LivaNova: Abrupt CEO Resignation Holds Few Surprises as Shares Rise

While the resignation of LivaNova LIVN CEO Damien McDonald was rather abrupt, it was not wholly surprising, from our perspective, and we’re leaving our fair value estimate unchanged. Shares rose 13% on this development and the firm’s indication that first-quarter results were better than expected. However, the stock still remains roughly 9% below our intrinsic value. The management changeover holds few implications for LivaNova’s narrow economic moat, which remains rooted in intangible assets as well as switching costs associated with its neuromodulation devices. The board is moving forward with the executive search, and board chair William Kozy will take on the CEO role in the interim.

We speculate that in the wake of a string of pipeline disappointments it became increasingly difficult for McDonald to remain in his position, and the board may have lost patience. The firm made a number of acquisitions of emerging technology and had also invested in clinical trials to widen the application of its vagus nerve stimulation, or VNS. However, LivaNova scrapped development on its Caisson transcatheter mitral valve replacement in late 2019—a key market that we anticipate will drive growth in cardiac devices over the next decade. More recently, the firm halted development of VNS for heart failure.

We view LivaNova’s current situation as the unfortunate combination of structural challenges the firm faces as a smaller competitor with fewer resources and poor capital allocation decisions made on McDonald’s watch. This has left the firm with an anemic pipeline and significant goodwill write-offs that give us little confidence that it can generate meaningful innovation. Although the prospect of new leadership is unlikely to substantially increase LivaNova’s bandwidth to accommodate more development programs, at least the management change opens up the possibility for improved capital allocation.