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

Good afternoon, everyone. My name is Margaret Kaczor. I am a research analyst here at William Blair & Company who covers Penumbra. Now I am required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. Now with that said, thank you all for joining us. We're pleased to have Adam Elsesser, CEO of Penumbra; Maggie Yuen and Jason Mills from Penumbra with us as well. As we know, it's a virtual conference. So we've moved to a fireside chat discussion, feel free to ask as many questions as you want and submit them online, and I will do my best to field them up to the team. But with that, maybe we can start the Q&A with you, Adam, and we can start with COVID just because it's so eminent amongst us right now.

So yes. What's been interesting is the resilience that your business has really shown in April, given the discussions and disruptions we've heard from the peers, and even at physicians on the ground. So maybe talk to us about the impacts that you were seeing in neuro and the vascular segments? And how has that trended since that Q1 call?

Yes. Well, first of all, thanks for having us on this conference. It's great to be part of it. So really, if you look at the products we make, I would divide them into sort of 2 categories, both within Neuro and our Peripheral Vascular business. The first is sort of the emerging cases. The cases that sort of really should be done, need to be done. And one would hope that, that would be the least impacted and it was, but it still had some impact. And that showed up, it was pretty widely discussed in the mainstream media as well as in sort of academic and clinical journals that both on the peripheral and cardiac side as well as the neuro side, a number of those emergent patients didn't come to the hospital during a particular period of time, really focused, I think, in the most acute way at the beginning. There's really no sense in data or evidence or even, I think, I believe that those patients were not having those issues that somehow this slow down those larger issues, but really was a question of about a fear going to hospital settings where they would exacerbate whatever they were having by contracting the virus. And it makes sense. There was a time in late March going into April, in which we saw over and over again, scenes from hospitals starting in Europe and move to other parts of Europe and in the U.S. of a really sort of pretty challenging moments in hospitals. We mentioned on our earnings call in early May that we had -- as we shared our April numbers, that we had seen a tick up or 2, we haven't really commented and really aren't going to comment on a sort of monthly or weekly basis going forward. But the general sense, obviously, that is out there is that some of that is sort of starting to get back to normal. The other part of our business is focused on what is a broad category of more elective cases, but within elective there are really a range of categories. On one end of elective is sort of the truly voluntary. I don't have to do this procedure, aesthetics, other things fit into that. And then the other extreme is, sort of, it's pretty necessary, it's just not emergent. You should do it soon because it's a necessary, but not emergent procedure, call it urgent, for lack of better term. And almost all of our other products fit into that sort of category. So if you look at us going forward, it's unlike -- we don't really regain the lost emergent cases because that moment to treat them as past. But all of the cases in which -- are urgent, sort of elective urgent, it's likely that they will get treated at some time in the future as this happened sort of cleans up. Where I would look and how I've been sort of judging the pace of this recovery, if you will, is really twofold. One, hospitals' continued ability to make some fundamental changes just like every business has had to make, to make their environment safe for both their workers, but also patients, and there have been a huge amount of effort put into that so that patients are going to be safe when they go into those settings. And then the second thing is just generally people's own sort of sense of willingness to start to think about life within this current moment. And we've seen a lot of changes, obviously, in the past weeks, where people are easing up both because they're allowed to, but also out of their own personal choices. And so the combination of that tells me that more and more patients will likely get treated when necessary, and I think that bodes well. What we don't know is what happens in the future, do we see second and third waves, what do we make about certain states where rising numbers are still happening? It's hard to predict the impact of those, and do we see attitudes starting to change again from where they are today. But again, so far, there's some optimism around patients going to hospitals to be treated.

And so you talked a little bit about the hurdles of maybe coming back in that second wave or third wave, if they have or not. But if you listen to kind of the street commentary and we had another company, even earlier today that suggested maybe some of the hospital pieces get back normal by year-end, is that possible for you guys in terms of the mix of the businesses as you're looking at it?

Yes. So as I said in the 2 categories, it's -- the question is, first, how fast do people opt to go to the hospitals that have had emergent procedures. And I think one can look at current behaviors, and say, people are now in many states getting out and about, in some cases, sort of fairly normally going to restaurants, things. Other states, we live in the Bay Area in California, which is much more -- much slower to sort of open up and have that, everyone wears masks, and they're still a limited thing. But inside, there's still behaviors that are starting to change, people are creating pods of friends and things to get together with. So as you make those personal decisions again throughout various parts of the country, you're likely -- it all is moving in a direction of a slightly different behavior, if not much different behavior, than we were a number of months ago. And so you add in the sort of risk/reward of -- I've had a stroke or some other urgent event, should I go to the hospital? If you're willing to go to dinner with friends, you're likely going to say I'm going to go to the hospital. I could be wrong on that, but that seems fairly logical. So on that side, I think we're moving in that direction. Again, that could reverse itself. But so far, I think that's a positive. On the other side, the cases that I said are sort of elective urgent, I think, we're going to get some of those done now. We are, and we're going to likely try to get caught up. Hospital systems would want to catch up as fast as possible. And obviously, you're going to prioritize that. So for that, I'm optimistic. What my only caution was, if all of that were to continue, we'd be in great shape. If something changes that, that we don't know or can't predict then, of course, we have to just deal with that reality at the time. But so far, the positive direction, the work that hospitals, I know we're doing to ensure and communicate that to patients that they are safe places to come is pretty extraordinary, and they should be complemented for doing that work. And I think it will help a lot of people.

Got it. No, that's helpful. And so there's 2 parts of the equation to this as well. There's the existing cases and patients may be in the pipeline or they have disease. It's the -- there's the emergent cases. But talk about some of the market development efforts in terms of EMS triage and even legislative efforts that you guys have used in the past to drive growth. At least let's talk about stroke initially, and then we can move to vascular.

Yes. Well, I think it's sort of a little bit of a mixed bag right now on stroke, particularly. There's been a lot of conversation, both in the sort of medical community, but a lot of conversation in the mainstream media, both around 2 issues that involve stroke. One is the fact that patients weren't coming to be treated, and there's a lot of coverage around that. And then around COVID patients specifically, developing clotting issues and some of them developing or potentially developing strokes or having strokes because they had COVID. There were particularly 1 high-profile Washington Post article, some coverage in CNN around that topic. And I think when you add both of those different stories, but both of those together, there's been a lot of conversation sort of in the public around stroke treatment, which is going to have a benefit because, I mean, I've had neighbors and friends who sort of tangentially know what I do, say, "Oh, is that what you do? Is that what they're talking about on this article or in that newscast?" And I think that's the kind of thing that has huge impacted, that there's an awareness in the world, in the country now that there is such a thing as stroke treatment. There's a reason to go be treated. And I think that is the kind of the awareness and publicity is hard to pay for and create, but for a crisis like this, if you will. On the other hand, the negative side is, it's -- I am not speaking for the legislative team focusing on the Get Ahead of Stroke campaign. But one can just imagine the legislative challenges that most states are facing with their economy and unemployment issues and all of the other issues that they're facing right now in our society that, are they going to prioritize stroke triage legislation compared to some of the other things in the short term? Probably not. But again, I don't want to be pessimistic on that. It's certainly possible. But there is, I think, a renewed discussion around stroke as it related to COVID that I think is something that can be harnessed. And I know we're working on it with the societies to try to harness that in the short term.

Good. And do you think one impact is greater than the other at all, both this year or future years?

It's hard to know. I think whether it's the legislative effort or awareness and which matters more, I don't know. I think awareness has got to have a big impact. If you think you can be treated and that's in your head, you're going to ask questions, assuming you have someone around to help ask questions. You're going to ask the ambulance driver, EMS professional, where to go or what you're doing. So I think that has a huge impact. Legislative changes in the few states that have done it, we've shown have a big impact, too, but there's always a lag time because there's a training of everybody, everyone has to sort of get on the new protocols. And so I think the combination of both is fantastic. But if I'm going to be slower on one, again, I'm not saying I am, but if we were to have it combined with a heightened awareness, that's a trade-off that is better than not having that.

Theoretically, one should lead to the other.

100%.

Okay. So let's move to vascular a little bit. And if you can, give us a little bit of puts and takes in terms of awareness there, potential to kind of offset with some patient volumes.

Yes. So there, it's even greater awareness going on right now. The issue that you see a little bit in stroke and got some publicity has shown up in much greater percentages and numbers around hypercoagulable issues for certain COVID patients. There's been a lot of mainstream media on it. There's been a lot of academic interest. There was earlier on, in April, there was a lot of discussion within the physician opinion about what to do with these patients. We -- others did it, but we sponsored a symposium, sort of a webinar, if you will. We had to -- just an extraordinary number of people registered to sort of hear what some of the experts were talking about. Again, some of it did involve our products, some of it involves sort of a more holistic view of how to manage those patients. But I think it's driven a much different sort of viewpoint and even public awareness that clot in your body is a thing. It's a real topic. It's something you can't really miss. And I think that is going to help drive the conversion from sort of an old-fashioned approach to what we think is a more modern approach around just get rid of the clot. If it's there, it shouldn't be there, just take it out and move on. So I think the timing for our business is good. We can use that. We just got approval for not 1, but 2 topics at the Investor Day that we held in December. We had talked about getting approval for 2 products in 2020, 1 midyear, 1 toward the end of the year. We were fortunate to expedite and have that happen sooner. So we now have both our newer size catheter, larger catheter, together with our automated tubing, if you will, for -- that deals with flow. It's a very sophisticated set of -- or technology that involves algorithms that sense flow in the catheter itself and automate in microseconds, the pumps moving on and off so that you cannot have to worry about sucking up too much blood and only really worry about catheter placement to suck out clot. It's really exciting. And I think now is the moment coming up soon to present that and launch that product and I think that will help, again, drive another round of awareness and excitement around the ability to just take clot out.

So do you think from that perspective, you would launch it, kind of, in these virtual settings, and that's going to get you enough traction in the field?

I think there's going to be a combination of both. A lot of hospitals are starting to open back up to some sales reps, and we're able to have interactions directly. Our ability to do a lot of this work virtually has been honed the sort of expectations around it. If you last year, this time, had asked a bunch of physicians, "Hey, would you dial into a Zoom call, and I can pitch you on a product?" They would have just deleted the request. They were like, I don't know what that is. And you want to come see me, come see me, and I'll consider it. Obviously, a lot of those norms have changed and the ability to interact has actually become more efficient. And people are adjusting. So we have that ability, but we also will have the ability to -- for the right thing be able to have in-person conversations. Again, not in every location, but in many. So I think the combination that will give us the ability, that and the fact that it is addressing one of the current needs head-on will give us the platform to be able to start this shortly.

So let's dive into the product. We've been waiting for this for quite a while. You've talked about it for quite a while. I think catheter aside, people generally get, but maybe if you could provide a little bit of an update in terms of why it's so important for some of these types of vascular cases. And then I think you had referenced algorithms in there, so I'm going to push you on that as well.

So let me start with -- when you think about removing clot, particularly a lot of clot in a large vessel. You really need a balance between 2 things. You need, obviously, a catheter that can remove a lot of clot, but it has to be paired with power aspiration. The idea of sort of constant strong vacuum power to suck out that large amount of clot. And if you -- there's a certain balance that we did the research around that got us CAT 8, which is our 8-French system, that was sort of as big as you really wanted to go with power aspiration and still be safe so that you wouldn't inadvertently sort of suck out too much blood or hurt the patient. When you go much bigger to 16, 17, 18, 20 French, you can't obviously use power aspiration. So it's just too big unless you have some other gauge or are sort of circuitry around limiting blood loss. So you have to then use a syringe, which sort of defeats the whole purpose of a large catheter because you do a little pull, you stop, you take it off, you reload the syringe, you do another pull. And you're not really getting much. And so you really want the combination of as big a catheter as possible with power aspiration and limiting blood loss. And so that's what this next phase is, is really capturing the ability to really limit blood loss safely. You also don't have to take your eyes off the screen because you're not having to look back at the tubing and see how much blood you're taking out, you can focus on the procedure. So the combination of all that is what this new combination of tools presents. And we think it's a huge step forward. Do we think it's the end of the journey? No, I don't. I think it's just like in stroke, where we've been able to just constantly innovate for a long time. The moment we launch this, we'll already be well underway, new tools that will supplement even this. But I think this is a pretty sophisticated advance. And it's more than just a new catheter. The lightening part of this tool has taken us about 4 years and has got a lot of innovation in it, a lot of pretty unique thinking. And I think will really be the cornerstone of the next phase of what we do.

Well, one of the things that has at least correlation-wise -- and we're financial analysts, so that's all we look at, right? But from a correlation perspective, historically in stroke, when you've had even new catheter launches and you do a small kind of single-arm study, you publish it. You tend to get some good traction around that, especially following the data. So is that still the prescribed thought process here in vascular as well?

Well, the first and most important part is the launch of the product. And when we're ready and you can tell we're getting ready, we'll know a lot as that unfolds. What we do clinically, in terms of getting data, whether it's single-arm data or whether we have confidence to do additional or maybe more sophisticated trial, we'll know that relatively soon after the launch. There are different things. Stroke is relatively sort of one thing. Here, you have the arterial side. You have DVT, you have PE. All of those will bring slightly different reactions or answers to that question. And we'll know a lot more in a short period of time and be able to answer that more particularly.

Okay. No, that makes sense. And then in terms of launch timing, I understand you guys typically don't give things like that. But is this going to be a limited launch, just kind of top docs? And is it going to take 6 months, 9 months, 12 months to kind of put this out into the marketplace?

That's a great question. I think you're baiting me with that question. So I'm not going to take the bait. But...

I tried.

But we'll know soon.

Okay. No worries. Okay. So in terms of the last question within vascular, there's been talk of competition within that space. So I think even when we hosted you guys at the West Coast field trip in August last year, you talked about there being new competition within the space. So maybe talk a little bit about that, specifics or not specifics, I have follow ups. Up to you.

Yes. Well, yes, it was inevitable that there'd be competition. It is one of those great interesting things in medtech. We, for many years, believed that the peripheral thrombectomy space was the fastest-growing space in medtech and underpenetrated in. And it wasn't, I think, until our Investor Day that we had the time and the forum to sort of lay out the numbers and the size and scope of the opportunity so people could digest it. So that was probably our fault. I think the investment community has sort of figured that out. I think COVID has helped with the issues brought to the forefront. And so there are inevitably going to be not only the company in [ array ] that just went public. And I'm thrilled that they're joining the fight, so we can move people to a new thought process away from sort of old-fashioned dissolving clot to just removing it. There is inevitably going to be more folks who come in, whether small companies like them or bigger companies that come into the space. There's -- look, we're so underpenetrated. We're in single-digit penetration in a large market that has a lot of innovation ahead. So there's a lot of room for folks to come in and help out and develop this. That being said, I think you know, and I think folks who watch us know, competition is never something we've sort of gotten nervous about or scared about, it fuels our innovation. It fuels our team. And we're -- we don't really get too uptight about it. It's pretty expected. What's nice is what people do with their own products. None of it so far has surprised us, and that gives us some comfort. It's a little more nerve racking when somebody were to come out and come up with something that's surprising. That could be more problematic. But so far, that hasn't happened.

Got it. Yes. And then maybe kind of a similar question from the neuro side. You've got a few larger competitors. Maybe on the margin having some impact on the market, but it doesn't seem like it's maybe had too big of an impact on you. Is there any opportunity for COVID to change that either in a good way or a bad way for you all?

Yes. On neuro -- on stroke competition, it's been an interesting sort of respite, if you will. Competition sort of stopped because sort of commercial -- traditional commercial activity sort of stopped for a period of time. And so if anything, we saw and this is just coming from the third-party data sources, a slight uptick in share as people sort of just reverted back to their name brand stuff. And we held that position. I don't think that will last. I think as things are opening up, people will come back out. There are companies who have products that they want to get tried and out there. Is -- does it go back immediately to sort of the normal competitive world that we've been living in for years? Maybe. Is there some likelihood that physicians are a slight bit more discerning in this moment where time is a little more precious and they sort of have a slightly different attitude about, "Hey, sure, I'll try your thing. Why not." Probably, at least with many physicians, there's still, I think, a seriousness around delivery of health care and efficiency and cost and all. And I think that will play to our advantage, at least around the edges but we have no illusions that we don't participate in highly competitive markets, and they'll stay that way. But -- and that will get back to some form of that sooner than later.

Got it. Yes. Well, we have 1 minute left, so the pressure is on the last question. Lot of ways to go through it. I'll actually let you choose. There's one question, you can go down the international path and the opportunity that you see there. And then the other question is on the financials. So your follow-on offering. You did a follow-on offering a few weeks ago. Really helped kind of strengthen the kitty, you didn't really need to do it, but you did it. So how quickly are you going to deploy that capital and where?

Well, let me in a short, short time answer both questions. Well, it's all a holistic one. The bottom line is we've done things very sort of serially. We raised this money not for purposes of sort of protecting the company. We did that earlier on with our revolver, which we didn't exercise. And we're now in a position, I think, to continue to comfortably invest in a lot of future products. In 2017, when we did our first follow-on offering, those are the things that we invested with that money that we're now talking about today, whether it's the REAL system, Lightning and some of the things that are now coming to fruition that we're talking about. So this allows us the chance to do that same work, which will have an impact both here and internationally for the years to come. So in a couple of years, we'll be able to be talking about the things we invested in with that capital and the growth ahead from that effort. And I can't wait, it'll be fun.

All right. Sounds good. Well, I appreciate the time that you guys had for us today. Thanks to everyone online, and hopefully, everyone stays healthy out there.

All right. Thanks. Take care. Appreciate it, guys.