Good day, ladies and gentlemen, and welcome to the LivaNova PLC First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background nose. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Matthew Dodds, LivaNova's Senior Vice President of Corporate Development. Please go ahead.

Thank you, Lisa. And welcome to our conference call and webcast discussing LivaNova's financial results for the first quarter of 2019. Joining me on today's call are Damien McDonald, our Chief Executive Officer; Thad Huston, our Chief Financial Officer; and Melissa Farina, our Vice President of Investor Relations. Before we begin, I would like to remind you that the discussions 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's available on our website. We do not undertake to update any forward-looking statement. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that's 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 material and should be used as an enhanced communication tool. You can find the presentation and press release in the Investor Relations section of our website under News & Events, Presentations at investor.livanova.com. With that, I will now turn the call over to Damien.

Thanks, Matt. Welcome to our first quarter 2019 conference call. Today, we will discuss our first quarter results, outline our plans to address the sales shortfall in Neuromodulation and Perceval in the US and updated guidance. To be clear, we are disappointed in our first quarter results. While we have made significant progress in transforming LivaNova portfolio over the last two years, we have more work to do. As Thad and I will explain in more detail during this call, we are implementing several actions to address the root causes of the sales shortfall and leaning in harder on our cost structure to countermeasure the near-term impact. I'm going to start off by discussing our sales results by business and provide color on actions already underway. After my comments, Thad will provide you with additional detail on the financials and our revised 2019 guidance. Then I will wrap up with closing comments before moving on to Q&A. On April 5th, we announced preliminary first quarter 2019 revenue results. The U.S. Neuromodulation business experienced an unexpected weakness due to a combination of factors, including competitive dynamics and sales force turnover. In addition, toughness in Perceval sales negatively impacted the cardiovascular business during the quarter. All of the weakness we saw occurred in the U.S. as both Europe and rest of world grew above plan. Turning now to our net sales results for the first quarter, which will all be stated on a constant currency basis. Total net sales were up 4.2% compared to the first quarter of 2018. Cardiovascular showed strong operational growth in the quarter, while Neuromodulation was below expectations. Cardiovascular sales were $155 million, up 5.1% from the first quarter of 2018 due to growth in cardiopulmonary and the inclusion of ACS. Cardiopulmonary sales were $122 million in the…

Thank you, Damien. I'm going to discuss the first quarter financials in greater detail and provide our revised 2019 guidance. As Damien mentioned, sales growth in the first quarter was 4.2% versus the first quarter of 2018, led by growth in HLMs and oxygenators, offset by lower growth in Neuromodulation. Adjusted gross margin as a percent of net sales in the quarter was 69.3%, up 240 basis points from the first quarter of 2018. The margin improvement was driven primarily by mix and price. Adjusted R&D expense in the first quarter was $37 million compared to $29 million in the first quarter of 2018. R&D as a percentage of net sales was 14.7% versus 11.6% in the first quarter of 2018. As we previously discussed, R&D is increasing behind the development of our next generation HLM, SenTiva and TandemLife products, along with the clinical trials and strategic investments we are making in TRD, TMVR, sleep apnea and heart failure. Adjusted SG&A expense for the first quarter was $105 million compared to $97 million in the first quarter of 2018. SG&A as a percentage of net sales was 41.6%, up 290 basis points versus the first quarter of 2018. The increase is largely due to US investments in a DTC campaign for epilepsy, the full impact of including and expanding ACS commercial capabilities, strengthening our commercial organization in international markets, and lower-than-expected overall sales results. Adjusted operating income from continuing operations was $33 million compared to $42 million in the first quarter of last year, which reflects the impact of lower Neuromodulation sales, while increasing investments in our key growth drivers in R&D. Adjusted operating margin from continuing operations declined 370 basis points to 12.9%. Our adjusted effective tax rate in the quarter was 15.5%, an improvement versus 15.7% in the…

Thanks, Thad. As a management team, we are looking to build long-term shareholder value. I'm proud of the foundation we have built so far. We have transformed LivaNova's portfolio with the sale of our CRM business, coupled with investments in our internal R&D portfolio and our recent acquisitions. At the same time, we have been able to expand gross margins, increase R&D to fuel our pipeline and strengthen our talent and capabilities. While our U.S. Neuromodulation and Perceval sales fell short of our expectations, many of our other business lines are performing well and we have a sense of urgency to course-correct these challenges and further streamline our cost structure. Although the results of our efforts will not be visible overnight, I am confident that our focus and attention will return us to our declared aspirations. We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value. And with that, Lisa, we are ready for questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Raj Denhoy from Jefferies. Your line is open.

Hi, Raj.

Good morning. I wanted to maybe just start on the VNS line. Obviously, probably a lot of questions there. But, I guess, as you've described the recovery from this Epidiolex issue you've seen so far, how do we get confidence that this isn't going to cut deeper for a longer, in a sense there is something that seems different about this drug in terms of people's willingness to try it or their desire to try it? So, again, just trying to frame why you think we'll see recovery. I know you've guided very conservatively here for the second and third quarter, but why do you think we'll see recovery by the fourth quarter and then into 2020?

Well, I think there's a range of things that we've dug into since we preannounced our sales rise. First is digging into what do we think drove the shortfall. And our pareto says that around 30% of this was related to Epidiolex, 40% related to our commercial issues and the balance really related to the change in the customer buying patterns. So, we're expecting this disruption that we saw in the first quarter to read into the second quarter and then in the second half start to bounce back, Q3 being a little stronger and then Q4 returning to growth. So, we've broken down the pareto. I think the other thing is we've begun to understand more from customers around Epidiolex, and I think that the trial and evaluation period is like a six to nine-month period. And I think that also informed us on how we think we're going.

Okay. That's helpful. I guess, to that point, 40% of it was sales force turnover, kind of execution on the commercial side. Maybe you could offer something in terms of how you've replaced those folks or how quickly do you think it will be before you can refill the physicians that were lost?

Yeah. So, look, we had a slight acceleration in turnover in the first quarter. And this impact was really meaningful in two regions. But in a lot of instances, we've replaced people in the field, many of those with internal candidates. We were able to retain a number of people who were entertaining alternative offers. So, I think that's also been key. But I think the other aspect of this too is getting into the commercial execution and making sure that we're focused on the sales force compensation, the territory optimization, the communication and positioning messages, those have all been key steps that we've taken in the last few weeks to start stabilizing this.

Okay. And maybe just for my last question, I could just kind of ask for a broader one. I think one of the other things that perhaps drove the sharp reaction in the stock on the pre-announcement was kind of the company's communication strategy. You had, I think, been on the road, meeting with investors just shortly before all of this happened and there wasn't any indication that something was going to happen or that – obviously, you couldn't have said much because you were deep into the quarter. There's a couple of questions there just about communication and also visibility, I guess, in terms of the business and why the miss wasn't known until very late, late in the quarter, at least things weren't tracking as you expected until very, very late

Yeah, Raj, it's a very fair point. Clearly, we typically see the quarter's sales cadence as definitely skewing towards the end of the month for our Neuromod business. And we were surprised by the -- we didn't see that pick up in the last week. And so, when we were out talking, of course, we were describing where we were at that point in time. But we did see that deviation in the trends that occurred really towards the back end of the quarter and that created a challenge for us. And that's why, as soon as we had clarity on the sales results, we started our efforts to publicly communicate, and that's why we did the pre-announcement.

So, how much of VNS revenue then does fall in the last week or so, two weeks of the quarter, typically?

It's Matt. We won't give you the last couple of weeks. But for the last month, it's about 50% for the quarter, generally in every quarter.

Okay. That's fair. I'll leave it there. Thank you.

Thanks, Raj, too.

Our next question comes from the line of Rick Wise from Stifel. Your line is open.

Hi. Good morning. Can you give us a little more color, Damien, on the US Perceval weakness? You sort of spelled out a little more detail on the Neuro side and what you're doing and the sales. I'm not as clear about what's happening there. Clearly, Perceval is doing great O-US. Just talk about the leadership changes that you've made and help us think through there the cadence or the drivers of improvement as the year unfolds, and maybe what you assumed around that.

Right. Yeah, we put in a new leadership structure around Q4 last year. The diagnosis, I think, is reasonably clear with them. They've dug in much more, especially these last three months. And I think, for us, this really relates to a few things. And I will say, and we said in the script, it's commercial execution on our part. We don't believe any of this had to do with a meaningful change in the perception of low-risk TAVR. Our plan is around better commercial execution, better procedure training, both of our internal people as well as the accounts that we're supporting. The Valve-in-Valve indication, I think, is a meaningful change in their communication plan as well as the 10-year data. And we'll be implementing more discipline around the, what we call, daily management for the sales force execution there. What many would just refer to as sales 101 that were really not in place that Rich and team are really starting to execute on that now.

And again, just as you reflect on – does this take a full year to make all these things happen, Damien, or do you think we can sequentially imagine improvement now that you're focused on it in each quarter or, no, it's back half loaded? Again, if you could frame that, that would be helpful.

Yeah. I think you stabilize it in Q2 and then you start building in the second half. By the time, you start getting traction in the accounts – and there's two parts of this. There's the account acquisition, finding new accounts, and then account penetration. And both of those things, coupled with these internal efforts, I think will take a few quarters to read through it.

And Damien, going back to Neuro, just can you help us understand what you've – you talked about the breakdown of the headwinds in Neuro short-term. I wonder what you've assumed in terms of the – on the Epidiolex side, what have you assumed about trialing or maybe de novo neuro implants going to drugs out of the gate as you trial? What changed in your assumptions and what are you assuming now going forward?

The big thing for us is we really looked at this and our key opinion leader and neurosurgeon, neuroscience input said, look, this looks a lot like another drug. The 12-week trial that's an acute therapy, it's relatively expensive, limited indication. So, this looks like drugs that we've seen in the past four to six months. What I think we were really caught off-guard by was the enthusiasm for things that are anything cannabis. And you probably know as much as anyone that there's a lot of noise and enthusiasm for that. And what we've really begun to understand is maybe this is more like a six to nine-month program, by the time people try it, see what the effects are. Again, our pipeline of -- the start of our funnel, the patient identification, was really robust. What we saw was the slowdown in the movement of people from patient ID through to implants. And so, that's where our -- probably our systems or process or methodology for analyzing it was slightly off, just that timing and what it would do to the conversion from ID through implant.

Yes. Clearly, we also, Rick, wanted to provide more clarity around the US kind of phasing. As we were surprised in Q1, we also have described a range of $70 million to $80 million in Q2 for U.S. Neuromod. And then, clearly, as we go on to the back half of the year, we still have an impact forecasted, but that's again why we provided a full year range as well.

Right. And just one last for me. I would be astonished to think that you weren't trying to be incredibly conservative as you reset the bar here. But can you help us think through your guidance here? Are you thinking, hoping this is conservative and working hard to make it better or, no, this is realistic? Would you hope it could be better than this? And maybe, Damien, at high level, help us think through what might make it better? You have a lot of new products in the pipeline in the basic business, SenTiva 2.0, HLM, Tandem. Where would the – do a little better side of things come from? Thanks so much.

So, this is where an old mentor of several of us would say hope is not a strategy. Our key activity here is focusing the US sales force on execution, giving them the resources to be more effective. So, that's why we came back to the product messaging, the field training and our account acquisition and penetration. Moving patients through from identification to implant is really key here. So, I think we've been prudent in the guidance. This is our best estimate of how the year looks. And our intention is to work our plan now.

Thank you very much.

Our next question comes from the line of Matthew O'Brien from Piper Jaffray. Your line is open.

Good morning. Thanks for taking the question. So, as we think about the business from here, given the shortfall in Q1 and the adjusted guidance here, I think what most people are trying to get a sense for are a couple things, and I'll break up the question. The first piece would be, as we base here for the core business and then, hopefully, improving the second half of the year with all the spending that's going on, how do we think about the business as we exit this year and then we get into 2020 because, obviously, this a soft year and an investment year? So, how do we think about the business unfolding late this year and into 2020 in terms of top line growth plus potential leverage to the bottom line?

Yes. Thanks for the question. It's clear that we wanted to better understand the impact on the Neuromod business and that's, again, why we provided a revised guidance. We're not in a position to provide 2020 guidance at this point. But, clearly, we'll provide updates as we go throughout the year and, as we get closer, give more of a line of sight on, frankly, the biggest driver, which is how our growth is projecting, particularly in U.S. Neuromod. So, we need a few quarters, obviously, to understand the impact of both Epidiolex and also the field dynamics that we've described.

And in terms of the P&L, what we've indicated too is we're going to be making changes in our cost structure to be more prudent there. So, I think we were pretty transparent about that. Having said that, what we've ringfenced is a lot of the growth program and the R&D. So, leading into later this year, with the Delta program for ACS, just to come back on the previous question from Rick as well, we've got that in the pipeline. We've got – really, I think a lot of opportunity to talk about with Perceval with the Valve-in-Valve. I think that opens up a lot of opportunity for us. And then, heading into next year, it's a next generation heart-lung machine as well as SenTiva 2.0. So, we've really ring-fenced the key near-term opportunities. And a very big focus for us is bringing depression into commercialization and that is progressing well. And we're still anticipating our start of our program in Q3. So, the idea for us is, let's make sure we stabilize the base and get the core growing again. Let's make the right cost decisions in the middle of the P&L. Let's make sure it ringfences the near-term and key growth drivers. And that's our playbook.

Makes sense. Would you get aggressive with the balance sheet to offset the lack of leverage maybe later this year, even into next year in terms of buying back stock?

Yeah. I think we've always looked at the balance sheet and, obviously, our capital allocation plans. Clearly, where we are today, we have to also look at addressing this 3T liability, and that's one of our priorities, but we will look at everything.

Okay. And then, the other question for me is, again, all the investment this year, you're sticking with your pipeline and really trying to be aggressive there. So, I know we're only three months after you gave us an update last quarter. But given all that investment, what have you seen in the last three months that gives you more confidence, either in the existing pipeline via heart failure or TRD, mitrals, whatever it may be or even on the circulatory support O-US. Anything along those lines you can point people towards as we transition through this investment year here in 2019 and look into 2020 and beyond?

Yeah. Look, I think a few things. We've talked about the LivaNova business system and we've really very much isolated these issues, US and particularly Neuromodulation for epilepsy and Perceval. The growth in the other regions, Europe and international, that has been really strong. So, I think that's a positive for us. We've recently reviewed the next generation heart-lung machine program in a big dive with that team. Very happy with the progress they're making. The Delta program, which is the project name for the next generation ACS device, which is the pump and monitor, is progressing well. We're really encouraged by the VITARIA, the heart failure recruitment, that's really, again, as we mentioned, ahead of expectations there now and coming around on 100 patients randomized. And 300 patients is the point of the functional end point that we'd be submitting the PMA. So, that's progressing well. The TRD program, while we're finishing off negotiations with CMS, we have begun in parallel recruiting sites. We can't go through IRB without a finalized protocol, but we're doing everything up to that point. And I'm really impressed with the focus and the business discipline that that clinical team has implemented there. So, I think there are a number of things that we're really pleased with the progress. Lastly, just to wrap around on Caisson, we've really identified that the single issue here is about the anchor design. The team have really made a tremendous progress on coming around to finalize two potential designs. They're going to try to nail it down in the next month or two and then they’ll go into the cycle of testing on that. And we expect to be back in recruiting for the trial in the first half of 2020. So, I think that's a bit of a list of things that we think are continuing to operate well.

Got it, thank you.

Thanks, Matt. Cheers.

Our next question comes from the line of Scott Bardo from Berenberg. Your line is open.

Yeah. Thanks for taking my questions. So, on VNS, I think the narrative has always been that the penetration opportunity is quite significant even in the US market, where I think you've called out around 5% of the addressable new patients for drug-resistant epilepsy getting VNS therapy, which makes it somewhat surprising that Epidiolex causes such a material and surprising impact to your business, given the narrow indication of that product. So, what I want to understand is, your guidance now for the second quarter for U.S. Neuromod, if I understand correctly, is highlighting a negative 10% to 20% fall in your U.S. Neuromodulation business. Particularly in keeping with the mindset that you have some regular business, if you like, or you have a replacement business here would imply that new patient adds grind to a halt. So, I wonder if you could sort of square the circle for me with respect to the penetration opportunity and why all of a sudden no new patients are going on VNS therapy in the U.S. And just help me understand really what forms this, particularly with the mindset that half of your sales are coming in the last few weeks in this business? That's question one. I have two follow-ups.

Okay. So, a few things. You're right. The end-of-service numbers for us still were very robust. The slowdown for us is in the new patient identification on new patients implants. And for us, yeah, you're right, the penetration is relatively low. There's still lot of drug-resistant epileptics coming into the funnel every year. But you've got to move those patients through a process with a combination of neurologist, neurosurgeon or another implant or like an ENT in the big centers. It's a panel of people. And again, we were surprised – and what messed our models up is just the enthusiasm for everything cannabis. And we can see a meaningful difference between the number of prescriptions written and a number of prescriptions filled for Epidiolex. So, we believe that the patients are in that pool, delaying their decision about an implant. So, now, we get back to competitive positioning, which is – we've got a series of messages that I think we have to be more aggressive about in terms of the benefits of drug plus VNS, whatever drug, Epidiolex or whatever. And as I said, I mentioned that as one of our countermeasures to start this working again. And so, yeah, it is new patient implants. It's in a very focused number of centers. And we've got work to do.

Yeah. I would add, I do think it's prudent for us to think about all of the patients that are essentially affected by this new drug launch and to look at the first half of the year and to assume that there's going to be a reduction in new patient implants, at least temporarily. And then, as we kind of look at the rest of the year, that it would gradually improve through the back half of the year. And so, kind of picturing a dip and then an improvement over time. And that's kind of how we've been thinking about it and understanding it. You also have then an impact on just kind of customer buying patterns until they understand those kind of -- there was an impact on the NPI, there was an impact on the amount that's being purchased.

Understood. And you're highly confident that there has been no stuffing of the channel or excess inventory in your hospitals and this is just, in part, a normalization of stock. You're very confident that there's no excess stock in the market, this is really end market demand trends you're seeing here?

Yeah. If you're implanting as an account, a few less patients, I think it's natural that the buyers look at their par levels and say, what we need to buy this month. And again, that's what caught us in the quarter in that last month. We just didn't see the customer buying patterns as normal. And, historically, you talk about IPGs and pacemakers, spinal cord stim, when the market is slow, you've seen impact to how much a customer will hold based on the unit demand.

Understood. So second question, please. Clearly, not great to be cutting guidance only a few months after setting it. You've decided to stick with meaningful investments into your pipeline. So, I think given the obvious impact that this is having on near-term performance, could you please give us some sense, as for the main full projects, sleep apnea, mitral, TRD, heart failure, how much are you investing actually across the P&L And maybe give us some sense of time frame, when you expect these assets to materialize that would help, if you like, balance some of the investments with some of the opportunities?

Right. So, as you point out, we are in this guidance, continuing to maintain our investment in our innovative R&D pipeline. So, we think that we have some really exciting opportunities clearly with TRD, with heart failure, with sleep apnea, with Caisson. Clearly, they kind of all come in this different time horizons. And, clearly, heart failure and actually TRD are more near-term; and then sleep apnea and then Caisson, it's for further out. We spend roughly half of R&D on our innovative pipeline. And so, I think that is one of the things that makes us very unique versus a lot of other companies in the space. But when you look at the number of cents or the amount of cents that we're spending, we're spending roughly $0.70 on our innovative pipeline. And that is a choice that we're making and it is roughly similar, $0.10 to $0.15 per item that we have in our pipeline on an annual basis that we spend. And so, I could provide more detail. But, clearly, we believe that these things are prudent investments, investments that are going to ultimately drive the long-term success, but we'll also look at all these pipeline opportunities and balance those choices.

And then, a proportion of the other half is spent on the organic pipeline, the Polaris program for next-generation heart-lung machine, the ACS Delta product and SenTiva 2.0. So, again, the strategic priorities or strategic projects that we've talked about, the big 4, as well as these internal programs that we kicked off roughly 18 months ago.

Yeah. The excitement that we have around TandemLife and then, obviously, a next generation HLM and the next generation SenTiva will really carry us into 2020 and beyond.

That's helpful color. And, sorry, just lastly on this then, I'm also assuming that there's been some additional SG&A investments related to this decline. A 40% SG&A ratio is quite astonishing. So, could you give us a sense of how much of your SG&A ratio relates to these pipeline assets as well?

Yeah. So, clearly, SG&A has been moving up. And part of the reason it's moved up is that we have made strategic investments in really Neuromodulation, particularly the direct-to-consumer promotion campaign as well as rest of world global expansion, as well as now we're bringing on TandemLife ACS into our portfolio and we doubled the sales force last year. So, we have stepped up the investments on our priority areas. Clearly, as that approach is 40%, that becomes a high watermark, I would say, and one where we have to offset and make some other choices within our expense portfolio. So, we are optimizing expenses. We're reallocating resources, in many cases, from cardiac surgery to Neuromodulation. We are redeploying investments to support epilepsy. And it's roughly $0.15 of our guidance is coming from these expense cuts. We're ringfencing the R&D programs and the geographic expansion, we think, is important. But we're cutting in other areas to help mitigate at least some of this downside.

Got it. I'll jump back in the queue. Thanks, guys.

Thanks, Scott. Cheers.

Our next question comes from the line of Matt Taylor from UBS. Your line is open.

Hi. Thanks for taking the question. And good morning. I just wanted to ask a follow-up question on the dynamics with Epidiolex that you called out. There's been some prior cases of drug launches in the past that you can compare this to. Could you walk us through any color, comparisons or qualitative comparisons from those launches and how do they inform your view of what's happening here with Epidiolex?

Sure. Hey, Matt. It's Melissa. The last most comparable launch would be launch of [indiscernible] which was in June of 2009. And during that time frame, we saw approximately a two-quarter impact to new patients. While that drug was significantly different than Epidiolex, it had lots of very generalized indication. We do, as we mentioned previously, expect the impact of Epidiolex to be slightly longer to adjust the time frame it takes to receive a prescription because of scheduling. But other than impact, it's quite similar on a percentage basis.

Okay. And then, with regards to the commercial disruption that you called out in Neuromod, could you talk a little bit more about what the plans are to make sure that that gets better? And if you're losing some reps, is this a change in the market or it was just kind of a one-off event that happened together? And could you give us any color on where you might be losing folks to?

Yeah. I think it was a confluence of events. You had the Epidiolex timing at the same time as some competitive hiring. Some of them did go to GW Pharma and I think they make fairly compelling offers to them financially. Having said that, I think we were able to retain a number of people, and I think our value proposition or patient proposition is something that goes beyond just compensation. And I think being able to explain that was a key part of it. Having said that, we are relooking at the sales force compensation and have implemented changes already for this quarter and beyond. And we're looking at territory optimization, which is as a key step that we're taking. We're looking at our competitive positioning and the story we're telling and how we tell that story. So, I think all of those things are going to help us readjust the sales force and commercial disruption. As I said, again on top of where Melissa was with, how do we deal with the timing of Epidiolex.

Great. Thanks a lot for the color.

Cheers, Matt.

Our next question comes from the line of Mike Matson from Needham & Company. Your line is open.

Good morning. Thanks for taking my questions. I guess, just want to start with the OpEx guidance, so on a dollar basis, Thad, maybe you can comment on SG&A and R&D spending on a dollar basis. Is that expected to be up or down versus your prior plans?

So, SG&A is clearly going to be down and roughly $0.15 of EPS to kind of mitigate what is roughly about $0.75 of EPS impact due to the sales shortfall that we're calling out here. So, we're covering a portion of that. We are, as I mentioned earlier, ring-fencing the R&D programs within our guidance at this point. We will take a deeper look at R&D and see what we can do to further optimize the spend there.

Okay. And then, given the issues in the Neuromodulation business, are you planning any changes to the DTC efforts there? Are you going to increase it, decrease it, maintain it in the shorter term?

I think, for the most part, we're kind of continuing with our plans, but what we are looking at, better understanding the pull through. So, we've increased the number of patients into the funnel. And so, we're pleased with the results, but it's still early. So, we're kind of closely monitoring that and phasing some investments, blowing down some other things till we have a deeper understanding of the results.

And as we mentioned, relooking at our competitive position and how we're telling a story versus the drugs plus VNS and why it plays a critical part of the thought process, not as an afterthought.

Sure. And then, just with the gross margin guidance, I guess, I'm a little surprised, it was only down 50 basis points from previously, just given the high margins on the Neuromodulation products. So, are you offsetting some of the impact somehow or…?

Yes. So, the good news is that we have seen and continue to see really great momentum in ACS.

In ACS.

Yeah. On ACS, but also just generally the mix of our business. And we are also seeing SenTiva as a percentage of total Neuromod implants also improve as a percentage overall. So, we think that SenTiva could reach 70% to 75% of total generator sales. So, price is holding up. Overall, regional mix is strong. So, although we took normalized sales down, we still feel confident about that range that we provided.

Okay, great. Thanks a lot.

Thanks, Mike. Cheers.

Our next question comes from the line of Jason Mills from Canaccord Genuity. Your line is open.

Hi, Damien, Thad and Matt. Thanks for taking my questions. Damien, I wanted to go back to the questions about Neuromodulation, some of the drivers of the impact there. And specifically, the sales force. Look, I have a hard enough time climbing into my own mind, but I'm going to ask you to help us understand the calculus of maybe going through some of the minds of these reps that are leaving. And the dynamic, as I look at it, is you're portraying it from an opportunistic standpoint, is you have still a big opportunity in TRE and a pending opportunity that isn't too far out in TRD. So, why are these – the question is just why are these reps leaving. Is it truly in your mind a near-term comp issue? And then, as a related follow-up to that question, the business seemed like something or a driver that would be surprising sort of end of quarter situation, or was it? Could you give us some help there on the calculus of reps leaving? It seems like it implies that they think it could be longer term?

Well, I'll come around on that second part first. And what surprises us, a few reps did leave in the quarter and they were particularly high profile reps. A significant amount of revenue dried up with their exit in the quarter. You change the patient dynamic as well as the ordering, purchasing from their specific accounts. So, in the quarter, that was a definitive issue for us. And the bigger issue is, for us, the whole competitive landscape has really amped up. And we've found a lot more competitive hiring, not just in epilepsy, but in implantables. And so, we saw an uptick in turnover and, again, a few key regions. So, those are the things for us that really, really ticked up. Now, what do we need to do about it? We need to really dive into compensation and territory optimization. Do we need to make some changes to the way territories are aligned and supported? We've already made changes in the compensation and made at all three levels of the area direct to the regional manager and the sales people. So, I think that's a key thing. We also look at what resources we're giving and how they can be more effective. And are those the things that were causing them to think about alternatives, where I could go to a job that had better resources or better support. So, we believe, on the first compensation changes, we've made great progress. We've got work to do on the support and the messaging and that's one of the other key sets of programs that we're leaning into.

Okay. Thanks for that. And then, as a follow-up to that, could you just talk about in general the Neuromodulation sort of marketplace. And as you think through some of these dynamics that are impacting the business in addition to some of the things you're talking about putting in place, could you talk about just the cadence as you roll through the year because if you've got a six to nine-month sort of trialing period as you pointed out with the drug and you also have more difficult comps for the U.S. Neuromodulation business in the second half of the year, is it reasonable for us to expect this organic growth in the second half of the year will actually tick up? It seems like some of them are in precarious place to be modeling growth to tick up against the difficult comp, given that you'll still be sort of overlaying some of the trialing periods that you pointed out? Thanks for taking the questions.

Yeah. That's okay. A few things if you come in [ph] on guidance. Look, first of all, the number of reps we're talking about isn't the entire sales force. We've got a bunch of really talented people who are very committed to the patient messages that we have. So, we've got a sales force that has still lots of opportunity, and I think that the people that have stayed see that and we're going to continue to work with them again. Compensation is one part of it, but tools and messaging, I think, is really key. And so, we've been very prudent with, I think, the guidance saying that where we think Q2 is in that $70 million to $80 million range. And what we're saying about the full year was the $315 million to $325 million, and we were also trying to let people understand that it's largely going to continue in Q2 – again, we've given the Q2 number, which is unusual for us, but we also wanted to be clear about why we think it's going to look different in the back half of the year.

I think to me, and again, we recognize we've surprised the market in Q1 with the results. And so, providing the range of $70 million to $80 million provides the baseline for what we think the impact will be of this Epidiolex effect. And then, as you look at the back half of the year, showing an improvement versus Q2, but still a decline versus probably prior-year NPI is kind of how we're thinking about it from a forecast perspective and that's how we get to this $315 million to $325 million overall annual US Neuromod sales.

Okay. Thank you, guys. I'll get back in queue.

Thanks, Jason. Cheers.

Our final question today comes from the line of Scott Bardo from Berenberg. Your line is open.

Yeah. Thanks very much for taking the follow-up. So, just a discussion on the heart valve business and, clearly, this has not been performing, not just the last few quarters, but in almost the last 10 years or so. So, I guess, the question I have is what makes you convinced that LivaNova is the right owner for Perceval and the structural valves franchise? And as a follow-on, can you operate in mitral valve if you don't have structural valve for the new portfolio? Thank you.

Hey, Scott. Great questions. Look, first of all, let's do the second part first. The answer is yes, it's a different call point, different disease state. In some instances, there are panels where you've got the entire cardiac group, but we largely believe that that call point is a different one between the surgical and the transcatheter. Look, I would point you back on the heart valve business to the last two years. We've largely transformed the portfolio. We've been able to make changes across the board. We've exited some businesses, doubled down in others. And so, that transformation, I think, has progressed well. We've built this robust pipeline, which is, I think, really going to read through mostly starting later this year into next year. And we've, lastly, really focused on key issues and we intend to fix them. One of those being the Perceval business. So, I think we've been very clear that the traditional surgical valves are probably going to head towards zero and really negating that part of the portfolio wasn't ever our intention. Stabilizing mechanical while getting Perceval growing was a key opportunity for us. And I do see a number of our sales people and the commercial teams being able to execute what I consider benchmark performance. We're seeing strong growth in parts of the world in international and Europe. We've got reps in the U.S. who are performing brilliantly. Focusing on them, giving them the resources and the things that I talked about, the procedure training, better indications to talk about better data, the ten-year data, now we've got reimbursement in Japan, commercializing in Japan.

And the Valve-in-Valve.

And the Valve-in-Valve, right. So the, history of our last two years is transform the portfolio, build the pipeline, focus and fix. And that's our intention with this part of the portfolio too. But that we'll make the tough decisions when we need to.

Understood. And last one, please. I've always argued that in your Neuromodulation business, growth is also pretty aligned to product cycles. And, clearly, here we are in a year where growth is pretty subdued and we've haven't got an imaginary introduction of a product. So, with that mind, can you lift the curtain a little bit on SenTiva 2.0? Is that an evolution or a revolution or how should we be thinking about that into next year to give us some comfort that these sorts of growth impacts are transient? Thank you.

Well, I think two things. I'm a believer too that SenTiva was a significant opportunity. An 18-month or 24-month cycle isn't anywhere near long enough to fully exploit the benefits of that. So, I still think we've got plenty of runway with SenTiva. Having said that, 2.0 is, I think, going to be really an impressive change. It's got the Bluetooth capability that the team are developing and the ability for the product to communicate into the cloud. And when you talk to patients, the big issue is empowerment and we think that being able to give them more access to information is going to empower them. And I think, from the clinical side, being able to access the data and doing more with the data and not necessarily have the patient coming into the clinic is also going to be powerful. So, we believe there's a lot of upside in that. And this is why we believe our investment in digital innovation is really key here. It's a major opportunity for us.

Got it. Thanks very much, Damien.

Brilliant. Thank you, Scott.

We have no further questions in queue. I'll turn the call back to the presenters for closing remarks.

Well, thank you, everyone. Again, we know that the Q was not the sort of numbers that you wanted us to print, nor was it the numbers we wanted to print. We've been focused on transforming the company over these last two years. We've built a robust pipeline and we intend to focus and fix the issues that we've spoken about. So, thanks for your questions, and we look forward to those conversations with you on behalf of the whole team here. Thanks.

Thank you.

This concludes today's conference call. You may now disconnect.