Penumbra, Inc. (PEN) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Robbie Marcus, the medtech analyst here at JPMorgan. I'm very happy to present Penumbra, the next company, and a warm welcome to Adam Elsesser, the founder, Chairman and CEO of Penumbra. Adam?

Good afternoon. I want to thank JPMorgan for including us in this year's meeting. And of course, thank you, Robbie, for your coverage of Penumbra. Here's our safe harbor disclosure. Since our founding in 2004, Penumbra's vision has been to build a business that always focuses on bringing new treatments to help as many people as possible. For us, this typically means finding an area that no other company is in or has succeeded in and working tirelessly to innovate for years to perfect the treatment. We have built a purposeful structure at Penumbra and culture that allows us to do this over and over and in a way that we can scale as we grow. Our company has achieved a cumulative annual growth of 30% since 2015 when we went public. Our latest guidance -- revenue guidance in the third quarter call in November was slightly over $540 million. To fully understand Penumbra, one needs to understand the strong foundation we have built. Excuse me. This -- I apologize, I clicked too fast. This foundation includes the people, unique organizational structures and our capabilities. There are a few facts about the over 2,600 diverse people who work at Penumbra. More than half our employees are women. 75% of our employees who are headquartered in Northern California are nonwhite. Almost half of our managers and executives are nonwhite and almost 40% of our managers and executives are women. We have developed world-class capabilities across our organization. In addition to the engineering team or Pengineers, as we call them, we have also scaled our manufacturing capabilities to meet our growth and also built one of the best commercial teams in health care. All of our success, however, is driven by our innovation engine. It is the soul of Penumbra. This capacity has gotten stronger over the past 4 years. Since our IPO, we have received FDA approval or clearance for 18 new products, and we have invested over $150 million in R&D. We have deepened our leadership in our existing markets and created new markets. We have over 150 people in R&D doing this work. We have created an environment that has attracted young talent and empowered them to take risks and challenge normal conventions. With that foundation, where is Penumbra going next? Within our ischemic stroke business, we have added new competencies in technology, so we can improve the stroke procedure and maybe get to the point where we can get all the clot out of one's brain in 5 minutes or less in almost every case. In the peripheral, clots are very different, and we are focused on removing all types of clots from everywhere in the body. To that end, we have had to develop novel technology that allows us to employ different techniques, devices of various shapes and sizes and new tools to tackle the specific clots based on their consistency and size. In embolization in the peripheral, simplicity is the key. We have developed solutions that allow for simpler and easier-to-use coils, achieving greater volume with less time and less devices. However, we believe that to continue to have durable growth, we need to keep adding to our expertise. So we have added the capacity to design sophisticated electronics to use with our virtual reality product, the REAL system. We also built a software studio, complete with art direction, data analytics and user interface software to bring to life our technology. We did not have any of these skills 3 years ago, and now we have world-class technology and software to tackle some of these critical medical issues. Let's focus first on our Vascular business. It has grown over 45% year-over-year in the past 6 consecutive quarters, now at meaningful scale. This market may not yet be recognized by investors because it really didn't exist a few years ago. We entered the space to address a huge unmet need that exists with blood clots in the body. What we're talking about with peripheral thrombectomy are really essentially several different diseases. This includes acute limb ischemia, or cold leg, as it is sometimes commonly known. This is usually caused by a sudden loss in blood flow to a limb that causes pain and a cold sensation in the leg. Like a stroke, it can be caused by a piece of embolus from the heart and end up in someone's leg, making it ischemic. This also includes venous thromboembolism, which includes deep vein thrombosis and pulmonary embolism. Deep vein thrombosis is caused by anything that prevents blood from circulating normally. Some examples are injuries to the vein, surgery, certain medications as well as limited movements, such as sitting for several hours on a plane or being immobile. When blood clot from the vein breaks off and travels to the lung, it's called pulmonary embolism. It causes severe chest pain and feels sometimes like a heart attack. It also can be deadly. Treatments have evolved for these diseases greatly over the years. First, open surgery was the only way to deal with these blood clots. Then an endovascular approach came about. Physicians started using tPA to try to dissolve the blood clots. They would drip tPA overnight for several hours and watch patients in the ICU to monitor brain bleeds. But if we're to ask any physician, "If you had a blank piece of paper, how would you design the perfect thing to deal with blood clots?" I can promise you, they wouldn't say, "Drip a dangerous drug overnight in the ICU and hope that you don't have a brain bleed." They would design a product that just got the clot out, and we're done with it. With Indigo, you have a highly differentiated technology. It's really the only system that simply gets the blood clot out. I'm going to play a short video here sort of showing the basic technique used by Indigo. You start by going in through the femoral artery, usually. You pick the appropriate-sized Indigo device. Here we go. You snake it up to the location of where the blood clot is. You attach it to our engine pump, and you slowly start to aspirate that clot out. The key here is using power aspiration, continuous strong, almost complete vacuum, as you can see, with our engine pump. Over the past 5 years, we've added to our Indigo system from our original sizes. We initially began in 2014 just below the knee with smaller-sized catheters for arterial use. Then we added larger sizes for venous and a shorter device, CATD, in 2017. Just this past year, we brought out ENGINE, our newest and most powerful pump yet. I want to focus specifically on pulmonary embolism for a moment. We ran a trial called the EXTRACT trial recently, which led to our receiving our new indication for PE recently. The data from the EXTRACT trial clearly showed that patients that have clot -- can have -- that have clot can have their clot removed safely with little to no thrombolytics, very low bleed rates and really with shorter duration procedure times than we've seen before. The Indigo system offers this direct and immediate mechanical relief of the pulmonary obstruction to patients with PE. Now that we've shown that we can get the clot out safely, it starts to open up the field to make this treatment possible and accessible to patients. It also gives you a sense of our clinical methodology. We go into new markets like this. We provide this innovative technology that addresses these needs. We build the necessary clinical evidence in fields like PE, where data is necessary, and we offer that treatment to those patients. Let me briefly go through this case. This is an example of a PE case. As you can see, in this case, blood clot from the vein broke off and traveled to the lung, causing a pulmonary embolism. The symptoms, as I said, are similar to a heart attack, and this patient experienced severe chest pain. Prior to Indigo, the only real option was to use tPA to dissolve the clot and restore blood flow. Unfortunately, this patient was contraindicated to lysis or tPA. So our Indigo device was used in this case to save this patient's life. Since we began several years ago, we have learned where our Indigo system can have success, which has helped us refine our addressable opportunity. From estimates on the addressable market earlier in the year, we have updated our numbers recently with the most recent market data and the inclusion of PE, given our recent indication. Of the 1.4 million patients in the United States every year who have clot in their body, Indigo is being used in areas where we believe almost 425,000 patients that are currently being treated, either surgically or interventionally, can benefit with our system. The 425,000 patients are broken down between arterial, venous, PE and dialysis. Let's shift our focus now to our Neuro business. Our Neuro business contributed $246 million in global sales through the first 3 quarters of 2019, more than 60% of our total revenue at 12% year-over-year growth. Our Neuro business includes products for a wide range of neuro conditions, but let's focus on ischemic stroke today. The impact of stroke is significant. It's got a large effect -- it has a large effect on health and function across the regions. Over the past, we've talked a lot about the incidence of stroke in the United States, but it's really a global issue. And we estimate that the total addressable market in the U.S. is about 200,000 patients and almost 10x that outside the U.S., which translates to a total addressable market of approximately $7 billion. At our Investor Day last month, we talked about developing our global structures to allow us to invest and maximize our long-term growth. As an update, just a few weeks ago, we signed a broader collaboration agreement with our current distributor partner in China to transform our current relationship into a future joint venture that will bring a more robust local market presence to our China strategy. And separately, in Japan, we are actively exploring alternatives to our current partner for our broader portfolio, not our current products of stroke and peripheral coils, but our future newer products. In 2018, we estimated that 36,000 to 38,000 patients were treated in the United States, more than double the number treated in 2015 when the first 6 trials demonstrating the benefit of mechanical thrombectomy were presented. It will just take continued effort and time to continue getting all these patients to the right place to be treated. But now that mechanical thrombectomy is accepted as the gold standard, the debate shifts to technique. Several years ago, the big question was the role of aspiration. Now that question has been answered by the clinical data, by physician's preference and the companies that make the products, who are now competing with us in the aspiration field. And finally, in early November of 2019, the AHA recognized this by publishing updated guidelines that state that aspiration-based mechanical thrombectomy is now an acceptable technique, with Class I level evidence as a result of the COMPASS and ASTER and our own 3D study. We're currently in the midst of our U.S. launch of our most advanced reperfusion catheter, JET 7 with XTRA FLEX technology. This catheter is designed to maximize thrombus removal force. Our JET 7 with XTRA FLEX technology has a large 0.072-inch intralumen, the largest yet in our Penumbra system family. The flexible tip, enhanced lubricity are great examples of our continued technological innovation. We see only more opportunity to develop further advanced technologies, which we expect this year and next. The next step on a patient's journey is often inpatient or outpatient or rehabilitation. The objective of treatment in this phase is to rewire the brain, to retrain it to gain the function that is lost. A virtual reality-based rehab tool has long been recognized by the clinical profession as possibly making a significant difference. With that foundation of the science, we went ahead, as I alluded to early, and built an entire capability in order to go after this huge unmet need. So let me introduce you to the REAL system. [Presentation]

So with that introduction, let me touch briefly sort of on the commercial market for the REAL system. Starting with stroke rehab, a stroke survivor, depending on their particular condition, might receive help in an acute care hospital, a skilled nursing facility, an inpatient rehabilitation facility or a number of different forms of outpatient care. Our commercial strategy is focused on really 2 fundamentally important elements. The first is a very low barrier to the customer or to get the initial experience with this product and making sure that they have success over time. To that end, our business model does not require capital acquisition. Instead, it's a monthly subscription-model based and including everything that is needed in that monthly subscription. We're starting in 2020 at the beginning here with our current customers in the same 600 acute care hospitals that we currently sell our neurointerventional products to. We'll pair our existing team with a new care specialist team that are made up of formally practicing physical therapists and occupational therapists. This allows us to drive placement through proven and existing channels while ensuring that our customers have real continued success with this product. We previously discussed sort of the incidence and prevalence of stroke. We believe that in the U.S., there are roughly 45,000 providers of neuro rehab, which translates to an addressable market in the U.S. alone for that application of over $1 billion. To summarize, looking at 2020 and beyond, Penumbra has developed a broad, broad business beyond stroke. We have the growth drivers in place to achieve durable growth. In just the 3 markets I talked about today, there is $10 billion in total addressable market, and each one of those markets is highly underpenetrated. This translates to tens of thousands of new patients that we can help this year. In short, we have more drivers of growth than we've ever had before. Vascular has been and will continue to be a significant near-term contributor for the company. We continue to have significant new customer opportunities. Additionally, we expect to launch new technology in 2020 that will continue to help with our adoption and penetration of that market. And finally, investments in new future franchises and global structures will be very important for our longer-term growth. And with that, and just a few minutes left, I want to thank you for your attention. Appreciate it. Thank you.