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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.
Good day, ladies and gentlemen, and welcome to the LivaNova PLC Fourth Quarter and Full-Year 2022 Earnings Conference Call. [Operator Instructions]. 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. Please go ahead, sir.
Thank you, Emily. And welcome to our conference call and webcast discussing LivaNova's financial results for the fourth quarter and full year of 2022.
Joining me on today's call are Damien McDonald, our Chief Executive Officer; Alex Shvartsburg, our Chief Financial Officer; 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, sales 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 Damien.
Thank you, Matt. And thank you everyone for joining us. Welcome to our conference call for the fourth quarter and full year of 2022. I'll discuss our fourth quarter and full-year results, provide 2023 revenue guidance and review our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results and 2023 guidance. I'll wrap up with closing remarks before moving on to Q&A.
In the quarter, we achieved 6% revenue growth. This was driven by the Cardiopulmonary and Neuromodulation businesses across all regions. Advanced Circulatory Support remained unfavorably impacted by a significant decline in severe COVID cases. I'm proud of our team for continuing to move the business forward against macro challenges, including inflation and supply chain complexities.
Now, turning to segment results. For the Cardiopulmonary segment, revenue was $137 million in the quarter, an increase of 9% versus the fourth quarter of 2021. Oxygenator revenue grew low-double-digits, driven by continued procedure volume recovery across all regions. Heart lung machine revenue increased mid-single-digit, led by growth in the rest of world region.
Cardiopulmonary revenue for the full year was $500 million and grew 11%. We expect the Cardiopulmonary revenue to grow 3% to 5% for the full year 2023. Our forecast includes the staged rollout of the next generation HLM Essenz.
In February, we initiated our limited commercial release in select centers throughout Europe, following successful clinical cases in two major hospitals in Q4. Looking ahead, we anticipate a gradual ramp in Essenz sales throughout the year.
Epilepsy revenue increased 7% versus the fourth quarter of 2021, with growth across all three regions. This performance was primarily driven by replacement implants in the US and double-digit growth outside the US for both new and replacement implants. US epilepsy revenue increased 4% year-over-year. Similar to last quarter, total implant growth was driven by replacements.
In the US, we are continuing to advance our go-to-market commercial strategy in Comprehensive Epilepsy Centers, which included 15 dedicated teams. These teams accounted for approximately 21% of US implants in the quarter as compared to 22% on a same account basis during the prior year. Epilepsy revenue in Europe grew 18% versus prior year, led by the UK and Nordics. The rest of world region achieved 18% growth led by Brazil. For the full year, epilepsy revenue increased 7%. For the full year 2023, we expect the global epilepsy revenue to grow at 3% to 5%.
ACS revenue was $10 million in the quarter, representing a decrease of 30% from the fourth quarter of 2021. Results continued to be impacted by the year-over-year reduction in severe COVID cases, and in part by product mix, which was partially offset by growth in non-COVID cases. Our field data suggests ACS case volumes related to COVID declined more than 90% year-over-year as fewer hospitalized patients progressed to a severity that required ECMO therapy. However, ACS non-COVID cases increased more than 20% versus 4Q 2021, driven by an easing of hospital capacity constraints.
ACS revenue for the full year was $39 million, representing a decline of 29%. For 2023, we expect ACS to grow at 4% to 6%. Our forecast includes the return to growth once we anniversary the COVID impact after the first quarter.
Turning now to the strategic portfolio initiatives. DTD revenue for the fourth quarter was $3 million, and for the full year was $8 million. For 2023, we anticipate DTD revenue of approximately $8 million to $10 million, primarily from the RECOVER study.
The RECOVER study continues to advance. The randomized controlled study is designed with frequent interim analyses that will assess if predicted probability of success has been reached or if the study should continue enrolling. Our interim analysis for the 450th patient in the unipolar cohort was recently completed and confirmed the study's continuation. The next interim look is at 475 patients, at which point we can either transition to the prospective longitudinal study or complete enrollment to 500 patients for the unipolar cohort.
Earlier this week, Dr. Conway, the principal investigator for the RECOVER study, delivered a poster presentation at the Fifth International Brainstem Conference detailing the baseline unipolar demographic data for the RECOVER study participants collected so far. The majority of these patients are severely depressed and are highly treatment resistant having failed more aggressive treatments such as ECT, TMS and ketamine.
In heart failure, we enrolled the 500th patients in the ANTHEM-HFrEF US pivotal trial last quarter, which triggered the second interim analysis. The analysis determined that the US FDA early filing conditions were not met, and the DSMC recommended that enrollment continue in accordance with the current study protocol. However, our further evaluation of the study data has not revealed a sufficiently positive impact on functional or mortality endpoints, and it is unlikely that the study will demonstrate such an impact. As a result, we are stopping enrollment, beginning the process to close the clinical study and winding down the heart failure program.
It's important to note that the decision to stop enrolling was not associated with any safety concerns. We'd like to thank the patients who participated in the trial and also thank the investigators, study committees and employees for their commitment to this program.
Moving to OSA. The OSPREY trial continues to progress. In January, we received approval from the FDA to include an additional five sites, one of which has already been activated. We still assume FDA approval in 2024.
And with that, I'll turn the call over to Alex.
Thanks, Damien. During my portion of the call, I'll share a brief recap of the fourth quarter results and provide commentary on 2023 guidance.
Turning to results, revenue in the quarter was $275 million, an increase of 6% versus 2021. Foreign exchange had an unfavorable year-over-year impact of approximately $12 million or 4% of revenue.
Adjusted gross margin as a percent of net revenue was 69% compared to 70% in the fourth quarter of 2021. Adjusted gross margin was unfavorably impacted by inflationary pressures, supply chain challenges, and product mix, partially offset by pricing improvements.
Adjusted R&D expense in the fourth quarter was $43 million compared to $41 million in the fourth quarter of 2021. R&D as a percent of net revenue was 16% versus 15% in the fourth quarter of 2021. While sequentially flat, the year-over-year increase was driven by continued investment in our strategic portfolio initiatives.
Adjusted SG&A expense for the fourth quarter was $100 million compared to $107 million in the fourth quarter of 2021. SG&A as a percent of net revenue was 36%, down 40% for the fourth quarter of 2021.
Adjusted operating income was $47 million compared to $40 million in the fourth quarter of last year. Adjusted operating income margin was 17% compared to 15% in the fourth quarter of 2021.
Adjusted effective tax rate in the quarter was negative 3% compared to 14% in the fourth quarter of 2021. The lower tax rate is primarily attributable to full year changes in geographic income mix.
Adjusted diluted earnings per share was $0.81 compared to $0.57 in the fourth quarter of 2021. Adjusted diluted earnings per share for the full year was $2.39.
Our cash balance at December 31, 2022 was $214 million, up from $208 million at year-end 2021. Total debt at year-end 2022 was $542 million versus $240 million at year-end 2021. The increase primarily relates to the $300 million term loan facility that we executed in July.
Net debt including restricted cash at year-end was $85 million.
Adjusted free cash flow for the quarter was $31 million and was $75 million for the full year. Free cash flow generation was unfavorably impacted by inventory build and inflationary pressures, partially offset by improvements in working capital. The free cash flow conversion ratio was 58%.
Capital investments were $27 million during 2022 compared to $26 million in the prior year.
Now, turning to 2023 guidance. We forecast 2023 revenue growth on a constant currency basis between 3% and 5% and assume approximately a 1% tailwind from exchange rates. We are projecting adjusted diluted earnings per share in the range of $2.45 and $2.65, with adjusted weighted average shares outstanding to be 54 million for the full year.
Adjusted free cash flow is expected to be in the range of $80 million to $100 million. We forecast capital spending in the range of approximately $35 million to $40 million.
With that, I'll turn the call back over to Damien.
Thank you, Alex. Our 2022 performance was balanced by our diverse portfolio. While some macro challenges may linger, our pipeline remains robust, and we remain committed to delivering differentiated products and therapies to patients and physicians.
In the year ahead, we will continue to use the strategic triangle as our guide for goal setting and execution. With quality at the center, we remain focused on three key areas – growth, pipeline and profitability. We believe this focus, underpinned by the LivaNova business system, positions us to create value for all stakeholders.
And with that, Emily, we're open to questions.
[Operator Instructions]. Our first question comes from a line of Rick Wise with Stifel.
Maybe they're sort of related questions in a way. But let's start off with the guidance, and maybe help us better understand your thinking in providing the guide, both from – how conservative is it actually or optimistic relative to what you're seeing. But maybe more specifically, the top line guide is well below the long term aspirational goals you laid out back in December of 2021 at the Analyst Day. How would you have us think about it, the guide, the outlook, your long term aspirations? And then I'll have a follow up related to that.
I think at the Investor Day, we laid out 5% to 8%. And we thought we'd ramp over time. I will say, I think, 2022 was a stronger year than we anticipated in our ramp. And there were lots of reasons for that. And we could cover that. I think 2022 was right in the middle of that range. For 2023, we're just looking at things like the transition year for the end of service to NPI driver, the Essenz transition. And let's be honest, the ACS plan is behind after the COVID disruption. But we're confident that that's going to get back to a growth trajectory.
So, the CP market, we think, is stabilized and back to pre-COVID levels. Normally, that market grows 3% to 5%, and we're expecting to be in that range with this portfolio and as we've transitioned to the Essenz. So, I like the way we're approaching this year. Do we think there's upside? Yes, we do, if oxygenators and the rest of world HLMs continue to run like they have been, if the neuromod NPIs ramps, if the non-COVID case ramp and ACS takes off as we ultimately hope it will. But we think this is proven guidance and gives us a chance to deliver on our promises.
Separate, but also related. Can you talk about the heart failure trial shutdown, the ANTHEM-HFrEF shutdown? What could the R&D savings be from winding it down and the cash implications? What's that contributing, that savings contributing to the EPS outlook, Damien?
As you might suspect, we're disappointed that we're ending this program after a long commitment. But as we saw the, the 500-patient interim analysis didn't give us the signal for the early FDA filing.
And while the DSMC – their protocol following the analysis is to recommend one of three options, and they recommended continuing to enroll. But we just took a look under the hood. And the further analysis was not revealing a sufficiently strong positive impact on the functional or the primary composite endpoint. And it was pretty unlikely that the full study would demonstrate that impact.
We're really early in the cycle of this close-down. And so, we're going to assume that it takes us some time to work through the process. We're going to work with the FDA and the investigators to ensure that we have the right process for patients.
And in terms of math, on average, we spend about $30 million a year on this program. And as we work through the process, we'll establish how much of that is in which bucket.
No early color, maybe even looking out a year, about what annual savings could be?
Rick, this is Alex, As Damien said, our burn rate was approximately $30 million a year. By 2024, we should start to recoup, and perhaps even earlier, sometime this year, as we figure out how to wind down the program.
Next question comes from Michael Polark with Wolfe Research.
First one, gross margin in 2023, some sequential and year-on-year weakness in the fourth quarter, something we've clearly seen from others as [indiscernible] deal with inflation and supply chain snafus and currency and whatnot. I guess, what's the baseline for that adjusted gross margin metric in your 2023 outlook?
Yeah, I think you're right. It's relatively flat. The improvements that we're seeing is in terms of productivity and price still being impacted by the inflationary pressures that we've seen over the last 18 months. Again, we're anticipating that to continue.
69% seem like a good input for now?
Yes.
The follow-up. Intrigued by the mention of the Dr. Conway poster presentation. I guess I have not seen that data. Is there anything in there that's new to you that kind of tells you about how the RECOVER unipolar cohort may be shaping up here late in the enrollment process?
It's Matt. So, you had a poster that came out again earlier this week. And we can make it available. It was the first look at the unipolar kind of, call it, demographics underlying patient numbers. So, you can see things like the modular score, average age, other therapies they were on. And what we think is interesting about it is the average age is older, there's a lot more what we call, Damien called it aggressive therapies like ECT, TMS, even ketamine, patients have failed in this trial. That's not normal in a pharmaceutical trial, even you don't have any patients with those types of therapies in there. And so, you can see just a lot more baseline demographics of how unique this trial is to any other, I think, depression trial that has been undertaken to date.
Our next question comes from Matt Taylor with Jefferies.
I had a follow up on depression. I guess, Matt, maybe I'll just start with – could you take that thought one step further and help us understand based on the unique composition of some of the patients in this trial, do you think that will have any implications for the likelihood of success or the strength of the treatment impact or what do you think that means for the ultimate result?
I would say, overall, the impression we've got is that this is not unexpected in terms of what the age was, the modular score was, the people on these aggressive therapies, the number of pharmaceuticals that they've been on over lifetime. What I think it helps with is, if you look at timing response, which is a relatively weak endpoint, when we talk about overall response rates, the initial design shows lower percentages than, I think, a lot of people have come to expect in some of these prior depression studies. And this is an example of why they're overall potentially lower, but still can be incredibly powerful. Just because this patient population has never had a therapy that kind of fits where they are in their depressive state.
One follow-up on depression. So, obviously, last interim look did not transition into registry or show early stoppage success. I guess the question I think a lot of investors have is, now that we have more data points, more water under the bridge versus your initial expectation at 350 that you could show early stoppage, does this have any implications for the overall strength of the treatment effect in the active arm? Meaning, can we see a weaker treatment effect because of the lack of early stoppage? Or is that reading too much into what's going on here?
It's probably reading too much into what's going on because, again, it's all blinded. It could mean that. It could mean that the control arm is doing better. But the therapy arm is also doing better.
What we are confident in is there is a futility curve on the bottom of this, and that continues to go up every look. So, we know we are seeing some benefit. We just haven't gotten to that level that would allow us to stop early.
But the other thing I'd say, Matt, is data can actually improve over time, especially when you go out to months 7, 8, 9, 10, 11, 12, where we believe that the therapy arm will have a more pronounced effect than the control arm. So, you could not hit an early stoppage, but actually see data improve over time before you get to the final number. So that's why we're still really confident overall.
Which is what [Multiple Speakers] in the Aaronson paper. This whole study is predicated on six prior studies, 1,400 patients, but particularly the Aaronson papers showed that at month six, you started to see the separation and it continued to separate and improve over time. So, I think the point Matt is making is quite valid that the longer this runs – in fact, the trial was set up to run to 500 patients. So we continue to be believers in this showing a significant response to treat these patients.
The next question comes from Adam Maeder with Piper Sandler.
I wanted to start with a two part question on Neuromodulation. I guess really epilepsy. So, first, I was hoping you could give a little bit more color on the epilepsy performance in Q4 and breakout performance by NPIs and replacements. Wondering if NPI had growth, either year-over-year, sequentially.
As we look at the guidance, the Neuromod guidance for 2023, the 3% to 5% range, maybe just kind of walk through the different assumptions there on the NPI and replacement side as well as by geography. And then, I had a follow-up.
Let's take from the top. US implants grew low-single-digits, and they were above the 2019 levels, I think, which was important for us to see that signal. Unit sales were flat, and we were up mid-single-digits with a combination of price and mix. The end of service outpaced the NPIs. And they grew mid-single-digits. NPIs in the quarter declined year-over-year. And sequentially, they were flat.
For us, we looked at this from multiple different angles. We looked at the macro, we looked at that storm in December, we looked at the share, and the bottom line is we just didn't execute. The team, I think, has some work to do. December really just didn't drive in NPIs like we anticipated and the team have to really dig into their performance management and commercial execution. And we've increased oversight of their funnel processes, removed the bottom 10% of the performers, we've looked at the growth profile of the various businesses that we have, that we're covering in the CECs. So we're expecting a change in that performance.
For 2023, this 3% to 5% is really looking at a decline in end of service as we previously discussed as we anniversary into this – the backlog of the COVID delayed cases, and then we're expecting sequential improvement in the NPIs throughout the year.
For international, again, it's a small piece, but double-digit growth in international. So, that should give you enough variables to get there.
For the follow-up, similar guidance question, but switching over to Cardiopulmonary. CP grew double-digits in 2022. The guidance for 2023 is 3% to 5%. The last time that you launched a new heart lung machine, you got a nice lift to growth. And I think you referenced the CP market kind of growing in that 3% to 5% range. So, I guess, when I take that all together, why is – 3% to 5% guidance for the CP business in 2023, why is that the right range at this juncture?
For CP, typically, the way we think about the market is in the developed markets, it's probably a low to mid-single-digit growth business. Two-thirds of our business is in consumables. Obviously, 2022, the growth was fantastic. It is based on a lot of the recovery from the surgical procedures coming out of COVID. So we still believe that it's the we're going to grow at a sort of a market rate from a consumables perspective.
And from a capital perspective, this is kind of a transition year. We expect our limited commercial release to be effective. And as we start to ramp Essenz sales in the back half of the year, we should expect a step up in growth, but we're being prudent about the way we're forecasting this business.
Our next question comes from Mike Matson with Needham & Company.
I have one on your covenants. I think the covenant requires an interest coverage ratio 3 to 1. I was curious if that includes or excludes the interest on the SNIA loan. And then, are you comfortable you can stay within that – compliance with during 2023?
Yeah. We're fine on our compliance with our covenants. We've pressure tested them and we're in good shape.
Just as far as the OSPREY trial goes, I hear you on the potential approval in 2024, but when do you think we could see data from the trial? Is it possible we could see it late this year or is it going to be really more 2024?
I'll take that one. It's 2024. It's a pivotal FDA ID, so we need to complete the study, file the data and then seek to publish or podium that. So, it won't be until 2024.
Our next question comes from Matt Miksic with Barclays.
We might have lost him, Emily.
At the moment, we have no further questions registered. I'll turn the call back to Damien McDonald for closing remarks.
Thanks, Emily. And thank you, everyone, for joining us on the call today. And on behalf of the entire team, we appreciate your support and continued interest in LivaNova and we'll talk to you on the first quarter call. Thanks very much.
Thank you, everyone, for joining us today. This concludes our call and you may now disconnect your lines.