LivaNova Earnings: Increasing Medical Utilization and New Products Pave Path for Solid Prospects

LivaNova’s LIVN first quarter slightly exceeded our expectations on the top line, but this was offset by higher expenses (principally on research and development) that are likely to continue into 2024. After slight adjustments in our model, we’re leaving our fair value estimate unchanged. We saw little in the quarter to change our thinking on the firm’s narrow economic moat. Indeed, robust quarterly growth of 11% in neuromodulation (adjusted for currency) was driven by better-than-expected replacement units, demonstrating the high switching costs involved with this therapy. Importantly, this segment also attracted solid de novo implants, which suggests the lengthy referral pipeline has moved closer to normal following the disruption of the pandemic. Over time, these newly implanted patients should further bolster LivaNova’s switching costs.

Even the mature cardiopulmonary unit delivered strong 18% year-over-year growth, which was better than we’d expected even after accounting for the omicron-influenced prior-year period. Though we don’t think this high-teen rate can be maintained, we do expect 7% growth in this category for the full year thanks to the launch of the new Essenz heart-lung machine, which includes new safety features. Additionally, LivaNova’s cardiopulmonary business received a little assist from ongoing competitive supply-chain issues, though we anticipate that should diminish over the year.

Finally, LivaNova has reached a milestone in the completion of enrollment of unipolar depression patients in its clinical trial for treatment-resistant depression. The firm is now focused on enrolling the bipolar depression arm of the study, but we recognize the former group of patients is nearly twice the size of the latter. With 12-month unipolar results expected in late 2024, the firm could be the path to regulatory approval in late 2025. However, we remain cautious about this application given the body of mixed clinical data thus far.