Q3 2024 Earnings Summary
- Encouraging progress in the Obstructive Sleep Apnea (OSA) program, with the OSPREY study showing a 97.5% or greater chance of statistically significant results in the primary endpoint for effectiveness. The company's device does not require Drug-Induced Sleep Endoscopy (DICE), simplifying the treatment pathway and offering a significant advantage over competitors. Primary endpoint data is expected in November, and a PMA submission is anticipated in the first half of 2025, potentially opening a significant new market opportunity for LivaNova.
- Potential improvement in reimbursement for VNS Therapy in epilepsy, as the company is encouraged by unanimous support for moving the coding to Level 6 payment. This increase in reimbursement could drive greater VNS Therapy utilization among the over 1 million patients with drug-resistant epilepsy who are currently untreated, where procedure penetration is below 5%. This could significantly expand the market and drive growth in the epilepsy segment.
- Strong demand and market share gains in oxygenators, with customer demand continuing to outpace global supply. LivaNova is increasing manufacturing capacity and has achieved at least 10% volume growth in manufacturing output from the end of 2023 to the end of 2024. Despite competitors resuming full operations, LivaNova remains in back order, indicating sustained demand and potential for continued market share gains in 2025.
- LivaNova is expecting a slowdown in revenue growth in Q4 2024 due to tough comparisons from accelerated placements of Essenz in Q4 2023, and increased operating expenses in Q4 2024 will result in a step down in earnings.
- The company's effective tax rate is expected to increase significantly in 2025, rising to 24% to 25%, leading to a potential $0.15 headwind in EPS, which may limit EPS growth despite operational improvements.
- Uncertainties around the commercialization and success of high-risk programs like Difficult-to-Treat Depression (DTD) and Obstructive Sleep Apnea (OSA) may impact the company's future growth prospects, especially as significant investments may not yield returns until 2026 and beyond.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +11% (from $286.1M to $318.12M) | Total revenue increased by approximately 11% YoY, driven by solid gains across core segments—Cardiopulmonary, Neuromodulation, and a notable surge in Other Revenue—all supported by robust geographic performance in the United States, Europe, and Rest of World markets. |
Cardiopulmonary Revenue | +19% (from $144.8M to $172.2M) | Cardiopulmonary revenue climbed 19% YoY as a result of strong demand for products such as the Essenz Perfusion System and consumables, reflecting improved market conditions and accelerated adoption across key regions compared to the previous period. |
Neuromodulation Revenue | +8% (from $128.9M to $139.9M) | Neuromodulation revenue increased by about 8% YoY, driven by upticks in new and replacement implants and steady geographic expansion that underline consistent patient demand enhanced by favorable pricing strategies relative to prior performance. |
Other Revenue | +300%+ (from $1.5M to $6.02M) | Other Revenue surged over 300% YoY, likely due to improvements in ancillary income streams such as rental and site services—potentially reflecting changes in revenue recognition practices and strategic portfolio adjustments compared to previous underperformance. |
United States Revenue | +11% (up to $179.83M) | US revenue increased roughly 11% YoY, bolstered by strong Cardiopulmonary performance (notably a prior report of 29.7% growth in U.S. Cardiopulmonary) and steady gains in Neuromodulation, underpinned by effective pricing programs and higher product demand in the region. |
European Revenue | +10% (up to $52.82M) | European revenue grew about 10% YoY, as market conditions improved and core segment performance stabilized, indicating a recovery in the region despite previous challenges experienced in earlier reporting periods. |
Rest of World Revenue | +12% (up to $85.48M) | Rest of World revenue increased by nearly 12% YoY, reflecting strong demand in emerging markets and improved performance in both the Cardiopulmonary and Neuromodulation segments, building on past momentum observed in select international markets. |
Operating Income | +695%+ (from $4.46M to $35.62M) | Operating income improved dramatically, rising from $4.46M in Q3 2023 to $35.62M in Q3 2024. This turnaround is attributable to higher revenue, enhanced cost management, and operational efficiencies achieved through better leverage and streamlined expense structures compared to the previous period. |
Net Income | Positive turn (from –$7.32M to $32.95M) | Net income swung from a loss of $7.32M to a profit of $32.95M YoY, driven by the substantial improvement in operating income, effective cost-control measures, and a more favorable effective tax rate compared to the last period, reversing the previous period’s losses. |
Basic EPS | +430%+ (from –$0.14 to $0.61) | Basic EPS rebounded sharply from –$0.14 to $0.61, reflecting robust gains in net income and enhanced operational leverage, which together reversed the previous negative EPS, underscoring the improved profitability and earnings strength in Q3 2024. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted Diluted EPS | FY 2024 | $3.10 to $3.20 | $3.30 to $3.40 | raised |
Adjusted Free Cash Flow | FY 2024 | $95 million to $115 million | $110 million to $130 million | raised |
Revenue Growth (constant currency) | FY 2024 | 7% to 8% | 8.5% to 9.5% | raised |
Revenue Growth (excluding ACS) | FY 2024 | 9% to 10% | 10% to 11% | raised |
Adjusted Effective Tax Rate | FY 2024 | approximately 21% | 21% to 22% | raised |
Capital Spending | FY 2024 | Approximately $60 million | Approximately $60 million | no change |
Cardiopulmonary Segment Revenue Growth | FY 2024 | 12% to 13% | 13% to 14% | raised |
Epilepsy Segment Revenue Growth | FY 2024 | 6% to 7% | 7% to 8% | raised |
Foreign Currency Impact | FY 2024 | 1% headwind | negligible | lowered |
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2025 Guidance and Margin Outlook
Q: Can you discuss expectations for 2025 growth and margins?
A: Management stated it's premature to provide 2025 guidance but emphasized their goal to grow margins faster than revenue next year. They are modeling a tax rate increase to 24%-25%, aiming to offset this with margin expansion and continued earnings growth. -
DTD Program and CMS Reimbursement
Q: What's the outlook for the DTD program and its CMS reimbursement?
A: Management is optimistic about securing CMS reimbursement for the DTD program due to the high unmet medical need and positive secondary analyses. They plan to initiate the formal application after all publications are out in early 2025, with the CMS process generally taking about a year. -
Obstructive Sleep Apnea (OSA) Data and Commercialization
Q: What are the expectations for upcoming OSA data and commercialization plans?
A: Preliminary seven-month data will be released in November, indicating the device performed better than expected. A PMA submission is planned for the first half of 2025. Significant investment in commercialization is unlikely before 2026, with options still being considered. -
Epilepsy Reimbursement Level 6 Payment
Q: What is the impact of potential Level 6 payment for epilepsy on the business?
A: Management is encouraged by unanimous support for moving to Level 6 payment, which could eliminate economic headwinds and drive greater VNS therapy utilization among Medicare patients, who represent about 40% of their NPI numbers. Over time, this could increase procedure penetration, currently below 5%. -
Oxygenator Market Share and Capacity Expansion
Q: How sustainable is the oxygenator market share gain and capacity expansion?
A: Due to strong procedure growth and industry-wide capacity constraints, LivaNova has gained market share by increasing manufacturing output by at least 10% from end 2023 to end 2024. They see no improvement from competitors and plan further capacity expansion to meet demand in 2025. -
Essenz Adoption and Revenue Growth
Q: What's the outlook for Essenz adoption and its impact on revenue?
A: Essenz is expected to account for 40% of heart-lung machine sales globally this year. The company plans to increase penetration by approximately 20 percentage points annually, aiming for near 100% adoption over the next three years, which should contribute positively to revenue growth. -
DTD Cost Savings and Investment Plans
Q: Are there any changes to DTD cost savings plans next year?
A: There are no changes; the company expects over $20 million in pretax cost savings in 2025 from the DTD program, which will drop directly to earnings. -
Tax Rate Increase Impact
Q: How will the tax rate increase affect next year's earnings?
A: The tax rate is expected to rise to 24%-25% in 2025, creating an approximate $0.15 per share headwind. Management aims to offset this through margin expansion and continued earnings growth. -
Portfolio Management and R&D Investment Balance
Q: How is the company balancing investment between core business and high-risk programs?
A: The company is maximizing core businesses in epilepsy and cardiopulmonary by reinvesting in core R&D and human capital. They are setting directions for DTD and OSA, awaiting reimbursement decisions and clinical data before making further investments, with strategic plans to be communicated in 2025. -
Potential Impact of Reimbursement Changes on Private Insurers
Q: Could Medicare reimbursement changes spill over to private insurers?
A: Management acknowledges that increased Medicare reimbursement could potentially influence private insurer reimbursement, but they are still evaluating the possible effects.