LivaNova’s Advanced Circulatory Support Faces Post-COVID-19 Headwinds

After taking another look at our estimates, we’re reducing our fair value estimate on LivaNova LIVN to $53 per share from $60. This reflects our decreased expectations for the mature cardiopulmonary business, which is the less moaty segment of LivaNova. Additionally, we believe COVID-19 pulled forward demand for advanced circulatory support units (extracorporeal membrane oxygenation, or ECMO), which sets the stage for further declines in that area through 2023 and lukewarm growth in 2024. ECMO is primarily used for extremely ill patients who need to rely on the machine to take over heart-lung functions in order to give the patient time to heal those organs. This came in very handy for COVID-19 patients with severe lung damage. However, ECMO remains a niche therapy, and we suspect that hospitals may find their ECMO capacity sufficient now that we’re beyond the pandemic emergency.

We continue to assume profitability improves as the product mix gradually shifts away from the cardiopulmonary portfolio and toward neuromodulation. On a consolidated basis, we expect mid-single-digit top-line growth and operating margin to improve by 400 basis points through the next five years.

Over the long term, we continue to hold tempered expectations for cardiopulmonary growth in the low single digits annually. We assume neuromodulation will average over 7% growth annually through 2027, supported by pent-up demand for replacements as well as more gradual return of de novo implants. Even with Medtronic’s entrance into the refractory epilepsy market, 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 stem losses to Medtronic.