LivaNova PLC (LIVN) Q4 2019 Earnings Call Transcript

LivaNova PLC (LIVN 1.87%)
Q4 2019 Earnings Call
Feb 26, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 and full-year 2019 LivaNova PLC earnings conference call. [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.

Sir, you may begin.

Matthew Dodds -- Senior Vice President of Corporate Development

Thank you, Sydney, and welcome to our conference call and webcast discussing LivaNova's financial results for the fourth quarter and full-year 2019. 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 investor 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 statement. 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 and 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 2019 conference call. Today, we will discuss our results, provide some recent highlights and provide our guidance for 2020. 2019 was a challenging year overall, and sales in the fourth quarter were below our expectations.

The shortfall in sales was largely driven by our rest of world region, which I'll explain in more detail shortly. However, EPS did reach the upper end of our guidance range, driven by a strong profit margin and a favorable tax rate. I'm going to start off by discussing some recent highlights, then move to our sales results focusing first on our three primary growth drivers: U.S. epilepsy, advanced circulatory support, and the rest of world region.

Then I will discuss our VNS strategic portfolio initiatives, difficult-to-treat depression or DTD and heart failure. After my comments, Thad will provide you with additional details on the results and provide our 2020 guidance. Then I'll wrap up with closing comments before moving on to Q&A. We are committed to providing ongoing clinical data related to the use of VNS Therapy.

In early December, we released new data at the American Epilepsy Society Annual Meeting on two debilitating subsegments of epilepsy: super-refractory status epilepticus and Lennox-Gastaut syndrome. We received CE Mark for Symmetry, our VNS Therapy device for difficult-to-treat depression. Our first commercial Symmetry implants in the U.K. occurred earlier this month, thanks to a collaborative effort with both the Somerset Partnership NHS Foundation Trust and the Taunton and Somerset NHS Foundation Trust.

Thank you to both of these teams for supporting the severely affected patient group. In February, the Journal of Affective Disorders published an international consensus statement written by several renowned psychiatrists, proposing the use of difficult-to-treat depression as a more clinically useful definition than treatment-resistant depression. This consensus emphasizes a more empathetic assessment and treatment approach. As a company, we commend this decision and will embrace the use of difficult-to-treat depression or DTD as a designation going forward.

Yesterday, we received U.S. FDA 510(k) clearance for a device modification to our 3T Heater-Cooler. This is an important step as we work through the resolution of the residual issues of our warning letter. Now I'll discuss our three growth drivers, U.S.

epilepsy, advanced circulatory support and rest of world region. All the net sales results will be stated on a constant-currency basis. U.S. epilepsy sales declined in the high single digits versus the fourth quarter of 2018 but rose sequentially and were within our guidance range.

This calculation excludes $2 million in DTD sales recorded in the fourth quarter. In 2020, we expect our U.S. epilepsy business to grow in the low- to mid-single digits, excluding DTD sales. Advanced circulatory support sales were $9 million in the quarter, an increase of 20% from the fourth quarter of 2018.

This performance excluded any benefit from our next-generation LifeSPARC system. The growth was driven by deeper penetration of existing accounts with ProtekDuo kits used for the right ventricle recovery, and TandemLife kits also saw a modest pickup in growth due to DRG reimbursement code changes on October 1. While we did initiate a very limited commercial release of LifeSPARC late in the fourth quarter, we have faced the yield issue that will require some additional time to rectify. This will limit our full U.S.

commercial release until the second half of the year. That said, we still expect our ACS business to grow at least 20% in 2020. Rest of world sales were $85 million in the quarter, a decline of 5% compared to the fourth quarter of 2018. As a reminder, we terminated a Canadian distribution agreement at the beginning of 2019.

And in the fourth quarter of 2018, sales from this agreement were $8.7 million and were located in this region. Excluding this impact, rest of world sales grew mid-single digits. This performance was below recent trends and due primarily to two factors. First, we faced an unexpected supplier issue for a key component of our oxygenators that led to a backlog in the rest of world region, where we have been experiencing the highest level of demand.

Our supplier is currently building out additional manufacturing capacity. Second, we did not execute in Japan during the quarter. While we did grow in the mid- to high single digits in this market compared to the fourth quarter of 2018, we expected to see more of a benefit from our shift to direct distribution in both heart valves and neuromodulation. Turning now to difficult-to-treat depression, sales in the fourth quarter were $2 million and $5 million for the full year, consistent with our guidance.

In 2020, we expect DTD sales of approximately $20 million from a combination of the RECOVER study, replacement implants for CMS-eligible patients and a modest benefit from our commercial payer efforts. Finally, in heart failure, our ANTHEM-HFrEF U.S. pivotal trial continues to progress ahead of our expectations with over 200 patients enrolled. 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 results in greater detail and then provide our 2020 guidance. Sales of $288 million declined 2.2% compared to the fourth quarter of 2018. As Damien mentioned earlier, the fourth quarter of 2018 included $8.7 million in distribution sales from an agreement that was terminated in the beginning of 2019.

Cardiovascular sales were $174 million, down 3.8% from the fourth quarter of 2018. Cardiopulmonary sales were $133 million in the quarter, a decline of 8.4% versus the fourth quarter of 2018. Heart-lung machine sales declined in the low single digits, primarily due to a difficult year-over-year comparison in the rest of world region. In addition, the timing of capital equipment purchases led to a stronger performance in the first half of 2019.

Excluding the impact of the Canadian distribution agreement, oxygenator sales declined low single digits due to an unexpected supply issue of one of our key components. Turning to heart valves, sales for heart valves were $32 million in the quarter, an increase of 14% versus the fourth quarter of 2018, primarily due to favorable comparisons in the rest of world region. Perceval grew 10% this quarter globally. While we saw declines in the U.S., they were more than offset by favorable year-over-year comparisons in the rest of world region, primarily driven by the Middle East and Japan.

Now let's turn to neuromodulation. Sales were $113 million, which were flat versus the fourth quarter of 2018. U.S. neuromodulation declined 5%, while Europe grew 17% and rest of world grew 39% behind the continued adoption of SenTiva, which now represents 61% of global generator sales.

Adjusted gross margin as a percent of net sales in the quarter was 69.7%, up 70 basis points from the fourth quarter of 2018. The margin improvement was driven by the focus on mix and our pricing discipline. Adjusted R&D expense in the fourth quarter was $38 million, compared to $36 million in the fourth quarter of 2018. R&D as a percentage of net sales was 13.1% versus 12.2% in the fourth quarter of 2018.

R&D is increasing behind our continued progress in the ANTHEM-HFrEF pivotal trial and the initiation of the RECOVER study. Adjusted SG&A expense for the fourth quarter was $108 million, compared to $101 million for the fourth quarter of 2018. SG&A as a percentage of net sales was 37.4%, up from 33.9% in the fourth quarter of 2018. The increased investment is largely related to expanding rest of world commercial infrastructure and building out our U.S.

neuromodulation capabilities, including DTD. Adjusted operating income from continuing operations was $55 million, compared to $68 million in the fourth quarter of last year. Adjusted operating income margin from continuing operations was 19.2%, compared to 22.8% in the fourth quarter of 2018. Our adjusted effective tax rate in the quarter was 5.3%, an improvement from 16% in the fourth quarter of 2018.

The lower tax rate is primarily attributable to an ongoing benefit related to our ongoing tax planning efforts. Finally, adjusted diluted EPS from continuing operations in the quarter was $1, compared to $1.12 in the fourth quarter of 2018 and was within our guidance range. Moving to cash flow. Our cash flow from operations, excluding payments for onetime integration restructuring costs through the fourth quarter of 2019, was $151 million.

Capital spending for 2019 was $25 million, which was $13 million lower than 2018. Our cash balance at December 31, 2019, was $61 million, up from $47 million at December 31, 2018. Our net debt at quarter-end was $273 million, up from $124 million a year in 2018 to address our 3T settlement payments. Now turning to 2020 guidance.

In terms of our overall guidance, we forecast 2020 sales growth to be between 3% and 5% on a constant-currency basis. If current exchange rates remain unchanged, the company's full-year revenue guidance will be negatively impacted by up to 1%. We expect our neuromodulation business to grow in the mid- to high single digits, driven by the rest of world region and incremental DTD sales. We expect our cardiovascular franchise to grow in the low single digits, with strong growth from ACS, largely offset by the late-stage replacement cycle of HLMs.

Now turning back to the rest of the P&L. Adjusted gross margin is projected to be in the 70% to 71% range. We expect adjusted R&D to be in the range of 14% to 15% of sales and adjusted SG&A to be in the range of 38.5% to 39.5% of sales, driven in large part by our incremental DTD investments. We are projecting adjusted operating margin from continuing operations to be in the 16.5% to 17.5% range.

Our adjusted effective tax rate is expected to be in the range of 14% to 16%. We are projecting adjusted dilutive earnings per share from continuing operations to be in the range of $3.10 to $3.30, which includes a minor impact from foreign currency. The share count is expected to be approximately $49 million. While we don't provide quarterly guidance, our sales are historically lower in the first and third quarters, while our expenses are generally more evenly spread out.

In particular, the first quarter is our softest earnings quarter. Our adjusted cash flow from operations, excluding integration, restructuring, 3T product remediation and litigation payments, is expected to be in the range of $180 million to $200 million. Integration and restructuring are expected to be in the range of $35 million to $40 million, compared to $44 million in 2019. Capital spending is projected to range between $25 million and $35 million, and depreciation and amortization expense is expected to be approximately $28 million.

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

Damien McDonald -- Chief Executive Officer

Thanks, Thad. While 2019 did not go as expected, we've learned a lot as a company putting in place building blocks to be stronger and remain confident in our growth prospects. We will be laser-focused on improving our execution in 2020, delivering strong portfolio management and developing the talent and culture of LivaNova. To highlight those focus areas, please refer to the Slide 18 in our investor presentation.

I'd like to take a moment to thank many of you on this call for the thorough and constructive feedback you provided over the past several months. I hope you see that feedback reflected in the framework on that slide. While some of our cardiopulmonary businesses will be challenged in 2020, we are expecting strong global growth in epilepsy, a ramp-up in the DTD efforts and the release of LifeSPARC to drive sales growth higher this year. We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value.

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

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Rick Wise. Your line is open.

Damien McDonald -- Chief Executive Officer

Hi, Rick.

Rick Wise -- Analyst

Maybe just starting off, cardiopulmonary, Damien, as you indicated, was the biggest underperformer. That seems to be mostly rest of the world. Maybe you could give us even more color on the two major factors. One, I'm clear on the supplier issue, but help us understand in a little more detail what takes six months.

What is this revolving on what takes six months to resolve? How do you make sure it doesn't happen again? And the other part, I'm just less -- I'm not as clear as I'd like to be. You talked about rest of the world. Is that cardiopulmonary only or the total portfolio that was impacted or where there was a shortfall? Just a little clarification there.

Damien McDonald -- Chief Executive Officer

Thanks, Rick. Well, first off, let me just say it's fair to say that 2019 was not a playoff year for us. But like all good teams, we've taken time to step back and evaluate our game, and we've made changes to our focus. We made changes to our processes, and we made changes to our execution metrics and changes to our roster, so we're setting ourselves up for a stronger year.

For CP, there are a number of things. The supplier issue was the one thing that you mentioned. That discussion has been an ongoing one with that group, and we've seen a number of improvements with them. They've been very responsive, and they are putting in place additional capacity for supporting our growth plans going forward, but that group really did impact us in the quarter.

I would say Japan was the second thing that caused us some heartache as we were really expecting a stronger performance from them, but they grew mid-single digits, and that was very strong for that economy. But we'd expected significantly different performance as we were shifting from our distributor model to direct models. We put in place some different things. As a result of that, our account planning processes that we've deployed very effectively in Europe, the key opinion leader engagement, increased proctoring around particularly the heart valve transfer.

So I think that for us is another big thing. And lastly, HLM growth in the quarter, we faced some pretty tough comps. Rest of world, 2018 versus 2019 was a very strong comp for HLMs, and that was the third thing. So really, about supplier issue in Japan and then the HLM comps coming back around, so that's the CP wrap-up.

Rick Wise -- Analyst

Got you. Turning to neuro, you're guiding us, if I'm understanding it correctly, to mid- to high single-digit growth, and clearly $20 million of that, thank you for calling it out, is the DTD trial. Maybe if you could help us better understand why not even stronger performance from, if you will, the core business ex the trial. Help us better understand some of the factors there.

How are you factoring in potential drug competition as you -- incremental competition as you contemplate 2020 and the replacement cycle versus new implants? Just again, if you could do a little deeper dive into some of those moving pieces.

Damien McDonald -- Chief Executive Officer

Sure. So first of all, we're really pleased with the double-digit growth performance of Europe and international this year, and I think that that team have done a great job. And I will say, since the Q1 results and the reset from the U.S. team, they performed well, and they exceeded their plan in the back half of the year, so I'm pleased with that.

So going forward, we've had a thoughtful forecast that I think really take into account a number of factors. And we are really considering, as you said, the idea of additional competitors in the drug area, and we've put in place a number of changes that we've alluded to before. Our market intelligence and competitive selling approach is different. I would say that we've also changed our go-to market.

We've added MSLs into the field. Account targeting has changed. Clinical evidence and support that I mentioned earlier on in my prepared comments has changed. And so all of those things for us are important building blocks to drive the U.S.

back to growth starts. So we see strong double-digit performance in the European and international markets. That's been a great driver. We've been prudent, I think, and thoughtful with our U.S.

forecast as we consider new drug launches, and I think we're setting ourselves up for a growth platform.

Rick Wise -- Analyst

Yeah. And maybe last for me. LifeSPARC, it sounds like you have a new -- and help me better understand, help us better understand the yield issue. Is the second-half launch conservative optimistic? Help us think through that.

And I'd just say, Damien, sort of just on the side a little bit, just happened to talk to a doc yesterday on a different topic and LifeSPARC came up, and he was enormously enthusiastic about the potential for the product, better pump, better flow. His language was great future, patient mobility. You described it. I'm quoting him as a huge deal.

Does this delay -- how representative is that reaction? And does this delay concern us or could maybe second-half '20 look better than maybe you're reflecting in your guidance today?

Damien McDonald -- Chief Executive Officer

Well, I think, actually, a lot of great information there, Rick. So first, let me say I think we've guided thoughtfully to this greater than 20% growth for the full year, and I think that's an important signal from us about what we think about this platform. But our initial experience with the pumps and the controllers in the field has been really well received, and I think that the start we're taking around the yield is important. It's an important component of the controller, and we want to make sure that we have continuous flow to have production meet what we expect to be the demand, and we think this is a better approach than having a stop-start with the yield.

So I think we're on it. The team have done a tremendous job of identifying how to fix this, and I think we're going to look forward to some great growth from this group. And I'm pleased to hear that your experience or that your doctor's experience is similar to us. It is an important product.

It has a simplified interface. It's easier to set up. The priming is incredibly much simpler. And the high flow rate, I think, is something that people are going to see as an important aspect of patient recovery.

So pleased to hear -- hearing the same feedback we are. Thanks, Rick.

Operator

Thank you. And our next question comes from the line of Matthew O'Brien. Your line is now open.

Matthew O'Brien -- Analyst

Thanks. And thanks for taking the questions. Just real quickly, Damien or Thad, can you just quantify the impact of the supplier issue in Q4?

Damien McDonald -- Chief Executive Officer

Yeah. No, we're not giving into specific numbers, but it did create a backlog for us. As I said, we've worked through a lot of that, and we're going to be on a very good start, I think, going forward and especially as we return to really normal numbers later in 2020 and 2021. But I think that this team has been very responsive.

Our supplier quality team and our procurement team have done a great job, but we're not going into the exact numbers on the backlog.

Matthew O'Brien -- Analyst

OK. Are you through that issue now? Are you back to full capacity?

Damien McDonald -- Chief Executive Officer

Yes, largely.

Matthew O'Brien -- Analyst

OK. And then shifting over to the -- and kind of following up on Rick's question on the neuromod business. When you strip out the contribution from DTD and the rest of the world commentary, again, it kind of implies a U.S. number that's pretty low single digits.

And I know you're accounting for the new drugs, which really haven't had an impact historically on you guys on a longer-term basis. So I'm just curious, why are you still so conservative in that business? Are you worried about other device competition specifically? And then when do you think that domestic neuromod business can maybe get back into the upper single-digit range?

Damien McDonald -- Chief Executive Officer

Like I said earlier, I'm really pleased with how this team responded. And since the Q1 reset, that team has met their numbers and continue to deliver, and I'm encouraged by that performance. Having said that, we take all new drugs launches seriously. And as you say, long term, the drugs had an impact, but we are looking at making sure we're thoughtful about the 2020 forecast.

And low to mid-single digits reflects our expectation that there may be some impact. Big picture, DRE is still hugely underpenetrated, and our focus is on the drug plus VNS. As I've said before, there are a number of important benefits of VNS Therapy that drugs can't achieve. And we believe that our sales and marketing efforts really approach this.

And as I said, we've also put in place a new go-to market with the MSLs beginning to ramp in the field, a newer version of account targeting and more support with clinical evidence. So I'm encouraged, but I think this is a thoughtful forecast for 2020.

Matthew O'Brien -- Analyst

OK. That's fair. And if I can squeeze in one more here just on the DTD clinical study. Can you tell us how many patients are enrolled at this point? And then I thought your commentary on the commercial side was short but very interesting that you're making some progress there.

Can we expect any kind of potential positive updates here in 2020 as far as some coverage on the commercial side?

Damien McDonald -- Chief Executive Officer

Yes. So look, on the overall number, we're not going to give specific details on the enrollment, but I will say I'm really pleased with how this team is ramping. A number of really great hires. They've made good progress on opening the sites.

And similar to the ANTHEM study, we really expect to see enrollment accelerate through the year. I think the forecast is really based on, first of all, the RECOVER trial. It's our primary focus. This is the single most important thing.

Having said that, we're also looking at end of service for the CMS-eligible, patients, and then some modest gains with private payers as we ramp some of the efforts there and especially with patients who probably screen out of the RECOVER trial, but nevertheless, eligible for therapy. I think they're an important population, so we're investing behind this. As Thad said, with the R&D spend, we're really augmenting our patient engagement and recruitment and, really, the field support for these end-of-service in private. So again, an important focus for us and I think one of the things that has the potential to create a lot of value for LivaNova.

Matthew O'Brien -- Analyst

Very helpful. Thank you.

Damien McDonald -- Chief Executive Officer

Thanks, Matt.

Operator

Thank you. And our next question comes from Raj Denhoy. Your line is open.

Raj Denhoy -- Analyst

Hi. Good morning.

Damien McDonald -- Chief Executive Officer

Hi, Raj.

Raj Denhoy -- Analyst

I wonder if you could maybe start with the guidance. I think one of the things that we've been thinking about is the cadence of your new product launches. And I think in some of our conversations with you, it sounds like in 2021, there's going to be some significant launches both in the heart-lung machine side of the business, as well as in VNS, a new generator, both of those could prove to be pretty significant upgrades. And so the thing that we're curious about is how much you've incorporated potential slowdowns in purchases toward the end of this year as customers maybe anticipate the launches of those new products in 2021.

Thad Huston -- Chief Financial Officer

Yes. Thanks, Raj. We didn't anticipate or forecast big numbers for slowdowns and purchases for this year. But I think what we want to learn from is where we landed in 2019, both in terms of the impacts of new drug entrants for VNS Therapy, obviously, looking at how we trended with HLM and some of the things that we saw with CP being very thoughtful in our guidance for 2020.

I think also looking at the investments that we have to make to support the pipeline. One side, we were disappointed that we had to shut down the TMVR program after prolonged efforts to redesign that product and address the safety issues and at the same time, we have this fantastic opportunity with TRD and heart failure and others and so allocating resources to support those investments. And so that's why we guided where we did.

Raj Denhoy -- Analyst

Well, maybe I can ask the question different way. So in past product launches, when you've launched a new VNS generator or a new heart-lung machine, what has been the cadence of purchases in front of those launches? Have you seen any slowdown in the business? And I think one of the things we're also maybe asking about, too, is that the launches that you've sort of started to articulate are fairly significant with adding Bluetooth to the VNS generator, the upgrades on the heart-lung machine. I mean, these seem like pretty chunky launches coming 2021. In times past, have you seen any impact in your business in front of those kinds of launches?

Thad Huston -- Chief Financial Officer

Not material impacts in previous launches.

Damien McDonald -- Chief Executive Officer

Yes. So and look, specifically, HLM, I mean, the last HLM that was launched was 12 years ago, and that's a significant opportunity for us. And the other aspect of it is our global footprint is very different now. So the way we would phase and roll out launches really sort of go around the world.

So things like neuromod, for example, the release in the U.S. first, would still allow us to continue selling SenTiva in the international and European geographies, where we're seeing strong double digits. So those are all expanded thoughts as we're going into our launch planning for 2021.

Raj Denhoy -- Analyst

OK. Fair enough. And then just maybe one on Italy. There's been a lot of news flow out of potential impact of coronavirus in Northern Italy, where you guys still have some presence given the Sorin history there.

Is there anything you can update in terms of whether you're expecting any impact in your supply or any business disruptions at this point?

Damien McDonald -- Chief Executive Officer

Yes. So good question. We haven't forecast any overall coronavirus impact in our guidance. Having said that, Italy is less than 5% of our sales in 2019.

We do have two manufacturing facilities there: one in Saluggia and one in Mirandola. They are both located in regions that are not affected currently by the virus, so they are outside the current exclusion zones. We have a small administrative office in Milan that we've closed that facility for the week. And like just about everyone else, we're monitoring this daily.

We have a whole number of discussions going on with our Tier 1 and Tier 2 vendors to show they have appropriate measures in place. But like everyone in the world, we're monitoring this, and I think we've taken the appropriate steps so far.

Raj Denhoy -- Analyst

OK. Thank you.

Damien McDonald -- Chief Executive Officer

Thanks, Raj.

Operator

Thank you. Our next question comes from Scott Bardo. Your line is open.

Damien McDonald -- Chief Executive Officer

Hi, Scott. We normally like...

Scott Bardo -- Analyst

Sorry. I beg your pardon. Thanks, Damien. Yes.

So first question, please, just relates to the performance of neuromodulation in the fourth quarter. I think your previous commentary was surrounding a return to new patient growth in North America in the fourth quarter and a negative 5% performance doesn't appear to stack with that around 40% of your business as replacement. So can you talk a little bit about what happened there and whether you're seeing new patient contraction rather than growth as expected? And also through emails Bloomberg coming in and I think rightly so. Just some clarification on your guidance for neuromodulation, please.

I think you've said you expect to grow low single digit -- low to mid-single digit in North American epilepsy, and I think you've been growing around 20% outside of the U.S. So that would imply to me, at least, that your guidance is for mid- to high single digit for epilepsy, unless you're expecting rest of the world materially change. So can you please clarify that that is the right interpretation and the TRD comes on top?

Damien McDonald -- Chief Executive Officer

Yes. So do you want to go...

Thad Huston -- Chief Financial Officer

Yes. That's correct. So first of all, I mean, coming back to 2020, yes, that is correct. We are assuming that the U.S.

has growth of epilepsy given the 2019 reset that we had. We were pleased that we, in Q4 and for the full year, beat our overall guidance since the reset in April by about $5 million for the full year. When you look at Q4 2019, it was a tough comp. I mean, the U.S.

grew 10% in Q4 2018, it was really related to the momentum that we have with SenTiva, so I feel good about where we're entering. We are being, I think, thoughtful about our 2020 guidance for epilepsy and the $20 million that we're building in for TRD will also help us or deep -- sorry, DTD will also help.

Damien McDonald -- Chief Executive Officer

So you've got enough on the 2020. Scott, I just want to make sure that your analysis is basically right. Yes.

Scott Bardo -- Analyst

So just to be 100%. So all going well, we should be in a situation of mid- to high single digit for epilepsy?

Thad Huston -- Chief Financial Officer

Yes, correct.

Damien McDonald -- Chief Executive Officer

And just to round out the 2019 Q4, I think the other thing for us, the overall performance was strong and ahead of our plan. We did have a December recall classification from a recall that we executed in August, and I think that caused some confusion in the market. So at the top of our funnel was still really strong, but the velocity of moving through that funnel was a little slower than we anticipated. And that's why there was a slight downturn in new patient implants, but overall, we're really happy with the performance of that team.

Scott Bardo -- Analyst

OK. And sorry to be so pernickety on guidance. But if that is the case and your depression revenues come on top, then basically, your guidance is assuming no growth from cardiopulmonary, your group guidance, given that that franchise is 40% of group revenues. I just want to understand a little bit better than this oxygenator issue because I think for 10, 15 years, I've never seen the supplier issue for oxygenators.

So can you talk a little bit about what is the supply issue here? And also, maybe give us some flavor for your low single-digit cardiopulmonary. What is embedded for oxygenators within that assumption?

Damien McDonald -- Chief Executive Officer

Why don't I do supplier, and you do the forecast?

Thad Huston -- Chief Financial Officer

Yes. I think on the forecast, you're right. I mean, cardiopulmonary, we're projecting low single-digit performance just given the fact that ACS, we're saying 20% for the year, so...

Damien McDonald -- Chief Executive Officer

And on the component supply, I don't have enough history. You have a longer history than I, but I'm sure that there have been supply issues in the past. In our instance, we're not going to name the particular supplier, but this is a supplier majority of this component for the oxygenator market. We've been working closely with them and resolved some of the issues, not all of the issues, but they're back on to contiguous supply, which is great.

And we expect to clear the backlog and return this portfolio to some growth, and as I said earlier, they're working on manufacturing capacity so that there's a stronger demand support for 2021.

Scott Bardo -- Analyst

All right. Very good, guys. And maybe just one last quick one if I may. I mean, Damien, I appreciate being upfront about being a challenge in 2019.

I guess the question for you is, do you consider this weak sales dynamic, a structural issue for LivaNova? Perhaps, you can share with us why you think you're a growth company. And you talked about that you've learned some lessons over the course of '19. Can you go a little bit more into explain what they were also including some of the leadership changes you've made? Thanks.

Damien McDonald -- Chief Executive Officer

Right. That's a pretty extensive set of conversations to have, but let me try and summarize it. I mean, I do think we're a growth company, and I think that we will show the people who had faith in us that that's the case, and we're forecasting growth this year, and I anticipate that we'll be able to deliver on those based on the following. First of all, we've made changes to the focus of our organization, simplifying the things that we are focusing on.

And I refer you again to Page 18, what are those things to drive growth. U.S. epilepsy, U.S. ACS and international, so the focus there is important.

The processes that we put in place, we're making a number of changes to the way we think about operational efficiency, the effectiveness of the LivaNova business system and how those things are applied more broadly. Where we've seen that implemented effectively in Europe, for example, nine quarters of contiguous sales growth. The quality team has used these methodologies to change a number of key processes, and I point to the fact that the 510(k) clearance for 3T came through significant efforts there to have that remediated. And then lastly, the operations team, enormous process change there, specifically in supply chain and logistics, where we're starting to see a reduction in back orders globally.

So the processes have changed, and the execution metrics have changed, and that's an important set of behaviors internally for us and how we apply those vertically throughout the company. With respect to leadership changes, some of you that have been following the 8-Ks will have seen that we've made some changes to Section 16. And we've combined the operations and the R&D organization. I think this is critical, back to being a medical innovator.

And the second focus area, which is pipeline execution, bringing those two groups together are important to drive speed to market, and they're very focused on the near-term things, which is LifeSPARC, the trials with RECOVER and ANTHEM and the Polaris program. And then lastly, we also took out the franchise structure, the verticals that were neuromod and cardiovascular and focused the teams much more on global marketing insights and key opinion leader development, again, important for the speed-to-market and market innovation and put the responsibility for commercial delivery more squarely back into the regions. And those regions now have a greater level of accountability for execution. So this is a longer answer than you probably wanted, but I'm trying to point to very specific actions we've taken.

And then you can also see on Page 18, how we're looking to focus in more definitively on EPS and cash generation as well.

Scott Bardo -- Analyst

Understood. Good answers. Thanks, Damien. I'll jump back in the queue.

Damien McDonald -- Chief Executive Officer

All right. Cheers. Thanks, Scott.

Operator

Thank you. And our next question comes from Mike Matson. Your line is now open.

Mike Matson -- Analyst

Hi. Thanks. So I just wanted to ask about the savings from your shutdown Caisson and then the 150% headcount reduction that you're going to be implementing in Italy or, I guess, combined with Caisson. So obviously, that's going to be generating some savings.

It sounds like based on what the guidance sort of implies, you're planning to reinvest virtually all of that. One, can you quantify the savings? And two, can you confirm whether or not any of that is going to be falling through the bottom line, or is it all getting reinvested?

Thad Huston -- Chief Financial Officer

Thanks, Mike, for the question. Clearly, we were disappointed about where Caisson landed and ultimately the investments that we made there. And also, as you pointed out, the restructuring of cardiovascular, it did generate savings. We do see a tremendous opportunity.

It's roughly about $0.25, $0.30 between the two that we are putting back into depression mainly. We think that this depression RECOVER study is a very large and complex study. We've really embarked on the enrollment. We're making substantial investments to ensure that we have strong patient recruitment and engagement.

We're also doing a lot of work on sub-study analysis and also looking at the commercial prospects post the completion of the study, and we're also investing, as you know, in the rest of the pipeline, but the big driver is really the DTD.

Mike Matson -- Analyst

OK. That's helpful. And then that kind of leads into my next question. Just on DTD, so I mean, you did call out a number of investments that you're making there.

And I understand part of that is to fund the actual trial itself and all the activity around the trial, but to what degree are you kind of laying groundwork for an eventual favorable coverage decision? And how much of that investment is going toward that type of investment? And then what does that sort of imply about your confidence in the outcome of the trial ultimately?

Damien McDonald -- Chief Executive Officer

Let me take that. The confidence in the outcome of the trial is largely based on the Aaronson paper that we've spoken about in the past. You see significant changes in response rate, significant changes in remission rate, and those are over a long period. You see that the period of performance continues to improve over up to five years.

So that's what gives us the confidence in where we're going. So what do we know has to happen? First of all, we've got to get the trial enrolled, so a lot of effort with our partner ICON to enroll this trial as quickly as possible. And you may all remember, it's 500 patients in the unipolar and up to 500 patients in the bipolar, so we're very aggressively opening sites and trying to drive patient enrollment. Importantly, there, you have to make sure patients are engaged and continue to participate in the trial.

So we're spending resources on that to make sure that we have tools in place to drive engagement, online tools, apps. And I think the team there have done a great -- they've made some great steps there to really look at patient engagement. And then lastly, ensuring that the field clinical support and the engineers, who are responsible for the programming in the blinded study, are really well versed and also available. And so we've ramped our resource investment there.

I think overall, we're also encouraged by the possibility of moving into end of service to CMS-eligible patients and the possibility of private payers, and so we're also recruiting people in that market access area as well to help us support those efforts. So there's clinical trial, there's the clinical trial execution and then there's the commercial ramp. And all three of those pieces are significant investment by us.

Thad Huston -- Chief Financial Officer

Yes, I would just add. I mean, that is one of the reasons why SG&A still remains relatively high for 2020 in our guidance is because we are building the team, building capabilities to support the infrastructure, to support the trial but also to then ultimately be in a position to start once the trial is completed.

Mike Matson -- Analyst

OK. And then I apologize if you mentioned it at the very beginning of the call. I missed the first five or 10 minutes. But I know you commented on coronavirus with regards to Italy.

But what about with regard to China? How much revenue do you generate in China? And to what degree are you getting any of your components out of China? Thanks.

Damien McDonald -- Chief Executive Officer

So that's another good follow-up question on that. So China represents less than 5% of our sales in 2019, so we don't anticipate huge disruption yet, but we've not taken that into account in our guidance, as I said. We don't have any manufacturing in China and only limited supply agreements. So we don't currently anticipate any impact on our supply since we're not exposed really to the Chinese market.

However, that said, we are continuously monitoring our Tier 1 and Tier 2 vendors there to make sure that any supply changes are communicated quickly. We haven't seen a change in elective procedures yet, but we're also monitoring that as well, and we're also making sure we support the Chinese government in any way we can with our products. We know that oxygenation is an important aspect of this at the moment. And so we're working through any aspects of their requirements.

So overall, I think, again, like we said with the Italian starts, it's fluid. We're monitoring it every day, and we think we've taken the appropriate steps.

Mike Matson -- Analyst

OK. Thanks a lot.

Operator

We have a follow-up question from Scott Bardo. Your line is open.

Scott Bardo -- Analyst

Thanks, guys. You've given me a lot of time, but just a couple of quickies. I know we've discussed a little bit before about your commitment to deliver your medium-term targets when set. Obviously, there's been a few puts and takes.

But just with respect to your commitment to start managing the business to get to this 20% margin, can you today confirm -- margin profile in the next couple of years? I also would like you to just maybe talk a little bit about where you will be deploying some of your investments, given that you've got some cost to take out from mitral and also the transfer of production from Saluggia. So where is that money going? It's not flowing through to margin just yet.

Thad Huston -- Chief Financial Officer

Yes. So Scott, we have an absolute commitment to get to 20%. We understand that that is a goal that we've set out, and we believe that we will get there soon rather than later. For 2020, we're redeploying a lot of the savings related to Caisson back into depression, given the significant opportunity.

We're generating $20 million in revenue, which is great to support the business, but the level of investment that we're making, both in R&D and building initial commercial capabilities, is in excess of that. So we think that this is a great opportunity, and that's why we're not dropping to that 20% target in 2020. But I believe that more like 2021, we should be seeing that kind of number.

Damien McDonald -- Chief Executive Officer

Again, I'll refer you to Slide 18. Gross margin expansion continues to be a focus for us. Maintaining SG&A as a percentage of revenue this year is an important signal for us. So leverage, we know, is key.

But I think everyone also sees the upside of DTD, and that's where we're investing.

Scott Bardo -- Analyst

Great. OK. Thanks, guys.

Operator

I'm not showing any further questions at this time.

Damien McDonald -- Chief Executive Officer

Well, thanks, Sydney, and thank you, everyone. Again, as always, thoughtful questions. And on behalf of the entire team, we appreciate your support and the continued discussion, and we look forward to updating you on our next call. Thanks, everyone.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Matthew Dodds -- Senior Vice President of Corporate Development

Damien McDonald -- Chief Executive Officer

Thad Huston -- Chief Financial Officer

Rick Wise -- Analyst

Matthew O'Brien -- Analyst

Matthew OBrien -- Analyst

Raj Denhoy -- Analyst

Scott Bardo -- Analyst

Mike Matson -- Analyst

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