Morningstar | LivaNova's Preliminary First-Quarter Results Disappoint, but Narrow Moat Remains Intact
LivaNova is the surviving entity resulting from the combination of Houston-based Cyberonics and Italy’s Sorin that closed in late 2015. While the firm has only operated for a little over three years, we’ve seen substantial changes to the strategic profile of the business, catalyzed by an change in management shortly after the merger's completion. CEO Damien McDonald has been effective in consolidating LivaNova’s focus on developing new technologies targeting the patients’ head and heart, making tough decisions early in his tenure that we think are likely to improve shareholder value over the long term. Pruning noncore assets, whittling down the firm’s minority investments, and adding new capabilities to the pipeline have been the hallmarks of McDonald’s strategy thus far. We believe the firm is well-positioned to continue to innovate within its core market niches, while advancing the development of pipeline assets that could land it near the forefront of much larger competitive opportunities.We like the direction McDonald has taken the business and are happy to see leadership make decisive bets on the future of the company. By our estimate, the underlying businesses garnered attractive returns on capital as stand-alone entities, and we anticipate this is likely to continue as operational improvements become apparent throughout the remaining neuromodulation and cardiac surgery franchises. However, long-term growth expectations will be defined by the outcomes of these ancillary bets, which should begin to yield results in 2020 and beyond. McDonald’s shift to a more focused investment has been necessary to allow the firm’s comparably limited resources to better compete with the behemoths of med-tech. Whether in the race to market in transcatheter mitral valve replacement or in the development of innovative therapies within neuromodulation, we think the LivaNova portfolio is worthy of being in the conversation. After an active 2018, management has been able to maintain the firm’s debt-free balance sheet, which provides substantial dry powder to continue to invest and add to its pipeline over the coming years.LivaNova is a medical device company focused on the development and delivery of therapeutic solutions. Co. has three product franchises: Neuromodulation, which engaged in the design, development and marketing of neuromodulation therapy for the treatment of drug-resistant epilepsy and treatment resistant depression; Cardiac Surgery, which engaged in the development, production and sale of cardiovascular surgery products; and Cardiac Rhythm Management, which engaged in the development, manufacturing and marketing of products for the diagnosis, treatment, and management of heart rhythm disorders and heart failure.
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