LIVN - LivaNova: Reaching End Of RECOVER And ANTHEM

2023-12-26 18:00:00 ET

Summary

• LivaNova is approaching the end of the ANTHEM and RECOVER which could dramatically change the company profile.
• In cardiopulmonary results are great with a new product launch of Essenz taking market share at premium prices.
• Run-rate PEs aren't that high, and a languishing price means a setup here that could be attractive once the trials start to demonstrate concrete promise in 2024.

It's been about a year since we covered LivaNova ( LIVN ). The going has been slow but it seems we are approaching the end of the important ANTHEM and RECOVER trials. Their new product Essenz is selling very well, and overall the cardiopulmonary segment is actually performing. With the possibility of commercial breakthroughs in neuromodulation next year, we think that this dormant stock might be looking attractive for an add this year.

Trials

The business is split between neuromodulation, focused on their VNS stimulation indications, and cardiopulmonary equipment for bypass surgeries and such at hospitals.

Let's focus on neuromodulation as this is where the opportunities are as there are several VNS indications in pretty intensive trials. They have taken a long time to add sufficient patients to the trials. In RECOVER , for difficult to treat depression, they have finished enrolling and are letting the cohorts graduate. Final study and analysis will be published in late 2024 is the hope, and that should hopefully result in the treatment being insurable. A reminder of how this all works:

Once every patient enrolled in that initial phase after it was closed have been observed for the full 12-month period, a final analysis and peer-reviewed article is going to be submitted to the CMS in hopes that the DTD implant becomes an insurable product. At that point we hope to have a successful commercial venture. LIVN expects the RCT to be able to close by the end of the year, which means a year thereafter is when we will see the submission to the CMS happen.

Comments from our last article on RECOVER

ANTHEM is actually driving down the R&D expenses, as these trials are being closed out. They have failed, to be clear. Not a great outcome but this was the smallest estimated market , where we guessed maybe a $100 million EBIT contribution one day.

As for OSPREY, which concerns a VNS therapy for sleep apnea, there has been approval by the FDA for the trial and they are enrolling patients. This market could be big, we guessed a possible $400 million EBIT contribution one day to our estimate of $600 million for DTD. Filing could come in 2025.

Sure, thanks Mike. So OSPREY, as Bill said, was on track. You know, we've talked about getting the enrollment completed in 24, six months follow-up. To your point, you know, it looks right now like kind of late ‘24, early ‘25, we'd get the data, you know, a little bit of time to analyze it and that's why we've talked about a filing in ‘25.

Matthew Dodds, SVP at LIVN

Overall Picture

The following is the financial picture for the company.

R&D is coming down on the failed conclusion of ANTHEM. Operating margin is increasing giving throughput to the good progress in cardiopulmonary.

Neuromodulation is growing on further patient recruitment, but cardiopulmonary is seeing its new Essenz perfusion machines taking share despite its 30% premium price. This is driving heart-lung machine revenues which is up 25%. Oxygenator revenues are also up in the mid-teens, a great performance.

Bottom Line

Run-rate PEs are around 25x currently, and insurability of DTD and commercialisation after OSPREY would compress that multiple a lot. There's not that much latent dilution, around 7% we calculate, through compensation plans in equity .

We maintain that there is a massive latent earnings power from the DTD product. On reasonable market multiples in a SoTP, the optionality from the ongoing OSPREY and RECOVER trials are going negatively valued. We like LIVN at these prices as we approach the completion of the neuromod trials.

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