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

Okay.

Let me -- we're starting with a pretty significant base already. We're not starting at 0. This makes up a significant part of our business already and that, I think, changes people's perspective. I think people forget that. I think people think stroke is the majority of our business. And we've moved past that already.

Sure. One thing that did surprise me, I don't think you've been specific about your pricing, but I sort of went into this launch, thinking $6,500, $8,500 for this product and those suggest as well as some of your public commentary that when I adjust for separators, the pricing of the product is probably maybe less than $6,500. And I think you could have priced this thing at $6,500. And one of those investor dynamics of Penumbra where they've had tremendous success has been -- I'd like that Penumbra gross margin to be a little higher than low, if the Penumbra gross margin were 70, not 60. Here's a perfect opportunity to kind of price at parity, get a really significant mix shift. And look, you're still going to get a mix shift in the product at $5,500 and $6,000 relative to Indigo, but you had an opportunity to drive more mix. And it sounds like based on your public commentary, you didn't take that opportunity. Why is your pricing strategy appropriate here?

Yes. That's a great question, David. And I think people miss -- I think people don't quite get on the investment side pricing from a hospital's perspective. And there's sort of a dynamic. Hospitals don't like to see a company with 80-plus percent margins. That's not a benefit. And they want to make sure they're getting well treated. And more importantly, when you're in a growth market, where you know you're going to attract more and more competitors, this is now the most sort of popular and sought after area. Remember, for years, we talked about this being a market, and it wasn't until recently that investors sort of recognized that. And so we're obviously going to attract more competitors and more folks coming into this market. And the last thing you want to do is price yourself at a point where in the middle of your growth, you're going to have to reduce price. That's sort of a buzzkill, if you will, I mean, in the middle of that process. So we price it fairly, and everyone feels like they're getting the right price. And if you look back at our history in pricing strategy with stroke, everyone thought we would have to reduce price when competitors came into the market with aspiration catheters. And we've never reduced price, and we withstood that competition. And the last thing you want to do is have competition lose share and reduce price on top of that. That's not a positive thing. So we price things very carefully. We're very strategic about it. And I think in the long run, that sets us up for a much greater success.

Is Lightning 12 in this configuration? I know you don't have a label yet for PE, but obviously, you're going to pursue one. Is Lightning 12 in this configuration? Is that the product you take into pulmonary embolism? And is your pricing likely to be consistent?

So -- yes. So Lightning 12 is not going to be -- once there's an indication for the combination, it's not going to be priced separately from one specialty to the other, it's the same product, right? Just to clarify, Lightning has a PE indication, but the CAT 12 product doesn't. So that's an important distinction, so that people understand that. But the answer is the product will not have 2 separate prices depending on what it's being used for. That doesn't sort of work.

Yes. It's not going to work inside the system. Totally agree. Where does Lightning 12 go from here? What's sort of the -- what's the next generation of this product?

Yes. It's a great question. I -- I'm not going to tell you, but I can tell you that we view this as really the starting point of the next phase of innovation. We hosted a large summit last night, one, first night of 2 nights, where we had 300 and some-odd people dial in for a virtual experience, listening to folks go through their cases. And I opened the session, and we talked about the goal that we have, which is really to continue to innovate for a number of years to make -- removing clot, whether it's the arterial side, the venous side, PE, just so routine that no one really thinks about doing anything else. It just becomes a simple and routine procedure. And in order to do that, Lightning 12 provides the starting point for that, but it's certainly not the ending point. And you know us, we're well underway developing the next components to this long before we even launched this. So stay tuned. We'll continue to add tools and continue to improve them for many years to come.

Okay. Very helpful. So let's talk about this XTRA FLEX situation. We have a situation where investors seemed concerned that you're telling a doctor not to use a product kind of against the contraindications. So it seems a little goofy here. Maybe just share your perspective here because I've got a few follow-ups.

Yes. I mean let me maybe start just sort of with what happened because there's a lot of misconceptions in the new windows and other things that are sort of out there. So let's just start with the basic facts. JET 7 XTRA FLEX was designed as an aspiration catheter. It tracks through the brain incredibly well and it aspirates clot better than any catheter on the market. And I think people pretty much will agree with that. One typically doesn't inject contrast through an aspiration catheter because -- after you suck out clot because the contrast could push that clot back out that you just -- if it's still in there, and it could push it back out. It might not do it in every case, but that possibility exists. So that's not a necessary or typical thing. Do some folks do it? Do some folks have to do it in certain cases? Maybe, but our instructions have always, from the very beginning, said, don't do that. As you know, there were some tragic cases that happened when contrast was injected through the JET 7 XTRA FLEX. Like any other medical device company, I assume, we did a thorough evaluation. We followed all of the procedures and the quality system, and we shared that information very openly with the FDA. We were incredibly transparent. We wanted to make sure that all of our customers knew that the instruction said don't do this. So we added a very specific warning, an additional saying, please do not do this with this product. And we sent that to every single hospital that had purchased JET 7 XTRA FLEX. We made sure that it was received through the formal risk management departments. And since we did that, it's been almost 2 months. We haven't received a single report of this happening again. So we did this the right way. There is no their story. David, I've been around for 16 years at Penumbra running this and we've played an important role in opening up the stroke market and other critical markets like vascular thrombectomy, we just talked about. Our team talks to customers every day. And one thing I've learned over the years is that our customers don't like it when there's this sort of innuendo and false statements that are spread about what's actually happening. And they tend to support us and our products even more when that happens. And I kind of sense it that's happening now. I don't think everyone understands this market maybe or the procedure and what's actually happening. So maybe these things will continue. The articles will keep coming. We expect more. But from a field standpoint for what's actually happening out there, our customers think this is behind us. They give us a lot of credit for handling this openly and well, and they have supported the use of this product. I mean it's an amazing product. And it's enabled countless cases where you wouldn't be able to bring other products up that hard, that far, that fast. You would be taking products that weren't as good, potentially adding dissections or things to the procedure. So I can't respond other than that. I'm proud of how we've handled this, and I'm certainly proud of this product.

Yes. I probably have seen, I don't know, 30 of these situations in my career, and I'm probably dating myself. The way these companies get off track in situations like this are really 1 of 2 ways: one, they're telling doctors they're doing it wrong; or number two, they're not honest and upfront about the clinical risks to the product. It just is telling in this particular situation you're providing physicians choice, where they can go back to use the 68 if they wanted to. If they want to increase tractability and not push catheter -- sorry, dies to the catheter, they can also do that. So you're providing choice. It sounds like you're very confident how you've handled this from a clinical information perspective, sharing the risk with clinicians. So we want just to get you to respond to that, number one. And number two, do you think this product is safe to stay on the market because I imagine you're also working on further innovations of this product in the future?

Yes. There's -- first of all, the answer is this product is absolutely safe. I mean there would be a massive uproar from physicians if somehow there's noise and sort of stuff pulled this -- got people to say this product should go. I mean there would -- that would just be absurd. I mean this product has enabled so many successful cases, that would not -- I just think that's -- that makes no sense to hear that. That isn't an issue. The question about -- and you're right, certainly, physicians who want to inject contrast can use one of our other catheters or a competitor catheter. I just want to sort of comment on that. We are never ever going to tell physicians how to do procedures. Their judgment is amazing. And they always have to exercise their independent judgment. And there are cases in which things happen, which they need to react quickly and do things that they need to do. So we're never going to challenge that. But I do think it's worth pointing out that -- and I really mean this without, again, saying anything about our customers and their judgment, that the idea that you would want to routinely inject contrast through an aspiration catheter that that's like a goal of a procedure. That's not a very highly held view. And I think a lot of folks who may have done that, this whole scenario gave them an opportunity to rethink it and go, why was I doing that? Maybe I should limit that. Because by definition, you're going to, in certain number of cases, push clot back out and that's obviously not good for the patient. So to some degree, I think that this has been a good moment for the field. Because as the field grows and the -- it allows everyone to sort of level set as to what we are doing. And it's certainly not a majority view or even a significant view at all, that the goal should be to be injecting contrast through your aspiration catheter on a routine basis.

It sounds like competitors that may suggest that, that is an inappropriate clinical behavior, it may backfire is sort of the suggestion.

Well, yes, I think it has backfired. And I can feel it. I definitely sense that that's happening in the field. It feels to a lot of the customers that have shared their views with us that that's been a pretty big overreach to be encouraging doctors to take that risk in these cases to use their product.

And do you think that this -- I mean, this creates a little bit of kind of clinical noise in the channel. Is it reasonable to assume that clinical noise has some near-term commercial friction? Or you really think this is a well-understood issue and is unlikely to have kind of commercial applications?

Yes. I appreciate that question. We -- this has been going on for -- the field heard about this almost 2 months ago. This is not something we spend a lot of time now on in the field anymore. I think they've digested it and moved on. And again, we have not seen the kind of -- any kind of negative impact from this as our business continues to do quite well. So I think the noise is in the confusion. Some of these sort of articles that have a lot of falsehoods and other things in them. I think that's a fair thing for people to ask about and I'm delighted to always try to answer all those questions. But from a field standpoint, this is not something we see, and our customers have been incredibly supportive and have stood by it.

Okay. Well, unfortunately, Adam, we're out of time. I wanted to hit VR a little bit here. If we have -- I have time for 1 more minute, if we have -- you talked about VR starting to have some commercial impact back half of '20. Is that still your view? Has that been impacted at all by COVID? Or has COVID actually been frankly a catalyst for VR, frankly?

Yes. Well, so for 2, there's sort of the good and the bad. The bad is getting our original system out. We -- it slowed down a little because of COVID and ability to have those conversations and also just budgets in certain places, they got pinched a little in the middle of the year. But nothing that I think is any kind of long-term issue at all. And then COVID has had a very positive impact, if you will, which I hate to say it that way. It sounds odd when it came out that way. But it's opened up an opportunity for tele rehab and home use and the reimbursement for a system like that. So we've announced that we were working on that. And that opens up huge new opportunities, not just in the traditional sort of stroke rehab that people heard we were working on with this, but other medical conditions that could benefit from that type of thing. So we went from a pretty significant opportunity to a much, much larger opportunity. And as you can tell from just even last quarter, we're investing pretty heavily in making that a reality. So I think this effort that we're doing is profound. I just heard yesterday from one of our care specialists out in the field who shared with a story of a woman who had a stroke and was -- had very little movement in her arms. She couldn't raise it, sort of above here. Had been going to rehab for about a year, traditional rehab. The center got the REAL System that she was in and within a month of using the REAL System, she's regained almost all of that mobility after having not done that for about a year. And her biggest comment was she's so delighted because she's been swimming in circles. She does a lot of swimming, and now she swims straight. So those kind of things make me feel good and realize that what we have here is a really important tool.

Okay. Well, let's end on swimming in circles.

Okay.

[ I've been having that problem in ] my life. Adam, as every year, I appreciate you spending time with us here, talk to us. And enjoy your meetings and enjoy the rest of your week, sir.

Yes. Thank you very much. Appreciate it.