Investor neglect can be a source of new ideas while also providing an element of downside protection. We found this combination to be compelling in our purchase of Livallova (NASDAQ:LIVN), which is the new name for Sorin and Cyberonics post their late-2015 merger. We think investor neglect was paramount, for Sorin, an Italian company, which merged with Cyberonics, based in Houston, changed its name and reincorporated in London. Indeed, we came across the company on a screen of our potential universe of companies, and had to do some digging into the new name we did not recognize, to realize the potential for these two well-known companies and the significant potential their merger offers.
Livallova is a healthcare company with a $3 billion market capitalization that holds leading positions in cardiac surgical equipment, surgical heart valve replacement, neuromodulation and cardiac rhythm management. In its cardiac surgery division, Livallova holds number one positions in Oxygenators and Heart Lung machines. It also is rapidly gaining share with its new sutureless Perceval heart valve, with a history of successful procedures in Europe and recently approved in the U.S. In Neuromodulation, Livallova holds the number one position in devices for the treatment of drug resistant epilepsy, led by its success with its AspireSR device. Livallova is also rapidly gaining share in cardiac rhythm management with Kora250 and Platinium in Japan and Europe, while retaining options on strategies to re-enter the U.S. market. In all, Livallova holds number one positions in over 60% of its revenues.
Livallova also has a strong self-help profile, with targeted synergies from its merger of $80 million over three years. As of its second quarter earnings call, Livallova indicated it was ahead of the first phase of $19 million expected in 2016. Creditworthiness for the company is easily demonstrated by net debt of roughly $75 million.
The ability to compound earnings and book value growth is not only supported by its new product introductions and merger synergies, but also its compelling research and development pipeline, which Livallova refers to as its New Ventures unit. In this unit, Livallova is pursuing groundbreaking new technologies in percutaneous mitral valve repair and replacement, the adaption of its Neuromodulation technologies for treatment of central and obstructive sleep apnea and also the potential to treat heart failure through vagus nerve stimulation. Not only is the potential market opportunity for all three of these areas separately in excess of a billion dollars, but through its merger, Livallova has multiple research efforts in each area to evaluate, streamline and prioritize.
Brexit created a window to initiate a position at under $50 per share for the Fund, which represents a compelling 50% upside to our fair value NAV target. Perhaps due to investor neglect on the name, Livallova trades at a substantial discount to its U.S. peers. We think this discount and its relatively smaller market capitalization also provide downside protection, for the company would likely be attractive to a larger entity looking to expand its product franchise.
From Third Avenue Value Fund's third quarter 2016 letter. Continue Reading »