LivaNova Continues To Be A Spring-Loaded Opportunity In Neuromodulation

Feb. 11, 2022 8:30 AM ETLivaNova PLC (LIVN)1 Like

Summary

  • As per our first article, DTD remains incredibly attractive, even with conservative prevalence figures.
  • The whole neuromodulation opportunity renders the company a potential growth engine.
  • Three major trials are underway for three unmet medical needs which will rocket profile to one of high margins and cash generation.
  • ASPs are high and products are fundamentally profitable with captive patients as this is quite last-line as a therapy.
  • Company's valuation is modest despite likelihood of success in DTD, and prevalence of other VNS treatment areas.
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Published on The Value Lab 9/2/22

LivaNova (NASDAQ:LIVN) is one of our smaller, VC style holdings where we are betting on a peculiar option that is remarkably undervalued despite how the markets these days value growth. As explained in our last article, the DTD opportunity for LivaNova is structurally more likely to succeed in becoming reimbursable, thereby allowing for superb ASPs, and positioning the company for incredible growth. Moreover, the financial profile of the company is stabilised, with success in several vagus nerve stimulation (VNS) trials focused on heart and head likely to rocket the company into substantial scale and profitability. The market opportunities are large, with many trials trudging through their various phases to deliver scale and growth. With neuromodulation being an attractive area, and ASPs being very high in these treatment areas, the upside is notable.

Financials Today

In terms of the financials, we should understand where we are today, and how much margin current performance gives us in our thesis. As of now, the only products that are marketed for LIVN are the cardiopulmonary products, which command very weak margins, are not strong growers, and are generally not very interesting, and the first neuromodulation product for epilepsy. The epilepsy product proves to some extent of the potential success in the platform with strong profitability and growth rates.

livn guidance

LivaNova Guidance (LIVN Q3 Pres 2021)

With the cardiopulmonary products being relatively uninteresting, almost all the growth is being contributed to by the epilepsy products compared to 2019 figures.

LIVN sales growth

YTD Sales Evolution (LIVN Q3 2021 Pres)

While neuromodulation, at the moment only including epilepsy, accounts for about 50% of revenue, its margin is much higher at around 40%, and has more than 2x the operating income of cardiopulmonary.

Assuming costs for corporate are shared equally between the two divisions, we have neuromodulation operating income at about $38 million per quarter, or around $160 million annualised. For cardiopulmonary it'll be about $40 million annually.

livn profits

Segment EBIT (LIVN Q3 2021 Pres)

The Three Trials

The three trials are all in neuromodulation. The recovery trial is for difficult to treat depression, so a last line therapy with meaningful prevalence. We went into detail on this last segment, showing that the business option implied a low ASP less than $400, with the 2005 FDA approval and revival study for reimbursement means that the probability this works out for them from a regulatory point of view is very high. Turns out the ASP is over $2,000, and therefore peak sales could be substantial.

DTD market size

DTD Market Sizing (LIVN CMD Pres)

At a 40% margin, that would mean $500 million a year from DTD, which would bring total neuromodulation EBIT up to almost $600 million annually at this point. This can be expected to start developing in 2024 when reconsideration for reimbursement takes place.

The second trial is the OSPREY trial which is looking to get a VNS product for sleep apnea approved. As is the case for VNS therapies, all of which being quite invasive, they are last line. The prevalences are high on the most unmet need basis, and with a substantial ASP around $1,000, we can expect a rough approximation of $1 billion in sales here too at a hypothetical peak. We can add another $400 million to the EBIT, which will start to develop after approval expected in 2024.

sleep apnea market size

Sleep Apnea Market Size (LIVN CMD Pres)

Finally we have a VNS product for heart failure. ART is a system for regulating heart failure, where heart failure is a large source of absenteeism and morbidity in the US. Again, with similar ASPs we can achieve substantial sales in this area.

ART livanova

ART Market Size (LIVN CMD Pres)

Perhaps another $100 million could be added annually to EBIT in the event of a successful trial. As it is in early stages, no timeline is yet given.

Final Remarks

In addition to the neuromodulation trials, there is also the circulatory support product which is growing quickly from its initial launch. Considering the market caps and profitability of companies like Abiomed (ABMD), the product could also be an attractive contributor once it achieves scale. However, even just on the basis of the neuromodulation trials, the EBIT for LivaNova could surpass the $1 billion mark. With its most major potential blockbuster, the DTD VNS product, already being close to reconsideration for reimbursement, at least $400 million could be added to the bottom line. For a business that already generates about $120 million in EBIT annually, and with an EV around $5 billion, the implied multiple on just current businesses + DTD is already less than 10x. With the OSPREY and ART trials also potentially adding meaningfully to the income, not to mention regulatory support with ABMD being a reference of high profitability for a business already annualizing $60 million in sales at very early stages, the multiple continues to fall on future EBIT constituting a margin of safety. While the OSPREY and ART trials are more regular, and thus have the typical likelihoods of failing trials as any other invasive medtech product constituting your typical risks, the peculiarity of the DTD revival constitutes the edge here. With depression continuing to be a major societal problem, LIVN is well positioned at a modest valuation.

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This article was written by

Author of The Value Lab
A long-only voice with eclipsing growth through 2020 and 2022 bear markets.

Valkyrie Trading Society seeks to provide a consistent and honest voice through this blog and our Marketplace Service, the Value Lab, with a focus on high conviction and obscure developed market ideas.

DISCLOSURE: All of our articles and communications, including on the Value Lab, are only opinions and should not be treated as investment advice. We are not investment advisors. Consult an investment professional and take care to do your own due diligence.

DISCLOSURE: Some of Valkyrie's former and/or current members also have contributed individually or through shared accounts on Seeking Alpha. Currently: Guney Kaya contributes on his own now, and members have contributed on Mare Evidence Lab.

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Disclosure: I/we have a beneficial long position in the shares of LIVN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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