LivaNova - Q1 2024
May 1, 2024
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the LivaNova PLC first quarter 2024 earnings conference call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Matthew Dodds, LivaNova's Senior Vice President of Corporate Development and IT. Please go ahead, sir.
Matthew Dodds (SVP of Corporate Development and IT)
Thank you, Candace, and welcome to our conference call and webcast discussing LivaNova's financial results for the first quarter of 2024. Joining me on today's call are Vladimir Makatsaria, our Chief Executive Officer and Member of the Board of Directors; Alex Shvartsburg, our Chief Financial Officer; Stephanie Bolton, President of Global Epilepsy; and Briana Gotlin, Director of Investor Relations. Before we begin, I would like to remind you that the discussions during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent financial filings and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any forward-looking statement.
Also, the discussions will include certain non-GAAP financial measures with respect to our performance, including, but not limited to, revenue results, which will all be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the Investors section of our website under News, Events, and Presentations at investor.livanova.com.
I would like to welcome Vlad to his first earnings call as LivaNova's CEO after starting March 1st. Prior to joining LivaNova, Vlad most recently served as Company Group Chairman at Johnson & Johnson MedTech, leading its global Ethicon surgery business. He's a respected leader in the medical technology industry with a 27-year track record of delivering results, driving innovation, and leading high-performance teams. With that, I will turn the call over to Vlad.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Thank you, Matt, and thank you everyone for joining us. It's my pleasure and privilege to welcome you to LivaNova's conference call for the first quarter of 2024 as LivaNova's Chief Executive Officer. First and foremost, on behalf of the Board and the executive leadership team, I would like to express our gratitude to Bill Kozy, Chair of the Board of LivaNova, for a tremendous job leading the company on an interim basis. I would also like to thank the entire Board of Directors for the opportunity to serve as CEO and express my sincere gratitude and excitement for the future of LivaNova. During my first two months, I interacted with customers, met investors, and engaged with my colleagues around the world. I can confidently say that the patient-first mentality thrives across every function and geography at LivaNova.
It is an honor to work with a global organization that focuses on solving significant unmet patient needs in two very high-impact medical fields: neurological and cardiac health. I'm humbled to be in this role and grateful to our teams for their exceptional work and dedication to serving our patients and customers. Over the coming months, I will continue to listen, learn, and complete a comprehensive review of business. In doing so, I'm focused on three key areas: execution, innovation, and talent. Let me provide additional color on each. First, execution and performance. My view of success in this area is achieving sustainable, above-market growth while improving profitability and cash flow, and most importantly, delivering on commitments to our customers. The first quarter marks our fifth consecutive quarter of double-digit revenue growth.
In Cardiopulmonary, we maintained above-market growth, driven by the strong launch of the Essenz heart-lung machine and our ability to fulfill the high demand for consumables. In Epilepsy, we saw continued growth in both new and replacement implants, driven by disciplined commercial execution. Second, innovation and portfolio. Over the last year, the company has made progress in refining the business strategy and portfolio, including the wind down of the advanced circulatory support segment and the heart failure program. These portfolio actions position us well for the future and enable us to have appropriate resources, focus, and investment to drive growth in the business. This includes reinvigorating our cadence of core innovation to meet our customers' most prevalent unmet needs. In both difficult-to-treat depression and obstructive sleep apnea, we anticipate results in RECOVER and OSPREY studies later this year.
Looking ahead, we will evaluate those opportunities alongside a holistic view of all possibilities for innovation. At LivaNova, our commitment to pioneering innovation remains unwavering, and to this end, I'm very pleased to welcome Ahmet Tezel as LivaNova's Chief Innovation Officer, which we announced yesterday. Ahmet has a remarkable track record, leading teams and developing a wide range of market-leading technologies. Ahmet will draw upon his extensive experience to guide innovation at LivaNova. And finally, the third area of focus is people and culture. Any great organization starts with great people, and in my first two months at LivaNova, I have met many of our colleagues from Houston to Arvada, from Munich to Mirandola. As previously mentioned, I'm most impressed by their embodiment of the patient-first value. I was also struck by their deep expertise in the areas which we operate.
It is no wonder we are category leaders in heart-lung machines and epilepsy surgery. We will build on this foundation and continue to attract top talent to LivaNova. Focus on execution, innovation, and talent will lead to success as an organization. We're confident that by delivering in each of these areas, we will improve patient outcomes and create shareholder value. For the remainder of the call, I will focus on the first quarter results and then turn to our strategic portfolio initiatives. After my comments, Alex will provide additional details on our results and update 2024 guidance. I will wrap up in closing remarks before moving to Q&A. So in the first quarter, we achieved 12% revenue growth versus prior year. Excluding the impact of ACS segment wind down, revenue increased 14% versus 2023.
This performance included double-digit revenue growth in both Cardiopulmonary and Neuromodulation segments. We're encouraged by our team's continued strong execution and as demonstrated by our performance in the quarter. Now turning to segment results. For the Cardiopulmonary segment, revenue was $156 million in the quarter. That's an increase of 16% versus the first quarter of 2023. Heart-lung machine revenue increased more than 20%, driven by Essenz. We were pleased to see continued Essenz placements and strong price mix in the quarter. Oxygenator revenue grew in low teens, driven by customer demand and price. As previously noted, the oxygenator business continues to see strong demand, and our efforts to increase capacity remain on track. We now expect Cardiopulmonary revenue to grow 8%-9% for the full year 2024. Our revised forecast incorporates strong HLM growth and continued strong demand for consumables.
Epilepsy revenue increased 11% versus the first quarter of 2023. U.S. Epilepsy revenue increased 13% year-over-year, with growth in both new and replacement implants. We achieved 826 new patient implants in the quarter, representing 4% growth versus the prior year. We realized 1,941 replacement implants, representing 5% growth versus the prior year. Epilepsy revenue in Europe and the rest of the world grew 7% versus prior year. For the full year 2024, we continue to expect global epilepsy revenue to grow 6%-7%. Our forecast incorporates a continued mid-single-digit growth rate in the U.S. new patients and more normalized low single-digit growth rate in replacements. We now expect international revenue to grow in high single digits.
Difficult-to-treat depression revenue in the first quarter was $2 million, and for the full year, we continue to anticipate approximately $7 million revenue, primarily coming from the RECOVER study. The RECOVER study continues to advance, and the Bipolar cohort continues to enroll as expected. As a reminder, enrollment for the Unipolar cohort of the study is now complete. We anticipate the 12-month follow-up data for the 500 Unipolar patients in the second quarter. At that time, we will conduct an analysis and continue to expect publication of the full study results by late 2024. Now moving to obstructive sleep apnea. The OSPREY clinical study achieved a positive predictive outcome and concluded enrollment in March. That this means that there is a very high probability that there will be a statistically significant result in the primary endpoint, which is seven-month AHI response rate.
In accordance with the study protocol, once the last implanted patient completes the last follow-up visit, we will conduct a final analysis for the study. We are pleased to have achieved this positive milestone for the OSPREY study, and we will continue to work actively with clinical sites to manage the study patients. With that, let me turn the call over to Alex.
Alex Shvartsburg (CFO)
Thanks, Vlad. During my portion of the call, I'll share a brief recap of the first quarter results and provide commentary on 2024 guidance. Turning to results, revenue in the quarter was $295 million, an increase of 12% versus 2023. Excluding the impact of the ACS segment wind down, revenue increased 14% versus 2023. Foreign exchange in the quarter had an unfavorable year-over-year impact of approximately $1 million, or less than 1% of revenue. Adjusted gross margin as a percent of net revenue was 71%, compared to 69% in the first quarter of 2023. The year-over-year increase was driven by favorable product mix and pricing. Adjusted R&D expense in the first quarter was $43 million, compared to $46 million in the first quarter of 2023.
R&D, as a percent of net revenue, was 15%, down from 18% in the first quarter of 2023. The year-over-year decrease was largely driven by the closeout of the ANTHEM trial. Excluding the costs related to ANTHEM, our R&D investments increased 15% versus the prior year. Adjusted SG&A expense for the first quarter was $113 million, compared to $108 million in the first quarter of 2023. The year-over-year increase was driven by targeted investments supporting Essenz, legal expenses, and variable costs such as freight and commissions associated with increased revenues, offset by the reduction in ACS. SG&A, as a percent of net revenue, was 38%, compared to 41% in the first quarter of 2023. Adjusted operating income was $53 million, compared to $27 million in the first quarter of last year.
Adjusted operating income margin was 18%, compared to 10% in the first quarter of 2023. This increase was driven by improved gross margin and operating expense leverage, primarily related to the wind down of the Heart Failure Program and the ACS segment. Adjusted effective tax rate in the quarter was 21%, compared to 6% in the first quarter of 2023. The year-over-year increase is related to developments in the global tax landscape and is in line with our expectations. Adjusted diluted earnings per share was $0.73, compared to $0.43 in the first quarter of 2023. Our cash balance at March 31st was $309 million, up from $267 million at year-end 2023.
Total debt at March 31st was $624 million, up from $587 million at year-end 2023. This increase in total debt was driven by the closing of a $345 million private offering of convertible senior notes maturing in 2029, and repurchase of $230 million of convertible senior notes. Net debt, including restricted cash at March 31st, was $120 million. Adjusted free cash flow for the quarter was $11 million, down from $20 million in the prior year period. The year-over-year decrease was driven by higher working capital needs and ACS restructuring costs. Capital spend in the quarter was $6 million, compared to $8 million in the prior year. The year-over-year decrease was driven by timing of key investments.
Now turning to our revised 2024 guidance. As Vlad mentioned, based on our performance in the first quarter, we're increasing our full year 2024 revenue and adjusted diluted earnings per share guidance while maintaining the range on our adjusted free cash flow. We now expect 2024 revenue growth on a constant currency basis between 6% and 7%, and between 8% and 9% when excluding the portion of the ACS business that we are exiting. In the first quarter, we observed favorable comparisons, which will continue in the second quarter. While we do not provide quarterly guidance, we expect revenue growth to be lower in the second half of 2024 compared to the first half of this year. Foreign currency is now expected to be a 1% headwind based on current exchange rates.
We continue to expect a full year adjusted effective tax rate of approximately 21%. We now project adjusted diluted earnings per share in the range of $3.05-$3.15, with adjusted diluted weighted average shares outstanding to be approximately 55 million for the full year. Adjusted free cash flow is still expected to be in the range of $95 million-$115 million, an increase of approximately 9% at midpoint versus the prior year. This range includes a meaningful step up in capital spending, which we forecast to be approximately $60 million. As a reminder, our cash flow projections include costs associated with the ACS wind down in the range of approximately $15 million-$20 million, the majority of which occurs in 2024.
From a phasing perspective, free cash flow generation in the first half of the year is lower than the second half. As a reminder, LivaNova pays its prior year short-term incentive bonuses in the second quarter. In summary, I'm encouraged by the company's execution and financial performance in the first quarter. Looking to the rest of the year, we will continue to invest in critical capabilities to support innovation, growth, and infrastructure. We remain well-positioned to drive above-market growth and more than 300 basis points of operating leverage in 2024. With that, I'll turn the call back over to Vlad.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Thank you, Alex. So to conclude, our first quarter results were marked by double-digit revenue and operating income growth in both the Cardiopulmonary and Neuromodulation segments. Our performance in the quarter positions us well to build on this competitive momentum. Looking ahead, we will focus on execution, innovation, and talent. With this framework in mind, we're excited for the remainder of the year. Again, we will build on the strength of our core Cardiopulmonary and Epilepsy businesses, making investments to drive sustainable above-market growth. We will also gain clarity on the results from the RECOVER and OSPREY studies, which will allow us to strategically target our most compelling opportunities. Finally, we will continue to explore areas of high clinical unmet need in markets with high growth potential to create long-term shareholder value.
In closing, I would like to thank my colleagues across the organization for the warm welcome to LivaNova. Their hard work and passion underpin our success as an organization. I'm grateful for their continued dedication to serving customers and patients, and together, we will continue to advance our mission of improving outcomes for patients with neurological and cardiac health conditions around the world. So with that, Candice, I think we're ready for questions.
Operator (participant)
Thank you. If you have a question at this time, please press star then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star followed by the number two. As we enter the Q&A session, please limit your questions to one question and one follow-up, and then return to the queue if you have any additional follow-up. Our first question comes from the line of Rick Wise of Stifel. Your line is now open. Please go ahead.
Rick Wise (Managing Director)
Good morning, everybody, and good morning to you, Vlad. I look forward to meeting you in person. Maybe to start off, you talked about the fundamental momentum, and it's clearly visible in the outperformance. Maybe you could help us better understand, just first at a high level, the sustainability of the strong epilepsy growth that we saw and some of the drivers there, both on the new implant side and replacement. How are you thinking about the year unfolding and the drivers of that? And on the Oxy side, you know, where are you with capacity expansion, and are you seeing competitors come back? So again, addressing the sustainability, and your thoughts about it as you look ahead to the full year.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Yeah. Well, Rick, thank you for the question, and likewise, I look forward to meeting you in person soon. Look, I think the first order of business, as I said earlier in my comments, is to, you know, build a sustainable above-market growth in the core business. And I think it's both in Cardiopulmonary and in Neuromodulation segments. On the Cardiopulmonary side, you know, the sustainability comes from continuous upgrade to the Essenz heart and lung machine, which, you know, still around the world, we have major opportunities. And as a market leader, I think that upgrade is our biggest driver for that growth momentum, as we continue to upgrade the customers, but also to upgrade the technology itself.
On the disposable side, you know, we have a significant opportunity to increase our market share still. And obviously, we were helped in this quarter and the previous quarters with some of the competitive disruptions. So we have capitalized on that momentum, and the key drivers there will be short term, will be expansion of our capacity, which we are on track. And you know, we are using our current footprint to really improve the way the work is done. So that's number one. And then number two is going back to innovation is you know, making sure that our cadence in innovation in the oxygenator and other disposable businesses is following. So that's on the Cardiopulmonary side. On the Neuromod side is you know, similar drivers.
Obviously, we're coming from the position of strength. We're currently the leader in the technology in the space of kind of neuromodulator interventional procedures, surgical procedures, and we will build on that strength. The key driver there for sustainable growth will be innovation. And so our first step is to invest in digitally connected, you know, technologies and that will make procedures easier for the physicians and better outcomes for patients. So that is gonna be the major driver of our long-term sustainability. And short term is really about our commercial execution around the world, which with Steph's leadership over the last year, we have significantly improved. So that's that.
And I'm really encouraged because it's now, I look back, it's five quarters of double-digit growth, and you know, obviously, my key role here is to make sure our organization is enabled to continue this momentum.
Rick Wise (Managing Director)
Yeah, that's great. And maybe just, as a follow-up, you've highlighted innovation repeatedly. I think I'm correct in saying you said, R&D growth X, whatever 15% if I'm saying it correctly. Anyway, you, you've made an important hire with a Chief Innovation Officer. What are you, what are you charging him with? What are you asking him to do? What are his priorities? What are your priorities? What can we expect to see? You've touched on it a little bit.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Yeah.
Rick Wise (Managing Director)
Maybe you can give us a little deeper perspective. Thank you.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Rick, thank you for highlighting this. I think it's a big deal for us. Ahmet comes with just an incredible track record, and you can obviously look at his background in various companies, various technologies and clinical states. And he led not just R&D, but a holistic innovation functions with regulatory and medical affairs, clinical, preclinical, market access. So that's a little bit on Ahmet's background, and I think just outside of pure innovation capability, he is an extraordinary leader and I think just a great addition to our leadership team. You know, my and to go back on the why and what needs to get done, you know, it's been two months for me, and I've been kind of deeply engaged with teams around the world and learning and assessing.
Like I said, I'm extremely impressed with the people and talent and culture of LivaNova. Obviously, execution is very strong, and you see this in the results. You know, innovation is one area where we need to build on the strength of our core and really accelerate. My ask for Ahmet is to come in and continue to develop top talent and bring top capabilities in functions that are surrounding innovation. So bring top talent and develop our current talent at LivaNova, that's number one. Improve our processes on how we look at innovation from end-to-end state, you know, inside generation, product development, market access, links to supply chain. So improve the entire process of innovation end to end. And then finally, help us assess and make decisions on spaces in which we should work.
You know, short term, this will be some major decisions that we will have to make with our OSA and DTD strategy, and I think it will be important to have his voice on this.
Rick Wise (Managing Director)
Thank you very much.
Operator (participant)
The next question comes from the line of Matt Taylor of Jefferies. Your line is now open. Please go ahead.
Matt Taylor (Managing Director and Senior Equity Research Analyst)
Hi, thank you for taking the question. I guess I actually wanted to ask one about the medium-term outlook for some of your businesses. You know, it's a little bit challenging to try and forecast Cardiopulmonary with some of the dynamics going on with oxys this year. Can you help us understand, I guess, first for oxygenators, with your increase in capacity combined with all the share you've gained and the potential for competitors to come back, how do you expect that business to grow over the next couple of years? And same kind of question I have on the heart and lung machine launch. Obviously, that's gone really well. You're out of the gate. What, you know, what happens when you start to comp the launch? What kind of growth would we expect through that period? Thank you.
Alex Shvartsburg (CFO)
Hey, Matt, it's Alex. I'll take this one first. So in terms of the midterm outlook for the Cardiopulmonary business, we really, really excited about the opportunity that we have in the HLM replacement cycle. We said all along, this is gonna be a multi-year opportunity for LivaNova, and we're capitalizing on the great technology and the insights that we use to develop the product. So we think that the HLM growth will continue. It will continue to accelerate into the balance of the year. So, and we project that for, as I said, for next couple of years.
As far as the oxygenator business, as we've said all along, we reached our sort of peak capacity in oxygenators in the second half of last year. We've been really working hard to expand the capacity, and the team's doing a really good job at that. We're actually seeing some acceleration in those programs where we're really improving our processes at the Mirandola manufacturing facility and continuing to add some automation to enable that. So we expect some capacity expansion, primarily in the second half of this year, but we're probably gonna see some benefits in the second quarter as well. So I feel good about the opportunity that we have there. Now, we're monitoring the competitive situation.
Never sure what the competition will do in terms of coming back into the market, but we feel like we have a great opportunity to continue to enhance our market position and continue to capture market share.
Matt Taylor (Managing Director and Senior Equity Research Analyst)
Great. Thanks for the color, Alex.
Alex Shvartsburg (CFO)
Sure thing.
Operator (participant)
The next question comes from the line of Michael Polark of Wolfe Research. Your line is now open. Please go ahead.
Michael Polark (Senior Equity Research Analyst)
Hi, good morning. Thank you for taking the question. My first question is on the sleep program. Obviously, a positive update here from the clinical trial prediction work. You know, this is a confirmatory study. You know a lot about this asset already. If I just speculate on timing, kind of team set up or LivaNova set up to get an FDA approval, call it middle of 2025, maybe one year away from today. So I'd imagine, you would want to think about doing some commercial prep here, hiring a field force, that sort of thing. So what is the state, what, what is the view on that, prepping for a sleep launch in 2025, and, and, maybe as it relates to 2024 numbers, do you have anything built in here from an OpEx perspective, on early sleep prep?
Matthew Dodds (SVP of Corporate Development and IT)
Hey, hey, Mike, it's Matt. I'll go through those for you. So for the program, we are gonna have around 105 patients implanted. You know, we took the look at 90, but as we were discussing with the FDA on early stoppage, all patients in the queue were implanted. So it's. We're gonna have the primary endpoint data, that's seven months reduction in AHI, around year-end. And to your point, we'd probably file then, if assuming the data is there in early 2025. And just so you're aware, we do have to give the FDA one year safety data as well. That'd probably be in, like, April. So it's still a 2025 approval based on, you know, where we are today. It didn't change that much.
In terms of the commercial prep, you know, I think the seven-month data will be directionally very important, but we're, again, we're not going to get that till year end. The 13-month data, which will compare to the competitive data we've seen from now two companies, that's the really important data. So I would say, you know, commercially, we're gonna take this very slow until we see, A, the seven-month data, and then B, the 13-month data. So there's really not much in 2024 in terms of commercial spend.
Michael Polark (Senior Equity Research Analyst)
Helpful. And then my follow-up on the Essenz launch. I'm just curious, in the U.S. and Europe, where this product is available, kinda, what is the Essenz/S5 mix? Any color on units and how it has ramped versus the back half of last year, and what Essenz unit expectations might be for this year? Thanks so much.
Alex Shvartsburg (CFO)
Hey, Mike, it's Alex. We're not sharing the actual unit numbers. What I will tell you is, typically, first quarter is kind of a lower volume quarter anyway for our heart-lung machine placements. And we continue to anticipate that we'll have a steady increase in placements throughout the year.
Operator (participant)
Thank you. The next question comes from the line of Adam Maeder of Piper Sandler. Your line is now open. Please go ahead.
Adam Maeder (Managing Director and Senior Equity Research Analyst)
Hi, guys, good morning. Congrats on the nice start to the year, and thank you for taking the questions. I wanted to follow up on Essenz and, you know, I believe you're fully launched in the U.S. and Europe, but was hoping you could talk about potential timelines for rest of world. And then also wanted to better understand how the existing heart-lung machine install base kind of is broken down by geography as we think about a potential replacement curve. And then I had a follow-up.
Alex Shvartsburg (CFO)
Yeah. So Adam, again, as far as the Essenz rest of world rollout, this is already starting to occur in select markets. As we saw in Europe and the U.S., we kind of start out slowly with kind of the limited commercial releases and then ramp as we get insights and feedback from our customers. So, throughout the year, we'll see a continued flow of new markets coming online.
Adam Maeder (Managing Director and Senior Equity Research Analyst)
Alex, any color on the existing heart-lung machine install base and kind of how that looks between the U.S., Europe, and rest of world?
Matthew Dodds (SVP of Corporate Development and IT)
Sure, Adam, it's Matt. U.S., say roughly 30%, Europe, about 20%, rest of world, 50%.
Adam Maeder (Managing Director and Senior Equity Research Analyst)
Okay, I got it. That's good color, guys. Thank you for that. And then for the follow-up, wanted to ask Vlad, you know, for your thoughts on the RECOVER program. And, you know, I guess, two-part question. First, you know, what would you define as a successful RECOVER trial? You know, maybe to ask the question differently, you know, what do you want to see to push-forward and commercialize the program. And then I did want to ask about, you know, data disclosure. It sounds like you'll see the data in June, so next month. Will you top-line that information to the investment community? Do you have approval to do that from CMS, or is that still up in the air? Thanks again for taking the questions.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Yeah. So Adam. Adam, thank you for the question. It's obviously the outcome of the RECOVER trial is a very important milestone for us because, I mean, not only will more importantly make some opportunities potentially available for, you know, patients, but also will kind of determine direction of our strategy on this one. So it's, it's a, it's an important milestone. All the decisions will be rooted in or founded on the outcome of the clinical study. And like you said, you know, we anticipate the results before the end of this quarter. Once we have them, we will analyze and we will make it transparent at the high level to the, to the community. So that's, that's, that's important.
And two, based on this clinical results, we will then determine the path, work with CMS, with the clinical sites, and with the investment community on what is the best path forward. So, to your point, there will be transparency to data as we have it at the high level, and then the full data will be available by the end of the year with the scientific publication. And then the way I look at it, it's a complex trial because we're answering a number of questions in various clinical needs within difficult-to-treat depression. So we will have to assess, together with CMS on path to reimbursement, depending on what clinical, you know, questions we're positively answering.
Adam Maeder (Managing Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
The next question comes from the line of Anthony Petrone of Mizuho Group. Your line is open. Please go ahead.
Anthony Petrone (Managing Director and Senior Equity Research Analyst)
Thank you, and congrats to the team here on strong 1Q, and Vlad, congrats on the new role of CEO with the company. Maybe to start with guidance and maybe just a little bit of math on the 1Q beat versus the guidance outlook. And so you look at the prior guidance versus revised guidance, top line is up by 200 basis points, and the midpoint of the range is up $0.10. You had a sizable 600 basis point beat top line, and a $0.24 beat in 1Q, so there's a little bit of spread there. So hoping to just get a little bit of color on, you know, the extent of the 1Q beat and what's implied for guidance. And then one specific to guidance would be on capacity for oxygenators.
You know, what is actually assumed in there in the revised guidance of 4%-6%? Does that reflect a tailwind in the second half for that business specifically? And I'll have one quick follow-up. Thanks.
Alex Shvartsburg (CFO)
Hey, Anthony, it's Alex. So the first quarter is typically a low quarter for us in terms of revenue and profitability. So we had favorable comparisons, and we do not expect the same level of growth in the second half of 2024. We're still continuing to invest in critical capabilities to support innovation and growth and infrastructure. We expect spending to be higher for the remainder of the year. Additionally, we saw favorable pricing and product mix, which contributed meaningfully to our gross margin expansion in the quarter.
So look, at the end of the day, it's still early in the year, and the way we think about this is, we have some significant opportunities, as Vlad talked about, the innovation portfolio, et cetera. And I think it's at this point in time, we're taking sort of a prudent approach to the revised guidance.
Anthony Petrone (Managing Director and Senior Equity Research Analyst)
No, that's very helpful.
Alex Shvartsburg (CFO)
And, uh-
Anthony Petrone (Managing Director and Senior Equity Research Analyst)
Go ahead. Sorry. Sorry, Alex.
Alex Shvartsburg (CFO)
No, go ahead.
Anthony Petrone (Managing Director and Senior Equity Research Analyst)
That, that's helpful.
Alex Shvartsburg (CFO)
Go ahead.
Anthony Petrone (Managing Director and Senior Equity Research Analyst)
Thank you, Alex. Maybe just a quick follow-ups here, and I'll get back in. One would be, you know, just to recap on, you know, the cost savings from ACS. And when we think about depression, you know, how do you think about the bipolar cohort here? So in other words, you know, there's a go, no-go sort of option here for unipolar. You know, how does that influence the bipolar cohort decision-making process? Thank you.
Alex Shvartsburg (CFO)
I'll take the ACS question first. So as far as the ACS, we guided the ACS savings and the impact on the EPS to about approximately $0.10 the beginning of the year, we still feel good about that. Now, with your follow-up question, I'll turn it over to Matt.
Matthew Dodds (SVP of Corporate Development and IT)
Sure. So, Anthony, for Bipolar, we said last June, we had 150 patients enrolled, and we said roughly, you know, 25 patients a quarter, and we've said that's on track. Yeah, for that one, the unipolar data could have an influence on it, but this is a very different patient group. And if you look at some of the historical data that we've shown, generally, VNS does better with the bipolar patients. So, you know, there is still a path for bipolar, regardless of where unipolar ends up, in our opinion.
Alex Shvartsburg (CFO)
And Anthony, just follow up on your question regarding capacity. We're continuing the program to expand our capacity in Mirandola, and that's, as I said, it's going really well. We incorporated that capacity expansion into our original guidance, and so we're kind of maintaining that assumption.
We're gonna see some favorable benefits, some tailwinds in the second quarter as we were able to achieve some success there earlier than anticipated. But the expectation is that there's gonna be some growth in the back half of the year as a result of our ability to expand the capacity.
Operator (participant)
The next question comes from the line of Mike Matson of Needham & Company. Your line is now open. Please go ahead.
Mike Matson (Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Just so on the Essenz launch, I mean, obviously, it's driving really strong growth. But I was wondering, you are getting a pretty big price premium with Essenz, so, you know, how much of it is pricing and how much of it is volume? I, I know you're not going to give us a volume number, but I guess I'm getting at is, has volume picked up? Has the availability of Essenz driven more, you know, upgrades, or is it really just been pricing so far, at least?
Alex Shvartsburg (CFO)
Yeah, look, we're seeing a strong funnel with regard to units, and the placements have been tracking according to plan. So yeah, obviously, the price mix benefit, right? We have a substantial price premium in effect here, but we're also seeing customers sort of taking advantage of the newer technology and the feature and benefits that are offered with Essenz that didn't exist with S5. So we are getting some of that benefit. But as I said, our funnel for, you know, for unit placements looks strong for the balance of the year, and we're gonna continue to see an acceleration of our placements.
Mike Matson (Managing Director and Senior Equity Research Analyst)
Okay, got it. And then with the earlier sort of end of enrollment in OSPREY, is there any cost savings associated with that? I think on the last call, you said you expected to spend a little more than the $27 million that you spent in 2023 on that program. So would that spending be down as a result of that, or is it kind of not impacting it? Thanks.
Alex Shvartsburg (CFO)
It's roughly the same, Mike, because the majority of the cost is associated with managing the patients throughout the trial, throughout the study. So, while there's some savings in perhaps the recruitment costs, the majority of the costs reside in sort of the active management of patients throughout the trial process.
Mike Matson (Managing Director and Senior Equity Research Analyst)
Okay, got it. Thank you.
Operator (participant)
Thank you. The next question comes from David Rescott of Baird. Your line is now open. Please go ahead.
David Rescott (Director and Senior Research Analyst)
Oh, great. Thanks for taking the questions. Vlad, I wanted to follow up on one of the comments I heard you make in the prepared remarks around evaluating RECOVER, OSPREY trials, alongside what you called a holistic view around some of the areas for innovation. And I'm wondering if you could expand a little bit on what some of the factors are, maybe, around that holistic approach. And then specifically for RECOVER, I heard some of the comments earlier to a prior question.
But does the holistic view around RECOVER get accounted for or thought about maybe when we start to hear about some of the top-line results, or is that maybe more of a, "Hey, let's wait till we see the publication and think about the fit in the portfolio longer term?"
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Yeah. So, thank you, David. I think short-term investment choices, you know, will—yeah, and I'll start maybe before the RECOVER and OSPREY comment. You know, but if you look at some of the really good decisions that the leadership team made over the last couple of years, you know, one was to focus the portfolio. So with the wind down of the ACS and then the heart failure business, that gave us opportunity to reinvest in the core. And partly, you see the kind of the outcome of the decisions and improve execution and improve results in the core business. So short term, you know, potential kind of for short-term growth will be to reinvest more in the core, both on the innovation front, execution front, expansion of capacity, and so forth.
So that's one opportunity we're looking at. Longer term, you know, in terms of strategic directions, we're gonna have to wait until we see what clinical results OSPREY and RECOVER bring, because obviously, that will be a fork, if you like, in the strategic direction of the company. So, so that's, that's a little bit how we're thinking about it. Short term, more reinvest in the core. Long term, see what the, what direction we take on DTD and LSA.
David Rescott (Director and Senior Research Analyst)
Okay, great. Maybe a question for Alex. If I look at the kind of updated EPS guide for the year, in the bridge relative to what you laid out, after Q4. The operational growth and leverages is where things kind of have moved higher. Tax, cost inflation, infrastructure investments, the HF, ACS exits, all remained relatively the same as it relate to the contribution for the bridge to growth in EPS this year. My guess is that implies that there's no real update out on the latter kind of pieces to the guide. If we think about maybe some levers for upside in the remainder of the year, is there any, you know, shift in potential for those three latter pieces?
Or if, you know, there's more upside to be had on the EPS line, it's more gonna be operational growth and leverage, you know, relative to those four other or three other kind of buckets. Thank you.
Alex Shvartsburg (CFO)
Yeah, I mean, as we looked at the components of EPS, we you know feel really good about the savings from the heart failure and the ACS wind down. Tax rate, we knew going into this year was a headwind, but you know, we're managing through it. So, you know, the majority of the upside here is really about operating leverage and you know, our team being super disciplined and focused about driving growth and ensuring that there's an appropriate level of drop through on the bottom line.
David Rescott (Director and Senior Research Analyst)
Okay, thank you.
Operator (participant)
The next question comes from the line of Matt Miksic of Barclays. Your line is now open. Please go ahead.
Matt Miksic (Managing Director and Senior Equity Research Analyst)
Thanks so much. Can you hear me okay?
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Yep.
Matt Miksic (Managing Director and Senior Equity Research Analyst)
Great. Thanks for taking the question. Maybe just if I could follow up on the sort of scenarios and your decision process between OSPREY and RECOVER, that'd be super helpful. And which of those programs you likely to move forward with? Thanks.
Matthew Dodds (SVP of Corporate Development and IT)
Hey, Matt, it's Matt. So for both, I mean, the data is obviously critical. You know, we as we said, with RECOVER, for unipolar, we'll get that data by the end of the quarter, and then for the OSPREY OSA program, you know, around year-end. I'd say, you know, in terms of product development, there's a little bit of a difference with OSA. You know, that's a component as well to look at. But generally, you know, those are the core timelines when we get the clinical data to show basically, you know, where we would play in each one and what the value would be to the patients and physicians.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Yeah, and Matt, maybe just, I mean, obviously, we don't have the outcome of the decision, but I think what's important is the principle on how we make it. And we were gonna look at three dimensions. You know, the first one is: What is the clinical benefit to patients? And, that's, that's number one. That's the most important one. The second one is: How competitive is our technology in this space versus other available technologies, on the marketplace? And then the third one is looking at the end-to-end kind of business model, if you like, and how we can create value, not just for patients, but also for the shareholders. So those, those will be the three, kind of parameters that we're gonna use to decide how to prioritize between those two.
Matt Miksic (Managing Director and Senior Equity Research Analyst)
That's helpful. If I could, just one follow-up on the epilepsy market. You know, if you could maybe talk about the, the biggest sort of, factors driving or, or maybe, you know, enabling or restraining your, your execution there and ability to operate. Is competition, is it, some of the, the changes in your sort of go-to-market strategy? Is it, you know, just general, general sort of, you know, end of life cycles in your, your current and, and previous kind of, you know, implanted patients? Maybe just what, what are the most significant factors that we can look at to, to measure that performance this year? Thanks so much.
Stephanie Bolton (President of Global Epilepsy)
Hi, Matt, it's Steph here. Sure. Let me tell you where our focus is for the remaining part of this year. So the U.S., it's gonna be the continuation of that, disciplined commercial execution, building very much on the foundations that we laid, last year in 2023. You touched on our sales force structure, but we'll be maintaining our sales force structure and our territory design. We're also building a high talent bench for those, large influencing territories as well. But as I mentioned on the last call, our strategy is a little broader than that, than just our sales force structure. And in combination with that, it's also making sure that we expand our efforts, in regards to partnership with our physician base.
We had a really successful recent scientific advisory board full of great insights. And also, as we look towards 2024 and our end of service, so that's based on our latest data, but the comparisons do get a little more tricky throughout the rest of the year. But we still are encouraged by our end of service performance and partnering with our physicians to identify patients in accordance to that all important continuity of care. So those are the sort of main aspects, really. Partnership with our physician base, ensuring that we can expedite care, continuation of our territory structure, and, and as I say, key partnership with our advisory board.
Operator (participant)
The next question is a follow-up from Anthony Petrone of Mizuho Group. Your line is now open. Please go ahead.
Anthony Petrone (Managing Director and Senior Equity Research Analyst)
Thanks. Vlad, just a quick follow-up on RECOVER and the messaging there. Is the go or not-go forward, you know, decision, will that be on the headline readout in June-July timeframe, or will you wait for the final data set at the end of the year to make that decision? Thanks.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Anthony, thank you for this follow-up. Just, you know, the, if the clinical data is negative, then it's a clear no-go decision. If the clinical data has elements of positive, whether holistically or in certain clinical areas, then we will continue working with CMS to define a go or no-go decision. You know, and that is, for me, the best scenario where, you know, we can continue to work with them to evaluate that.
Anthony Petrone (Managing Director and Senior Equity Research Analyst)
Yeah.
Operator (participant)
As there are no additional questions waiting at this time, I'd like to hand the conference back over to Vladimir Makatsaria for closing remarks.
Vladimir Makatsaria (CEO and Member of the Board of Directors)
Thank you. Thank you, Candace, and thank you everyone for joining the call, for your feedback and very thoughtful questions. Look, on behalf of the entire leadership team at LivaNova, we really appreciate your support and your interest in the company. We'll talk to you soon. Have a good day.
Operator (participant)
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.