LivaNova

LivaNova delivered second-quarter results that featured revenue growth of 10% in constant currency. Operating margin fell 270 basis points thanks to unusual legal expenses. Management raised 2026 guidance for sales by 1 percentage point and earnings per share by $0.10 at the midpoint.

Why it matters: LivaNova largely maintained the strong start of the first quarter, with cardiopulmonary and neuromodulation each up 10% in constant currency year over year. We think underlying demand in cardiopulmonary remains strong and, when coupled with supply constraints, could translate into low-double-digit growth into 2027. Now that LivaNova has an agreement with Thermo Fisher Scientific to obtain greater quantities of a key oxygenator component, this could help boost production and even accelerate cardiopulmonary growth.

The bottom line: We've raised our fair value estimate for narrow-moat LivaNova to $75 per share from $67. Roughly half the increase reflects recent strength in both product segments; the other half is time value of money. Importantly, the firm has begun to consistently post economic profits over the last several years commensurate with the intangible assets and switching costs it enjoys. Under current management, the firm has focused on optimizing its key businesses. Just as importantly, the firm has stopped frittering away cash on long-shot technologies outside its wheelhouse under CEO Vladimir Makatsaria.

Bears say: LivaNova's long-awaited implantable nerve stimulation platform to treat obstructive sleep apnea could find its sizable market reduced significantly, now that AD109 from Apnimed has got two favorable phase 3 trials under its belt. AD109's once-per-night oral dosing is substantially less invasive than LivaNova's implantable device. We think an oral medication will be first-line treatment, similar to CPAP machines today, and the more invasive devices will be reserved for those who fail the medication.

We’re raising our fair value estimate to $75 per share from $67. This reflects the recent strength in cardiopulmonary and neuromodulation, which we believe can be maintained, as well as time value of money. Now that LivaNova is refocusing on its traditional areas of strength and has jettisoned its advanced circulatory operations that had been dragging down the firm, 2026 looks positive. Revenue growth is estimated at 8% for the full year, though investments in the Essenz platform could hold down operating leverage. Over the longer haul, we expect the firm to achieve growth on par with the medtech market in the midsingle digits. The robust adoption of the Essenz heart-lung machine, as well as gains in LivaNova's oxygenator market share, drives our projection for cardiopulmonary to grow at 9% in 2026 before decelerating to the midsingle digits through the remainder of our explicit forecast period. In a fortunate development for LivaNova, key competitors have faced challenges with their oxygenators in recent years, prompting the firm to expand its manufacturing capacity to meet growing demand.

Over the longer term, we anticipate neuromodulation will experience an average annual growth rate of 7% through 2030, supported by the introduction of de novo implants for refractory epilepsy. We are not particularly concerned about Medtronic’s presence in the refractory epilepsy market, as we think practitioners comfortable with LivaNova’s technology will be reluctant to switch and the firm’s long-standing body of clinical evidence should also insulate this franchise from competitors. Medtronic hasn’t seemed to have had much impact on LivaNova’s epilepsy business. Thus far, if LivaNova secures Medicare reimbursement for treatment-resistant depression, there would be upside to our valuation.

We think LivaNova’s underlying business has a narrow economic moat based on intangible assets and switching costs that are characteristic of its neuromodulation business. While this unit accounts for roughly 45% of total revenue, attractive profitability means it drives more than 70% of consolidated operating income.

As a much smaller competitor in a field populated by medtech behemoths, LivaNova has managed to carve out a small niche in neurostimulation, where it is dominant. Unlike the more crowded spinal cord stimulation market for chronic pain, LivaNova was the only major competitor in refractory epilepsy for more than two decades with its implantable vagus nerve stimulation device. Indeed, LivaNova has long been the only firm focused on vagus nerve stimulation—a key highway in our parasympathetic nervous system that generally remains mysterious to us. We believe the firm’s intellectual property, expertise, and engineering know-how in VNS add up to intangible assets that would be difficult to replicate.

There are several aspects of LivaNova’s neuromodulation technology that investors should appreciate, in our view. First, it was the first and remains the only VNS device for drug-resistant epilepsy. Peripheral competitors, including NeuroPace and Medtronic, have had to engineer alternative responsive neurostimulation and deep brain stimulation platforms—both of which are considerably more invasive than LivaNova’s system.

Second, aside from IP, LivaNova has also amassed a body of clinical data. LivaNova’s significant head start in this market means it has had more time to collect a substantial body of clinical evidence to demonstrate the device’s safety profile and efficacy. This is important because neurologists and neurosurgeons tend to be conservative when approaching these implantable therapies that are clearly more invasive than medical therapy. LivaNova continues to hold the longest clinical record in this niche market that gives practitioners confidence in the therapy.

The importance of clinical data is amplified by the switching costs for both patients and physicians. Once the generator and leads (connecting wires) have been implanted, this creates a stream of replacement revenue later down the line when the generator’s battery runs out. In the vast majority of cases when replacing a generator, the same brand of generator is chosen because it reduces the possibility of malfunction or incompatibility when mixing brands of leads and generators. Because there are risks to the patient when explanting a neurostimulation device, practitioners are generally reluctant to do so, unless there is greater risk associated with leaving a broken or infected device inside the body.

We estimate LivaNova’s neuromodulation segment historically earned returns on capital that averaged near 30% when it was stand-alone Cyberonics, before the merger with Sorin. The firm has consistently been able to raise prices on its new products, which we view as further evidence of its ability to leverage its intangible assets and switching costs.

The firm is also seeking to establish reimbursement for VNS therapy to treat refractory depression. If successful, this additional level of reimbursement could help boost neuromodulation returns. However, we’re not particularly optimistic. The body of clinical evidence on efficacy is mixed, and LivaNova’s own data is as well.

We’re less positive about LivaNova’s cardiopulmonary segment, which we do not think possesses any moat. While LivaNova enjoys a leadership position in heart-lung machines with an estimated 70% market share, we do not think the firm is able to flex maintained pricing power in this arena for several reasons.

First, LivaNova’s area of cardiopulmonary strength happens to be in the lower-margin capital equipment—the heart-lung machines. These machines can range in price from $350,000 to $500,000. As we’ve often seen in healthcare, margins on the expensive capital equipment are typically significantly lower than on the per-procedure consumables.

Second, LivaNova’s heart-lung machines are generally open systems, which means the perfusionist can mix and match the consumable oxygenator with the pumping equipment. Considering LivaNova is one of three top-tier competitors in oxygenators, there are alternative oxygenators being used with LivaNova’s heart-lung machine. Thus, there are no switching costs that would result in an ongoing stream of higher-margin consumables.

From an environmental, social, and governance standpoint, Sustainalytics gives LivaNova a Medium Risk Rating, which reflects medium exposure to product governance issues, coupled with average mitigation measures. LivaNova's greatest area of exposure is product quality. Since its business includes a substantial chunk of life-sustaining products, the firm faces risks of product defects, recalls, and litigation. Based on what we've seen in previous cases of medical device recalls, we doubt a single recall would permanently impair the firm's reputation and relationships with practitioners, especially since the more profitable neuromodulation business is insulated from liability by how the Food and Drug Administration regulates medical devices and established case law.

However, in contrast with its larger rivals, LivaNova relies heavily on a narrow set of products, raising the probability that any single product recall could materially affect projected cash flows. Additionally, because there is such a thin spread between LivaNova's returns on invested capital and its weighted cost of capital, such a hit to cash flow could result in moderate destruction of value.

LivaNova continues to enjoy a large footprint in the heart-lung machine market, which comes with the sale of consumable oxygenators.

If hypoglossal nerve stimulation proves effective for sleep apnea, this could be a sizable growth opportunity for LivaNova.

LivaNova has developed expertise in smaller, more niche markets, which helps insulate the business from more intense competition seen elsewhere in medtech.

We think LivaNova has less bandwidth or infrastructure than larger competitors to integrate and optimize innovation following the acquisition of new technology.

GW Pharmaceuticals' cannabinoid-based Epidiolex for epilepsy caused a crimp in LivaNova's referral pipeline and leaves the firm exposed to other new medication-based therapies.

Given the safety and efficacy profile of Apnimed's AD109, it has a good chance of FDA approval and it could substantially shrink the market potential for LivaNova's device for obstructive sleep apnea.