to reinitiate recruitment in more than 75% of the sites, and to date, the trial has enrolled more than 240 patients. For our cardiopulmonary business, sales were $107 million in the quarter, a decline of 12% versus the third quarter of 2019. HLM sales declined in the high teens due to COVID-19 impacts on hospital budgets for capital equipment.
Oxygenators experienced a faster recovery in procedure volumes in the U.S. and Europe, and each region declined less than 10% for the third quarter. Moving to heart valves, sales for the segment were $21 million in the quarter, a decrease of 27% versus the third quarter of 2019. Perceval performed well in the rest-of-the-world region, returning to double-digit growth, driven by a solid performance in Japan.
For the full-year sales in our cardiovascular portfolio, we are still estimated to be in the range of flat to down 15%, with continued growth from LifeSPARC largely offset by tighter capital spending budgets and the impact from lower cardiac surgery procedure volumes on both oxygenators and heart valves. Starting in the second quarter and continuing in the third quarter, we reduced costs to offset some of the sales decline. We continue to reallocate resources to fund our priorities. These actions have delivered approximately $40 million in savings year-to-date.
Specifically, these key initiatives include the following: first, we instituted a hiring freeze, adjusted employee-related expenses, and continued to participate in government-sponsored work programs. Second, we reduced spend related to travel, marketing events, field presence, and have shifted to working with our customers and stakeholders using remote methods. Third, we reduced our other discretionary spend related to external consulting and temporary staffing. And fourth, we balanced our manufacturing output to coincide with the anticipated reduction in demand. Before I turn the call over, I want to thank Thad for his many contributions LivaNova during his tenure. I have valued his partnership, patient focus, and integrity as we worked to transform LivaNova.
Now is the right time to transition, as we prepare for our next phase. To this end, Thad will leave the organization, and the CFO responsibilities will transfer to Alex Shvartsburg on an interim basis. Alex is well-known to us and to some of you. He joined us at the end of 2017 and has acted in roles of increasing responsibility, most recently as Corporate Vice President of FP&A in the international region. Prior to LivaNova, Alex was CFO and COO of a private equity-backed clinical services organization. Previously, he held a variety of finance leadership roles, including divisional CFO of Genetic Sciences at Thermo Fisher.
I'll now turn the call over to Alex for a review of our financial information. Thank you, Alex.
Thank you, Damien. I'm going to discuss the third quarter results in greater detail. Sales for the third quarter were $240 million, a decline of 11% compared to the same quarter prior year. Cardiovascular sales were $141 million, down 10% from the third quarter of 2019. Neuromodulation sales were $98 million, which is a decline of 13% versus third quarter 2019.
Adjusted gross margin as a percent of net sales in the quarter was 67%, down from 70% for the third quarter of 2019 and sequentially improved from 61% in the second quarter. The year-over-year margin decline was primarily driven by mix from lower neuromodulation sales and unfavorable manufacturing variances. Adjusted R&D expense in the third quarter was $36 million compared to $39 million in the third quarter of 2019. R&D as a percentage of net sales was 14.9% versus 14.4% in the third quarter of 2019. The $3 million decline in R&D spending is due to expected spend reductions in legacy products.
Adjusted SG&A expense for the third quarter was $92 million, compared to $102 million in the third quarter of 2019. SG&A as a percentage of net sales was 38.2%, up from 37.8% for the third quarter of 2019. This $10 million decline in SG&A expense is a result of planned costs and payment actions previously highlighted. Adjusted operating income from continuing operations was $32 million, compared to $48 million in the third quarter of last year. Adjusted operating income margin from continuing operations was 13%, compared to 18% in the third quarter of 2019. Our adjusted effective tax rate in the quarter was 4.5%, compared to 11.2% in the third quarter of 2019. The lower tax rate is related to changes in geographic income mix and a partial valuation allowance in the US.
Finally, adjusted diluted income per share from continuing operations in the quarter was $0.38, compared to $0.84 in the third quarter of 2019. Now moving to cash, our cash balance at September 30, 2020, was $228 million, up from $61 million at December 31, 2019. Our net debt at quarter end was $528 million, up from $272 million at year-end 2019. These changes reflect the impact of our financing completed in the second quarter of 2020. In the quarter, our free cash flow was negatively impacted by several items, including a quarterly hedging settlement based on the recent sharp decrease of the U.S. dollar. Additionally, working capital did not improve as we expected relative to sales.
Capital spending for the first 3 quarters of the year was $28 million, which is $12 million higher than a year-to-date 2019 related to our initiatives to support manufacturing and sterilization capabilities in Houston and Arvada for both cardiopulmonary and ATS; and finally, to further develop our epilepsy digital innovation platform. Now, turning to our 2020 guidance, as Damien mentioned, we are reaffirming our previously announced full year sales and EPS guidance. We are also updating our free cash flow, excluding extraordinary items.
To recap sales and EPS, we are forecasting 2020 sales to decline between 7% and 17% on a constant-currency basis, assuming a minimal impact from exchange rates in the full year sales. We are estimating adjusted diluted earnings per share from continuing operations in the range of $1.15 to $1.35. We are now estimating free cash flow, excluding extraordinary items, to be in the range of $10 million to $30 million, down from previously projected $80 million to $100 million. This change reflects my earlier comments on the third quarter and a more conservative outlook on working capital and capital expenditure for the remainder of the year.
With that, I'll turn the call back to Damien for some final comments.
Thanks, Alex. With that, Catherine, why don't we open it up for questions.
[Operator Instructions] Our first question comes from Rick Wise with Stifel.
Good morning, everybody. Thanks for that, so clearly, laying out the program and the many changes that are positive changes, it sounds like, that are taking place. Damian, maybe just to start, stepping back before we get into some details, how should we think about all these actions and how that's setting up LivaNova for 2021? Obviously, at this point, investors are going to look ahead to next year. It sounds like the business has reasonable momentum as you're -- and you're feeling reasonably positive about the direction of the fourth quarter. But how does that set us up for '21, both on the sales side and on the cost and cash flow side? I appreciate it's a big question.
Yes, thanks, Rick. Well, first of all, I think we've tried to lay out very clearly what our strategic intent is and how we're driving to that. And we call it the triangle. First, it's about growth and focusing on growth, and we're pleased with the sequential momentum from Q3 and what we're seeing early in '20 billing days into Q4 with October, the momentum and the trajectory. I guess, like everyone, we continue to track and listen to global headlines, listen to customers about how COVID is evolving, but the early signs for October have been encouraging. And the intent for that is to continue to focus maniacally on our growth drivers with U.S. epilepsy and ACS. We think there's a tremendous runway there. The pipeline, as we laid out, has enormous opportunity in these key areas, and particularly the clinical trial development.
And lastly, what we've tried to lay out, both Alex and I, the focus on operating excellence or operating discipline using the LivaNova business system to be more focused on operating margin expansion and cash generation. So, we believe that discipline is important. We're demonstrating, we believe, in the quarters how we're focused on those things. But we recognize there's more work to do, but we're very bullish about our strat plan and what we can do to drive shareholder value.
Turning to capital spending, obviously, that's been a factor that's been unhelpful or a headwind this year. How concerned are you as you head into the fourth quarter, hospitals under pressure, et cetera, that you -- that you're in the right place as you give us guidance? And again, you think about finishing this year and heading into next year?
Yes. I would say that, again, we're really pleased with the initial trajectory of Q4. Like I said, we continue to track all of the COVID news. We've got a lot of customer feedback. You know HLMs and ATSs are going to rely on continued work there. We have a number of programs in place to be able to respond to the way customers are able to deal with capital spend, and we're interested in ensuring we support them. Just to put it in context, HLMs are 30% of cardiopulmonary. We are also very much focused on ensuring that the oxygenator and the other parts of that cardiopulmonary portfolio continue to expand, as we are with ACS. I mean, I think that, importantly, is a tailwind for us with the opportunity we have in COVID-related environments with ACS. I think that ECMO opportunities is really key to us, And I think that's less impacted by capital.
And just one last quick one for me, Damien. TRD, you're making progress clearly, 50% of the sites activated. Are you where you expect it to be? Just, if I'm remembering correctly, your timing in some of the commentary about where you expect to be, it hasn't changed much. Are you far enough along? Are you where you expected to be? And again, is that enrollment accelerating? How are you thinking about it?
Look, again, a key program for us. And so, as I said, we're continuing to assume a transition to registry in late '22 or early 23, again, dependent on CMS review timing. I think, importantly, since we started reactivating sites, we've been able to activate more than half of our target sites. But we'll know more as we progress through the next quarter, and I think the best thing to do is provide an update in February. But there's lots to do there, and we believe that all of our sites understand the importance of this for patients, and especially as everyone reads the headlines, what's happening with depression patients in this environment. So we think there's a compelling argument for people to engage in the study.
Our next question comes from Raj Denhoy with Jefferies.
This is Zach on for Raj. Just two questions for us. On the guide, can you provide a little bit more color as to where you guys feel comfortable models falling out in the down 17% to down 7%? And then, also, on OpEx spending, where do you see 2021 volume comparison to 2019 levels?
So on the guide, as I said, I think we're giving you our best view for those programs. And again, seeing what we're seeing in October, first 20 days in, we're seeing improvements. We're encouraged, notwithstanding what I said about how the world is viewing COVID. In terms of OpEx and 2021 guidance, we're going to give guidance in February. But again, I think what we're trying to message here is a discipline and focus on ensuring that OpEx in SG&A and R&D are very focused on core programs, and we're more focused on ensuring we have operating margin expansion.
And then, also, on the free cash flow guidance, can you provide a bit more color on the bridge from expectations for 4Q and the updated guidance?
I'll take this one. Zach, thanks for your question. I would say really 2 issues or 2 areas that came out in Q3: we hedge our intercompany debt positions, and we saw sharp declines in the U.S. dollar relative to the euro and the Canadian dollar, which impacted the hedges at the time of settlement. The second issue or the second item is really around working capital, and we just didn't see the improvements, the velocity that we had expected in the quarter. So just looking at [Technical Difficulty]…
Okay. Sorry about that folks. We're not sure how that line got cut. Zach,
Okay, go ahead.
Okay. Sorry about that folks. We're not sure how that line got cut. Zach, I don't know where we lost you on the free cash flow. Do you want to just come back on the free cash flow to Zach and where you were, Alex?
So I just wanted to highlight two items that we saw in the third quarter. First of all, we hedge our intercompany debt positions. And when the currency, the dollar -- the sharp dollar decline relative to the euro and the Canadian dollar really impacted the hedges on those settlement dates. So that was one area. And then the other one, we just didn't see the progress on working capital, particularly in receivables relative to the sales velocity. We continue to make progress on DSO, but just didn't see as much progress. And in terms of the guide, as I was saying earlier, we're just -- we're taking a more conservative outlook on working capital and capital expenditures for the remainder of the year.
Again, sorry about that, folks. Catherine, I'll send it back to you.
Our next question comes from Adam Maeder with Piper Sandler.
Just a couple from me, and maybe starting with epilepsy, that business saw a nice snapback in Q3. I'm just curious to get an update in terms of the pace of new patient visits and referral activities and maybe how that compares to the pre-COVID levels. Are we all the way back, nearly all the way back? And then additionally, on the epilepsy front, it might be tough to decipher in this environment, but just any updates around what you're seeing competitively on the drug side? And then I have a few follow-ups.
I mean, I will say we're very pleased with the team's execution in the quarter and the sequential improvement over Q2. Let's put it in context of what rebounded and how both end-of-service and NPIs rebounded. But end-of-service probably recovered 2x faster than NPIs. And again, I think that's important, given that we believe end-of-service represents a less elective procedure than new implants, and I think that's critical for patients.
And we believe there's probably a large backlog of end-of-service compared to NPIs, since they require patients to return to their doctor for one final device interrogation before a scheduled surgery, and we know not all neurologists are seeing in-office patients at pre-COVID levels. So I think we're encouraged by the sequential improvement. We're encouraged by what we're seeing in Q4 early on. I think there's fundamentally a difference as we've looked at internal data and external data between our neurology business and other devices of neuromodulation. And I think that comes down to a few things.
Firstly, you have patients that skew pediatric for us. So one of our key aspects is that we probably have more pediatric patients than a lot of other neuromodulation businesses. So secondly, we also skew more in-hospital than ACS. And I think those procedures, ACS, ambulatory surgery centers, sorry, have gone -- I just need to make sure I'm clear about which three letter acronym I'm using. Ambulatory surgery centers have rebounded for other neuromodulation devices faster than we've seen in-hospital epilepsy. And I think thirdly, we're also watching very carefully how patients work with neurologists. In-office visits for neurology haven't rebounded to the same extent than we've seen in other specialties like back pain. So I'm encouraged by the sequential improvement. I'm encouraging what I'm seeing, but our continued monitoring of those three factors are really important for us in how we drive the quarter.
On the drug side?
On the drug side, as you recall, we did factor, in our initial guidance in 2020, some impact from new drug launches, new indications. That is still baked into our forecast. I can say broadly, both from third-party data we've been tracking and our field force feedback, nothing has -- we've seen has influenced our forecast on what we think the drug impact would be this year, which, again, relatively minor.
And you said you had another question.
Actually, if I can sneak in two more. My next question is actually on the shareholder letter, and I appreciate the color you gave on the strategic update at the beginning of the call. There were a few proposals outlined in that shareholder letter, including portfolio management or divestiture of certain businesses. So my question is, is that something that you would potentially entertain? And with CP specifically, is that something that you looked at or explored in the past? If you could give any color there, that would be much appreciated.
Yes, good -- and thanks for raising that. Look, I would say, first of all, let me say I appreciate all the shareholder feedback we get. And we sought and continue to see a really candid and honest engagement with all our shareholders, not just the letter we received. On the particular aspect of portfolio management, I know that several issues were raised. I would say this, we continually evaluate our strategic footprint. And we've done, I think, our best in the past to ensure that we've got the right portfolio and continue to have discussions with the Board about what we think is the most appropriate investment opportunity for us.
So we've taken a number of steps in the past. We have continuous dialogue with the Board, and most recently, our July Board meeting was devoted to the strategic plan. And I would say, as of today, we have these 2 compelling platforms, neuromodulation and cardiovascular, and I think both of those have untapped potential. And as I said in my scripted comments, we're ensuring that both of those businesses are set up to realize their full potential.
Got it. I appreciate the incremental color there, Damien. And if I can just sneak in this last one just on ImThera, I think it's been a while since we've gotten an update there, so was just hoping to get latest thoughts around that pipeline initiative, how you're thinking about potential regulatory pathway and commercial timing.
Yes, two aspects to that. One was the design modifications to the aura6000 generator. We've completed those, and we're very pleased with how the team has responded to the things that we needed to do to make that a much more stable device. And secondly, preparing a study protocol that we can discuss with the FDA, and we're close to submitting the IDE to the FDA. And then, once we have that pathway clear, we'll come back to you all with the what next. But it really is dependent on submitting this IDE.
Our next question comes from Michael Polark with Baird.
On the gross margin, understanding that mix is obviously a major influence and revenue from here is hard to call; get all that. But structurally, has anything changed about your manufacturing platform, your gross margin potential versus, say, looking at 2018 and 2019? I heard on the call today another comment about unfavorable manufacturing variances. So I just want to understand, as we model out into a "normal" future, or more normal future next year and the year beyond, are there any structural reasons why the gross margin can't approach what we saw the last couple of years, if revenue mix were to normalize and epilepsy were to continue to recover?
Michael, it's Alex. I'll take this one. The way to think about it is, the fixed overhead within our manufacturing facilities is dependent on the throughput. So, given the COVID situation and the reduced volumes running through our plants as we reduce our manufacturing build on inventories to preserve working capital, as well as just the overall impact of our sales velocity, essentially, we're under-absorbing that fixed overhead. So, as we think about moving forward, we expect our business to rebound, and that will take care of itself.
Alex, maybe another one for you. A lot of numbers in your release, and it's early, and I'm only halfway through my coffee. But if I'm screwing this one up, please forgive me. But in the non-GAAP reconciliation, in the R&D line, there's a $10.7 million item that looks like a cost in the GAAP numbers, and it's pulled out of the adjusted metrics. I see a mention of contingent consideration remeasurement. Are those two tied together? And if so, can you unpack that for me a little more? If not, what is that adjustment in the R&D line?
So this was related to our acquisitions of ImThera and TandemLife. And so, on a quarterly basis, we remeasure our assumptions around contingent considerations or earn-outs. They're dependent on the discount rate, so it's kind of the accounting mechanisms, looking at the probabilities as well as the discount rates, that really drive that. So these are kind of accounting adjustments, nothing fundamental. No real fundamental changes there in our cost structure.
I presume, though, since it's a cost on the P&L, that it's a reflection of things are a little bit better, right? You're absorbing the cost on a contingent liability, quarter-over-quarter. So is that an unfair way of looking at it? I mean, my experience with these is, if you took a big benefit, that's because something has gone unfavorable. This would seem to imply that something, at least relative to June 30, has gotten a little bit better.
The discount rates change based on just kind of natural market reality, and so that's all we're -- it's an estimate, and it tends to change. If you've seen our prior quarters, we've had some ups and downs on that front. So I'll just leave it at that.
Last one. I heard a mention about some upcoming communications about the various business lines, and Damien, I'm just curious, what should we expect? What might that look like in terms of events and/or communications from LivaNova over coming months and/or quarters?
Melissa, do you want to take that one?
So, Mike, over the next few months, we'll be holding a series of education events in conjunction with the sell side. Our first event is scheduled for November 9 and will be Life Support Simplified, so about the advanced circulatory support. We'll follow those up with education sessions in epilepsy, depression, and heart failure. And so, definitely more to come as we progress through the rest of this year and into next year.
Our next question comes from Scott Bardo with Berenberg.
Damien, I think you alluded to it a little bit here on the neuromodulation side, but as I look at your performance in neuromodulation in the second quarter, it was down sharply, broadly aligned with Abbott's neuromodulation business. And that business, in the third quarter, was broadly flat, but you're still having some declines. I guess the nature of the question is, is there any reason not to assume some pent-up demand for VNS neuromodulation such leading to, if you like, disproportionate growth in 2021? Second question, please, just relates to cash. I think it was only 18 months ago, the group was guiding for $180 million, $200 million in operating cash, and now we see a rather than measly $10 million, $20 million, $30 million or so. So, as we look into 2021, has historic cash been -- is that likely to be a reasonable proxy for 2021? And more broadly, thoughts on getting margins up and paying down elevated debt. So I'll leave it there, and I have a couple of quick follow-ups.
Well, a few things. Firstly, let me say we'll broadly guide for 2021 in February when we release the fourth quarter results. In terms of epilepsy, what I'm seeing and what I'm pleased to see the team do it sequentially improve their performance. And we're seeing a solid October, again, notwithstanding what people are saying about how markets are evolving with COVID. And I'd like to say that the other opportunities for us here are to continue to focus on this pent-up end-of-service. So, regardless of, are 2019 levels the right thing or not, what we believe is that we're going to continue to focus on driving sequential improvement. There's two aspects to that. One is the NPIs and one at the end-of-service. End-of-service, I've already commented on.
NPIs, the other thing that we've talked about a little bit more recently is how we're changing our go-to-market strategy in the U.S. to be more aggressive with our engagement with CECs, who have large DRE populations. So our intent is to continue to focus there with our key account management, the MSLs and engaging with clinical evidence discussions, and patient-nurse educators. So we're looking forward with the group to continuing to execute on that. And as I said, we'll guide more broadly about 2021 in the new year. Do you want to talk about cash?
So Scott, if you recall, in the second quarter earnings announcement, we tightened up our definition of free cash flow. We're trying to make it easier for you guys to kind of follow the free cash flow metric for us. It really reflects the operating activities, less investing activities in this case, just really excluding the big onetime extraordinary adjustments for 3T litigation and any benefits from the current tax stimulus.
And 2019 was under the old definition.
Yes.
And maybe there's a part of that question, which I'd just like you to hit, please, which is your broad attitudes to improving profitability and paying down debt. If you could talk to that, please, that would be helpful. And maybe just real quick, can we have an update on some of your base business pipeline developments, the Polaris and the new heart-lung -- excuse me, (inaudible)? And lastly, whilst I appreciate having some education events, we have a guidance framework out in the market which appears somewhat outdated. What are the broader thoughts to giving a new medium-term guidance here?
So a few things. Broad attitude operating excellence and of OpEx, both uses of that language. Our intention is to be more focused on that and to drive operating expense reductions in both SG&A and be more prudent with R&D. And you've seen those lines in the last two quarters being more disciplined in that respect. So our intention is to, A, be more prudent there. Secondly, generate more cash. And lastly, look at our whole program around cash preservation and the appropriate application of that. But we do intend and would like to pay down this debt so that we get back to a more normalized ratio there. And again, we've talked about what that looks like in the past.
Secondly, base business pipeline, we have two major internal programs, excluding the trials. One is the Polaris program, continue to expect that next-generation heart-lung machine to commence rollout in 2022. As we mentioned in the last call, we were impacted by COVID, but importantly, by a number of suppliers and their engagement with us around the software development. So we're pleased with how that program is progressing. And again, we'll update on those programs as we evolve along that pathway there. And next-generation SenTiva, there's multiple aspects to this.
And next-generation SenTiva, there's multiple aspects to this. One is the IPG, and we're continuing to work on that and expect that to be rolling out in 2022. The other thing that we mentioned is the attachment and importance of our digital epilepsy initiatives. Those have other aspects to the program that we've talked probably less about, but the development of our FC patient app and the clinician FC Hub are important aspects of that whole program. And we've been very focused on that in this COVID world, being able to provide information and engage with patients, and we're pleased with how that's started to roll out, and we'll update that in one of our investor calls. Do you want to talk about…
On the Investor Day. Scott, it's Matt. We were planning an Investor Day in 2020. We had the date picked, the site picked. And once COVID hit, we decided to push it out. I know a couple of companies have done virtual. They seem to have gone pretty well. But our thought was that we would roll that into 2021, and we're actively looking right now at the date and the site, but that's our expectation for 2021.
Our next question comes from Matt Taylor with UBS.
I wanted to just clarify, I'm confused by the cash flow guidance. So, on a GAAP basis, you're minus $150 million year-to-date and then you're forecasting 10% to 30% for the year. So that implies a huge step-up in Q4. But I guess you're excluding litigation, so it's adjusted cash flow. Is that correct? So it's minus $25 million to get to the Q4? Can you just help us with that bridge? Because it implies a big step-up on a GAAP basis.
That's correct. So we are excluding litigation settlements in -- under the revised definition. And so, as we look at Q4, this -- our cash improvement, cash generation improvement is going to be driven by, obviously, our profits, which are improving in Q4, as well as continuing to drive our working capital down.
Okay. That makes more sense. And then, just on the strategic review that you're talking about here, I guess I'd love your thoughts on reflecting on the last several years with the merger and the different businesses. How much synergy do you see between that? Could you separate them? Do you think that they could operate on a stand-alone basis nearly as efficiently as you do together? Or do you really see a lot of strategic rationale to keeping all these businesses together?
That's a great question. And I would say this is a part of the discussions we have with the Board. I think the important thing is to look at the fact that we have these two compelling platforms. Both of those businesses have, I think, uncapped potential. And what we're working towards is ensuring both of them are set up to be able to deliver on that potential. I'm not going to get into a -- should we separate, not separate. I think the important thing is ensuring that both of them are exploring the way they can grow, exploring the way that their pipeline can develop, and we can work towards making sure that they're improving their operating profit. And both of those businesses, I think, still have plenty of room to grow.
Our next question comes from Mike Matson with Needham.
Damien and Alex, this is David Jackson on for Mike. Just a couple on some of these clinical programs. First, on RECOVER, can you update us on how many patients you've enrolled in the unipolar and bipolar cohorts? I think 250 and 150 were milestones for interim analysis, so any color on where you are now and when you expect to get to those levels?
Yes, you're spot on, and you're one of the people who I know has got a detailed view of those two studies. You're right, 250 in the unipolar arm, 150 in the bipolar arm is the milestone where we can take a look at the first review of that data. We expect at least one of those arms to reach the milestones in 2H '21. Both are enrolling. We continue to target enrollment of 250 between both arms by mid '21. And then, once we get to that, we'll start looking at the data. And you know that we believe that there's significant power in the study, and so that, once we get to those milestones, we'll be able to start looking at separation. I don't know if you want to add anything more?
No, that's spot on exactly what I was told.
And then another one on clinical stuff. On ANTHEM, I think you said you're at 250, and I think you can get a functional label at 300, and you said first quarter '21. So how long after the 300th patient is enrolled do you expect to get that label?
So at 300 patients, essentially, once we follow them up for nine months, that is the data we can submit to the FDA. We obviously have to review it, so a little bit of time after that. So, at 300, then the clock essentially starts for the follow-up. The other caveat to that, it should not be an issue at all, is that we also have to have enrolled 400 patients before we submit. But looking at the cadence in the nine months, that should go hand-in-hand with the 300. So, essentially, add probably nine months to a year to the 300-patient enrollment milestone, and then you'll get an idea of when we'd be ready to submit to the FDA.
What's exciting is the current discussion going on in the U.S. about CMS bridging -- what is normally a very long bridge between approval and reimbursement with that full year payment window for products that are designated breakthrough. And we do have expedited access pathway right through approval for this product, so we think that this is a hugely encouraging sign from CMS and the FDA collaborating.
And sorry, just another one on RECOVER. Is the flip to a registry 12 months after you hit the 250 and 150, or is I that independent of those two enrollment milestones?
No, that's what you need that data to be able to flip to registry. So that's why we're saying late '22, early '23, depending on CMS' review. As we've said before, there's no time-bound or statutory requirement. But we've been working well with them in terms of our relationship on this whole study and defining the milestones that would constitute a flip the registry. So, again, we're continuing to target that late '22, early '23, depending on their review.
Right.
And Mike, the primary endpoint there that for the registry conversion is time in response. It's a 12-month endpoint, but it's [phasing], so it could be less than 12 months, depending on how well the patient is doing during their 12 months. So if you look at -- when we're talking about getting to 250 and getting to 150 and when we plan on submitting, there's a little bit of a lag there because, obviously, the odds of hitting it exactly at 250 patients with the follow-up is low -- not statistically impossible, but low. So you can kind of back into how we think about the time of each patient's follow-up in the trial.
I'm showing no further questions in the queue. I'd like to turn the call back to management for any closing remarks.
Well, thank you, Catherine, and thank you, everyone, for joining us today. We look forward to updating you. We're going to drive hard and continue our progress in delivering on our commitments. We believe that improving the lives of patients around the world and driving shareholder value is an important mission, and we'll look forward to updating you on our next call. And I'd just like again to thank you all for your engagement and support of LivaNova. Thank you.