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

Great. Thank you. Welcome. With us today -- welcome to the Canaccord Genuity 40th Annual Global Growth Conference. I'm Bill Plovanic. I'm a senior medical device analyst here at Canaccord. I'm just excited to have Penumbra management with me today. Penumbra is a medical device company. They're focused on the development of novel products to address challenging medical conditions with unmet needs. We believe Penumbra is positioned for continued growth with a portfolio of products that address unmet needs, drive a paradigm change and are in the early stage of market penetration. With me today is Adam Elsesser. He's CEO and founder of Penumbra. Adam, thanks for joining me today.

Yes. Thanks, Bill, for having us. Appreciate it.

No -- so I'd like, though, to start our discussion with the neurovascular business, really what the company was founded on. In this neurovascular segment, the market dynamics have shifted over the past few years. I've seen a slowing growth rate. By our estimates, that market penetration rate is approaching about 20% of the addressable patients. And typically, that slowing, you don't see that until you're about double that penetration rate. Do you think it's possible we could see a reacceleration of growth beyond this low to mid-teens in this procedural market? And if so, what are the drivers of that?

Yes. Bill, it's a great question. And just to sort of remind everyone, because there's been a little bit of time with the COVID-19 pandemic and also since we've been talking about the growth rates in stroke, the market -- this is not a traditional sort of ground-up, nuts and bolts sort of penetration, where you're sort of going through the sort of sales and marketing channels to penetrate. This is a situation in where the biggest hurdle is getting the patients to a hospital in which they can be treated. And there's some real structural issues that need to continue to happen. The first number of years after the clinical trials that proved that you could be treating these patients showed a serious level of growth, a lot of which is coming from the local efforts of the physician community, the hospitals, stroke coordinators and ambulance services and so on. And like anything, that's never going to be a straight line, and we've been talking about that for a while. Then you add in the moment that we've seen right now with the COVID-19 pandemic and the unrelated issue of people likely not going to the hospital after they've [ had ] a stroke for a fear of catching the virus and so on. You're obviously going to have a step backwards in that process. But there's nothing about the underlying motivation, the underlying data, the need to treat these patients that tells us that, in the long run, we're not going to get back into that stage or place of growth. It's just a question of when is the right time, when can people focus on doing that local work. And obviously, it's going to be not -- it's a little delayed, or it's a little pushed off. Some of that work was physicians going to local firehouses and ambulance services and having discussions every week and reminding them of the importance of bringing the patients to a comprehensive stroke center, and you can't really do that in a pandemic. So some of that local work, which is high-touch, can't be done. But it will get back to it. It's too important. And almost, the fact that we've had this little pause, I think, highlights the need to be ready to do it when the time is right. So from my vantage point, there's nothing about this that doesn't bode well for the future, more patients being treated. It's just going to can take a little longer.

Okay. And then just from taking a step back, just a bigger picture perspective, I think you mentioned the physicians really building the channel in that referral channel. I think there's also maybe some legislative actions that you're working on. I was just wondering, how important is that in terms of driving or opening that market up further? And what's that next big leg of growth driver that really opens the gates to reaccelerate them?

Yes. Well, I think, to be honest, given where we are, the need to do the local work would still drive this growth for a while. Legislative efforts have made some progress in some states. But again, I say this more without direct knowledge of that legislative campaign. That's really been run by one of the medical societies. And we help, like all the other companies, fund it, but we're not the ones driving it. My impression, just saying, logically, as state legislatures now are pretty busy with a lot of other issues around their own economic budgeting and survival and so on, that this may not be the highest priority in the short term. But -- so I do still think that we need to look toward the local efforts to drive this for a while. And I think, as I said, there's so much passion in the physician community and the medical community for doing this. We all have stories. In fact, just this weekend, I had a colleague seek our help in getting their parent transferred from a hospital that wasn't going to do an interventional procedure to one that maybe could. And we didn't get involved directly, but we were advising as to what to say and do. And there's politics involved, and that's unfortunate when that gets in the way of good patient care. So I think the right -- it's pretty clear it will happen, and it's just going to take time. And in the meanwhile, the patients that are getting treated are fortunate, and there's a lot to look forward to in the future.

Great. Thank you for that color. I think in the stroke area, you've talked about some new products in the pipeline. You had one recently approved, I believe. As you focus on the continued innovation in stroke, where do you view the biggest opportunities to improve intervention?

Yes. I think it's a -- that's a great question, Bill. The way we've always looked at this field as well as some of the other fields, like peripheral thrombectomy, is really just in the most basic terms. How does a case look? How -- what's the normal case flow? And what do we think we can get to? And with stroke, I've always talked about it in a very simple term. We have a goal. Whether we get to this exact goal or not, we'll find out. But the goal is that almost every case, we can reliably and routinely get all of the clot out, not part of the clot but all the clot out sort of in 5 minutes or less. And we're nowhere near that with our current technology, and I don't mean our company's but the field's technology. And the goal is to keep pushing and innovating in every part of the case, so that deals with time and ease of access and also completeness of clot removal, so that you can get to that point. And that's what the next phase of our innovation hopes to do, really adds up all of those variables and tries to move the ball forward. And so that's why I'm excited about it, because I think that's the key goal, is to just continually make this easier and easier and more and more reliable. Many of the cases are that way now, and that's incredible. And when you see those cases or hear about them, it's very satisfying. But unfortunately, not everyone is like that, and we've got to get to the point where they're all that simple.

Thank you. And then COVID has definitely had a significant impact on companies and the market short term, as we've already discussed. But what do you see as the -- just operationally, the changes in the long-term market dynamics, your sales process, your patient care journey? I think a lot of the companies we're talking to, it's really kind of had them rethink a lot of what they're doing. Is there anything you could elaborate on for us for Penumbra?

Yes. Look, like everyone, we've all had to rethink about how we operate. And if you look at the customer side, there's definitely been some changes. We just had a product launch with Lightning 12, and I'm sure we'll talk about the specifics of that. But we did a totally virtual launch of that product. We were able to have, I think, a much bigger impact with that launch, with that method. How much of that is translatable to future sort of non-COVID world? It's hard to tell. There are certainly parts of it that we did that I think are. But you're able to capture -- and there's a reliability of -- you can get a lot more attention virtually than you used to be able to. If you had asked to have a video chat call with physicians in a practice before COVID, you would have gotten a lot of blank stares. The answer would have been, "I don't even know what you're talking about. You want to see me, come to the hospital and find me." And now you can routinely have an entire group or others get together and have a discussion around a new product or an issue of importance. So the question is, does that stay? If so, then there's some efficiencies that build. If it doesn't and we sort of resort back to the other way of -- the old way of doing it, then, at least, we found a way to navigate this particular phase. But I think, like anything, common sense tells me the things that are beneficial, the things that allow the world to work more efficiently and effectively, they'll probably stay, or some versions of those will stay. And I think that's really valuable. We found at Penumbra outside of the sales channel is -- I said this on our earnings call just last week -- we really are coming away out of the most prolific period in the company's history, which is sort of a weird thing to say when we've been on lockdown. Our company's headquartered in the Bay Area, so we've been on lockdown quite a long time since middle of March. And we've had to do a lot of different things. Our communication internally has actually improved dramatically because we had to. We got lazy before and relied on sort of organic communication a little more. And now we've had to be much more disciplined. And to be honest with you, it's made us more productive. And so that's not going to go away. That's crystal clear on the benefits of that.

Yes, I think you already started talking about the peripheral business a little. I'd love to dig in that a little more. That's a business that really, I think, had been growing in the background and received a lot more attention last year and then this year. It's become a bigger and bigger piece of the business and is -- I think is surpassing the original neurovascular at this time. Just how do we -- from a high level, as we think of that business, what are the drivers? What's the size of that? And then I think most importantly is, we have a lot of people asking us is, compare and contrast kind of the -- how this is relative to neurovascular. Because I think people look at it as so this is neurovascular 2.0, but I think there's a lot of differences. And I'd love to hear your perspective having being in both of those businesses.

Yes. So those are all great questions. Let me maybe start with sort of sizing the market and how we think about the market opportunity. We did this at our Investor Day, but I think it bears repeating right now more than ever. So the neurovascular market -- and let's just use U.S. numbers as a proxy for the global market. In the U.S., in neuro, there's about 200,000, give or take, strokes that people estimate could or should be treated endovascularly. And we're maybe 20%, 25% of the way there depending on exactly what -- where in the number 200,000 you land on. But the big issue there is getting the patients to the right hospital to be treated. In peripheral, let's start with a much different number. So there are about 425,000, 430,000 patients in the U.S. that are intervened on or surgically treated today for blood clot in their arteries or veins or pulmonary artery. So that's more than double. And those are patients that are being intervened on or surgically treated already by one of our customers or a potential customer. They're intervened on or surgically treated with no data for that procedure. So it wasn't like those procedures, which is either -- when I say intervene, I'm dripping tPA through a catheter overnight or a legacy product or even new technology with companies or surgically treated with no data. There is no clinical trial, randomized trial that proves you should do that. So they're being treated because they have to. That clot's a huge issue on the arterial side. You could lose a limb if you don't get it out. In certain cases, in PE and others, you could have serious consequences, including dying of a PE. So those are serious issues that they compel the physicians to do that work without any data. So that's our immediate market. And we're not even single-digit penetrated -- double-digit penetrated. We're still in single digits of that 400 and some-odd thousand. So that's our first -- and again, the patients are there. They're being treated. We just have to offer a better and more logical alternative. And that's the first sort of big mission. And so by definition, you're already looking at a very different model than neuro, where you have to do a lot of structural work to get the patients to the right place to be treated. Here, you don't have any of that issue and you have double the market size. And you have catastrophic consequences if you don't treat them so much so that people have been treating them with no data for years. So that, by definition, I think, answers some of those questions. Then when you go beyond that, you still have a number of other patients up to maybe another 300,000 who have DVTs or PEs that aren't part of that sort of group that are being treated and could be treated if you had more data to prove that they're getting treated with medical management and you could prove that the newer technology is worth treating. There have been trials in the past that have run with tPA dripping and some of the other legacy products that have not shown that, but I think we're getting closer. And we -- it's still early in the Lightning 12 launch. But maybe sometime in the next year or 2, we feel and the field will feel that we should run trials that open up the market to even a greater number. So when you add all of that up together, it's a much bigger opportunity. It's compelling. It's necessary. It's not sort of optional, and you're really not competing with more entrenched technology that's been proven that you have to be better than in a lot of those patients.

That's really helpful. I think, in peripheral, you started really targeting as an arterial company, and then you moved into venous. And I was wondering, given that experience, if you could break down the market between the arterial and venous and really how that's evolved over time.

Yes. So we -- the market -- we didn't necessarily say -- start out saying we're an arterial clot company versus venous. The clots are different in different parts of the body in different vessel beds. And unlike stroke, where there's a smaller band of technology that will sort of deal with stroke, and we've gotten that better and better, here, you're going to have slightly different solutions for different parts of the body, different vascular beds and so on just because of the nature of the size of veins versus arteries and different parts of the body. Obviously, a product that can remove blood clot below-the-knee on the arterial side or in the hand on the arterial side is going to be different than what can remove blood clot in the veins in your leg and so on. So this is a road that we think is -- we're going to be on for a while in our innovation. I think that plays to our strength. We have, again, always set the goal that is similar in the way we did stroke, which is our goal is to make products that just sort of so routinely and easily remove blood clot in the body wherever it is that people stop thinking about it. It's no longer sort of a thing. You just take it out. You don't have to worry about dripping tPA, putting the patient in ICU because you're worried that they might have a hemorrhage and all that. You just take it out and send them home. It's no big deal. We're not there yet, but we're way closer than we were before with the launch of Lightning 12. And that is a platform, again, not -- it's a great product independently. Don't get me wrong. I'm incredibly excited about it. But that's really the starting point for the next phase of development for our projects around how do we go after blood clot in the body. And I think the road map we have and the knowledge we have now is pretty exciting to see where this goes in the next 2, 3 years.

Agree. I think you're leading me in the questions because I literally was going to ask about the Lightning 12. And with new products, it's -- sometimes, it can accelerate growth and penetration rates. And it really depends on the incremental utility that, that new device brings. So how would you characterize that product in terms of -- is it -- do you think it's something that just continues the penetration and growth? Does it accelerate it? And what's the kind of 3 key attributes that, that product really brings? And why are they important?

Yes. Well, let's start with the attributes, and then I can sort of address the comment on whether I think it will continue or accelerate it. The attributes are really 3 fundamental attributes. We fully understood 2 of those. We understood the third but didn't appreciate how important it was until after the launch. The 3 attributes, the 2 that we understood was our ability to remove significant amounts of blood clot with this product, so not limited to smaller amounts but significant -- really any amount. And you can certainly -- if you're -- the investors listening want to go on Twitter and take a look at the cases that are out there, there are a lot of them that shows huge amounts of blood clot that are being removed with this product and doing it so without really any fear or worry about blood loss or taking out any sort of unnecessary blood. The last thing you want to do is take out blood and then somehow feel like you got to put it back in or recycle it. That's just not the way this should go. You just shouldn't take it out in the first place. So that dynamic is exactly what we thought the product would do. The other feature that we knew existed but we didn't fully appreciate how well it would be like is the auditory and visual signals that you get for being in blood clot. You can't really see that on your screen. And so you can now know whether you're in blood clot or not and, therefore, focus all of your efforts as a physician on maneuvering the catheter around so that you're in blood clot. And the rest of the thing is fully automated. So you're not turning the pump on and off. You're not doing all that, that's the value of Lightning. It's fully automated. So the combination of those 3 features, I think, is what's making the product do so well. In terms of the question of accelerating or just continuing, it's pretty early in the launch. I did say on our earnings call that I thought this was our best launch. I was alluding to 2 things. One is the method that we launched it, virtually, which was really positive. And two is just early reaction from physicians after one case. I've been doing this a while, and I've seen a lot of launches, and the reaction that physicians had after one case tells you a lot about how this is going to go. And that launch, that reaction has been great. So it's still early. I think it's probably wrong to characterize this launch as yet. But needless to say, we had high expectations for this and then probably exceeded that a little bit. So take that as all a good sign.

Yes. We have about 1 minute left, but I'd be remiss if we didn't talk about the REAL Immersion System (sic) [ REAL Immersive System ] and a very short amount of time to give us an overview on it and help us understand why you took on this project?

Yes. So the REAL System is designed -- was designed originally as a virtual-reality, fully immersive, sort of full-presence system that was mobile and wireless that would be used initially for a neuro rehab with newer applications coming. It was designed initially for work with a therapist and a patient physically together, in large part, because that's how therapists are reimbursed, to be physically together with their patient. Because of COVID, the reimbursement structure changed and now allowed patients and therapists to bill time for doing telerehab, which really opens up a-whole-nother avenue, which we always knew we wanted to go into but would have probably taken a little longer, where we get the system into the home, and therapists can do the same thing they could do when they're physically together but also then have the patient use it at home and do homework and really maybe accelerate their recovery and -- this is critical -- open up a number of other medical applications and medical conditions beyond just neuro rehab. So for us, it's an exciting moment. We have a lot to do and a lot to prove, both from a technological standpoint and a commercial model. So I don't want to get ahead of ourselves. But if we can do all of that, we certainly have the ability to help just an extraordinary number of people suffering from an awful lot of different medical conditions. And again, that fits exactly who we are and why we're around. So it's a mission for all of us right now.

I look forward to progress on that. And we're definitely out of time here. I truly appreciate the time you've taken with us today, and I appreciate for the audience as well taking the time to listen.

My pleasure. It's nice to be part.