EUR 850.00 For Business Accounts Only

Morningstar | LivaNova: CMS Proposes to Reimburse VNS Therapy for Depression but Requires New Clinical Evidence

On Nov. 19, the Centers for Medicare and Medicaid Services, or CMS, released its proposed decision regarding LivaNova's request to reconsider its longtime position of refusing reimbursement of vagus nerve stimulation, or VNS, therapy in patients suffering from treatment-resistant depression. While we've highlighted multiple avenues CMS could take in prior notes, we think the proposal for coverage with evidence development is a reasonable outcome for patients and for the company. We've been more conservative in our assumptions for this indication than the market, which seems to have been given the limited history of CMS overturning its national coverage determinations. The fact CMS is willing to revisit this issue, albeit in a limited way, is a step in the right direction toward broader coverage down the road. We think the ongoing development of evidence supporting VNS therapy will help reinforce LivaNova's narrow economic moat, but we intend to maintain our $92 per share fair value estimate for now.

While the proposal opens the door to additional stakeholder comments over the coming weeks, we doubt CMS will shift its stance meaningfully between now and the release of its final rule expected prior to Feb. 17. Ultimately, the main takeaway is that CMS appears to be willing to reimburse the procedure but only for patients willing to participate in a newly enrolled trial with an approved design and outcome measures. Both the enrollment period and the 12-month follow-up duration specified by CMS will limit any meaningful near-term economic benefit, but the company should begin to earn modest incremental revenue by the second half of 2019. The requirements laid out by CMS will likely create a bottleneck over the next few years that we think implies a lower implant rate than the market had been anticipating. Longer term, however, we think incremental evidence of efficacy and an expanded study help keep the dialogue open to potentially expand coverage in the future.

In addition to covering new implants, CMS indicated it would pay for any product replacement needs by Medicare-eligible patients that had received the therapy in the short window in which it was reimbursed prior the original national coverage determination in 2007. While this is a relatively small population (some subset of the 4,000 or so patients that received the product during this period), we're encouraged to see CMS build some flexibility into its proposal.