LivaNova PLC (LIVN) Q4 2018 Earnings Conference Call Transcript

LIVN earnings call for the period ending December 31, 2018.

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LivaNova PLC  (NASDAQ:LIVN)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 8:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the LivaNova PLC's Fourth Quarter and Full Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. 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.

Matthew Dodds -- Senior Vice President of Corporate Development

Thank you, Leandra and welcome to our conference call and webcast discussing LivaNova's financial results for the fourth quarter and full year 2018. 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 Investors 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 is available on our website. We do not undertake to update any forward-looking statements.

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 is 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 materials 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.

Damien McDonald -- Chief Executive Officer

Thanks, Matt. Welcome to our Fourth Quarter and Full Year 2018 Conference Call. This was a transformative year for LivaNova and our portfolio. In addition to closing the sale of our CRM business, we also completed the acquisitions of ImThera and TandemLife. The results from this quarter and the full year reflect the success of our growth strategy as we achieved strong sales growth, expanded gross margins, increased R&D to fuel our pipeline and further integrated our recent acquisitions.

I am going to provide some highlights and then discuss our sales results by business. And after my comments Thad will provide you with additional color on the financials, updates on our Form 10-K filings and the 2019 guidance. Then I'll wrap up with closing comments before moving on to Q&A.

So starting with recent events and quarterly highlights. On February 15, CMS finalized its national coverage determination for the use of VNS Therapy for the treatment-resistant depression or TRD. We are pleased to see that CMS meaningfully expanded the potential beneficiaries to include patients with bipolar disorder. In addition, CMS expanded its research questions to include response to treatment, as a primary outcome measure. This provides a much better gauge of benefit to this very ill patient population, a preference shared by both us and clinicians. We are now working with CMS to finalize details of the study and at current projection, is to begin enrollment in the third quarter of 2019. We expect the study size to be approximately 500 patients and enrollment to take 18 months. This is a monumental step forward for patients with this severely debilitating disease and to have a potential treatment alternative. We'd like to thank CMS for the careful consideration of the input from all stakeholders in reaching this important decision.

Perceval has received two positive outcomes on the clinical and regulatory front since the beginning of the year. First, we announced on February 21, the Japan's Ministry of Health, Labor and Welfare granted favorable national reimbursement for Perceval to treat aortic valve disease. By adding Perceval to Japan's health insurance system, physicians and patients have greater access to this versatile biological heart valve. Second, we announced on February 25 that we added new safety and technical information to the Perceval instructions for use in the US to support valve and valve procedures.

Next, we continue to make good progress in the ANTHEM-HFrEF pivotal trial. As you may recall, the study is evaluating a VITARIA System that delivers Autonomic Regulation Therapy via VNS. Sites activated in Europe and North America, patients are being enrolled and randomized to therapy and control arms. The total number of randomized subjects is based on an adaptive design, which was highly encouraged by the FDA.

In addition, three posters will be presented at the upcoming American College of Cardiology meeting in New Orleans on March 16. These posters provide additional insights regarding a therapeutic approach and will include longer-term follow-up data from the original ANTHEM pilot study, and should provide additional insight on the durability of this new promising therapies that addresses a large unmet need in healthcare.

Turning to obstructive sleep apnea, we remain in discussions with the FDA on the design of a confirmatory study for our THN system for the treatment of obstructive sleep apnea and expect to start this trial in 2019 .

And regarding transcatheter mitral valve replacement or TMVR, we recently stopped the interlude trial after experiencing seriously adverse events in two patients. Our analysis of recourse is determined that the anchor system will require design modification and our current expectation is to restart trial enrollment in the first half of 2020.

Turning now to our net sales results for the fourth quarter, which will all stated on a constant currency basis. Total net sales were up by robust 9.2%, both Neuromodulation and Cardiovascular showed strong growth in the quarter compared to the fourth quarter of 2017. Cardiovascular sales were $183 million, up 6.1% from the fourth quarter of 2017 due to growth in cardiopulmonary and the inclusion of advanced circulatory support. Cardiopulmonary sales were $147 million in the quarter, an increase of 6.8% versus the fourth quarter of 2017. Heart-lung machine sales grew in the low double digits, driven by strength in both S3 conversions and competitive placements.

And our oxygenator sales also grew in the low double digits, driven by strength in our international markets. In the US, we recorded several competitive conversions in the back half of the year that should set this business up for a solid 2019. Our autotransfusion business declined modestly in the quarter, as trends in this business can be a bit lumpy and while we're seeing mid single digits growth for the full year.

Turning to heart valves; sales for heart valves were $29 million in the quarter, a decline of 17.1% versus the fourth quarter of 2017. Excluding the impact of Japan and the OEM contract termination, sales declined 4.1%. Perceval declined in the mid single digits overall, and high single digits growth in the US and Europe was offset by unfavorable international sales.

Advanced circulatory support reflects our recently acquired TandemLife business. We were very pleased to see sales in the fourth quarter in excess of $7 million, representing greater than 20% growth versus fourth quarter of 2017. The business saw strength across the board, especially in the Protek Duo category.

So now let's turn to Neuromodulation. Sales were $114 million, up 14.5% versus a strong performance in the fourth quarter of 2017. In the US, sales increased 10% driven by similar growth in initial implants and end-of-service implants, despite challenging comparisons for both. US adoption of SenTiva continues to increase and represented 63% of our generated sales in the fourth quarter. We saw 20% sales growth in Europe, based on the continued adoption of SenTiva, which was launched last April. EU adoption of SenTiva is now more than 50% of generated sales with strong uptake in the UK, Nordics and Italy. Our Rest of World region delivered greater than 75% growth driven by strong performance in China, Japan and Latin America.

I'll now turn the call over to Thad, for an overview of our financial results. Thad.

Thad Huston -- Chief Financial Officer

Thank you, Damien. I'm going to discuss the fourth quarter financials in greater detail, provide our initial 2019 guidance and walk through some accounting items that occurred this quarter. As Damien mentioned, sales growth in the fourth quarter was 9.2% versus the fourth quarter of 2017, led by double-digit growth in Neuromodulation, HLMs and oxygenators.

Adjusted gross margin as a percent of net sales in the quarter was 69%, up 470 basis points from the fourth quarter of 2017. The margin improvement was primarily driven by price and mix. And for the fourth quarter of 2018 -- sorry, for the full year of 2018, the gross margin was 68.1%, up 240 basis points versus our 2017 Investor Day goal of 100 basis points per year.

Adjusted R&D expense in the fourth quarter was $36 million, compared to $31 million in the fourth quarter of 2017. R&D as a percentage of net sales was 12.2% versus 11.1% in the fourth quarter of 2017. As we previously discussed, R&D is increasing behind the development of next-generation products including HLM, SenTiva and TandemLife, along with clinical trials and strategic investments in TRD, TMVR, sleep apnea and heart failure. For the full year 2018, R&D expense was $136 million, up 42.8% versus the prior year and representing 12.3% of net sales.

Adjusted SG&A expense for the fourth quarter was $101 million compared to $92 million in the fourth quarter of 2017 and flat sequentially. SG&A as a percentage of net sales was 33.9%, up 80 basis points versus the fourth quarter of 2017. This increase is largely due to US investments in a DTC campaign for epilepsy, advanced circulatory support, commercial capabilities and strengthening our commercial organization in international markets.

Adjusted operating income from continuing operations was $68 million compared to $56 million in the fourth quarter of last year, which reflects an improvement in gross margin, partially offset by investments in our key growth drivers in R&D. Adjusted operating margin from continuing operations improved 280 basis points to 22.8%. Our adjusted effective tax rate in the quarter was 16%, an improvement from 20.3% in the fourth quarter of 2017, as a result of our ongoing tax efforts and the recent changes in US and UK tax laws.

Finally, adjusted diluted EPS from continuing operations in the quarter was $1.12, an increase of 27.3% compared to the fourth quarter of 2017. For the full year 2018, adjusted diluted EPS was $3.55, an increase of 7.3% compared to the prior year period.

Now moving to cash flow; our cash flow from operations for the year ended December 31st 2018 was $120.5 million. Cash flow from operations, excluding payments for one-time integration and restructuring cost was $217 million, up 39% versus prior year.

Capital spending for the full year was $38 million compared to $34 million for the full year 2017. Our cash balance at December 31st 2018 was $47 million, down from $94 million at December 31st 2017. Our net debt at year-end was $124 million, up from $50 million at the end of the year 2017, impacted by M&A and share repurchases.

As Damien mentioned, and as noted in our press release, there are few other important accounting items to discuss. In the fourth quarter of 2018, we established a $294 million pre-tax provision related to litigation involving the Company's 3T Heater-Cooler, because we now have enough information about the claims to estimate a reserve.

We believe the reserve, which does not reflect any insurance recovery is sufficient to address these outstanding global legal claims. We received $350 million in aggregate financing commitments from Bank of America Merrill Lynch, Barclays, BNP Paribas and Intesa Sanpaolo for a debt facility to increase our debt capacity and provide additional liquidity for estimated future cash payments related to this provision.

I'd like to now address some accounting items that were identified this quarter. In 2018, there was significant complexity carving out the CRM business and expanding our SCP platform globally. As a result, we identified two deficiencies in the design of two internal controls and we expect to report two material weaknesses. First, we identified a deficiency related to the design controls intended to restrict access to our primary financial system, resulting in a potential and appropriate access at both the information technology and end user levels. Second, we identify the deficiency related to the review of price and quantity in the billing processes. This billing process issue is linked to the deficiency related to access of our primary financial system.

We expect to file a Form 12b-25 with the Securities and Exchange Commission providing for a 15-calendar-day extension for our Form 10-K, and we also expect to file the Form 10-K prior to the expiration of the extension. No material misstatements have been identified and we believe that our consolidated financial statements are accurate in all material respects.

We have initiated remediation efforts and we are performing a comprehensive review of the financial reporting application, which the deficiencies were identified in order to provide our IT control, improve our IT controls. In addition, we are enhancing the design controls over the billing process to prevent the possibility of price and quantity years. Our objective is to complete remediation in 2019.

Now turning to 2019 guidance; first, I'll discuss the TRD opportunity and then provide detail on overall 2019 guidance. As you heard in Damien's comments, we have refined our expectations on the reimbursement pathway for obtaining CMS coverage for TRD patients. Given the timing of our clinical study start and the infrastructure build for replacements in private payer engagement, we expect revenue from TRD to be in the range of $5 million to $10 million in the second half of 2019. While CMS has agreed to pay for the VNS Therapy Systems used in a clinical study and for replacement implants, we will incur additional R&D costs for study management such as the CRO, electronic data capture, psychiatric core lab and additional clinical headcount.

Our sales and marketing spend is geared toward device replacement, and initial engagement of private payers and will include field-based therapeutic consultants, market access specialists, patient assistant programs and professional education. Overall, we expect our TRD initiative to be approximately $0.15 to $0.20 dilutive to earnings per share in 2019. In 2020, our current expectation is that we will generate sales of $20 million to $30 million and the impact to earnings per share will be less dilutive compared to 2019.

Given our success in creating a $400 million epilepsy franchise, we believe this initial investment in TRD is modest given the market opportunity. In terms of overall guidance, we are forecasting 2019 sales growth of between 5% and 7% on a constant currency basis. If current exchange rates remain unchanged, the Company full year revenue guidance will be negatively impacted by 1%. Also note that this guidance includes one quarter of sales from TandemLife prior to the deal closing in April 2018, and the impact of exiting a low margin OEM distribution agreement in Canada that represented $32 million in sales in 2018.

Adjusted gross margin in 2019 is projected to be in the 69% to 70% range. In 2019, we expect adjusted R&D to be in the range of 12.5% to 13.5% of sales and adjusted SG&A to be in the range of 37% to 39% of sales, with TRD having added an additional 50 basis points to each range. As a result of these factors, we are projecting 2019 adjusted operating margin from continuing operations to be in the 18% to 20% range, and our adjusted effective tax rate for 2019 to be in a range of 17% to 19%. We are projecting adjusted diluted earnings per share from continuing operations to be in the range of $3.55 to $3.75, which includes a negligible impact from foreign currency, the previous disclosed negative impact of $0.12 to $0.14 to account for the OEM transition in Canada and the aforementioned $0.15 to $0.20 impact from TRD. We assume our share count to be approximately 49.5 million. While we don't provide quarterly guidance, our sales pace is lower in the first and third quarters, where expenses are generally more evenly spread out. In particular, the first quarter is historically our softest earnings quarter.

Our adjusted cash flow from operations for 2019 excluding integration, restructuring, product remediation and litigation payments is projected to be in the range of $180 million to $200 million. The integration, restructuring, product remediation payments are expected to be in the range of $55 million to $65 million. Capital spending is projected to be between $38 million and $42 million and depreciation and amortization expense is expected to be in the range of $28 million to $30 million.

From a financial perspective, we are delivering on our financial commitments by accelerating growth, investing and building global capabilities and a strong product portfolio while improving working capital and addressing our 3T liability. This positions us well for a bright future and an exciting 2019.

With that I'll turn the call back to Damien for some final comments.

Damien McDonald -- Chief Executive Officer

Thanks, Thad. I'm very encouraged by our progress on a number of fronts in 2018. We delivered sales growth above the upper end of our guidance while improving gross margin through pricing discipline, product mix and cost efficiencies. We're also making significant investments in our future, expanding our pipeline, innovating next-generation products and funding studies for our growth drivers and strategic portfolio initiatives which include TRD heart failure, obstructive sleep apnea and TMVR.

In Cardiovascular, we continue to drive upgrades of S5 heart-lung machines and improve growth in oxygenators and other products in the Cardiopulmonary portfolio. TandemLife is off to a great start and should benefit in 2019 from both our commercial expansion and approval of our next generation pump .

In Neuromodulation, we continue to see the increased demand for the SenTiva VNS Therapy System in the US and Europe, and should see the benefits of our DTC campaign begin to kick in. We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value.

And with that, Leandra, we're ready for questions.


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Questions and Answers:

Operator

(Operator Instructions) And your first question comes from the line of Rick Wise with Stifel. Your line is open.

Rick Wise -- Stifel Nicolaus -- Analyst

Hi. Good morning, Damien. Good morning everybody.

Damien McDonald -- Chief Executive Officer

Hi, Rick.

Thad Huston -- Chief Financial Officer

Good morning.

Rick Wise -- Stifel Nicolaus -- Analyst

Let me just start this off if you would give a little more color on the TRD decision trial and you indicated that you're hoping to get under way in the third quarter. Can you give us any better sense of how many centers the US, OUS mix if any, and just your thoughts just even at the roughest level about timing in terms of enrollment and just some of the big metrics that you'd want us to focus on over the next 12 to 24 months?

Damien McDonald -- Chief Executive Officer

Yeah. Sure. Thanks, Rick. We are really thrilled about this news for TRD. It's been a legacy campaign for a lot of people and the team is excited about this opportunity, so not only us, but the patients. And if you look at the way we think this is panning out, 500 patients, 40 plus centers, we -- all of them are going to be in the US. And you think about the timeline, we've got discussions with CMS just to finalize the protocol for the study, that's one to three months. Then we start going through the IRB process with the various clinics and negotiate the trial agreements with the studies and then we begin enrolling. So all of that leads us to kicking off in Q3 and we've talked before about the LivaNova business system and the discipline, the team has done a phenomenal job of building out the whole way we're going to track this, the accounts we've identified, the discussions we've had already. So we really liked what this is opening up for us.

Rick Wise -- Stifel Nicolaus -- Analyst

All right. And two other questions then and I'll move on. Maybe just give us a little more color on the DTC campaign on the epilepsy side. You said you hope to see the benefits kick in. Again a comprehensive research -- where you -- what -- why you're doing it now, what you hope to see from it one of those benefits you're talking about? And my, just the last question, if you could talk a little bit more about the mitral valve redesign issues, and how confident you are you can get after this and get this program back on track? Thanks so much.

Damien McDonald -- Chief Executive Officer

Yes. Thanks, Rick. So, the DTC, the whole point of this for us is about in creating demand for therapy in epilepsy. We think, clearly one of the issue is awareness of VNS as an opportunity in the whole treatment paradigm for epilepsy and we think DTC is the way to do. We started off with direct-to-physician to start talking about this and create awareness, then we started the DTC in the second half of the year. We're seeing definitely an increase in physician and patient engagement, the web metrics we're tracking have definitely ramped significantly, and we've also been doing some testing. We know that it's very responsive to the campaign, and you can see the metrics ramp up and down, when we turn it on and off. It's really quite fascinating and we've seen some bright spots on lead generation and conversion to therapy. So for us, this is about creating awareness. A lot to do with the carers, the families of patients. And because of the way we've approached it, we decided to turn it from a pilot into significant campaign for the 2019.

On mitral, yeah, this is one of the things about being in early stage development, is that you run into bumps and we definitely did with this one. And that's why we've leaned into it. We take our responsibility to the patients and the physicians who participated in our trials very seriously and we saw two adverse events in patients in Q4, and as a result, decided to stop the trial, while we understood where the issues were. We think that it's a design modification issue around the anchor system, not the valve itself, but the anchor, and that's why we press forwards and what we're going to do is reboot that design and the team is confident about getting back into the trial in 2020. That worked at a whole program to go through this and prototype and get back through the IRB process, so we can start enrolling in 2020.

Rick Wise -- Stifel Nicolaus -- Analyst

Thank you very much.

Damien McDonald -- Chief Executive Officer

Sure, Rick. Thank you.

Operator

Your next question comes from the line of Raj Denhoy with Jefferies. Your line is open.

Raj Denhoy -- Jefferies & Company -- Analyst

Hi. Good morning.

Damien McDonald -- Chief Executive Officer

Hi, Raj. How are you?

Raj Denhoy -- Jefferies & Company -- Analyst

Hey, pretty good, thanks. I wonder if maybe I could ask a few more on the depression progress here. So, and congratulations on the progress in the last few months. I'm curious about a couple of things. So the interim look at the data that CMS has provided in their ruling, can you maybe offer a bit more about how you think that will play out? Will it be just a look at the response endpoints, how many patients do you think are going to be required before you can take that look, really just any thoughts around how quickly we can get to that important point?

Melissa Farina -- Vice President of Investors Relations

Hey, Raj, this is Melissa. The vagus nerve (ph) study is approximately 200 patients and the -- they will be looking at all endpoints of the study. So primary and secondary endpoints of the study will be evaluated at that time.

Raj Denhoy -- Jefferies & Company -- Analyst

Okay. So both response and remission will need it -- will need to be -- you need to be showing some sort of efficacy on both those endpoints at that point.

Melissa Farina -- Vice President of Investors Relations

Yes. I think the movement to a longitudinal study doesn't -- isn't predicated on the secondary endpoints.

Raj Denhoy -- Jefferies & Company -- Analyst

Okay. Understood. And then the other question is around the control group, and whether it's going to be an active sham arm in a sense, will the patients in the control arm receives even low level stimulation or will the device be entirely off?

Melissa Farina -- Vice President of Investors Relations

So the final decision memo did leave that up to the clinician to whether the device would be on or off or at a sub-therapeutic stimulation.

Raj Denhoy -- Jefferies & Company -- Analyst

And you've not yet decided which that would be, or is that still being negotiated?

Melissa Farina -- Vice President of Investors Relations

Yeah. The device will likely be off during the trial.

Raj Denhoy -- Jefferies & Company -- Analyst

Okay. Fair enough and then...

Melissa Farina -- Vice President of Investors Relations

But not in final -- the final protocol.

Raj Denhoy -- Jefferies & Company -- Analyst

Okay. Great. And then, just wanted to ask a question on, you mentioned the impair of the sleep apnea trial that you're finalizing design with the FDA and you expect to start this year. Any updates on that timeline and what that trial will look like?

Damien McDonald -- Chief Executive Officer

Yeah. One of the things that we said when we talked about the THN3 trial, as you know, the issues around that stability in the protocol for a titration weren't very clear and we've done a bunch of work over the last three or four months. We took the last cohort of patients who were coming into that THN3 trial, titrated them with a different algorithm and saw a very definite change in the response. So using that we've got -- we've had discussions with the FDA about doing a confirmatory trial and going back and doing a small cohort of patients starting in 2019. We're going to meet with them in March and look at wrapping up the study design.

Raj Denhoy -- Jefferies & Company -- Analyst

When you say a small cohort. I guess I'm really just curious about when you think that trial could provide the evidence to support the approval of that technology?

Damien McDonald -- Chief Executive Officer

Yeah. I think we've got to just get through the discussions with the FDA, but we're pushing hard to start the trial in 2019.

Raj Denhoy -- Jefferies & Company -- Analyst

Okay. That's fair. Maybe just one last question, just on cash position and thoughts around M&A. So you've outlined some of the costs you anticipate around the heater cooler issue, you've taken on some additional capacity for debt around that. Maybe you could offer a bit more about what you think your capacity is for further M&A over the near term and your thoughts around whether you're likely to do further M&A to build out the portfolio over the near term?

Thad Huston -- Chief Financial Officer

Yeah. Thanks, Raj. I mean, first of all, we are very strong financially and we have been improving our working capital. We've accelerated growth and we're generating roughly $200 million in cash flow from operations every year. So we, of course, having this liability behind us. I think this is a prudent thing to do. As you know, M&A is always going to be part of our growth strategy, and we still have capacity to do acquisitions, we'll always look at alternative financing if we find the right thing. But clearly we have to address the current liability and that's why we were able to secure these commitments from the banks to address the 3T.

Raj Denhoy -- Jefferies & Company -- Analyst

Great. That's helpful. Thank you.

Operator

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

Scott Bardo -- Berenberg Bank -- Analyst

Yeah. Thanks for taking my questions, and three questions please. And so, firstly, wonder if you could give us a little bit more understanding of the provision that you've made for the 3T and what sort of inputs have led to that calculations with respect to potential claim numbers and so forth, and what gives you confidence that this will be adequate and not need to be extended at some point in the future?

And second question is an operational one, please appreciate. There's a lot going on from an innovation standpoint at LivaNova, but it was my feeling that management had a degree of comfort in somewhat stable operating margins in '19 and absorbing some of these impacts. I know that in your guidance framework, you're calling for an 18% to 20% margin. So highlighting prospects of 150 basis points decline at the low end. So can you talk a little bit, I mean, is there more cost than you expected in developing the pipeline here or what are some of the moving parts from your operational cost perspective that we need to consider now that perhaps we shouldn't have considered before?

And last question on Perceval, please, and obviously heart valves has been the perennial disappointment for LivaNova for the last five years or so and a pretty shocking number in the fourth quarter. So either within your guidance, you've highlighted expectations of double-digit growth from Perceval, can you please just add a little bit of flavor around that what underpins that confidence? What visibility do you have? Thanks.

Damien McDonald -- Chief Executive Officer

First of all, hi, Scott. Let's talk -- I'll talk about the 3T provision, why don't you jump in on the guidance in the SG&A, and I'll come back on Perceval. So for 3T, we think it's important to draw a line under this issue. And if you look at the total number of cases and the provision amount, we think this is a reasonable and appropriate number for us. But I think the thing for us is, we looked at the business decision at the time that this was taking the inconvenience, expensive continuing litigation, avoiding distractions from operations and also our mission of improving patient care. We really think that it's the right time to take this provision. And again, the fact that the banks, the four banks were able to provide the financial commitments was an important market for that. So this is about drawing a line under this legacy issue. You can talk about, yeah.

Thad Huston -- Chief Financial Officer

Yeah, absolutely. So thanks, Scott. We're super pleased with the growth of the business and the momentum that we see. And clearly, as we highlighted back in Investor Day that we had a very clear plan to invest in R&D in 2018 and then 2019 to help build out the pipeline, but then use gross margin to support a lot of these investments. If you look at the base business excluding TRD, we are growing our business both top and bottomline in a similar margin profile. We are making incremental investments in TRD, which is basically a 100 basis points on the operating margin. We think that that investment is prudent given the size of the opportunity.

Damien McDonald -- Chief Executive Officer

And lastly on Perceval, I think is perennially, it's we've got Q4 again was disappointing, but overall I think one of the bright spots for us is that overall in 2018 Perceval was double-digit growth. So I like the fact that it's a double-digit growth product. I still think there's plenty of work for us to do that the high single-digits that we had in the US and Europe in Q4 were outweighed by international ordering patterns, and I'd rather -- us build a sustainable business than just hit a double-digit number for the sake of it. So I can identify where the issues are and we are working on that. But as you say, it's been a disappointment and let me just say that the team are well aware that there is plenty of work to be done and we're expecting a significant effort in this portfolio.

Scott Bardo -- Berenberg Bank -- Analyst

Understood. Thanks very much, and just one quick follow-up. So the mitral program, obviously this is a complex program has been delayed several times since the inception, I think of Caisson. So I wonder, could you give us some flavor of when an impairment tests for Caisson acquisition would come into effect? Obviously it's been delayed further now. I just wonder what are the points do you decide to write off the asset altogether or not, and if you could just give some flavor of that, please?

Thad Huston -- Chief Financial Officer

Yeah, I mean, every year we have to do impairment testing on all the different things that we have in the pipeline. The value of Caisson in the market opportunity is still significant. It is unfortunately costing more and taking longer. So we have to continually look at the net present value of that. If you recall though, also we spend, I would say, a relatively modest amount for Caisson given that we had owned roughly half of the business previously. So to trigger an impairment hasn't been an issue per se, given the fact that we didn't actually spend that much for the asset.

Damien McDonald -- Chief Executive Officer

And I think importantly, the fact that the team have identified the root cause, they've developed a remediation plan and we know what the timeline looks like. We believe that the program is healthy, we just need to rectify these issues we have identified.

Scott Bardo -- Berenberg Bank -- Analyst

Understood. Thanks guys. I'll jump back in queue.

Damien McDonald -- Chief Executive Officer

Cheers, Scott.

Operator

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

Matthew O'Brien -- Piper Jaffray -- Analyst

Good morning. Thanks for taking the questions. Just to finish off the 3T commentary; when you say this is a reasonable estimate, is there any chance this could snowball into being much, much higher liability? And then when do you figure out whether or not the insurance providers are going to cover some of this liability?

Damien McDonald -- Chief Executive Officer

Yeah. So we don't believe so. We think this is a reasonable estimate, and we are in negotiations with the insurance companies that took to cover us. But we've taken a provision for the whole amount that we believe is reasonable.

Matthew O'Brien -- Piper Jaffray -- Analyst

Got it. Thanks. And then as far as TRD goes, I'm having a little bit of a hard time reconciling the commentary on the revenue you expect this year and next year. If memory serves, and please correct me if I'm wrong, I think you do about 100 replacement cases per year and then I know you said about 500 patients in total. So either I'm getting that 100 number wrong in the terms of the replacement folks per year or the ASP is much higher than I was expecting? So which are the two of it -- which of the two of those would it be?

Melissa Farina -- Vice President of Investors Relations

Though it's -- in that number is the replacement plus some incremental replacements due to the various changes in the final decision memo for the funding of replacement. Additionally, clinical trial units are also in there.

Damien McDonald -- Chief Executive Officer

Okay. So, sorry Melissa, just to tell a little bit finer point on that. If you do call it $7.5 million this year in the back half, that's 300 patients at an ASP of $25,000 apiece. And I think you do about 100 replacements that would be 200 enrolled this year is what you'd be expecting then.

Melissa Farina -- Vice President of Investors Relations

And then you have to consider the additional replacements due to the change in the final decision memo.

Thad Huston -- Chief Financial Officer

That's a combination of end of service plus the clinical.

Matthew O'Brien -- Piper Jaffray -- Analyst

Sure. I think the end of service -- my end of service is (multiple speakers) yeah.

Melissa Farina -- Vice President of Investors Relations

It's higher, exactly.

Thad Huston -- Chief Financial Officer

Right. Though we think, obviously, we're doing everything to accelerate build the capabilities to ensure we get the clinical up and running, but we're also trying to provide a range around that.

Matthew O'Brien -- Piper Jaffray -- Analyst

Okay. Maybe we can follow up offline, but that's a 1,000 patients roughly, the next year it's $25,000 ASP...

Thad Huston -- Chief Financial Officer

That's roughly -- yes, that's roughly what we're thinking at.

Matthew O'Brien -- Piper Jaffray -- Analyst

Got it. Okay. And lastly, just real quick. On the guidance for the core business, 4% to 6%, you're coming off a pretty good cardiopulmonary number Neuromod was a monster in '18. Where does that 4% to 6% growth come from, when you net out the 100 basis point in contribution from TRD this year?

Damien McDonald -- Chief Executive Officer

5% to 7%.

Matthew O'Brien -- Piper Jaffray -- Analyst

Sorry, when you net out the 100 basis points, yeah.

Thad Huston -- Chief Financial Officer

Got it. Yeah, so, we have great momentum and I guess to be -- we could have probably characterize this differently, but it's very similar to the growth momentum that we have this year as you may recall, we talked about this OEM Canadian distribution agreement that we're exiting, so that you have to back off $32 million there off the topline. So that's roughly 300 basis points. In addition, you have 1% due to FX. So I would say as we go into 2019, it's a very similar kind of growth trajectory that we're seeing today.

Damien McDonald -- Chief Executive Officer

And the bits we're leaning into specifically driving international, you see the results in international, continuing to improve the DTC, it's up driving epilepsy in the US and Europe, and ACS, we're again building heavily into TandemLife and we expect the productivity of that commercial group to really ramp. And in the second half, launching the next generation product for ACS and so that those things excluding TRD is really what we're leaning into.

Thad Huston -- Chief Financial Officer

Yeah. And that the $5 million and $10 million for TRD is about 30 basis points of the growth.

Matthew O'Brien -- Piper Jaffray -- Analyst

Got it. Okay. Very helpful. Thank you.

Thad Huston -- Chief Financial Officer

Thank you.

Operator

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

Matt Taylor -- UBS. -- Analyst

Hi. Good morning. Thanks for taking the question.

Damien McDonald -- Chief Executive Officer

Hi. Good morning, Matt. How are you?

Matt Taylor -- UBS. -- Analyst

Great. Damien, how are you. Firstly, I want to ask was, is just a follow-up on the TRD discussion. I was hoping you could -- I know you are in discussions, but I was hoping you could give us some flavor for what the trial structure could look like in terms of the primary and secondary endpoints to the extent that you can reveal any of that?

Damien McDonald -- Chief Executive Officer

When you -- primary -- yeah, so -- I mean right now our focus is obviously on response is our primary endpoint. We will look at remission as well. We said it will be double-blinded, randomized, controlled, approximately 500 patients. A lot of it is laid out and it's very consistent what we've talked then about in the past, which is why we feel pretty comfortable that by the end of March, we should have clarity with them. I am getting the trial, I guess, with this 500.

Matt Taylor -- UBS. -- Analyst

Yeah. Great. And then...

Damien McDonald -- Chief Executive Officer

The important, so as the important thing to add to is, the addition of the bipolar patients, that's 25% of the patient population were back in the pool, which we think is a really important inclusion that CMS came to.

Matt Taylor -- UBS. -- Analyst

Hey, thanks for that. And then on sleep apnea, could you talk about what that trial looks like and what the timeline could be if you started here in '19?

Damien McDonald -- Chief Executive Officer

Yeah. Not yet. It just give us a couple of dates until we met with the FDA in March, and then we'll come out and talk about it more clearly either as a separate press release or we'll talk about it in April. But just give us a couple of days with the FDA on that one. But we're really encouraged by what we saw in the titration improvements that we made over the last few months.

Matt Taylor -- UBS. -- Analyst

Okay and last one, I just wanted to clarify is on TMVR. I guess can you disclose what the adverse events were in -- more specifics on why you think the anchoring system is the right fit?

Damien McDonald -- Chief Executive Officer

Yes, so that the two adverse events with that. And we've got a significant piece of work that the team have done over the last two months looking at all over the root causes that gone back and look through the cases that talk to the physicians that they're not just a physician, the entire team at the hospital. So that's been a pretty exhaustive review of those two cases and looking at all the imaging, we are confident that it's the -- to do with the anchoring system, as I said, not the valve. The valve has really proven out to be very versatile. So and that's why we're focusing our efforts on the anchoring system.

Matt Taylor -- UBS. -- Analyst

Okay. Great. Thank you very much.

Damien McDonald -- Chief Executive Officer

Cheers, Matt.

Operator

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

Mike Matson -- Needham & Company -- Analyst

Thanks for taking my questions. I guess, just wanted to start with your Neuromodulation, we're continuing to see really strong growth outside the US. So particularly in emerging markets, so just curious, what's driving the growth, is it investments in the channel or is that the SenTiva products?

Damien McDonald -- Chief Executive Officer

Yeah. So in Europe, it's SenTiva and now the SenTiva generator is more than 50% of the sales of the devices for epilepsy, which is just tremendous. And I put this down to in sales leadership and execution, particularly in the UK and Nordics and Italy. In international, I will say a lot has to do with the team's focus on execution, but also changes in our channel. We went direct in Japan, we went direct in Australia. They don't have SenTiva yet, in the international group. So we are working toward that and excited about the possibility of that. But it's really, I would say, it's sales force 101. The team being very focused on account acquisition and account penetration.

Thad Huston -- Chief Financial Officer

One of the reasons and we talked about our SG&A this year being both in 2018 and 2019 a bit higher, is that we've been investing ahead of the curve in basically going direct in key international markets with a real focus on building out teams to sell Neuromod and we're seeing amazing growth as a result. So this past quarter was 76% in the rest of world region. Nearly 20% in Europe and 10% in the United States. So we're seeing great signs with that investment in both the US and in international.

Mike Matson -- Needham & Company -- Analyst

Okay. Thanks. And then, just curious if you could give us your thoughts on the potential threat of DBS in epilepsy. I think Medtronic just announced their US commercial launch about a week ago of that product.

Damien McDonald -- Chief Executive Officer

Yeah. Look, I would say a few things. Firstly, anything that raises the awareness of drug resistant epilepsy is a good thing and again that's why we're leaning into the direct to consumer campaign, we think this is a large unmet need. I think you've heard me say, there's roughly 100,000 new patients identified with CRE every year. 5,000 of them roughly get VNS therapy, 5,000 of them get some other form of therapy. It leaves roughly 90,000 patients a year that I'm not getting a therapy other than drugs, and that's the large unmet population. And so I really think that what we've established with VNS with more than 100,000 patients implanted now, more than any other non-drug therapy. And so we think that we've got a great opportunity with VNS. We're continuing to improve the product and DBS coming to the party and talking about drug resistant epilepsy. We think we're good with that.

Mike Matson -- Needham & Company -- Analyst

Okay. And then finally, just curious if you had factored any additional R&D expense for around the European MDR changes that are happening, are you expecting to have to go back and recertified products over there for example, I know some -- there has been other companies that have specifically called that out as driving higher spending, at least, in the shorter term.

Thad Huston -- Chief Financial Officer

Yes. We have included that in our projections for 2019.

Mike Matson -- Needham & Company -- Analyst

All right. Thank you.

Damien McDonald -- Chief Executive Officer

It's part of our lines, in the R&D line.

Thad Huston -- Chief Financial Officer

Yes.

Damien McDonald -- Chief Executive Officer

But we've largely absorbed that as basically a cost of doing business and we've leaned into that and we've got a great team working on it.

Mike Matson -- Needham & Company -- Analyst

All right. Thank you.

Damien McDonald -- Chief Executive Officer

Thanks, Mike.

Operator

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

Jason Mills -- Canaccord Genuity -- Analyst

Hi, Damien, Thad and Matt.

Damien McDonald -- Chief Executive Officer

Hi, Jason. How are you?

Jason Mills -- Canaccord Genuity -- Analyst

Great. Thank you for taking the question. So I'll then take two questions already asked and smash them together and sort of ask the question about M&A and specifically in mitral. Regardless of the delay in Caisson, I think I've asked you in the past about your strategy in mitral, broadly speaking, in the past and clearly what we see with the mitral valve is a need to have an armamentarium approach, at least, that's how other companies are taking it. That's when we talk to physicians, it's not a one size fits all kind of like the aortic valve is. And so I'm just curious that you'll ask about your M&A capacity or ability. And you also talked extensively about what's going on with Caisson. So maybe talk about over the next couple of years what you would have us think about with respect to your mitral portfolio, potential for augmenting that via acquisition, specifically that business?

Damien McDonald -- Chief Executive Officer

Yeah. So I would say our team largely agrees that there's going to be a lot of different ways to go after the mitral opportunities, not just replacement is not even just repair. So the comments about tool box, looking other areas and other therapies, we are looking at those. That is definitely something that is on our list of areas we're focused on for now. But again we've always thought that replacement has the largest long-term opportunity and that's why we started there.

Thad Huston -- Chief Financial Officer

Yeah. And that's why we take an M&A, take portfolio approach and then clearly you're going to have, and it's natural in a more complicated space such as a mitral replacement that you're going to have delays, you're going to have obviously things that happen, but I think what we have built up in a relatively short period of time with everything from TRD to ImThera to even the heart failure program is really unique portfolio of assets. We're going to continue to look at other things and evaluate them and see if it's the right fit for us as LivaNova.

Matthew Dodds -- Senior Vice President of Corporate Development

This is Matt, I think we're just talking about, it's a structural hard approach.

Damien McDonald -- Chief Executive Officer

It's a broad (multiple speakers)

Jason Mills -- Canaccord Genuity -- Analyst

Makes sense. Thank you for that. And just as a follow-up on that specifically, does this latest issue, Damien, reduce your comps in any way in the transseptal approach, will you look at other delivery avenues or are you committed to transseptal in this specific avenue and...

Damien McDonald -- Chief Executive Officer

Yeah. We're very committed to transseptal. We still believe that's the right approach, again the issue for us is not about the approach, it was about the anchoring and so we are very committed and I think the clinician field still views transseptal is very much the way to go to.

Jason Mills -- Canaccord Genuity -- Analyst

Got it. And I just -- I'll just ask my two follow-ups in tandem, no pun intended and get back in queue. On that -- took note of your commentary about the internal controls and so that -- you said they were, the two issues were linked, it almost made it sound like you had folks that you didn't want to access to your internal systems that had access that perhaps made some changes there. I didn't want to read too much into it, but certainly sounded like there was something going on there, and I wanted to get your sense, confidence in the potential you've stemmed that? And that risk is completely off the table at this point.

And then secondly, I'll throw it in and then get back in queue. Just on your guidance, companies are obviously -- I'm sure you guys went through guidance for the funds you comb (ph) and you're hoping to show upside to your guidance. I'm wondering if you could give us, where you think you have the best opportunity to exceed your guidance, whether it be maybe a little bit of more leverage than you're guiding to you on the gross margin line or specific revenue area? And then where -- you were especially cautious and wanted to make sure that you didn't see any downside in any areas on both ends would be helpful? Thanks.

Thad Huston -- Chief Financial Officer

Yeah. So on the accounting item and clearly we -- as I mentioned in my comments, and there'll be a lot of complexity in both the CRM divestiture and implementation of our SAP program in 2018. Clearly, and I want to be extremely clear, we have not identified any misstatements in our financials. It's more of a control design matter related to access and so it's more -- because there is more access, there is the potential, but we have not identified initiatives. So we are working with our auditors on this and clearly we are very focused on addressing and remediating in 2019.

On the financials and the guidance, I mean, look, I am super excited about the momentum that we have in the business. Clearly, we are doing great things in driving neuromodulation globally. I think, also we're really excited about the potential with TandemLife, and I think we can do better there. But we're also within the P&L showing fantastic results in gross margin. We're well above the 100 basis points that we've described in Investor Day and we're reinvesting that today and grow the business even further. So again, I feel, we could drop more to the bottomline, but while we're in this period of accelerated growth, really maximizing the opportunities that we have particularly internationally in neuromod and TandemLife.

Damien McDonald -- Chief Executive Officer

Yes. I think, you're right. Look, I'm really proud of what the team achieved in 2018, driving growth, the gross margin improvement. I mean, basically the things we talked about with you at Investor Day, nearly two years ago now, and it's starting to read through. The constant focus on execution is really what's important for us, Jason. And I think we've had a very transparent relationship with you guys, clearly Perceval for us is something that's disappointing and that's what we're watching very closely. But I think, in international neuromodulation, those are the big drivers for us.

Jason Mills -- Canaccord Genuity -- Analyst

Thanks for the color.

Damien McDonald -- Chief Executive Officer

Thanks.

Operator

We have no further questions at this time. I will now turn the call back to CEO, Damien McDonald for closing remarks.

Damien McDonald -- Chief Executive Officer

All of you, thanks for your thoughtful questions and on behalf of the entire team, we appreciate your support and your interest in LivaNova and thank you, and we'll talk to you in a quarter, if not sooner. Cheers. Thank you.

Operator

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

Duration: 59 minutes

Call participants:

Matthew Dodds -- Senior Vice President of Corporate Development

Damien McDonald -- Chief Executive Officer

Thad Huston -- Chief Financial Officer

Rick Wise -- Stifel Nicolaus -- Analyst

Raj Denhoy -- Jefferies & Company -- Analyst

Melissa Farina -- Vice President of Investors Relations

Scott Bardo -- Berenberg Bank -- Analyst

Matthew O'Brien -- Piper Jaffray -- Analyst

Matt Taylor -- UBS -- Analyst

Mike Matson -- Needham & Company -- Analyst

Jason Mills -- Canaccord Genuity -- Analyst

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