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

Note that Wells Fargo Securities events are by invitation only. Members of the press or media are not permitted to join. [Operator Instructions] Also, please be advised that today's conference is being recorded.

Okay. Well, good afternoon, everyone. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. And it's my pleasure to host this session with the CEO of Penumbra, Adam Elsesser. Adam, thanks so much for being here.

Yes. Thanks for having us.

So in terms of format, it's going to be a fireside chat for 30 minutes and we'll start with Adam, the recovery.

On the Q2 call, you talked about sales in your direct markets being down less than 90% of pre-COVID levels in the second half of the quarter. And I think June trends are even better. So -- and based on competitor reports, peripheral has held up pretty well, and we heard stroke cases have come back to pre-COVID levels in some geographies. So what can you share with us, Adam, on your expectations for the recovery in the second half?

Well, thanks, Larry. It's a good question. As you highlighted, we saw certainly a good recovery in the second half of the second quarter. And so far, our recovery is continuing, and there's no reason to think it will be different than our peer companies as we go forward, but it's definitely been positive.

It's good to hear. And one thing that was interesting is we saw international sales down a lot more than the U.S. in the second quarter. And part of that are largely because of lower distributor sales. It would seem like you would get some of that back in the second half of 2020 when procedures recover because I don't think demand was down 40% in Q2, which is what -- your international business, I think, was down. So is that fair? Do you think you'll get some of that back?

Yes, that's definitely fair.

Okay. I guess we're not probably not going to give any quantification of it, but eventually, demand will -- would -- should -- the demand and your sales should correlate at some point.

Yes. Absolutely. And just maybe to remind everyone that the issue around our distributors that we were talking about in that second quarter call related to a lot of our -- all of our distributors where when the quarter started in April, we were all faced -- every business was faced, we were faced with what does this mean and a lot of uncertainty around where this was going in that part of time. And rather than sort of push our distributors to honor their commitments and what they had expected to buy, we encouraged them to be careful and make sure that they thought about husbanding their own resources so that their businesses would stay solid. So we thought we had tried to lay that out pretty clearly, but there was nothing fundamental about their businesses and about those markets that we were worried about. So that's why your assumption about the second half is fair.

Well, let me ask one more on that. I mean is there -- could there be catch-up? And we've seen some companies where distributors have worked out -- worked down inventory in Q2, we've seen some of that inventory actually bounce back where there's some catch-up, if you will, above sales, above exceeding demand. Is that a possibility for you in the second half of this year?

I love your optimism, and I'll hope it wears off on me and our business. But I think it's too soon to lean in that hard. But I don't think this is going to be an issue that we're going to have to worry about.

Well, I asked because if it happened, you might want to call it out if you thought that sales were kind of above trend, if you will, and there was catch-up, so people didn't kind of get ahead of themselves looking forward.

Yes.

Okay.

Yes. I think we'll wait till -- we still have a little bit of time here in the back half of the quarter, let's address that at the end of the quarter. But don't read in anything negative to that, guys.

Okay. But it's a possibility, it sounds like. It's possible. Okay. Got it. We'll move on. And I guess, maybe, Adam, if we think about kind of the -- you didn't give guidance, so it's tough for The Street to model the second half. I think The Street has sales down about 11% in Q3 and some growth in Q4. Is that -- do you think The Street heard the messaging correctly? Is there anything that you would point out that people didn't maybe take into account? Anything like that?

No. As you know, I'm not going to speak to specific -- or numbers or consensus numbers. But we -- barring the uncertainties of COVID that aren't specific to us or anybody else, just that we don't know yet, I -- our business continues to have a positive trend that in July, we commented, we saw that continue. That has continued, and we feel really good about where the business is right now going forward. We just had an incredibly successful launch, and that's a very positive thing. And I think the whole team is pretty fired up.

Good. We'll definitely get to the launch. I guess one last modeling question, looking at 2021, it's a difficult year for The Street to model for obvious regions. The Street has you at about 29% growth year-over-year. Any headwinds, tailwinds that you would call out as we think about 2021?

Yes. If you look at the things that are going well, and we talked about this just on our last earnings call, let's start with the vascular business and the launch and our ability, we just also got another product approved, which I commend you for picking up and writing about the CAT 7, both of those products give us an opportunity to really go after the core part of the 430,000 patients that have blood clot in their body in the U.S. and are being treated by our current customers. And I think that gives us a huge opportunity ahead of us to go after that. The stroke market still is underpenetrated. There's harder work to do to make sure those patients get to the right place. It's a little easier on the peripheral side because they're already in the right place being treated. But there's still a huge opportunity there. And then, of course, the REAL System and the expanded opportunity that has come because of COVID and the change in reimbursement and our ability to sort of continue to iterate and improve and innovate on that product. So we have a lot of positive things happening that I think will set us up for pretty successful years ahead.

Perfect. So let's turn to neurovascular. I know you have an exciting new launch within vascular. But obviously, there has been some controversy the last couple of weeks in your neurovascular business, so I wanted to focus on that. We've gotten a lot of questions, I know you have, with JET 7, XTRA FLEX and because of the risk with the distal tip rupturing if you use -- if you inject contrast media through it. So I guess, maybe, what are you doing to address this concern with physicians?

Yes. Well, let me -- before I specifically answer that, maybe for those who aren't as familiar with this, maybe just give a quick sort of factual update as to what this is. So a lot of -- I've heard a lot of folks sort of talk about this in a little bit sort of off a fact pattern way. So aspiration catheters are designed to go up into the brain and suck out blood clot. And that's what the JET 7, XTRA FLEX does really, really well. I think everyone who has done any sort of channel checks on it knows that it tracks better than any other catheter out there right now. And it holds its shape while you're putting aspiration force on it so that you can get the clot out. What we learned after tens of thousands of cases that, in some cases -- again, not that any case you never want your product to ever not perform, and I don't want to diminish this, it's -- we would love to have them be perfect. When -- in a rare number of cases when the catheter has injection of contrast put through it, the tip expands a little, and that expansion has hurt and caused the death of some patients. As soon as we did our evaluation and went through all of the work that is sort of part of running a medical device company through your design control and quality system, we made the determination that rather than rely on the IFU that existed that said do not do a contrast injection through the catheter, we wanted to make that even more strong, more aware so that physicians would be notified. And if they didn't know what the IFU said, they would now know. So we worked with the FDA. We submitted a change to our IFU and had that cleared. They, of course, reviewed all of the data and all the incidents and everything to agree. And we submitted that or sent that notification out to everyone who had purchased it through their -- through the formal channels as well as giving it to the society so that there would be no possibility that people wouldn't know about this. It seemed like the right thing to do. It's, without a doubt, being proactive in making sure people know about it. Now we certainly understand that some doctors need to or make the decision using their really great clinical judgment, that in certain cases, they may want to inject contrast. And then we just wanted to make sure that in those cases, they would not do it through our catheter, that they would use a different catheter, whether it's a catheter that we sell or somebody else's. And they get to make that choice. That's what a doctor does, and they have great judgment. So that's sort of the fact pattern. It's unfortunate, but not surprising, you guys know how competitive this space is, that this issue has become sort of a controversy, as you said, in large part driven by other manufacturers as well as a few doctors who are frustrated. But it really isn't that kind of issue. The vast majority of customers do not inject contrast. And just to remind everyone, the reason you don't typically want to inject contrast is there is the possibility it may be small, it may not be a clot being pushed back out of the catheter when you inject contrast. So you wouldn't normally do that if you didn't have to or feel that in that particular case, it's the right thing to do with your judgment. So as you all know, Larry, the catheter has done incredibly well in the market. And I think competitors saw an opportunity to try to take advantage of it. I don't think it's working. And in fact, in some sense, it may backfire in the long run. But it is sort of the way it is. I will point out that it is ironic that one of those competitors or other manufacturers who has been very aggressive using this notification, while they have been doing that, we're working on their own notification to doctors, not on an aspiration catheter but on another high-profile product in the neurovascular that sent out, updating their IFU to warn of serious events. So it's not necessarily an uncommon event, and it was a little surprising that one company would do that at the same time, providing their own notification shortly thereafter. Again, not on a similar product, not same issue, but another serious issue. So hopefully, people will understand this and won't spend so much time on it. But while they do, we're here, we compete.

Okay. That's very helpful background and color. A couple of follow-ups. One, Japan. Can you just, for the record, tell us what the situation is in Japan? Because I think there has been some, I guess, misunderstanding of the status of XTRA FLEX in Japan.

Yes. Again, not misunderstanding. I think everyone knows that there's a competitive sort of innuendo and so on being put out there. The status in Japan, as you know, we work through a distributor. We don't control that shown in. But that being said, they were in the early stages of that launch. When we did our analysis and came up with this determination to change our IFU, they obviously paused that rollout and because just like we had to go to the FDA and have the FDA approve our changes to the IFU or clear it to -- I'm sorry, to use the technical term, they have to do the same thing with their regulatory body. And so you have to wait until the U.S. one is done, now they're going to go and get that changed, and then they'll continue the rollout.

So the product's -- it's not -- it's going to be launched over the coming months in Japan.

That's certainly what we have been told by our partner.