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LivaNova PLC Half-Year Report

At 30 June 2016

  Table of Contents

This Half-Year Report should be read in conjunction with our 2015 Annual Report, which includes a detailed analysis of our operations and activities.

These condensed consolidated interim financial statements have not been audited or reviewed.

Interim Management Report

Business Unit Highlights

LivaNova PLC and its subsidiaries (collectively, the "Company", "LivaNova", "we", or "our"), the successor registrant to Cyberonics, Inc., was incorporated in England and Wales on 20 February 2015 for the purpose of facilitating the business combination of Cyberonics, Inc., a Delaware corporation ("Cyberonics") and Sorin S.p.A., a joint stock company organized under the laws of Italy ("Sorin"). As a result of the business combination, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin. This business combination (the "Mergers") became effective on 19 October 2015, at which time LivaNova's ordinary shares were listed for trading on the NASDAQ Global Market ("NASDAQ") and on the London Stock Exchange (the "LSE") as a standard listing under the trading symbol "LIVN".

LivaNova is a global medical device company focused on the development and delivery of important therapeutic solutions for the benefit of patients, healthcare professionals and healthcare systems throughout the world. Working closely with medical professionals in the fields of Cardiac Surgery, Cardiac Rhythm Management and Neuromodulation, we design, develop, manufacture and sell innovative therapeutic solutions that are consistent with our mission to improve our patients' quality of life, increase the skills and capabilities of healthcare professionals and minimize healthcare costs.

In the first half of 2016, we operated our business through three segments, which we call Business Units:  Cardiac Surgery, Cardiac Rhythm Management and Neuromodulation. Each Business Unit corresponds to one of our three main therapeutic areas resulting from the strategic combination of Cyberonics and Sorin and aligned to best serve our customers and capitalize upon the benefits of the business combination. The historical Cyberonics operations are included under the Neuromodulation Business Unit.

Cardiac Surgery Business Unit

LivaNova's Cardiac Surgery Business Unit is engaged in the development, production and sale of cardiovascular surgery products, including oxygenators, heart-lung machines, perfusion tubing systems, cannulae and accessories and systems for autotransfusion and autologous blood washing, as well as implantable prostheses for the replacement or repair of heart valves. Cardiac Surgery consists of two sub-categories, Cardiopulmonary and Heart Valves. Cardiopulmonary products include oxygenators, heart-lung machines, perfusion tubing systems, cannulae and accessories and systems for autotransfusion and autologous blood washing. Heart Valve products include a comprehensive line of surgical tissue and mechanical valve replacements and repair products for damaged or diseased heart valves.

Cardiopulmonary Recent Developments

In December 2015, we received United States ("U.S.") Food and Drug Administration ("FDA") Warning Letter (the "Warning Letter") alleging certain violations of FDA regulations applicable to our Munich, Germany and Arvada, Colorado, U.S. manufacturing facilities. The Warning Letter included an immediate prohibition on the importation of 3T Heater Cooler devices to the U.S., though the Warning Letter did not request that existing users cease using the 3T Heater Cooler device.  While we cannot sell additional 3T Heater Cooler devices to new customers, we can service existing customers through a medically necessary protocol. We take these matters seriously and are working diligently to resolve the concerns raised by the FDA and to reduce any adverse impact this import restriction will have on existing U.S. customers of 3T Heater Cooler devices. We believe that the FDA's concerns can be resolved without a material impact on our financial results. Manufacturing and shipment of all of our products other than the 3T Heater Cooler are unaffected by this limitation at the present time and will continue as normal. For further information, please refer to "Note 17. Commitments and Contingencies " in our condensed consolidated financial statements included in this Half Year Report ended 30 June 2016.

Heart Valve Recent Developments

In January 2016, we announced FDA approval of our Perceval ^TM valve. Perceval ^TM is the only sutureless biological aortic replacement valve on the market today with a unique self-anchoring frame that enables the surgeon to replace the diseased valve without suturing it into place. While we have been selling Perceval ^TM in other parts of the world, we began commercial distribution of the device in the U.S. with the first implant announced on 8 March 2016. To date, the Perceval ^TM valve has been implanted in more than 15,000 patients in over 310 hospitals worldwide.

In addition, in early February 2016, we announced that we had received FDA approval of the CROWN PRT ^TM
 valve for the treatment of aortic valve disease.  The CROWN PRT ^TM is a stented aortic bioprosthesis technology and features a surgeon-friendly design, with optimized hemodynamics with patented PRT, designed to enhance valve durability.  We anticipate launching CROWN PRT ^TM  in the U.S. later this year.

In the production area, we entered into a supply agreement in March 2013 for the production of components for the Lotus ^TM system, Boston Scientific Corporation's second-generation device for transcatheter aortic valve replacement ("TAVR"). Under the terms of the agreement, LivaNova continues to perform certain stages of production of the tissue valve at our manufacturing facility in Vancouver, Canada.

Cardiac Rhythm Management Business Unit

The Cardiac Rhythm Management ("CRM") Business Unit develops, manufactures and markets products for the diagnosis, treatment, and management of heart rhythm disorders and heart failure. These products include implantable devices, leads and delivery systems and information systems for the management of patients with CRM devices.

CRM Recent Developments

The 2015 and the 2016 Reorganization Plans (the "Plans") were initiated October 2015 and March 2016, respectively, and were initiated in conjunction with the Mergers. These Plans are intended to leverage economies of scale, streamline distribution and logistics and strengthen operational and administrative effectiveness in order to reduce overall costs. Costs associated with these Plans were reported as restructuring expense in the operating results of our condensed consolidated statement of income (loss). As part of these Plans, certain activities previously undertaken within the New Ventures organization will be integrated into and combined with the CRM Business Unit. We estimate that these Plans will result in a net reduction in the workforce at our manufacturing and research and development ("R&D") facility located in Clamart, France. This plan also includes the closure of our R&D facility in Meylan, France and consolidation of the R&D capabilities into the Clamart facility.

In November 2015, we launched the PLATINIUM ^TM ICD in Europe. During 2015, we continued the development of our IS4 PLATINIUM ^TM CRTD with SonR ^TM dedicated to the use of quadripolar left ventricular leads with IS-4 compatibilities. The development of new ranges of leads for defibrillation and left ventricular stimulation also enjoyed significant progress with the completion of the pre-qualification phase.

In June 2015, we announced the European launch of a full body MRI compatible pacemaker, the KORA 250 ^TM . The KORA 250 ^TM is equipped with our proprietary Automatic MRI mode. In addition, the device is designed to proactively manage comorbidities, including a pacing mode that manages all types of atrioventricular block ("AV"), referred to as "SafeR ^TM ", and the ability to monitor patients for severe sleep apnea using Sleep Apnea Monitoring ("SAM"). In the first quarter of 2016, the KORA 250 ^TM was approved and launched in Japan.

In June 2013, following FDA approval to initiate a clinical trial under an Investigational Device Exemption ("IDE"), the first patients were enrolled in the U.S. in the Respond CRT ^TM clinical trial. The purpose of this trial is to assess the safety and effectiveness of the SonR CRT ^TM system in patients affected by advanced heart failure. In October 2014, Sorin announced having completed enrollment in the Respond CRT ^TM clinical trial, enrolling 1,039 patients in the study. In May 2016 we announced results from the Respond CRT ^TM clinical trial, showing that a 35% risk reduction in heart failure hospitalization was associated with SonR ^TM .

Neuromodulation Business Unit

Our Neuromodulation Business Unit designs, develops and markets neuromodulation-based medical devices for the treatment of epilepsy and depression.  Through this Business Unit, we market our proprietary implantable VNS Therapy® Systems that deliver vagus nerve stimulation therapy for the treatment of epilepsy and depression. In July 2005, the FDA approved our VNS Therapy® System for the adjunctive long-term treatment of chronic or recurrent depression for patients 18 years of age or older who have not had an adequate response to multiple anti-depressant treatments. Regulatory bodies in the European Economic Authority ("EEA"), Canada, Brazil, Mexico, Australia, Israel and certain other international markets have approved our VNS Therapy® products for the treatment of chronic or recurrent depression in patients who are in a treatment-resistant or treatment-intolerant depressive episode. Reimbursement for the use of VNS Therapy® to treat TRD is significantly limited in most countries in which it is available.

Neuromodulation Recent Developments

In June 2015, the FDA approved AspireSR ^TM for commercialization in the U.S.. Growth of VNS Therapy® products has been strong during the period following this approval. Acceptance of the new product, as evidenced by the proportion of generators sold, has been high, and pricing obtained for the product has been at a premium due to the unique nature of the device.

New Ventures

The New Ventures group was created to invest in significant, new growth opportunities. The three significant unmet clinical needs the New Ventures group is seeking to address are: heart failure, sleep apnea and mitral valve regurgitation.

New Ventures Recent Developments

Heart failure . In the heart failure area, New Ventures is currently managing three internal neurostimulation projects that are each aimed at treating heart failure through vagus nerve stimulation:  Equilia ^TM , VITARIA ^TM and Intense. Equilia ^TM is a first-generation device that benefited from the legacy Sorin business' acquisition of the Belgian company, Neurotech SA in 2012, which enhanced Sorin's technical expertise and intellectual property in the field of neurostimulation. The successful implantation of the first Equilia ^TM neurostimulation system device occurred in February 2015 as part of the Vanguard (Vagal Nerve Stimulation Safeguarding Heart Failure) clinical trial. The aim of the system is to treat heart failure through stimulation of the vagus nerve.

In February 2015, the legacy Cyberonics business received CE Mark approval of the VITARIA ^TM System for patients who have moderate to severe heart failure (New York Heart Association Class II/III) with left ventricular dysfunction (ejection fraction < 40 per cent.) and who remain symptomatic despite stable, optimal heart failure drug therapy. The VITARIA ^TM System provides a specific method of VNS called autonomic regulation therapy ("ART"), and it includes the same elements as the VNS Therapy® System - pulse generator, lead, programming wand and software, programming computer, tunneling tool and accessory pack, but without the patient kit with magnets. Cyberonics conducted a pilot study, ANTHEM-HF, outside the U.S., which concluded during the quarter ended 24 October 2014. The study results support the safety of ART delivered by the VITARIA ^TM System. Cyberonics submitted the results to its European Notified Body, DEKRA, and on 20 February 2015, it received CE Mark approval. Cyberonics also initiated a second pilot study, ANTHEM-HfpEF, to study ART in patients experiencing symptomatic heart failure with preserved ejection fraction. This pilot study is currently underway outside the U.S..

The other principal New Ventures heart failure initiative, Intense, is a broader project that is partially subsidized by the French government through Banque Publique d'Investissement.

With the completion of the Mergers, the New Ventures group is continuing to evaluate the appropriate course of action for each project, which could include future development efforts such as additional clinical trials or re-evaluation of certain projects.

Sleep Apnea . In October 2014, Sorin invested $20 million in Respicardia, a U.S.-based developer of implantable therapies designed to improve Respiratory Rhythm Management and cardiovascular health. Respicardia's remedé® System is an implantable device system designed to restore a more natural breathing pattern during sleep in patients with central sleep apnea ("CSA") by transvenously stimulating the phrenic nerve.  The remedé® System received CE Mark certification in 2010 and is currently available in certain countries in Europe.  Results from a randomized, controlled pivotal trial were reported at the European Society of Cardiology - Heart Failure meeting in May 2016.  Investigators reported that patients in the treatment group were significantly more likely to have a reduction in Apnea Hypopnea Index ("AHI") of greater than or equal to 50% between baseline and 6 months (p<0.001) compared to patients in the control group.  This result was matched by significant improvements in other apnea-related parameters and quality of life measures.  The device was well-tolerated, with 91% of patients free from serious adverse events associated with implantation.  Respicardia expects to apply for U.S. FDA approval later this year.

Cyberonics completed an investment of $12.0 million in ImThera Medical, Inc. ("ImThera") by December 2013. ImThera is a privately held company developing an implantable neurostimulation device system for the treatment of obstructive sleep apnea ("OSA"). The aura6000® System stimulates the hypoglossal nerve to treat OSA. In November 2014, ImThera announced that the U.S. FDA approved an IDE for their pivotal clinical study and patient enrollment has commenced.  Additionally, in 2013, Cyberonics acquired the assets of Apnex Medical, a privately held medical device company developing an implantable neurostimulation device system for the treatment of OSA.  The Apnex HGNS System is an implantable therapy that is intended to work by activating the muscles in the upper airway to ensure that the airway remains open during sleep.

Mitral valve regurgitation. Sorin also invested in three mitral valve startups. Cardiosolutions Inc., a startup headquartered in the U.S. is developing an innovative Spacer technology for treating mitral regurgitation. In addition, Highlife S.A.S. ("Highlife"), headquartered in France, and Caisson Interventional LLC ("Caisson"), headquartered in the U.S., are two external companies focused on developing devices for treating mitral regurgitation through percutaneous replacement of the native mitral valve. Although both ventures are focused on mitral valve replacement, their devices differ significantly in both the delivery system (transapical versus transfemoral) and the anchoring system. We loaned an additional $2.8 million to Highlife S.A.S and additional $1.0 million to Caisson Interventional LLC during the six months ended 30 June 2016.

Results For The Six Months Ended 30 June 2016

The merger of Cyberonics and Sorin on 19 October 2015 was considered a business combination with Cyberonics considered the acquirer of Sorin using the acquisition method of accounting. As a result, Sorin's assets and liabilities were acquired at their estimated fair values. In addition, LivaNova became the holding company of the combined businesses of Cyberonics and Sorin and the "successor" company to Cyberonics for accounting purposes. We are reporting the results for LivaNova and its consolidated subsidiaries for the period 1 January 2016 to 30 June 2016, which is the first half of the fiscal year ended 31 December 2016. In addition, we are reporting the historical results of Cyberonics and its consolidated subsidiaries for the twenty-six weeks ended 24 July 2015, as the comparative prior fiscal year period, which consists of the thirteen weeks ended 24 April 2015, or the fourth quarter of Cyberonics' fiscal year ended 24 April 2015 and the thirteen weeks ended 24 July 2015, or the first quarter of the transitional fiscal year that ended 31 December 2015.

Upon completion of the Mergers, we reorganized our reporting structure and aligned our segments and the underlying divisions and businesses. The Cyberonics operations and historical data are now included in the Neuromodulation segment, and the Sorin operations are included in the Cardiac Surgery and the CRM segments. Refer to "Note 18. Segment Information " to review the condensed consolidated financial statements included in this half year report ended 30 June 2016 for additional discussion related to our segment reporting.

Net Sales

The table below illustrates net sales by operating segment (in thousands, except for percentages):

(1) We developed the equivalent prior period data using unaudited historical Cyberonics' data.

The Cardiac Surgery and CRM segment sales occurred from 1 January 2016 to 30 June 2016, as a result of the Mergers on 19 October 2015.

Neuromodulation net sales for the six months ended 30 June 2016 increased by $16.3 million or 10.5%, as compared to the twenty-six weeks ended 24 July 2015. Revenue growth was due to an increase in revenue of 14.9% in the U.S. market and a 9.4% decrease in revenue in non-U.S. markets. The revenue increase in the U.S. market resulted from an increase in the average selling price of generators of 12.8% and an increase in generator unit sales of 2.1%. The increase in the average selling price was primarily due to product mix with an increased market penetration of the higher priced AspireSR® generator. The decrease in revenue in non-U.S. markets resulted from a decrease in generator unit sales of 8.7% and a decrease in the average selling price of 0.7%. The decrease in the average selling price was primarily due to unfavourable foreign exchange rates although partially offset by an increase in sales of leads. The decrease in international unit volume was primarily due to the drop-off of sales activity in Venezuela.

The table below illustrates net sales by market geography (in thousands):

(1) Includes those countries in Europe where LivaNova has a direct sales presence. Countries where sales are made through distributors are included in Rest of World.

Cost of Sales and Expenses

The table below illustrates our cost of sales and major expenses as a percentage of sales for the six months ended 30 June 2016 as compared to the twenty-six weeks ended 24 July 2015. We developed the equivalent prior period data using unaudited historical Cyberonics' data:

Cost of Sales

Cost of sales consisted primarily of direct labor, allocated manufacturing overhead, the acquisition cost of raw materials and components. Our cost of sales as a percentage of net sales increased to 42.6% for the six months ended 30 June 2016, as compared to 10.9% reported for Cyberonics' historical data for the twenty-six weeks ended 24 July 2015. This increase was primarily due to the inclusion of Sorin's business activities after the Mergers. The amortisation of the step-up in inventory basis at the Mergers accounted for 5.8% of our cost of sales as a percent of net sales for the six months ended 30 June 2016.

Selling, General and Administrative ("SG&A") Expenses

SG&A expenses are comprised of sales, marketing, general and administrative activities. SG&A expenses exclude expenses incurred in connection with the merger between Cyberonics and Sorin, integration costs after the Mergers and restructuring costs under the 2015 and 2016 Restructuring Plans initiated after the Mergers.

SG&A expenses as a percentage of net sales for the six months ended 30 June 2016 was 41.3%, as compared to 40.6% for the twenty-six weeks ended 24 July 2015. This increase was primarily due to the increase in amortisation of intangible assets, partially offset by a reimbursement received from the Italian government for the May 2012 earthquake. Amortisation of intangible assets recorded in SG&A for the six months ended 30 June 2016 increased as compared to the twenty-six weeks ended 24 July 2015 due to amortisation of the stepped-up basis of Sorin's  intangible assets at the Mergers, principally related to Sorin's customer relationships. In addition, in May 2016, we received a grant of $4.7 million from the Italian government, the Regione Emilia Romagna, as a reimbursement and offset to the costs Sorin incurred as a consequence of the earthquake of May 2012 in Italy, which we recorded as a reduction to SG&A expenses for the quarter ended 30 June 2016.

Research and Development ("R&D") Expenses

R&D expenses consist of product design and development efforts, clinical trial programs and regulatory activities. R&D expense as a percentage of net sales was 11.4% and 13.7% for the six months ended 30 June 2016 and the twenty-six weeks ended 24 July 2015, respectively. This decrease was due to the completion of certain R&D projects and the reduction of R&D work as a result of our ongoing review of projects and priorities in conjunction with the 2015 and 2016 Reorganization Plans.

Exceptional Items

Merger and Integration Expenses. Our merger and integration expenses consisted primarily of consulting costs associated with computer systems integration efforts, organization structure integration, synergy and tax planning, as well as the integration of internal controls for the two legacy organizations. In addition, integration expenses include retention bonuses, branding and renaming efforts and lease cancellation penalties in Milan and Brussels.

During the six months ended 30 June 2016, we incurred $13.0 million in merger and integration expenses. We reported these expenses as a part of exceptional items separately in the condensed consolidated statements of income (loss). For the twenty-six weeks ended 24 July 2015 our merger and integration expenses were $15.2 million.  These expenses decreased by $2.2 million due to a reduction in merger cost post 19 October 2015 partly offset by integration cost.

Restructuring Expenses. Restructuring expenses were primarily due to our efforts under our 2015 and 2016 Reorganization Plans to leverage economies of scale, eliminate duplicate corporate expenses and streamline distributions, logistics and office functions in order to reduce overall costs. We reported these expenses as a part of exceptional items separately in the condensed consolidated statements of income (loss).  We incurred restructuring expenses of $32.8 million in the six months ended 30 June 2016. There were no restructuring expenses in the comparative twenty-six weeks ended 24 July 2015.

Impairment of available-for-sale assets. During the twenty-six weeks ended 24 July 2015, an impairment of $2.1 million in equity investment in Cerbomed GmbH was recorded. There were no impairments of available-for-sale assets during the period ended 30 June 2016.

Litigation Related Expenses. We report separately certain litigation expenses as part of exceptional items in the condensed consolidated statements of income (loss). For the six months ended 30 June 2016, we reported $2.3 million of litigation expense related to: (i) the FDA Warning Letter regarding our 3T Heater Cooler devices we manufactured at our Munich facility, and (ii) the SNIA S.p.A litigation regarding potential liabilities arising from claims for environmental damage. There were no litigation related expenses in the comparative twenty-six weeks ended 24 July 2015.

Interest Expense, Net of Interest Income

We incurred interest expense, net of interest income, of $2.6 million for the six months ended 30 June 2016 and interest income, net of interest expense, of $56 thousand for the twenty-six weeks ended 24 July 2015. Interest expense for the six months ended 30 June 2016 was primarily interest due the U.S. Internal Revenue Service ("IRS") related to the installment sale of intellectual property to our United Kingdom ("U.K.") subsidiary and interest expense related to the debt acquired in the Mergers.

Foreign Exchange and Other, Net

Foreign exchange and other, net loss of $1.2 million was recognised during the six months ended 30 June 2016, respectively. This net loss was primarily due to foreign exchange gains and losses on inter-company debt and related freestanding foreign exchange derivative contracts and foreign exchange gains and losses from partially hedged third party financial assets and liabilities. For the twenty-six weeks ended 24 July 2015, foreign exchange and other, net gain of $0.1 million consisted primarily of foreign exchange gains related to an intercompany trade account.

Income Taxes

Our effective tax rate was (298.9)% for the six months ended 30 June 2016. This rate differed from the U.K. statutory rate of 20% primarily due to the tax impact of the intellectual property migration and to not recording a deferred tax benefit on losses of $17.7 million primarily in France and the U.K., as well as the tax expense generated by profitable operations in higher tax jurisdictions, such as the U.S. and Germany, offset by tax savings from our inter-co financing, which we entered into as part of our 2015 tax restructuring.

We have consolidated certain of our intangible assets into an entity organized under the laws of England and Wales.  As a result, a deferred tax liability was established in the selling jurisdiction to recognise the future tax liability of the sale in the amount of $156 million and a corresponding deferred tax asset was recorded in the buying jurisdiction to recognise the future tax benefit of the amortisation of the purchased intangibles in the amount of $76 million.  As a result, the impact to deferred tax expense at the time of this transaction is approximately $80 million.

The effective tax rate for the historical Cyberonics activity for the twenty-six weeks ended 24 July 2015 was 39.8%. This rate was primarily comprised of the U.S. federal income tax rate of 35%, plus state and foreign income taxes and permanent differences.

In April 2016, the Guardia di Finanza, the Italian enforcement agency, under the authority of the Minister of Economy and Finance, commenced an audit of Sorin Group Italia Srl for tax years 2015 and 2014. At this time we are unable to predict the results of the audit.

In April 2016, the U.S. IRS and U.S. Treasury Department issued new rules that materially change the manner in which the determination is made as to whether the U.S. anti-inversion rules under Section 7874 will apply.  The new rules have the effect of linking certain future acquisitions of U.S. businesses made in exchange for LivaNova equity with the Mergers, and such linkage may impact our ability to engage in particular acquisition strategies.  For example, the new temporary regulations would impact certain acquisitions of U.S. companies in an exchange for stock in LivaNova during the 36 month period beginning 19 October 2015 by excluding from the Section 7874 calculations the portion of shares of LivaNova that are allocable to the legacy Cyberonics shareholders.  This new rule would generally have the effect of increasing the otherwise applicable Section 7874 fraction with respect to future acquisitions of a U.S. business, thereby increasing the risk that such acquisition could cause LivaNova to be treated as a U.S. corporation for U.S. federal income tax purposes.

In April 2016, the U.S. IRS and U.S. Treasury Department issued section 385 which provides that certain intercompany debt instruments issued on or after 4 April 2016 will be treated as equity for U.S. federal income tax purposes, therefore limiting U.S. tax benefits and resulting in possible U.S. withholding taxes.  Moreover, while these new rules are not retroactive, they may result in our existing debt instruments being treated as reissued, will impact our future intercompany transactions and our ability to engage in future restructuring. These new rules may also impact intercompany transactions relating to financing, treasury, and inventory movements.

Risks & Uncertainties

There are a number of potential risks and uncertainties which could have a material impact on LivaNova's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results.  For the remainder of 2016 we view our principal risks as relating to the following:

• Global healthcare policy changes, including U.S. healthcare reform legislation, may have a material adverse effect on LivaNova.
• LivaNova may be unable to obtain and maintain adequate third-party reimbursement on its products, which could have a significant negative impact on its future operating results.
• Cost-containment pressures and legislative or administrative reforms resulting in restrictive reimbursement practices of thir