EUR 850.00 For Business Accounts Only

Morningstar | Firmwide Growth Improves In LivaNova's 2Q; Raising FVE

LivaNova reported solid second-quarter results, with sales growth handily beating our expectations, albeit on the back of elevated operating expenses. We'll likely raise our fair value estimate by a mid-single-digit percentage to incorporate the time value of money and better sales performance out of the recently acquired TandemLife business and LivaNova's neuromodulation franchise. For now, we're maintaining our narrow moat and stable trend ratings.

With revenue growing nearly 8% in constant currency for the first half of 2018, management's maintained guidance of 6%-8% implies sizable upside to full-year consensus estimates, which in our view has fueled the sharp rally in shares. Further, the neuromodulation segment rebounded to 13.2% growth, up from 6.2% in the first quarter, with strong uptake across geographies. Profitability suffered modestly due to slight foreign exchange headwinds and increased investments in sales, advertising, and research and development, which should help lay the foundation for future growth.

More importantly, we believe the market is pricing in heady probabilities of success across multiple catalysts set to read out over the next few months. Management indicated early data from its feasibility study in transcatheter mitral valve replacement is likely to be announced in the coming weeks. While the product is not likely to be on the market in the U.S. before 2021 even in a best-case scenario, this will be investors' first look into the clinical profile of LivaNova's offering in what is estimated to be a large and competitive market.

Management's discussion around the potential for a favorable decision from the Centers for Medicare and Medicaid Services, or CMS, on the reimbursement of vagus nerve stimulation therapy in treatment-resistant depression, or TRD, continues to be upbeat. We'd remind investors that CMS has a wide array of options available, and pricing in broad adoption of the product at current rates seems premature.

With the market valuing the stock at nearly 30 times our 2019 earnings estimate, and north of 20 times our forecast for 2022, we believe investors are discounting the potential for bad news across the board. As we detailed in our prior note, we estimate the relevant TRD patient population at 2-5 times larger than what is currently addressed within drug-resistant epilepsy. That said, there are many actions CMS could take in regards to reconsidering reimbursement, including allowing limited adoption as further clinical evidence is gathered or delegating coverage authority to local Medicare Administrative Contractors. Even in the event of a full-blown reversal of its prior noncoverage decision, CMS could peg reimbursement at a level that would eat into the segment's current margin profile. To provide some context around the potential financial impact, we figure a TRD indication, if reimbursed near current levels, could add roughly $1.00 to our 2022 EPS estimate.

Finally, while management intends to have a transcatheter mitral valve, or TMVR, product launched in Europe around 2021, potential clinical or developmental delays could materially weaken LivaNova's ultimate position in the market given the highly competitive environment. To highlight this risk, we'd point to the recent one year delay in the development timeline for the company's pipeline product to treat sleep apnea. While in this instance a delay was relatively immaterial to investors' growth expectations, we'd likely see a more sizable reaction if the firm's timeline in TMVR begins to get pushed out.