Company Reports

Narrow-moat Livanova posted first-quarter results that exceeded our expectations on the topline but were consistent with our profitability projections. We continue to hold more tempered views for slower growth in the second half of 2024, which is consistent with management's comments and, as a result, our fair value estimate is unchanged. Though quarterly revenue grew strongly at 12% year over year, below-the-line charges pushed earnings down. Considering that new CEO Vladimir Makatsaria is eager to demonstrate positive results now that he's leading the charge, we wouldn't be surprised if above-market growth could extend through the second quarter, aided by the regulatory and supply issues with oxygenators from competitors. If competitive oxygenators are able to return to the market in the second half of 2024, as expected, we anticipate Livanova's cardiopulmonary business could see noticeable moderation.

As a smaller medical-device firm, LivaNova follows the same innovation strategy that has been successful for many larger competitors, including Medtronic and Boston Scientific. With this approach, manufacturers can create differentiated products that are not entirely interchangeable and, with each iteration of the technology, can eke out a pricing premium. The success of this strategy hinges on two factors. First, firms must be able to generate meaningful innovation. This usually happens through internal research and development, potentially augmented with acquisition of emerging technologies. Very rarely have we seen medical technology firms succeed solely on acquisition of technology. Second, successful commercialization also depends on a salesforce that has built strong relationships with the practitioners making the brand choice.

LivaNova delivered fourth-quarter and full-year results that ran slightly ahead of our expectations on the top line and slightly below on the bottom line largely due to impairment charges. We’re leaving our fair value estimate unchanged. Full-year revenue increased 13% in constant currency, fueled by exceptional 18% growth in cardiopulmonary, as adoption of new heart-lung machine Essenz has ramped up. We anticipate this growth to moderate in 2024 as capital spending on those platforms softens.

Narrow-moat LivaNova reported robust third-quarter results that ran slightly ahead of our expectations on the top line, but our slight adjustments to our near-term estimates weren’t enough to materially shift our fair value estimate. The shares remain fairly valued, in our view.

As a smaller medical device firm, LivaNova follows the same innovation strategy that has been successful for many larger competitors, including Medtronic and Boston Scientific. With this approach, manufacturers can create differentiated products that are not entirely interchangeable, and with each iteration of the technology, can eke out a pricing premium. The success of this strategy hinges on two factors. First, firms must be able to generate meaningful innovation. This usually happens through internal R&D, potentially augmented with acquisition of emerging technologies. Very rarely have we seen medical technology firms succeed solely on acquisition of technology. Second, successful commercialization also depends on a salesforce that has built strong relationships with the practitioners making the brand choice.

LivaNova’s second-quarter performance demonstrated a continuation of the strength seen in the first quarter, and after adjusting our full-year estimates upward, we plan to raise our fair value estimate modestly. The 16% organic revenue growth seen in the second quarter was broad-based both in terms of product lines and geography. Though we anticipate some factors contributing to the outsized performance in the first half of 2023 to moderate—such as easy comparable quarters, the temporary absence of an oxygenator competitor on the market—we think underlying demand should remain solid thanks to the resumption of the procedure referral pipeline, the rollout of Essenz heart-lung machine in Europe and the U.S., and the replacement cycle for its vagus nerve stimulation to address treatment-resistant epilepsy. We saw little to change our view of LivaNova’s narrow economic moat in second quarter.

LivaNova's 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.

While the resignation of LivaNova CEO Damien McDonald was rather abrupt, it was not wholly surprising, from our perspective, and we’re leaving our fair value estimate unchanged. Shares rose 13% on this development and the firm’s indication that first-quarter results were better than expected. However, the stock still remains roughly 9% below our intrinsic value. The management changeover holds few implications for LivaNova’s narrow economic moat, which remains rooted in intangible assets as well as switching costs associated with its neuromodulation devices. The board is moving forward with the executive search, and board chair William Kozy will take on the CEO role in the interim.

After taking another look at our estimates, we’re reducing our fair value estimate on LivaNova to $53 per share, down from $60. This reflects our decreased expectations for the mature cardiopulmonary business, which is the less moaty segment of LivaNova. Additionally, we believe COVID-19 pulled forward demand for advanced circulatory support units (extracorporeal membrane oxygenation, ECMO) which sets the stage for further declines in that area through 2023 and lukewarm growth in 2024. ECMO is primarily used for extremely ill patients who need to rely on the machine to take over heart-lung functions in order to give the patient time to heal those organs. This came in very handy for COVID-19 patients with severe lung damage. However, ECMO remains a niche therapy, and we suspect that hospitals may find their ECMO capacity sufficient now that we’re beyond the pandemic emergency.

As a smaller medical device firm, LivaNova follows the same innovation strategy that has been successful for many larger competitors, including Medtronic and Boston Scientific. With this approach, manufacturers can create differentiated products that are not entirely interchangeable, and with each iteration of the technology, can eke out a pricing premium. The success of this strategy hinges on two factors. First, firms must be able to generate meaningful innovation. This usually happens through internal R&D, potentially augmented with acquisition of emerging technologies. Very rarely have we seen medical technology firms succeed solely on acquisition of technology. Second, successful commercialization also depends on a salesforce that has built strong relationships with the practitioners making the brand choice.

Though we weren't entirely surprised by the halt of LivaNova's development of Vitaria for vagus nerve stimulation in heart failure patients and have already lowered our fair value estimate, this latest development underscores our largest concern about LivaNova—the firm does not have enough bandwidth to support multiple development programs (and the inevitable occasional gutter balls) necessary to ultimately successfully commercialize new technologies. It was just about three years ago that LivaNova ended its Caisson program (transcatheter mitral valve replacement). We see little in the pipeline to get excited about and hold tempered views of neuromodulation for refractory depression because the clinical data has been underwhelming. We’re also skeptical about LivaNova’s technology for obstructive sleep apnea, which strikes us as a relatively invasive approach compared with existing alternatives. All this leaves us lukewarm on LivaNova’s ability to generate meaningful innovation, even off its neuromodulation platform and expertise, which we think are significantly more compelling than its cardiopulmonary technology.

Narrow-moat LivaNova posted fourth-quarter and full-year 2022 results that slightly outpaced our revenue estimate but fell short of our earnings projection thanks to an impairment charge. Additional red flags in the quarter led us to trim our longer-term assumptions and moderately lower our fair value estimate to $60 per share from $68. We continue to view LivaNova's neuromodulation technology for refractory epilepsy as worthy of a narrow moat, based on substantial switching costs, as well as intangible assets in the form of accumulated clinical data, but the cardiopulmonary and advanced circulatory support segments have yet to dig moats.

As a midsize medical device firm, LivaNova follows the same innovation strategy that has been successful for many larger competitors, including Medtronic and Boston Scientific. With this approach, manufacturers can create differentiated products that are not entirely interchangeable, and with each iteration of the technology, can eke out a pricing premium. The success of this strategy hinges on two factors. First, firms must be able to generate meaningful innovation. This usually happens through internal R&D, potentially augmented with acquisition of emerging technologies. Very rarely have we seen medical technology firms succeed solely on acquisition of technology. Second, successful commercialization also depends on a salesforce that has built strong relationships with the practitioners making the brand choice.

As a midsize medical device firm, LivaNova follows the same innovation strategy that has been successful for many larger competitors, including Medtronic and Boston Scientific. With this approach, manufacturers can create differentiated products that are not entirely interchangeable, and with each iteration of the technology, can eke out a pricing premium. The success of this strategy hinges on two factors. First, firms must be able to generate meaningful innovation. This usually happens through internal R&D, potentially augmented with acquisition of emerging technologies. Very rarely have we seen medical technology firms succeed solely on acquisition of technology. Second, successful commercialization also depends on a salesforce that has built strong relationships with the practitioners making the brand choice.

Narrow-moat LivaNova saw third-quarter revenue and adjusted earnings growth that weren’t far from our expectations, and the firm remains on track to reach our full-year projections. We’re leaving our fair value estimate unchanged for now. The firm posted solid quarterly revenue growth of 5% in constant currency, but the consolidated number doesn’t fully capture the see-saw that LivaNova has been riding across its different product segments thanks to the pandemic. On one hand, advanced circulatory support saw a quarterly decline of 44% as the number of severely ill, hospitalized COVID-19 patients has significantly diminished. On the other hand, the cardiopulmonary and neuromodulation segments grew 7% and 10%, respectively, as non-pandemic cardiac surgeries and less-urgent epilepsy patients return for treatment. We anticipate this general pattern to hold into 2023.

Narrow-moat LivaNova's second-quarter performance featured steep declines in the advanced circulatory support product line, more than offset by continued strength from the first quarter in cardiopulmonary. After reviewing the firm’s results for the first half, we may trim our top-line estimates slightly for 2022, but at first blush, this is unlikely to significantly shift our fair value estimate. Gross margin has been running slightly ahead of our estimates for the full year, but this is offset by selling, general, and administrative expense, which has also slightly exceeded our projections.

LivaNova posted first-quarter results that reflected the shifting dynamics of the pandemic, but as there were few surprises in the quarter, we’re leaving our fair value estimate unchanged. We remain confident in LivaNova’s narrow economic moat, which is almost wholly driven by its neuromodulation segment and well-established footprint in drug-resistant epilepsy, where switching costs and the body of clinical evidence have kept practitioners as well as patients in the fold.

LivaNova delivered solid fourth-quarter and full-year results that generally met our expectations on the top line, but fell slightly short on the bottom line. But, we’re leaving our fair value estimate unchanged as slight adjustments to projected expenses in 2022 and 2023 were offset by time value of money. Quarterly sales rose a respectable 12% in constant currency, after adjusting for the divestiture of heart valves in mid-2021. Over the course of 2021, LivaNova benefited from the ebbs and flows of the pandemic. The neuromodulation segment grew 28% compared with 2020 thanks to a return of non-pandemic epilepsy patients. However, the smaller advanced circulatory support (ACS) segment also rose 31% year over year on higher demand for consumables related to acute COVID-19 patients. We still think that the switching costs and intangible assets associated with the neuromodulation segment are the heart of LivaNova’s narrow economic moat. Though we see little to threaten the firm’s narrow moat, we also think it’s unlikely LivaNova could edge itself toward wide moat status without another grand-slam product. At this point, we’re not confident that treatment-resistant depression or obstructive sleep apnea will provide that boost.

As a midsize medical device firm, LivaNova follows the same innovation strategy that has been successful for many larger competitors, including Medtronic and Boston Scientific. With this approach, manufacturers can create differentiated products that are not entirely interchangeable, and with each iteration of the technology, can eke out a pricing premium. The success of this strategy hinges on two factors. First, firms must be able to generate meaningful innovation. This usually happens through internal R&D, potentially augmented with acquisition of emerging technologies. Very rarely have we seen medical technology firms succeed solely on acquisition of technology. Second, successful commercialization also depends on a salesforce that has built strong relationships with the practitioners making the brand choice.

LivaNova delivered strong third-quarter results that slightly outpaced our expectations, however, our adjustments for the near term weren’t material enough to shift our fair value estimate. Our more optimistic revenue growth expectations for 2021 and 2022, as well as lower interest expense, were generally offset by the increased share count and higher weighted average cost of capital, reflecting the late-summer capital raise that was partially used to pay down debt. Overall, we think these latest moves put LivaNova on stronger financial footing, with debt-to-EBITDA less than 1 time, by our estimates (compared with 3.6 times previously). Nonetheless, we do not see much in the latest quarter to change our thinking on the firm’s narrow economic moat.