Good day, ladies and gentlemen, and welcome to the LivaNova PLC's Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your moderator today, Mr. Matthew Dodds, LivaNova's Senior Vice President of Corporate Development. Please go ahead.

All right. Thank you, Julie, and welcome to our conference call and webcast discussing LivaNova's financial results for the third quarter of 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.

Thanks, Matt. Welcome to our third quarter 2019 conference call. Today, we will discuss our results, provide some recent highlights and reaffirm sales and earnings guidance. Third quarter adjusted EPS exceeded the upper end of our guidance range driven by high single-digit sales growth in Neuromodulation that included another sequential uptick in our U.S. epilepsy sales. The solid performance in Neuromodulation was partially offset by some softness in our Cardiovascular franchise. I'm going to start off by discussing some recent highlights, then move to our sales results by business. After my comments, Thad will provide you with additional details on the financials. Then I will wrap up with closing comments before moving on to Q&A. In early September, CMS accepted the protocol for our RECOVER clinical study, evaluating VNS Therapy for Treatment-Resistant Depression. RECOVER is a double-blind randomized placebo-controlled study with a follow-up duration of at least 1 year. The Coverage with Evidence framework also includes the possibility to extend the study into a prospective registry. RECOVER will include up to 500 unipolar and 500 bipolar patients at a maximum of 100 sites in the United States. On September 27, Dr. Azfar Malik, President and Chief Medical Officer for CenterPointe Behavioral Health Systems in St. Louis, enrolled the first patient in the RECOVER study. We believe this represents a landmark achievement for patients who suffer from this debilitating disease. Turning now to our net sales results for the third quarter which will all be stated on a constant currency basis. Total net sales were flat compared to the third quarter of 2018. Neuromodulation grew in the high single digits while Cardiovascular declined in the mid-single digits. Overall, our U.S. business declined 1% primarily due to difficult comparisons in HLMs and softness in heart valves. Europe grew for the eighth straight…

Thank you, Damien. I'm going to discuss the third quarter financials in greater detail. Sales in the third quarter were flat versus the third quarter of 2018. Sales growth in Neuromodulation, ACS and oxygenators were offset by a decline in HLMs, heart valves and the impact from the termination of a Canadian distribution agreement. Adjusted gross margin as a percent of net sales in the quarter was 70.1%, up 190 basis points from the third quarter of 2018 and represents the first time LivaNova's adjusted gross margin has exceeded 70%. The margin improvement was driven by mix, price and currency. Adjusted R&D expense in the third quarter was $39 million compared to $38 million in the third quarter of 2018. R&D as a percentage of net sales was 14.4% versus 13.9% in the third 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 third quarter was $102 million compared to $101 million in the third quarter of 2018. SG&A as a percentage of net sales was 37.8%, up 70 basis points versus the third quarter of 2018. The change is largely related to the full impact of expanding ACS commercial capabilities, strengthening our commercial organization in international markets and increasing investments in Neuromodulation. Adjusted operating income from continuing operations was $48 million compared to $47 million in the third quarter of last year, as improvements in our adjusted gross margin were partially offset by investments in our key growth drivers in R&D. Adjusted operating income margin from continuing operations rose 50 basis points to 17.8%. Our adjusted effective tax rate in the quarter was 11.2%, an improvement from 12.6% in the third quarter of 2018 as a result of geographic income mix.…

Thanks, Thad. We are confident in our growth prospects and continue to focus on execution, strong portfolio management and developing the talent and culture of LivaNova. While our heart valve sales remain challenged and we are in a period of difficult comparisons for HLMs, the U.S. Neuromodulation business is improving and the rest of the business lines and regions are performing well. We continue to expand gross margins, make significant investments in our R&D portfolio and streamline expenses in non-core areas. We look forward to updating you on our continued progress and delivering on our commitments to drive shareholder value. And with that, Julie, we'll open it up for questions.

[Operator Instructions]. Your first question comes from the line of Raj Denhoy from Jefferies.

Maybe we could start with the VNS business, the epilepsy business. So as you noted, some of the issues earlier this year, particularly the sales force turnover and then the competitive headwinds from the recent drug launch, I'm curious if you could maybe parse out which of those seems to be recovering for you? Is it -- are you seeing maybe the sales hires getting more productive? Or is it that the kind of slowness in the pipeline progression of patients is maybe lessening because of the -- that drug is kind of playing through? Any thoughts just really on where you are in that recovery.

Well, I think it's a combination of all of that. We've done a lot in the last 6 months to really understand the market dynamics. I think the uptake of Epidiolex, the rate of uptake is flattened. So we're not seeing a progression of patients, and that I think is one thing. Definitely, the sales force, I really believe, has become more productive. We see that in their -- in new patient implants. And the growth rate still declined year-on-year, but it was a lower decline than we anticipated and ahead of our expectations. So I think they're being more productive. End of service continues to tick along well in that low single digit. And I think the way we're changing our messaging and talking about why VNS is so essential to the mix of drugs and -- you need to have this guardian to get at the other benefits, like cardio protection, neurocognitive benefits, decreased hospitalization, sue debt reduction. Those things, I think, are really starting to play through in our story line.

Okay. Fair enough. And just two other ones quickly. Just the -- so I know you raised the guidance for the U.S. -- for U.S. VNS. And again, kind of a follow on to the last question, but where are you thinking in terms of the recovery now? Is this a business that we can reasonably assume can get back to sort of mid-single digits as we move into 2020?

Yes. I think that for us is where we'd like to have the business positioned. We've always seen this as a robust business and the U.S., I think, is ticking along well and particularly pleased with what the international teams are doing, too. Europe and the Rest of World teams have done tremendous work in the last 6 months too, and I'm really, really pleased with what they're printing in terms of results.

Okay. And here's my last question, just on the clinical study. So you mentioned, the first implant has occurred. I'm curious, is there anything you can offer in terms of how that pace of patients getting done has progressed? Are you -- and the density of the question is really, thinking about when you can get to an interim look at the data, 250 or so patients. How is enrollment going? And are you comfortable with maybe getting to that 250 patients third, fourth quarter of next year?

Yes. You're spot on there, Raj. That's exactly what we're thinking. It's going to take a little while to ramp. We were thrilled that Dr. Malik could get a patient in 3 weeks after we had the approval for the study. We're just -- really fabulous effort from the whole team, and that's what we're really looking at, is 250 patients around 4Q in '20.

Your next question comes from the line of Rick Wise with Stifel.

Congrats on the better-than-expected Neuro performance. But let me turn to the Cardiovascular part of the business, if I could. You said there's some cardiopulmonary softness among others. Can you talk -- take us through the various pieces? I'm sure this was not the quarter you wanted to see. But just help us sort of, business-by-business, understand some of the elements. TandemLife, obviously, LifeSPARC approval came earlier than expected. It sounds like their controlled rollout is later this quarter. Just help us understand how that business, what happened and how the various pieces get back on track in the fourth quarter.

Great set of questions, Rick. Good to hear you. Look, I'll start with HCS. We did get the clearance earlier than anticipated. And honestly, I think that impacted our ability to drive new customer acquisitions. If the new model is coming, people are less inclined to want to be trained on the old model, and that's really what we saw. But I think the team is doing well and the account planning for the launch is progressing. So we'll do a limited release in 4Q, back end of 4Q, and we're really now building inventory so that we can do a more robust launch in 1Q. I think it's important that we go to market with a contiguous supply chain, and I think the planning there is on track. So that's, I think, a very important step for us. That's a high-growth business that we are very excited about. HLMs, tough comps. We grew 10% in the U.S. and 14% in Europe 3Q '18, so 10% overall. So it was a tough growth comp. But we're still working our pipeline. We're getting into the later innings of that conversion pipeline for the S3s, still some room left in Rest of World, but U.S. and Europe are in the later innings. And our business is not all just about conversions. We do have new installations and competitive conversions, but we're at the back end of that program. So I think the tough comps in the conversion cycle is really what happened there. But again, funnel management is in place, and I'm really expecting the team to continue to drive that business. Heart valves, this was tough for us. As you say, not what we wanted to see. First of all, continues to struggle in the U.S. with the execution there, but…

Yes. I was actually...

The only thing I'd highlight, oxygenators, as you highlighted earlier, did do quite well, mid-to high single digits in the quarter. So that business is holding and gaining share.

Got you. And turning to guidance for a second. Just -- if I'm thinking about the guidance, doing the math right, quickly here, the fourth quarter guidance and keeping guidance unchanged after especially the strong Neuro, I think I'm doing it right in suggesting that it implies much softer Neuro results in the fourth quarter. Is that right -- is that the right way to think about it? And on gross margins, it would seem to imply, and I'm guessing, if Neuro growth would be less, gross margins will be impacted. It would imply a big sequential down tick in gross margins. Am I thinking about it right, wrong? Or maybe help us understand those dynamics looking at the fourth quarter.

So while we feel good about the new range, we did want to remain prudent on the views of this business. You look at where we expect NPI to return to growth in Q4, it's a very positive result. As we mentioned before, there is an impact on customer buying patterns, and we do still believe that Epidiolex is having some impact on the new patient funnel. But as you point out, we think that taking the range up is a really positive sign. The thing to think about too, though, is that last year's Q4 was a -- represents a really difficult comp because it was a record quarter for the U.S. where we grew over 10%. Coming to gross margin, we do think that, that should remain around that 70%. So breaking through the 70% threshold I think is a really positive sign for the profitability of the company and it's just a matter of maintaining the top and bottom line guidance that we previously provided.

Got you. And maybe last for me, sort of a 2-part question. Damien, you highlighted Europe, eighth quarter in a row, I think you said, of solid performance. I know you've worked very hard to turn around that business, get the right leadership, get the right systems, make it work and it would seem to be working in a big picture perspective. U.S. seems more frustrating, I think it might be fair to say. So part one of my question is what -- I know you're in a turnaround. What needs to be done, in your mind? How are you thinking about the next few years to get that kind of U.S. consistency? And sort of not a fair question because I know there's a lot of moving pieces here, but just wonder at a high-level your thinking. And every CEO's, CFO's favorite question at this time of the year, how should we be thinking about 2020? I know it's early. I know you're not going to give guidance...

We wanted to be first out of the gate on that one. And I think Matt would like me to say, we'll provide guidance on our fourth quarter call.

Yes, I would.

So look, you really highlighted something that I think is important. The EU, 8 straight quarter and it would seem to be working. And what was the difference there? Leadership. And Marco and the team there, I think, have done a tremendous job. The double digit, again, in international, Roy and the team there, I think, have really made great progress, a lot of change in those geographies with the go-to-market strategy, taking areas direct. And so I chalk this up to leadership, and I think this is that thing that's important in the U.S., is for the leadership to gain traction. Paul Buckman, who a lot of people know, took over the U.S. region about a quarter ago, and he's really stepped up and is starting to really understand where the opportunities are and how to bring the team together. It's not a one-man show, there's a team of people there that are doing, I think, great things. And we'll continue to focus with that team. There's also a new CFO in the U.S. region as well. And Lawrence I think is going to bring a lot of discipline to that group. So I think we will continue to focus our energy on getting the U.S. back to consistent growth but I'm quietly encouraged by the new leadership there.

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

Just one clarification on Raj's question. Did you guys say the interim look should be Q3, Q4 of next year as far as the depression study goes?

Yes. Q4 '20 is the first...

First look, yes.

Got it. Okay. So then, following up on Rick's question a little bit on the Cardiovascular business. I think you said, in cardiopulmonary you had a really strong first half, probably a little bit of pull-forward sales there. You're not going to get the new heart-lung machine out until the middle of next year, and it sounds like the valve business, especially Perceval in the U.S., remains challenged, it's because of other options that clinicians have at this point. So as we think about that business, heading into 2020, is it one that can deliver some decent growth throughout the first half of next year? Or is it going to be more of a growth headwind as the Neuromod business accelerates a little bit?

Yes. It's Matt, Matt. So for Cardiovascular, we're not giving overall 2020 guidance, but if you just think about where the market is, we've said before, HLMs, oxygenators, it's a low single-digit market. A lot of that's coming from international expansion versus the U.S. and Europe. Our take is that we are assuming that's the current run rate. If you want to give a share, go right ahead. But we're really looking at ACS, as we've been talking about, as being the key driver and not just now but also into 2020 because of the opportunity there and as we continue to expand the sales force. So when you put the three parts together, that should really be your driver, not just now but also as you look forward.

Okay. That's helpful. And Matt, can you -- better for Damien, can you talk a little bit about LifeSPARC? We were at a conference recently and the feedback on that product was really, really strong. So I'm not overly surprised to see the Q3 slowdown here. Why do you think Q4 accelerates a little bit? And then did I see in the release that I think you're selling a little bit in Europe now. Is that your -- are those your first sales in Europe? And how do we frame up what you could do there in 2020?

Yes. Sales in Europe are going to be prioritized for -- after we get the U.S. cranking. And this is why I think it's important. What we're planning to do is have a limited launch in Q4, small number of accounts, build inventory heading into Q1. So there's a slight lift there. But also, the other thing is the CMS decision, which we really applaud them coming back and revisiting DRG 003, is being reinstated in just a couple of days.

No, actually October 1. It's already started.

Yes. And that's a big deal for us. We sell over -- in 100 DRG codes, and a lot of patients are going to benefit from being able to access the product. So between the CMS and launching LifeSPARC, we think that, that's the key driver.

Okay, and -- that's helpful. Last one for me is just on the depression side, and Raj alluded to it a little bit. But do you want to give us a little bit of an update as far as how enrollment's going here through October? And I think you had talked about doing $5 million to $10 million of -- in that business here in 2019. Shall we just assume kind of low end is the right number?

Yes. Spot on. Yes, look, it's very early days. We're going to not give sort of blow-by-blow accounts of enrollment, but focus on this milestone of the 250 and towards the end of next year. But I think it's very encouraging where we've seen the engagement from the site. So it was at the investigator kickoff meeting in Chicago, and that was really exciting, to see the engagement, not just from the investigators but also the staff that we brought in. So I'm excited about what we're going to be able to do here. And that's the plan. Enroll aggressively and work for a Q4 '20 look.

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

Right. So I guess it's not so surprising to see some volatility in heart-lung machines, you can't grow that business double digits forever. But what has surprised me has been your communication confidence about this upgrade cycle where I think in the last quarter, you said you had some 12-month visibility into the Polaris launch. So clearly, didn't come through quite as you're expecting this quarter. So what's really changed since last quarter? That will be helpful to understand. And more broadly, given that this is a capital business and subject to some volatility, could you please at least split out, how big heart-lung machine is in the context of cardiopulmonary so we can better gauge the more predictable consumable drivers?

So in Cardiopulmonary, it's about 25% of the business, so just to categorize that group. Look, I think you have been very close to this business for longer than any of us actually. And you know that this cycle was really an exciting driver. And I think a lot of people were surprised to see us be able to reinvigorate this whole product group. And I've been very pleased with how the team have adopted funnel management. And what we've seen over the last 2.5 years is a real ability for the team to identify S3 conversions and drive that to an S5 unit. That -- we're coming to the later end of that cycle, the late innings, just to put it in a World Series context. And we've got work to do there to continue that as well as identifying new installations, which is predominantly in the international region. And we're also winning competitive conversions, too. And I think the team has really stepped up there. But having said that, we are in the back end of the S3 conversion cycle, which is the primary driver. And there are just tough comps coming around, so the growth rate on this will slow. But we're not any less excited about how we use this business and also to understand what we need to do to continue driving oxygenator share.

Okay. Understood. And with respect to heart valves, I know we talk about this often, but obviously, been many, many years for the company to try and to improve positioning of that business in North America. Can you help us understand, at what point you make a determination on that business? Are there any real triggers that could -- or key performance indicators that really make you comfortable that LivaNova can progress this to its full potential? That's the business making all talk about having any impact.

Yes. I've spoken in the past about average daily units, ADUs, and I've seen benchmark level performance of implants here in our sales team in the U.S. And that's what's makes me believe we can do this. We just have to be consistent. We have to be better at commercial execution. We've invested in the last couple of quarters more on procedure training, the Valve-in-Valve indication is giving us a new reason to talk about the product. And I think for us, the -- this is about the sales team finding traction in the accounts that are expensive and thinking about minimally invasive alternatives for the valve repair -- replacement. For sure, the noise around low-risk TAVI is creating a headwind for us, but that shouldn't take away from what we see is still a large opportunity. So how do we know we can do it? There are reps in the U.S. who are doing it. And importantly, there are reps in the rest of world who are doing it. And that's what makes us believe. And as I said that this Massa experience, 1,000 patients, shows that there is a longitudinal opportunity here. So I continue to want to make sure this team succeeds.

And sorry, does the PERSIST-AVR trial make any difference here? And when does that read out?

Well, I think that -- you want to talk about that?

Yes, so the PERSIST-AVR, it could be a very important trial for us. It looks like right now, it's going to be in the late first quarter, early second quarter of 2020 for the full readout being presented at a major medical meeting.

Okay. Understood. And great to see Neuromodulation having a nice recovery. I think that's what we've all been looking for. But as we look to the fourth quarter, I don't think there's been a fourth quarter in the company's history where, on an absolute basis, Neuromodulation has not performed better than the third quarter. So I just want to understand that there, in your opinion, given the discussions about improving new patient implants, that there's no reason why that trend shouldn't continue, just trying to understand in the context of your group guidance.

Yes. I think that's fair. We typically have a very strong Q4. So when we provided this revised revision upwards yes, we wanted to be prudent in our forecast. At the same time, Q4 last year was an extremely high quarter and so the comp -- obviously, we want to drive quarter-on-quarter sequential momentum and so we provided that range.

Good. And lastly, just puts and takes on the treatment-resistant depression trial. So obviously, great news to hear you are going to try aggressively recruit for this trial. Just help us understand what that means from a revenue perspective into 2020? I know the trial is now bigger at 1,000 patients, but what would you expect then? And on that, I might be also on that point about reimplantation for patients. But just help us understand, and again, Damien, please, if you're going to have a look at a Q4 for these patients, do you not need 12-month follow-up data? How does that time frame work within the context of the trial design?

Yes. So just on the numbers, we -- I previously gave 5 to 10 for this year. We'll be at the lower end of that given the late start of the study. And for next year, 20 to 30, again looking at the ramp, the lower end of the 20 to 30 is probably reasonable. Again, we will be driving hard to enroll fast. But let's -- if you want to model it, there's the way that I think about it. You want to...

Yes. Sure. So for the endpoint that would get us to registry, 12 months response. We get our first look at 250 patients, we can continually look every 25 patients after that. We're seeing up to 500 patients. So at 12 months follow-up, somewhere between 250 and 500 is when we expect to hit the endpoint. So it would be between the guidelines we gave of best case late 2020, and then think about a few months after that as needing to enroll the rest of the patients.

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

I just wanted to follow up on Neuromod and ask more specifically, what are the pluses and minuses that we can think about for Q4 and going forward in the U.S. and OUS? Can you help us understand last year's Q4 in the U.S.? Is there anything onetime like a big bulk order that made that really strong, or was that just strong demand? And then for this year, are there any things that you can point us to, like sales force adds or the end of life comps or things that would help us to forecast the next couple of periods?

Yes. So I think there's a number of things. We're continuing to see SenTiva traction in the U.S. and internationally. I think that's important, so there's a price premium on that product. We're now at 58% in worldwide sales, and I think there's some small runway there still. We typically have a price increase in the quarter where we selectively look at price changes by geography, and I think that's an important driver. And I think we look at the end of service, I think we've said to you before, 2% to 4% is sort of the long arc of that. And we're continuing to see that low single-digit end of service, which I think is an important base. And then we also talked about our expectations for NPIs to gradually return to growth and we've seen sequentially, since Q1, the declines start to decrease. So we had actually a better Q3 than we anticipated in that respect. So that I think will be an important market for us as well.

The only thing as for end of service. We're assuming we don't grow at the same rate we did a year ago, and that's now more than half the overall generator implants versus actually -- and still is. So that has a bit of an impact as well.

Got you. And then last year's Q4, was there something onetime in there or was that just strong demand? And then OUS, doesn't seem like you saw any impact from Epidiolex. Do you still think that you can -- you talked about doubling that business over a multiyear time frame. Is that the kind of outlook you're still expecting there?

Yes, we really are very bullish about our opportunities internationally. The team in Europe I think is doing well. Again, the markets we've highlighted have continued to show great traction. The change in our go-to-market in Japan and going direct has really had a big impact for us. So I think those businesses are continuing to grow well. International now is bigger than Europe for Neuromodulation, which is a huge step. In the U.S., I would say the team executed very well last year, and we talked about it in Q1, the change in buying patterns with the Epidiolex emergence. And I think as we see all of that normalize, we'll get back to a natural rhythm with this business.

Q4 was very strong also because of SenTiva and just the momentum that we had last year.

Okay. All right. Can I ask one other follow-up question on the heart valve business? I just wanted to understand if you thought your growth rate was indicative of the market or are you losing some share there? Help us kind of parse out those 2 factors.

Well, yes. Damien's talked just about in the U.S., I think that's where the sticking point is. I'd say we're losing share in the U.S. Internationally, I think we're in a good place. I think in Europe, we're in a good place. It's the U.S. As I said, I think TAVI is definitely a headwind. We are seeing some great print from those companies on their results. But again, I think we can do more here. And that's why I'm continuing to invest and believe that this team will turn it around.

And we don't have that much share in the U.S.

Yes. We lost share in the quarter based on our trend and what else we saw...

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

I guess I just wanted to ask about your ability to really focus on both the Neuromodulation and Cardiovascular businesses at the same time. It feels a little bit like whack-a-mole here, where the Neuromodulation was weak, it's getting better, but now Cardiovascular is really slowing down. So I guess that's the first part. and the follow-up part would just be, does it still make sense to have these 2 separate businesses combined in a single company?

Yes. I think that for us, it's about balance in the portfolio. And we recognize that we haven't had all of the pieces working in unison here driving growth at the same time for a few quarters. But we continue to believe that the power of the combined LivaNova is really useful. The balance sheet, I think, gives us a lot of opportunities to invest in things. The scale and scope of our geographic reach is significantly enhanced by the business combination, and that's for us what really is important. And we've seen that -- you can see what's happening in Europe now with Neuromodulation crossing the Atlantic. You can see the international team taking the portfolio and growing Neuromodulation, for example, 66%. So we really believe that the scale and scope of the combined team is important here.

Okay. And then you mentioned the new heart-lung machine. So I guess, first, do you think that, that has impacted sales of your existing system? And then do you think -- if it hasn't, I mean, is there a risk that as we get into the first half of next year that it does start to weigh on the sales of the existing system because the reps and/or the customers just don't want to buy the old one right before the new one's launched?

Yes. I think we've been very thoughtful about that and we're looking at ways and being flexible with accounts on how we make that transition. This is always the great question when you have a capital goods product. But we believe we're being very thoughtful about that, and we've already seen places work with that flexible model here. And I think that's what's going to continue to drive us. Let's go account-by-account and look at what they need and when. And I think that market responsiveness has been important to us.

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

I wanted to go back to Mike's first question. That was a good question. And so if we go back to the premise of the combination of the 2 businesses, there -- a couple of them were leverage points on the P&L. And from a tax perspective, it looks like you've executed quite well there, a lot of folks are benefiting on that front as well but the combination has certainly benefited. And SG&A, I think, it's fair to say, has been a win vis-à-vis this combination. The expansion of the U.S. business for -- on the Cardiovascular side, vis-à-vis the combination of the strength that Cyberonics had in the United States hasn't come through. And I guess I just wanted to go back to that. I hear you with respect to the benefit of -- or the ability to leverage a larger franchise. But at this point, have you not sort of squeezed the benefit out of the combination? And could you look to, like you did with the CRM business, divest underperforming assets when they still might have some value to someone else and focus on the pipeline? And that was the subject of my follow-up, and I'll get to that in a second.

Yes. Sure. Look, I think you've hit on some really great points. Taxes benefited, SG&A has -- the R&D. I mean our ability to invest essentially doubled our R&D investment in what I believe is, and continue to believe, is a great medtech pipeline, I think are the big, big wins. The CB expansion, look, I think it's done well except for heart valves. The cardiopulmonary heart-lung machine business in the U.S. was reinvigorated. We've done some great work with oxygenators there. It's really heart valves that I think has not read through. So we really continue to believe that this is a great combination. Now we've always said we will look at the portfolio in the light of day with new facts. But I think what you've seen from us is a continued investment in the pipeline that I believe is really going to read through. And the combination, as I said, apart from the heart valves in the U.S. I think is really, really borne out well.

Yes. I think we have scale both with the balance sheet, the P&L. We've driven leverage and improved our cost base. And as Damien pointed out, we've been able to invest in the pipeline while delivering great results. And we've had some ups and downs, of course, with Neuromodulation, but to have that business now coming back and improving our forecast versus where we previously were is a very positive sign.

Okay. So before I ask my pipeline question, so would the answer, Damien, to that would be that you wouldn't look to divest anything in the near to medium term?

Yes. Well, that's not our plan. But we -- as I said, it's important to remember that we are prepared to make the decisions when we look at the portfolio, and understand that there are better opportunities for that asset somewhere else. So never say never, but that's not our plan.

Got it. Okay. And then on the pipeline, I guess two part. First on depression, just going back to the question about readout moving to registry. Your commentary would seem to imply you think that getting to 250-plus enrollment in the fourth quarter is possible given that you need that 12-month endpoint to hit at end of year, and you've got a couple of months of data adjudication to sort of read that out. So it seems aggressive, but that would imply a fairly bullish feeling about the ability to enroll near term. So maybe you can just comment on that. And then secondly, on these calls, we used to talk a lot more about the pipeline. So maybe you could give us your current thoughts on mitral? What the firm's plan is long-term to compete? And what I think is becoming obvious, that it's requiring a toolbox approach with respect to addressing the mitral regurgitation market. And then also the OSA front. Maybe you can give us a pipeline update on sleep apnea?

Yes. So great -- a lot of nested questions in there. First, RECOVER, you're right. It does imply a very aggressive enrollment. But again, we believe there's a pent-up demand for these patients. Again, talking to the investigators at the kickoff in Chicago, we really do believe that there are patients that they can characterize and put into the study. And the team are really working hard to be aggressive there to meet this time line of 250 by 4Q '20. So you're right, then you've got some -- the follow-up period. And then some work to do on the stats, and that puts us into submitting for reconsideration in 1H '22. So that -- you're spot on with the math there. Pipeline. Mitral valve. Look, I think the team -- since we paused the study and went back to look at what the issues were, the team's done a great job with the redesign. They've locked into a new design that incorporates the valve and the anchor in a single delivery system. One of the things that I think became apparent in the user-centric design discussions was making it simpler to get the valve and the anchor in, and I think the team's done a great job there. So the initial feedback with the FDA was positive and they've started preclinical work back in the bench testing, the animal studies, the biocompatibility work. And we're still looking at getting back into enrollment in 2020. I'm not entirely sure that the whole toolbox thing has fully played out yet. I think there's people talking about it. And certainly, the results with repair initially have been great. But we still believe that a replacement option is going to be necessary, and we like the product that the team have developed. Sleep apnea. Love the sleep apnea market. I think there's just such tremendous opportunity there and we really continue to believe that we have a great technology and a great knowhow. I mean we know how to make these implantable generators and leads, and we've done a lot of work in our Bluetooth capability with the SenTiva 2.0 work. So I think that will read over into our R&D efforts. So we're bullish on the market, bullish on the disease state and what we can do to help patients. We concluded the THN3 study. The readout on the last set of patients where we changed our titration protocol has been really positive. We're still working with the FDA to find out what exactly would be required for confirmatory study but we expect to start in '20 on that. And we've stabilized the product design, stabilized the supply chain, we understand our titration protocol much better than we did when we first inherited this business. And so I really think this is a great opportunity for us.

[Operator Instructions]. Your next question comes from the line of Scott Bardo with Berenberg.

Just looking at your results today, and I happened to reflect back a couple of years ago when you had your Capital Markets Day. And back in 2017, you had 65% gross margins and nearly 22% operating margin. And you were calling out by 2022, you should be a 70% gross margin business with well over 20% operating margin. And now you appear to have achieved your gross margin target 3 years early, and yet your operating margin has contracted by 500, 600 basis points, not expanded. So gone in completely the diametric opposite position. So look, I know that there's been moving parts, and I know that you've invested in some pipeline that wasn't apparent in 2017, but clearly, big differences. So I guess the nature of the question is when do we start to see some operating margin performance which is more respectable for a 70% gross margin business? Do we start to see that evidence as of next year?

Yes. We're not giving 2020 guidance today on the call, but you're absolutely right. That is what we laid out, and I'm extremely pleased that we're able to see the gross margin read through 3 years earlier than expected. And I even believe now, our belief is the target should ultimately be closer to 75% over time. So we -- in our strat plan, think that the profile has changed. One, we've built, I think, a fantastic pipeline here and we've made significant investments in our international expansion. We've also made significant investments in getting Neuromodulation back on track. We've made significant investments in things like TRD and starting to build that out both in SG&A and R&D. But then we've also made investments with ACS and TandemLife. And so all those things will help us, I think, drive a sustainable high single, even double-digit, growth rate over time. And obviously, then you'll start to see the leverage come through in the P&L. But this window in 2019 and 2020 is still largely an investment period of time with the pipeline and the R&D investments that we're making.

That's helpful. But just to understand direction actually. And I appreciate you're not going to give us any real concrete guidance. But your R&D ratios are quite high, and you're talking about a broader TRD trial next year. But at the same time, that should be coupled with more revenue from CMS. Can you give us some sense actually whether operational ratios, cost ratios have some leverage potential next year? Or do you think that they could expand further? Just some sense in direction would be helpful.

Yes. I think a lot of the R&D investments, we think as a percentage of sales and even absolute dollars, are relatively consistent going into 2020, that the investments within that mix will be more focused towards TRD and heart failure as those are really progressing. We are driving leverage within G&A, but we're still making investments in sales and marketing, particularly with TandemLife and international expansion.

And there are no further question at this time. I will turn the call back over to Damien for closing remarks.

Julie, thank you. And look, everyone, thanks for your questions this morning. And on behalf of the whole team, we really appreciate your support and interest. And thanks, and we look forward to the next quarter. Cheers.

This concludes this conference call. You may now disconnect.