LivaNova Earnings: Competitor’s Oxygenator Woes Fuel Strong Revenue Growth

Narrow-moat LivaNova LIVN 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.

LivaNova delivered quarterly revenue growth of 12% year over year, reflecting strength in its cardiopulmonary segment (up 18% in constant currency). Considering that cardiopulmonary is LivaNova’s largest product category, it is a material lever. However, we do not anticipate this cardiopulmonary double-digit growth can be maintained over the longer term, as it is primarily the result of rival Getinge’s recall of key oxygenators last spring. We expect that once Getinge resolves its packaging issues and begins shipping product again, many of its customers will likely switch from LivaNova back to the Getinge oxygenators.

We continue to see LivaNova’s neuromodulation business as the seat of its narrow moat, which is supported by intangible assets and switching costs. We remain confident in LivaNova’s dominant position in the epilepsy market but are cautious about its efforts to establish vagus nerve modulation for treatment-resistant depression. Though this could offer a much larger market, LivaNova has been trying to crack this nut for a very long time. The firm continues to invest in clinical trials for this indication, but we hold tempered views until we see favorable data.

Finally, LivaNova remains in the process of selecting a new CEO. Interviews with candidates are happening, but it could be another quarter or two before a new leader is in place. Whoever the next CEO is will still need to contend with LivaNova’s narrow bandwidth that stems from its subscale size. It will still be challenging for the company to keep up with deep-pocketed rivals.