LivaNova PLC (LIVN) 2025 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LivaNova PLC Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Emily, and I will be coordinating your call today. (Operator Instructions) As a remainder this conference call is being recorded.

I would now like to introduce your host for today's conference Ms. Briana Gotlin, LivaNova's Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to our conference call and webcast discussing LivaNova's financial results for the fourth quarter and full year of 2025. Joining me on today's call are Vladimir Makatsaria, our Chief Executive Officer and member of the Board of Directors; Alex Shvartsburg, our Chief Financial Officer; Ahmet Tezel, our Chief Innovation Officer; and Zach Glazier, Director of Investor Relations.

Before we begin, I would like to remind you that the discussion during this call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings and documents furnished to the SEC, including today's press release that is available on our website. We do not undertake to update any forward-looking statement.

Also, the discussions will include certain non-GAAP financial measures with respect to our performance, including, but not limited to, revenue results, which will be stated on a constant currency and organic basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website.

We have also posted a presentation to our website that summarizes the points of today's call. This presentation is complementary to the other call materials and should be used as an enhanced communication tool. You can find the presentation and press release in the Investors section of our website under News, Events and Presentations at investor.livanova.com.

With that, I'll turn the call over to Vlad.

Thank you, Briana, and thank you, everyone, for joining us today. Welcome to LivaNova's conference call for the fourth quarter and full year of 2025. 2025 was a year of strong performance for LivaNova. We delivered double-digit revenue growth, meaningful adjusted operating margin expansion, and robust cash generation, reflecting strong execution across our cardiopulmonary and epilepsy businesses. 2025 marked LivaNova's fifth consecutive year of double-digit EPS growth and third consecutive year of double-digit organic revenue growth.

Importantly, we also continue to advance our long-term strategy and made progress towards the financial targets outlined at our November Investor Day. Our core businesses provide a durable foundation of growth, profitability, and cash generation, which enables disciplined investment in innovation to drive our next chapter, entering high-growth, high-margin markets to build a more profitable, more sustainable financial profile over time. The first stage of that next chapter is obstructive sleep apnea, where we have a clear right to win based on rigorous clinical evidence, a differentiated technology designed to treat a broader range of challenging patients and our existing neuromodulation capabilities.

At the same time, we continue to preserve upside optionality in difficult-to-treat depression, pending a CMS reimbursement decision, and we remain focused on advancing that work required to reach clarity there. As we execute the strategy, our goal is to transform LivaNova into a best-in-class MedTech company for the long term. Over time, entering higher-growth markets like OSA, will shift LivaNova's overall weighted average market growth upward and position the company for sustained acceleration. Our approach leverages our competitive advantages and is grounded in disciplined capital allocation and focused execution.

We have also been deliberate in strengthening the capabilities required to execute the strategy, including our innovation engine, our digital platform investments, and targeted leadership and talent upgrades across the organization. Consistent with that focus, we recently appointed Lucile Blaise as Global Head of Commercialization for obstructive sleep apnea, further strengthening our leadership team as we prepare to scale the opportunity. Lucile brings a strong track record in creating new sleep therapy pathways, improving patients' access to care, and building high-performing teams. I'd like to welcome Lucile to LivaNova and look forward to her leadership in advancing our OSA program.

For the remainder of the call, I will discuss our fourth quarter and full year 2025 segment results and provide top line guidance for 2026. After my comments, Ahmet will discuss key innovation updates including recent clinical and regulatory progress. Alex will then provide additional details on our results and 2026 guidance. I will wrap up with closing remarks before moving on to Q&A.

Now turning to segment results. For the cardiopulmonary segment, revenue was $207 million in the quarter, an increase of 10% versus the fourth quarter of 2024. Cardiopulmonary revenue for the full year was $785 million and grew 13%. The heart-lung machine revenue grew in the mid-single digits in the quarter, driven by an increase in Essenz placements and sustained favorable price premiums. Some planned Essenz placements and tender activity for the quarter shifted into 2026, moderating the fourth quarter contribution. As a point of reference, Essenz represented approximately 55% of our annual HLM units placed in 2025. HLM growth remains strong with full year revenue growing in the mid-teens.

Cardiopulmonary consumables revenue grew in the mid-teens in the quarter, driven by market share gains, procedure growth, and price. Strong demand oxygenators continues to outpace the market's ability to supply. Our manufacturing capacity expansion plans are progressing well and remain on track. And we continue to partner with third-party suppliers to increase component supply for even more rapid expansion. For the full year, consumables revenue grew in the low teens.

Looking ahead, our growth strategy in cardiopulmonary is driven by three levers as we outlined at Investor Day. First, continued market share gains in consumables, enabled by capacity expansion and enhanced by our next-generation oxygenator with an estimated launch in 2028. Second, the continued upgrade cycle of Essenz where we expect approximately 80% of our new heart-lung machine placements to be Essenz by the end of 2026. And third, recurring revenue streams via software, hardware, and service attachments, leveraging the breadth of our HLM installed base.

For the full year 2026, we expect cardiopulmonary revenue to grow 7% to 8%. Our forecast incorporates continued HLM growth as we drive Essenz penetration globally. It also reflects strong demand for consumables and expanded manufacturing capacity.

Turning to epilepsy. Revenue increased 9% versus the fourth quarter of 2024, with growth across all regions. Epilepsy revenue in the Europe and Rest of World regions increased the combined 17% versus the prior year period. While US epilepsy revenue increased 8% year-over-year. These results reflects strong commercial execution globally. For the full year, epilepsy revenue grew 6%, with strength across all regions. Epilepsy revenue in Europe and Rest of World grew a combined 13% versus 2024, while US epilepsy revenue grew 5% year-over-year.

We expect continued profitable growth in this business, supported by three key strategic levers: first, impactful clinical evidence, leveraging the core VNS clinical study which we presented at the American Epilepsy Society in the fourth quarter. The study has been well received and is reshaping the perception of VNS therapy effectiveness, prompting clinicians to reevaluate where VNS therapy fits within their treatment algorithm.

Second, innovation, including our Connected Care platform and Bluetooth-enabled generator will remove barriers to access and improve both the patient experience and physician workflow. Ahmet will provide additional details on recent progress with our digital health platform and how we intend to leverage it as a foundational innovation.

Finally, sustained commercial excellence, including reimbursement and market access initiatives will continue to be a driver as demonstrated by recently improved reimbursement in the US. Effective January 1, 2026, provide reimbursement for VNS therapy procedures for drug-resistant epilepsy under Medicare increased significantly with hospital outpatient payments rising by approximately 48% for new patient implants and 47% for end-of-service procedures versus 2025 rates. This shift will improve hospital economics for VNS therapy, creating a more sustainable financial foundation for providers and paving the way for expanded patient access.

As a reminder, there are more than 1 million DRE patients in the US, yet fewer than 10% receive advanced treatment. These changes significantly reduce a known barrier to procedure penetration as historical hospital rates for Medicaid patients did not fully cover VNS therapy procedure costs.

For the full year 2026, we expect epilepsy revenue growth of 5.5% to 6.5%. This forecast incorporates mid-single-digit growth in the US. We continue to evaluate the positive impact of reimbursement on the US business. It also assumes the Europe and Rest of World regions will deliver a combined growth of high single digits for the year.

In summary, our growth in 2025 was driven by healthy markets, the continued successful rollout of Essenz, market share gains in cardiopulmonary consumables, strong commercial execution in epilepsy and pricing strategies. These drivers will continue to fuel growth in 2026, supported by sustained execution in cardiopulmonary and the combination of impactful clinical evidence and improved reimbursement dynamics in epilepsy that should support expanded patient access over time. As a result, we're guiding full year 2026 revenue growth between 6% and 7%, which is consistent with the 2025 to 2028 framework detailed at our Investor Day. Alex will provide additional details on our 2026 guidance later in the call.

With that, I'll turn the call over to Ahmet to discuss progress with our digital health platform and continued regulatory and clinical evidence momentum in OSA and difficult-to-treat depression.

Thank you, Vlad. Innovation remains a key driver of value creation for LivaNova, both by strengthening our core businesses and by enabling our next chapter of growth. Starting in epilepsy, we recently received FDA approval for our cloud-based digital health platform. This approval establishes the foundation for our connected care road map and enables the initial rollout of our cloud-based clinician portal. At Investor Day, we also described a multiyear innovation road map in epilepsy.

Starting with the clinician portal, followed by a Bluetooth-enabled generator that integrates patient and clinician applications. The goal is to streamline workflows that includes remote titration, provide immediate access to patient insight and enable more digitally connected care pathways that remove barriers to access.

Consistent with this road map, we expect a limited market rollout of the clinician portal in 2026, primarily focused on workflow validation and clinical engagement with limited financial impact. A full market release is planned for 2027, alongside the launch of our next-generation Bluetooth-enabled implantable pulse generator. More broadly, this is a strategic investment in Connected Care and epilepsy is the first step.

Importantly, it also establishes a single shared cloud platform across the entire portfolio. That means the same digital infrastructure we're building for epilepsy can be leveraged across OSA, depression and cardiopulmonary over time, accelerating the cadence of our software and digital health innovations and supporting a connected ecosystem approach.

To be more specific for cardiopulmonary these same capabilities can also support more connected workflows and data-driven insights as we continue to build around Essenz. This includes a pipeline of hardware and software upgrades designed to improve workflow and outcomes. Our innovation efforts in cardiopulmonary consumables also continue to progress. We recently completed a design freeze for our next-generation oxygenator and will now move towards manufacturing scale up.

Turning to obstructive sleep apnea, our modular PMA submission continues to progress with the FDA, and our timing expectations have not changed. We continue to expect PMA approval for the clinical trial device in the first half of this year followed by a PMA supplement for the commercial MRI-compatible device. This supports a limited market release of the MRI compatible device in the first half of 2027, followed by a broader commercial launch in the second half of that year.

We continue to view OSA as a very compelling derisked opportunity grounded in differentiated technology and clinical evidence as well as our established neuromodulation capabilities. On the critical evidence front, we expect a full 12-month data set from the OSPREY trial to be published imminently. OSPREY is the first and only randomized controlled trial in the HGNS space, bringing gold standard scientific rigor to the field.

As previously disclosed, patients with the complete concentric collapse or CCC were not excluded from OSPREY, and approximately 45% of participants were high risk for this condition. OSPREY also enrolled a challenging patient population with higher baseline AHI and BMI compared to other pivotal US trials. Yes, the responder rates were comparable to these studies even though other cities scream the more difficult-to-treat patients out. This is reflected in their FDA labels as contraindications or warnings.

Additionally, our PolySync evaluation continues to progress. As a reminder, PolySync is our advanced titration algorithm designed to fully leverage the six-electrode architecture of our p-HGNS cost, which was not done in OSPREY. It enables multi-contact activation for greater nerve and muscle selectivity, optimizing therapy for each patient.

PolySync's demonstrated the ability to convert nonresponders into responders both strengthens our competitive positioning versus existing HGNS therapies and has the potential to expand the penetration by bringing neurostimulation to a broader range of patients. We look forward to sharing the full PolySync results at the SLEEP conference in June, but are confident we will be able to convert at least half of the nonresponders into responders using the PolySync algorithm.

As a reminder, we intend to make PolySync immediately available during our commercial launch to ensure all of our patients have access to this advanced algorithm at their initial titration. This will not be used as a follow-up for nonresponders, we will optimize therapy for PolySync for all patients from the start.

Now turning to difficult-to-treat depression. In January, the RECOVER durability manuscript was published in the International Journal of Neuropsychopharmacology. The durability profile of the VNS therapy is central to why we believe it is a differentiated option in its markedly ill patient population, where therapies can often get patients better for a short time, but cannot keep patients better over time. RECOVER demonstrated that after 24 months, more than 80% of patients maintain clinically meaningful improvements across symptoms, daily function, and quality of life.

With respect to CMS, we remain in active contact with the agency, and we're working toward our next meeting with them. We view this as an important step towards submitting our reconsideration package, which remains a top priority. Given current scheduling uncertainty, we won't speculate on the exact submission timing at this stage. In summary, we're encouraged by our progress from advancing our connected care foundation across our portfolio to continued regulatory and clinical evidence momentum in OSA and DTD. We look forward to providing future updates as milestones are achieved.

With that, I will turn the call over to Alex.

Thanks, Ahmet. During my portion of the call, I'll share a brief recap of the fourth quarter results and provide commentary on 2026 guidance.

Turning to results. Revenue in the quarter was $361 million, an increase of 9.5% on a constant currency and organic basis versus the prior year. Foreign exchange in the quarter had a favorable year-over-year impact on revenue of approximately $9 million or 3%. Adjusted gross margin as a percent of net revenue was 68% in line with the fourth quarter of 2024. Favorable product mix and pricing across segments and geographies were offset by unfavorable currency changes and tariff impacts.

Adjusted SG&A expense for the fourth quarter was $131 million compared to $122 million in the fourth quarter of 2024. SG&A as a percent of net revenue was 36%, down from 38% in the fourth quarter of 2024. The year-over-year decline as a percent of net revenue was driven by fixed cost leverage.

Adjusted R&D expense in the fourth quarter was $49 million compared to $40 million in the fourth quarter of 2024. R&D as a percent of net revenue was 14% up from 13% in the fourth quarter of 2024. The year-over-year increase was driven by OSA and core product development investments.

Adjusted operating income was $64 million compared to $56 million in the fourth quarter of 2024. Adjusted operating income margin was 18%, as compared to 17% in the fourth quarter of 2024. The increase was primarily driven by revenue growth and operating leverage from fixed costs, partially offset by investments in cardiopulmonary oxygenator capacity expansion as well as higher R&D spend in both OSA and the core.

Adjusted effective tax rate in the quarter was 24%, up from 20% in the fourth quarter of 2024. The increase was related to changes in geographic mix and the roll off of certain tax attributes that have contributed to our historically low effective tax rate.

Adjusted diluted earnings per share was $0.86 compared to $0.81 in the fourth quarter of 2024. The increase was primarily driven by adjusted operating income, reflecting strong revenue growth in both the epilepsy and cardiopulmonary businesses as well as effective cost management.

Additionally, Q4 2025 included approximately $0.04 of favorable impact versus prior guidance assumptions related to cardiopulmonary investments, primarily due to timing of the Essenz printed circuit board conversion, where the related costs have been rephased over the rollout period. Importantly, the printed circuit board conversion program remains on track and is reflected in our 2026 guidance assumptions that I'll cover in a moment.

Moving to our cash balance at December 31. Cash was $636 million up from $429 million at year-end 2024. The increase reflects improvements in operating cash flows, and the release of $295 million of restricted cash following the SNIA litigation guarantee termination. Total debt at December 31 was $377 million compared to $628 million at year-end 2024. The reduction in total debt was a result of the $200 million early repayment of a portion of the term facilities as well as the $58 million repayment of the 2025 convertible notes. On January 8, we fully repaid the outstanding term facilities through an early payment of $98 million, inclusive of accrued interest.

Adjusted free cash flow for the quarter was $53 million as compared to $62 million in the prior year period. The year-over-year decrease was driven by increased capital spend. Adjusted free cash flow for the full year of 2025 was $183 million, up from $163 million in the prior year period. The year-over-year increase was primarily driven by stronger operating results and working capital improvements. Capital spend was $81 million in 2025 compared to $47 million in the prior year period. The year-over-year increase was driven by IT investments and cardiopulmonary capacity expansion initiatives.

Now turning to our 2026 guidance. We forecast 2026 revenue growth between 6% and 7% on a constant currency basis. We expect the impact of foreign currency to be a tailwind of approximately 1% based on current exchange rates. We estimate full year adjusted operating income margin between 20% and 21%. Adjusted effective tax rate is forecasted at approximately 23%.

We project adjusted diluted earnings per share in the range of $4.15 to $4.25, with adjusted diluted weighted average shares outstanding to be approximately 56 million for the full year. This EPS range represents approximately 8% growth at midpoint. This range also incorporates the assumption of a third quarter SNIA payment of approximately $400 million, representing a $0.06 unfavorable impact to EPS due to lower interest income.

On January 30, the Court of Appeal set the next new hearing date for June 2026 to allow the parties to discuss possible out-of-court resolution of the matter. We believe the amount reserved for SNIA remains our best estimate, and we have sufficient resources to satisfy the liability. Adjusted free cash flow is expected to be in the range of $160 million to $180 million. This range includes $120 million in capital spending, roughly a $40 million increase versus the prior year. This increase supports cardiopulmonary capacity expansion initiatives and the next-generation oxygenator manufacturing scale-up as well as investments in the IT infrastructure.

I'd also like to call out that the guidance ranges shared today incorporate our best estimate of the impact of currently applicable tariffs. We estimate a tariff net impact of less than $5 million on adjusted operating income for the full year. We acknowledge this is a dynamic environment, including the recent US Supreme Court ruling and we continue to monitor it closely. Nonetheless, we believe LivaNova remains well positioned to manage the impact of tariffs.

In summary, 2025 was a year of strong performance, reflecting the dedication of our global team, resulting in double-digit organic revenue growth and 150 basis points of adjusted operating margin expansion. This translates into a 15% increase in adjusted diluted earnings per share and a 13% improvement in adjusted free cash flow.

Our 2026 guidance is consistent with the 2025 to 2028 framework detailed at our Investor Day, which targets a mid- to high single-digit revenue CAGR, annual adjusted operating margin above 20%, and EPS growing roughly in line with revenue. It reflects durable, healthy core business performance and continued disciplined investment in both the core and innovation pipeline aligned with our capital allocation framework.

With that, I'll turn the call back over to Vlad.

Thank you, Alex. In closing, our 2025 results demonstrate the durability of our core cardiopulmonary and epilepsy businesses, which continue to provide a strong foundation for the company. We delivered double-digit revenue growth, expanded operating margins, and improved cash generation, while investing in key innovation priorities.

In 2026, we will continue to advance the long-term strategy outlined at our recent Investor Day. Throughout the year, we expect to achieve a number of key milestones including the manufacturing scale-up of our next-generation oxygenator in cardiopulmonary, the launch of our digital health platform in epilepsy, PMA approval for our clinical trial device in OSA followed by PMA supplement submission for the MRI compatible system and the formal submission of reimbursement consideration to CMS in difficult-to-treat depression.

I want to thank our colleagues around the world for their focus and dedication to serving our customers and improving outcomes for patients. We have the right team, the right strategy, and I'm confident in LivaNova's path forward and our ability to deliver sustained value for shareholders as we look ahead.

With that, we are ready to open the call to questions.

(Operator Instructions) Adam Maeder, Piper Sandler.

Congrats on a nice 2025 campaign. Two for me. The first one on cardiopulmonary. So you have the guidance of 7% to 8% growth for FY26. Can you help us think about how you're thinking about oxys versus HLM growth in '26?

And then you did signal some HLM tender shifted from Q4 into '26. Maybe just flesh that out for us in more detail and which regions? And if possible, could you quantify that? And then I have a follow-up.

Adam. Yes, so we expect the same growth drivers in '26 that we saw last year. So one, Essenz upgrades; two, market share gains in consumables; and three, price. So as far as the components of the guide, the Essenz upgrades are going to drive approximately a double-digit growth which means that the market share gains will continue into the year. So we'll have good growth on consumables as well.

Given the timing of the year, we consistent with kind of the typical guidance philosophy that we have, we've made some prudent assumptions around our outlook. We've assumed a moderation in the price premium for Essenz as well as conservative on the oxygenator output, given the third-party supply constraints that we've experienced in 2025.

And Alex, any color on the shifting of the tenders from Q4 to '26?

First of all, we're going to fully recapture those in the first quarter. It wasn't -- it wasn't super material in terms of the shift. So it's fully incorporated into our full year guide.

David Rescott, Baird.

Great. Congrats on the strong end to the year here. I wanted to ask maybe first on the epilepsy business and what's baked into the guide for the year? It looks like the outlook that you have laid out for this year is higher than the epilepsy guidance you initially laid out in 2025. So curious if at all there is anything with comps there? Or if it's fair to read into maybe some incremental tailwinds coming in from the elevated reimbursement front? And if so, when you think about the potential either pricing or contracting tailwinds that could be there or utilization benefits through the year, how should we be thinking about kind of the pieces that you've baked into this epilepsy look for '26?

David, thank you for the question. I'll start, and then I'll turn it over to Alex and Ahmet because they are important components in that. And just to remind everybody, our epilepsy -- in our epilepsy business, the procedure penetration is still significantly low. And there were a number of barriers to this penetration.

And then we have two significant tailwinds that happened in early this year and last year in terms of removing those barriers. So the first one is reimbursement improvement close to 50% on both new patient implants and replacement implants. And then the second one is the core VNS study results, clinical results that were published and received very strong support from the clinical community. So while maybe this is early to measure the impact, those strategically, those two drivers will be lasting levers to continue growth and durability of growth in epilepsy business. And so maybe Alex can address reimbursement and Ahmet can address the clinical side.

Sure. So as Vlad said, we're excited about the tailwinds with both the core VNS as well as the increased Medicare reimbursement. What we've baked into the guide is price will be a short-term contributor to growth. Now as Vlad said, driving increased penetration will take some time. So we're changing physician behavior and reactivating closed accounts, and that just doesn't happen overnight. So we're being kind of prudent at this point given those assumptions.

We ended '25 with strong results. And we're confident we can continue building on that momentum, but also means that we have a difficult comp in the second half of 2026. The other thing I just want to remind everybody that 2/3 of the US epilepsy revenue comes from replacement implants. So this provides us with a durable, profitable recurring revenue stream, but it also means that increased growth in new patient volume has less of an impact on the overall epilepsy growth rate in '26.

Yes. And maybe I'll just give a quick summary of the core study. So this was the largest global prospective study for VNS up to today, and it was with 800 patients in 60 sites over 16 countries. And the study demonstrated that VNS therapy delivers early durable and meaningful seizure reduction and freedom in both children and adults that have drug-resistant epilepsy. Just to give you kind of a few key points.

The study demonstrated that the seizure frequency across multiple seizure types, including the most severe and disabling seizures significantly reduced. For example, at 36 months, the seizure reduction was 80% for patients with focal onset seizures. And there was an 84% reduction in SUDEP, which is a sudden death that occurs with epilepsy patients. So we're extremely excited about the data, and we continue to roll it out in conferences and through publications.

So David, I think in summary, the combination of two factors give us more confidence in the durability of our growth in epilepsy.

Okay. Maybe just on this WISeR program that I think may have an impact on the VNS business, maybe it doesn't. But I know we've heard some other companies call out some of the denials in the Medicare patient populations so far in 2026. Wondering, if at all, you could comment on the exposure there or if there's any risk in your mind around denials in this patient population?

David, in the cohorts that we've been tracking, we haven't seen any denials, so virtually no impact. What I will say is that a significant portion of our Medicare patients are -- fall under the Medicare Advantage plan. So that requires a prior authorization anyway. So nothing really changes dramatically for our business.

Michael Polark, Wolfe Research.

A follow-up on HLM on the tender timing. I didn't hear countries or geographies, I'm imagining Europe, maybe China. So can you be more specific on where that timing slipped? And if it is in China, your fresh perspective on the Essenz opportunity as it launches in China.

Yes. So Mike, good to hear from you. So on the first part of the question, like Alex said, the shift in some placements was immaterial and will be fully captured, majority of it in Q1 of this year and then maybe potentially some in Q2. Regarding China, our launch is going as planned. We continue to be very optimistic about that market. And just a reminder, China is our second largest market in terms of placed units. We are the market leader there, and our current win rate in China is above 80%.

And to give you a little bit of flavor on the launch, we had a product approved in the first half of the year. We had a commercial launch in the second half of the year, given the timing of capital sales cycle, the first placement actually was in November. And so maybe just this gives you a little bit of a flavor that 2025 was the year of launch and preparation and launch and '26 will be the first year of significant impact. We see the funnel of new placements and we're very confident in our ability to be successful with this launch in China. And as a reminder, Essenz in terms of percent placements of all HLM is going from approximately 55% last year to approximately 80% this year, and a big driver of this will be coming from China.

If I can follow up on US epilepsy. On the end of service business, with the reimbursement increase, can you remind us how long the window is to get a replacement? I'm imagining it's 12 months. I think I see evidence to device alerts that much in advance. And so could there be a dynamic here where centers are motivated to do more replacements, pull it forward, if you will, given the change in financial incentives?

Look, when we originally thought about the reimbursement change and that was late last year, we always thought of the improvement in reimbursement for end of service is kind of -- it will actually support the penetration of new patient implants. We kind of looked at it as a -- the overall financial viability of VNS therapy at the hospital level was challenged in the past. So we always saw it as an opportunity to drive actually penetration with new patients as opposed to promoting a step-up in end of service. So we still think of it as in a similar fashion that this is a new patient implant opportunity and expanding penetration across all of our account universe is what we're focused on.

Brett Fishbin, KeyBanc Capital Markets.

Just wanted to follow up on the epilepsy reimburse topic. Over the past couple of months, CMS actually removed the HGNS procedures from joining your current 64568 code, which impacts multiple product areas. So I was curious how you guys are viewing this decision and potentially touch on some of the trade-offs around protecting the VNS reimbursement change versus any changes in economics as it pertains to the HGNS opportunity down the road?

Brett, this is Ahmet. Maybe I'll start by summarizing what happened so that everyone on the call has the same information. So just as a reminder, with HGNS the previous generation device of the incumbent was in a different code than VNS. And when they moved into the latest generation, temporarily, they started utilizing the VNS code for HGNS therapy as well. And consistent with the recent statement by CMS, we believe that the code for VNS therapy for epilepsy should be separate and not shared with reimbursement codes for HGNS or OSA.

So as we prepare for our launch, we will continue to work with the relevant medical societies to have the most appropriate HGNS code. And at the time of our launch, we'll utilize the most prevailing codes at that time. And because the features and the procedure of our technology for HGNS is similar to the incumbent, we don't see any risk of being able to use the prevailing codes at that time. And finally, related to your question, we continue to advocate and actively pursue a Level 6 APC classifications for new patients with VNS therapy. And as I said, we believe VNS and VNS therapy epilepsy and OSA therapy should be separate codes.

All right. Super helpful. And then maybe a second question. I know it's a little bit early, but just curious if you could touch on any -- very, very early days feedback and commentary that you've heard from customers at the CEC or other facility level just regarding these changes. I'm wondering if you've heard any specific anecdotes about changes in philosophy as it pertains to budgeting or supporting these procedures at the provider level?

I can answer this. So kind of our early read is when we said we were going to focus on -- the commercial teams will focus on the following. So first and foremost, trying to reopen accounts that have closed for us.

And we're seeing some green shoots there that we're pleased with. Expanding penetration and existing accounts is two, and the third is going back and renegotiating our volume-based discounts. And that's where I think where we're seeing some of the early progress, probably more so than on the penetration side. So we expect kind of an outsized impact on price relative to volume.

Anthony Petrone, Mizuho Group.

Congrats on a strong '25. Question on RECOVER and one on R&D spend. When we think on RECOVER and depression, I know timing is still up for debate. But if we look ahead and take a glass half-full approach, assuming that we get favorable coverage. I'm wondering from the company's perspective, is favorable coverage now Level 6 coding that in depression, we should expect that to code to Level 6 and i.e., payout $45,000 or so on an outpatient basis versus what we estimate is a $25,000 device input cost or should we assume that still Level 5 coding at $30,000 to $35,000 is still a best-case outcome? And I have one quick question on R&D spend.

I'll just comment on the code piece and then ask Alex to comment on the pricing piece. So we anticipate that depression would be the same code as VNS Therapy. So where -- whatever the VNS Therapy code is today, it will be the same code. But as I said in the previous question, we are continuously advocating and actively pursuing a Level 6 APC classification for VNS Therapy. So if epilepsy moves in there, depression will be together with it.

As you said it's too early to comment on our ASPs given that we're still awaiting the reimbursement decision from CMS.

Helpful. And then just R&D spend, Alex, it ticked up a little bit in the 4Q. I'm just wondering what the complexion was there? Was that recover manuscripts, was it setting up sleep apnea, something else that we're not seeing, device redesign? And is the fourth quarter level for R&D sort of the new run rate?

So I'll just speak to R&D in general as it relates to 2026. So we're largely maintaining our R&D investment in the core for '26. Obviously, we're wanting to continue to advance innovation and that's what's going to fuel the sustainable growth for both epilepsy and CP. As far as focus in '26 in epilepsy, we're prioritizing the development of our next-generation Bluetooth enabled IPG, which we intend to launch in 2027. In CP, we're investing in the next-gen oxygenator and additional HLM hardware enhancements to strengthen our market leadership.

The next-gen oxy, again, is expected to launch in '27, '28. This year, we're increasing our investment in OSA product development. The investment is focused on our next-generation device which will be the product that we launch into the market in the second half of '27. Just as a reminder, our goal is to continue to drive adjusted operating margins above 20% annually, despite the fact that we're ramping investments in the OSA business. And so our '26 guidance is very much in line with our -- with the targets we set.

Mike Matson, Needham & Co.

Yes. So just with where things currently stand with the OSA, HGNS reimbursement assuming nothing changes there going into '27 when you go into your full launch, what does that mean for that launch in that business for LivaNova? Does it limit you somehow? Or can it still be equally successful if reimbursement doesn't improve?

I mean I'm just going to comment on the reimbursement piece. We're very comfortable with the current coding that CMS guided towards. It will still be very meaningful growth opportunity for us. So we're -- our excitement around the OSA space hasn't changed at all.

We believe we have a differentiated technology with a very interesting and differentiated clinical outcomes. And we believe this is a disease state that has unmet needs. It's underdiagnosed. The growth for the patient population is there. So nothing has changed for us since the Investor Day that we communicated around our excitement.

Okay. Got it. And then just another one on sleep apnea. So I think at the Investor Day, you'd spoken about making some investments in 2026. Can you maybe talk about what you're doing this year to set the stage there? Are you going to start hiring reps? And then how much have you baked into the OpEx guidance to account for those investments?

Yes. I mean -- this is Ahmet again. I'll give a broad answer to that. So on the R&D side, we have multiple key deliverables; one, we need to continue and finalize the PolySync clinical piece, we're spending time and energy there. We are still actively working in getting our clinical trial device approved. Nothing has changed there. We expect that in the first half of this year, and we are actively working on our commercial launch device, which is the MRI compatible version, which will be submitted after we have the FDA approval of the clinical trial version.

So those are the kind of the key R&D pieces where we're spending time and energy. We are going to invest in our commercial organization, but it's fairly limited. In 2026, the broader expansion of the commercial capabilities is more so in '27 onwards. As we kind of discussed during the Investor Day, again, nothing has changed compared to what we shared in November.

John McAulay, Stifel.

Just want to follow up on the earlier guidance questions we heard. Last three years by our math, you grew double digits this year. You're saying 6% to 7%, albeit it's in line with the Investor Day guidance, just want to be very clear that there's not a negative shift in dynamics that's reflected there, whether it be tougher comps or being later in the Essenz upgrade cycle. Is this truly just conservative positioning as you start the year?

No, there's no -- John, thank you for the question. There is no negative dynamics. We are consistent with our guidance philosophy that we've had in the past years.

And I was asked the question during the Investor Day, what are the biggest levers to the upside from our plan? And I think they remain the same. We have to see how the reimbursement improvement and the clinical data impacts our epilepsy business. And on the cardiopulmonary side, Alex noted that we are continuing to gain market share in our oxygenator business and our ability to scale manufacturing faster will be an additional level of growth.

And I would just add to that, in terms of our guidance, we assumed a kind of a moderation in the price premium on Essenz relative to the premiums we've realized in 2025. And the other, I would say, conservative assumption is on the oxygenator output, right, given the third-party component supply constraints that we've been working through those are kind of the two elements that have moderated our assumptions going into '26.

Switching gears to epilepsy. If I recall, something like 40% of your patient population is covered by Medicaid, you can correct that number is off. But my understanding is that the reimbursement there for a decent portion of states has to be adjusted at the state level. Could you just give us an update on where you are in terms of Medicaid reimbursement changes and where you might expect to be by the end of the year?

Yes. So I mean, the way to think about this is Medicaid is essentially going to follow Medicare. So while it's going to take some time to work through the individual state situations, we assume that ultimately, Medicaid will get to the same level of reimbursement.

Thank you. Those are all the questions we have time for today. And so I'll turn the call back over to Vladimir Makatsaria for closing remarks.

Well, thank you, everyone, for joining the call today, and thank you for your continued support and interest in LivaNova, and have a good day ahead. Bye-bye.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.