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

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to this investor update call hosted by Penumbra, Inc. [Operator Instructions] Thank you. I would like to introduce Ms. Jee Hamlyn-Harris, Investor Relations for Penumbra. Ms. Hamlyn-Harris, you may begin your conference.

Thank you, operator, and thank you all for joining us on today's call. During the course of this call, the company will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, quality and compliance programs and business trends. Actual results may differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those referenced in our 10-Q for the quarter ended September 30, 2020, which was filed with the SEC on November 2, 2020; as well as those described our 10-K for the year ended December 31, 2019, which was filed with the SEC on February 26, 2020. As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our periodic filings with the SEC, including the 10-Q and 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock, including, but not limited to, the impact of the COVID-19 pandemic on our business, results of operations and financial conditions. Penumbra disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. I am joined on today's call by Adam Elsesser, our Chairman and CEO; Maggie Yuen, our Chief Financial Officer; and Jason Mills, our Executive Vice President of Strategy. Adam will share some prepared comments, and then we will open the call for your questions. I will now turn the call over to Adam.

Good afternoon. Thank you for joining us on short notice. Earlier today, we issued a press release announcing the voluntary recall of the Penumbra JET 7 reperfusion catheter with XTRA FLEX technology. This recall follows Penumbra's July 27, 2020, notification to health care providers. We have not received any reports of deaths or injuries since the event that occurred on late -- in late October that appears in the MAUDE database. Penumbra is recalling the JET 7 XTRA FLEX because the catheter may become susceptible to distal tip damage during use. Distal tip damage in conjunction with pressurization or contrast injection may result in potential vessel damage and subsequent patient injury or death. We have reported both injuries and deaths with the use of this product, and we are deeply saddened by these tragic events. JET 7 XTRA FLEX is a unique product. On the one hand, physicians have told us that the trackability of JET 7 XTRA FLEX has enabled them to treat patients that they otherwise would not have been able to treat. On the other hand, the design considerations necessary to achieve that trackability also make the catheter susceptible to failure in certain scenarios. We issued the July 27 notification to physicians and took other steps to ensure the safe use of the product, but these measures were not able to fully address the risks. In conjunction with our notice, the FDA is issuing a letter to health care providers to ensure the immediate awareness of this voluntary recall. Now I would like to address the implications of this recall. We are taking all the commercial and operational steps to be there for our physician customers. We are immediately engaging with our physicians to supply them with other aspiration catheters in our portfolio to ensure product availability to treat their patients. While it's too early to ascertain the total cost of the voluntary recall, we expect to record associated costs in the fourth quarter ending December 31, 2020, primarily as a onetime reduction to revenue of less than $20 million to account for product returns. To be clear, this estimate for product returns is distinct from the 7.5% of total third quarter revenue attributable to JET 7 XTRA FLEX. Additionally, we expect an increase in cost of sales to account for the inventory write-off and to a lesser extent, increased selling, general and administrative expenses. Looking ahead, we may incur some additional costs in future quarters. This represents our current best estimate of the financial statement impact, and the amount of loss may differ materially from this estimate. We will fully address the financial statement impact of today's recall during our fourth quarter earnings call. We started our effort over 16 years ago to address ischemic stroke by designing the first neuro aspiration catheter. We completed the first trial for aspiration-based mechanical thrombectomy in 2007, which led to the first 510(k) clearance for the Penumbra System. Our aspiration catheter technology is driven by 2 main design principles: trackability, how fast and how easily can you reach the clot to be removed given the complex brain artery anatomy that varies from patient to patient; and two, effectively aspirate these clots. These 2 principles have guided every generation of the Penumbra system, and JET 7 XTRA FLEX did both of these things. Together with our entire team, I remain as committed as ever to bring new technology to our physician customers and their patients that address these key principles. We continue to innovate so we can safely help every patient facing the life-threatening conditions we support, not just stroke, but also in vascular and rehabilitation. As I have previously shared publicly, we have a deep product development pipeline and expect to deliver new technologies in 2021 and beyond across all franchises.

And now we would like to open the call to questions. Operator, please go ahead.

[Operator Instructions] And your first question comes from the line of Bob Hopkins from Bank of America.

Okay. Great. I just have a couple of short quick ones here. First, Adam, just in your comment on the pipeline, just to clarify that. Do you have a new catheter system coming out kind of earlier in the year? Or is it later in the year? Just to clarify your pipeline comment.

Yes. It's a good question, Bob. I'm not prepared to give a time line right now just given the -- where we are in that process. I think it'd be premature. But we're certainly optimistic that we will have new products in stroke -- at least some new products in stroke in 2020 and beyond. And we're -- 2021, I'm sorry, and beyond. So I just don't want to put out a specific time line there. I think that's premature.

Okay. And can you help us think through the potential revenue impact? I understand most of what you disclosed on the call was very kind of immediate term. But if we think about kind of going forward, I guess, one question that comes to mind is if, hypothetically, everyone wanted to switch over to .068 right away, do you have enough .060 inventory to do that? And -- as kind of the first part of the question. And the back part of the question is simply just kind of talk, if you don't mind, a little bit about how you think this might impact your ischemic stroke and stroke access business as we look forward.

Yes. I think it's a great question. Look, we are -- as I've said before, we're very proud of all of the aspiration catheters we've made and the original JET 7, which has different material, as well as ACE68. Both are very, very good alternatives. They, I think, are more than competitive compared to other catheters. In fact, in some cases, at least physicians have told us they're superior. So we expect to be able to switch out in the short term to some of those catheters. The question around supply, I believe we have enough supply of both of those to meet demand certainly in the short term.

And then, Adam, maybe for my last question just to be clear on this process and time lines and such. Did FDA ask this voluntary recall essentially because of the last death that was reported on, I guess, as of November 4? Or was there anything that happened subsequent to that, another death or another incident?

Yes. Bob, thank you for the question. Let me -- I'd maybe point everyone to the FDA's own safety notice that they put out. I mentioned that in my prepared remarks. In that, you can see their own time line. They discussed the action from approving the product to prompting us to issue the notification to health care providers. And then when new issues happened, that other death, we engaged in the conversation, and they did request that we voluntarily remove it. And we wholeheartedly agreed that at that point, we could no longer fully address the risk. So that time line is there in their statement as well. And certainly, as I said in my prepared remarks, we are not -- we have not received any other reports since the one that we were talking about earlier.

Your next question comes from the line of Robbie Marcus from JPMorgan.

Adam, a couple of questions, if I can. A lot of us had been hearing you talk really against the possibility of a recall for several months now since the issue with XTRA FLEX first came out. So one, is this -- it's clearly again a recall, but do you view this as a tone change? A lot of people are concerned that it might really be an issue with trust management. Just try and help us understand what -- how it evolved over the past few months. How much of this is different from what you said previously? And then I have a question after that.

Sure. Thanks, Robbie. It's a great question, and I think it's an important one. I don't think anything has changed at all from what we've said. Let's start with the product itself. I think all of you have done work at hearing the success stories and the customer reaction to this product. It is really a pretty extraordinary product. And when we were able to ascertain the role of contrast injection in this, obviously, again, you can see that we've worked on that notice, got it out there. And obviously, we're hopeful and optimistic that, that would address the concerns and everyone would use it as we are telling you. When that didn't happen, there's no question we should reassess and decide, and the FDA worked with us. We shared additional data and coordinated. And here we are doing, I think, the exactly right thing. And when they suggested it, we totally agreed very quickly because it's the right thing. If we can't mitigate the risk, then this is the right action. If we could have mitigated the risk, then the benefit of this product would have been on the market for many years, and it's that simple.

Got it. Two other quick ones for me. You gave the stat recently that XTRA FLEX was 7.5% of sales in third quarter. What have you been seeing, let's say, the past month or so? Has the number gone up or down as people have adjusted to the issues? And if you could give us sort of -- you gave us the financial impact, which seems much more of recalling inventory, but how you think this might affect just sales on a go-forward basis, and then I'll ask my last question. There's a lot of concern that people are seeing increased rates of -- in the MAUDE database of Lightning 12. Just if you could give us a statement on Lightning 12. And do you see any of these issues potentially moving into other products?

Sure. Thanks, Robbie. I really appreciate the question. So let's start. I tried to write them down to make sure. The first question was the 7.5% and is that sort of -- how much of that's, if you will, recoverable with our other products. It's -- we're 2 hours into this, so I can't give you a firm prediction. But as I said, we're confident that many of our customers will switch to our other catheters. But we'll certainly have a better handle on that as time goes. As it relates to the sales of JET 7 XTRA FLEX before today, we did not see a fundamental change. And I don't have the specific numbers to be exact, but when we -- when I do look at the trends, they did not seem to be fundamentally different than before. But again, I don't have the exact numbers. As it -- if I'm not mistaken, next question was Lightning 12 and other products. I've heard that sort of be whispered out there. I just got to say there is -- it's hard to respond. Lightning 12 is an extraordinary product. I think everyone knows, and many folks who like you covered us from the initial IPO, know that our philosophy, which really stems from work many years ago with the FDA, is to be very, very open and conservative in reporting events. Many times, events are reported that really don't even have much -- there's no real malfunction or safety issue, but it might delay a case or something like that, and we report those. There is nothing at all that at this day has concerned us about Lightning 12. And more importantly, I want to just remind everyone or you, Lightning is not even in the body. Lightning is attached to the catheter outside the body and automates the blood flow and enables more efficient aspiration. So there have been some reports of the red light going on. That's actually appropriate. The red light's a safety mechanism to alert you that the catheter got clogged and is not fully aspirating. That's not really a problem. I mean that's what it's supposed to do. We tend to be very conservative and report those even though that's what's happening. So I have full confidence in Lightning 12 and our other products. This is a very complicated situation where you had a product that performed very well that had a limitation, and we addressed it directly and head on, and I'm proud of the work we've done on this.

Your next question comes from the line of Larry Biegelsen from Wells Fargo.

A couple for me. So on the Q3 call, Adam, you said you expect Q4 sales to be similar or slightly better than Q3. So excluding the $20 million in product returns that you mentioned -- or approximately $20 million, how are you feeling about achieving the guidance that you gave for Q4?

I'm a little hesitant, even though it's a public call, around my -- our counsel has indicated our notice was pretty short so I want to be careful in giving that type of guidance. I would suggest you look back at my comments in the past week or so that were public. I don't want to add any issues. I don't want to address that directly on this call because I want to make sure that, that information, which is material, is not addressed. That being said, do not read anything into that other than me being ultra careful about what I say.

Okay. And may I ask you on the pipeline? Go ahead, Adam. I'm sorry.

No. I just -- I feel we're less -- we're sort of 2 weeks before the end of the quarter, and I just think that's a difficult question to ask, but don't read anything into my saying that other than the timing.

Understood. And Adam, on the pipeline, what can you say -- I think people are trying to -- have asked this a couple of different ways, but what can you say about your ability to develop and launch a new aspiration catheter for stroke that's similar in diameter to XTRA FLEX? Because you already have ACE68, which is thinner, a similar diameter to XTRA FLEX that you can safely inject contrast into if a physician chooses to do that? I know your feelings about that, but doctors often want to do that. And related to that, how do you gain physicians' confidence in your next-generation device given this recall?

Yes. I think those are really good questions. I have a lot of confidence that we will be able to develop, if you will, and launch catheters bigger than ACE68. Let's not forget that the original JET 7, which does not have this technology at all, has not had these issues. And even though there was a perception at the time that it didn't track as well as ACE68 compared to some of the other catheters its size, there's a perception that it might track better than those. So I think even now, we have a competitive portfolio. Where we go in the future, I am pretty confident we can develop products that will continue to treat stroke and frankly, maybe even better than where we're headed that may or may not just involve size of the catheter. So I do have a lot of confidence. I am careful around giving time frames. But I am, as I said many times, very, very confident and optimistic that the work we're doing now will help stroke patients for a long time, and we will stay competitive.

Adam, just one follow-up on that before I drop. I know you don't want to predict FDA approval time lines. But are you willing to tell us when you're expecting to file that new catheter or any of these new stroke devices?

Yes, Larry, that's a totally appropriate question. But you also know, having covered us for many years, that I'm not going to answer that for the only reason, but the only -- the reason being competitive intel. The last thing I want to do is give a highly competitive market that kind of information. So I respectfully decline to answer for that reason, and I hope you understand.

Your next question comes from the line of Bill Plovanic from Canaccord.

Great. Just trying to understand as you go through, what was the new information that you received to drive the recall decision? Because you're having discussions with the FDA and something else. Kind of -- I mean, that discussion was ongoing. And then have you made any staffing or process changes associated with this JET 7 testing recall? And then I'd just add on international. We haven't really talked about it, but I don't think XTRA FLEX was really being sold international. So I don't think that impacts the international business, but just a confirmation on that.

Yes. Let me -- staffing, process, international. The first question was related to -- I'm sorry, Bill, remind me. I wrote down all questions and I lost the first question.

Sorry. We always talk fast. What new information did you receive to drive that recall decision?

I'm sorry. Yes. Well, as I said in my prepared remarks, and I think you can see it if you read the FDA's notice that they issued, the new information was the October -- the late October patient death. And that's obviously extraordinarily serious. We took it that way, and that really immediately prompted the dialogue that ensued and they requesting our wholehearted agreement to go forward. So that's the information. There isn't new information after that, and I said that in my prepared remarks. The -- related to staffing and processes, we -- there is no staffing change here. The team did everything exactly how we should do. Like anything, we always look back in our processes and stuff that's part of continuous improvement, but we do that on a regular constant basis. That's not unusual. But I -- and we can always get better. But there is nothing about this instance that we don't feel exactly appropriate about so far. As it relates to international, we do sell this in some international markets, some smaller distributor countries. But we also sell it, as you know, in Japan. And so that, obviously, is part of that, but they also have our other products as well.

Your next question comes from the line of Joanne Wuensch from Citibank.

I have 2 questions. Is -- and I'll put them right out there right now. The first one has to do with your messaging to sales and to physicians, and I'm just curious how you will be positioning that. And then the second one is there's a reason that aspiration catheters are iterated to make the next one and then to make the next one. Do you lose anything, either competitively or in technique, if you revert to ACE68 or JET 7?

Yes, those are great questions. Messaging is exactly what I've said. There's no need to say anything other than what I've said, that this -- that we're -- we tried our absolute best to mitigate the risk by encouraging the use according to instructions. When that didn't work, we took action. I think everyone understands that, both on our sales side but most importantly on our physician side. I think physicians will be -- many who use this regularly and use it the way we've instructed will be quite disappointed, but I think that they will understand and be able to get by with our current technology until we can improve it. So there's no really messaging. It's just what happened here. I will tell you that throughout the last several months, the amount of support that we have heard from our customers has been really overwhelming, and I'm really proud of that. I think it says a lot about the 16 years of work we've done in this field, the ability -- our start to develop this field in the first place and our place with physicians and how they see our role in this. I think there's a lot of trust that physicians have in what we make and our ability to continue to innovate. So as it relates to -- I think the next question is reverting. I don't think that people will see it that way. They understand the risks all the time. You have to put it into context. We are doing procedures where there are critically ill patients, and we're talking about very delicate work inside people's brain. So I don't think this is as -- I think people see this as critically important that we do the right -- take the right steps at the right time, which I think everyone believes we did. Reverting, if you will, backwards, again, I'm going to go back to my comments. Our original JET 7, which is sort of the similar technology to ACE68, just a little bigger, both of those catheters are really quite good, and they're quite effective in removing clot from patients. They don't track as well as XTRA FLEX, which is extraordinary, but they do everything else. And so I think between now and then, the next stuff, they will be quite effective. And as you know, there's an extraordinary amount of clinical data that supports how good they are. And I think people know that, and they will be quite comfortable using those products.

Your next question comes from the line of Ryan Zimmerman from BTIG.

Just one for me. A lot of questions have been asked, but I have a follow-up on Joanne's question. On the ACE68, just trying to reconcile, the IFU specifically says not to use automated high-pressure contrast injection. And so given that the ability to inject contrast has been kind of the key variable with the JET 7 XTRA FLEX, is there any concern at all that physicians will have concerns about that or still prefer to inject contrast? And then how do you overcome that with the ACE68?

Yes. I am really glad you asked that question, Ryan. I think it's really important. And I think there's a lot of, how should I say, misunderstanding about the instructions itself. There are 2 different parts. Let's start by saying what's in the instructions. There are 2 different parts. One is talking about automated high pressure. That's a very different thing than sort of typical contrast injection that we're talking about here. That's -- in the brain, that would be a highly unusual thing to do and so that's a typical sort of don't-do-that in -- type of instruction. The instructions I'm talking about are different than that. The instructions I'm talking about in all of our products since the very beginning, and this goes back to our original trial, is to say that you do not -- you should not inject contrast through the aspiration catheter. Or I should -- let me give you the exact word. You should inject contrast through the guide catheter. And that's because as opposed to -- it doesn't say as opposed to, but it says in the procedures, the step of the instructions. In order to make sure that you don't inadvertently push clot back out after you aspirate a clot. That's important. We aren't going to ever change those instructions. That's different than if you do, do it, there's some device malfunction. That's important so that you don't push clot back out, and our instructions will continue to have that. The other products do not have the same design consideration that allowed for this issue. And to the extent physicians needed to, elected to or wanted to follow their own instincts or their own needs in the case, there's nothing about those products that wouldn't appropriate. But we will not ever obviously market or represent that because our instructions say, and will always say, to inject contrast through the guide catheter. I hope that clarifies it.

Your next question comes from the line of Margaret Kaczor from William Blair.

A couple for me. So one is tying back into Joanne's question. In the past, you've kind of talked to having an entire portfolio of products that really in sum together becomes a paradigm chain. So with XTRA FLEX off the table potentially for a bit, does that change that midterm vision here? Or is that kind of Jet 7, ACE68 and whatever else is coming sufficient enough to still kind of satisfy that vision you laid up?

That is a great question. And I don't -- if I just answered it directly, it may tip the competitors' hands, so I'm going to be careful. I do not believe that our -- it is necessary to have JET 7 XTRA FLEX at the time that we fully reveal our new paradigm. I think that we will not need that as a critical component.

Okay. I was going to go with 2, but now that deserves a follow-up. So as you think about how folks think about the benefits of catheter-based technologies and what you view as the future, maybe remind folks on the line the goals that you guys have as part of your aspiration portfolio of products and why maybe one product doesn't be-all, end-all.

Yes. I just -- I want to sort of, again, be cognizant and hope everyone understands that I'm not going to change my traditional view of revealing stuff too soon before it is ready and tested -- not tested in the bench but tested in the clinical setting. But that being said, a paradigm change, if you look at where we have been for the last sort of 3 or 4 years, where every company is making a different catheter or a different size, they have slightly different trackability or characterizations and so on, that's today's paradigm. And when I talk about a paradigm shift, that means that process, that paradigm changes. And that's all I want to say, but that's what I want you to understand. That's -- today's paradigm is what we're on. We think we can change that, and we obviously have to execute. There's a lot to do to change that paradigm. So I don't want to get ahead of myself, but we are obviously optimistic that we think we can change that paradigm.

Okay. And then in terms of kind of the -- today, if you look at the loss of XTRA FLEX, you've referenced it being able to treat more patients potentially than it has in the past. So what are the other options for these patients? Is it competitive stent retrievers or lack of treatment? And then if you do lose a few accounts, what's the impact potentially on other sales like amortization within those accounts?

Yes. I think that's a great question. We -- we're really fortunate from a physician engagement standpoint right now. As you know, we're launching the BMX96 guide catheter, and that is being really well received independent of its use just with JET 7 XTRA FLEX. But as a guide catheter on its own right, it's really great. So that's allowing us a great deal of engagement and sort of interest and excitement, and I think that's a perfect moment. I also think in some way -- and I say this without trying to be inappropriate. This recall obviously enforces engagement. We have to ensure that it's done quickly and efficiently. And I think, as I said, there's a lot of physicians that really wanted and like this product. And I think it allows folks -- I think folks are responding very favorably to that, and I think that won't have a negative impact on the rest of our portfolio. If anything, it might have a positive impact on our portfolio.

And there are no further questions at this time. Ms. Hamlyn-Harris, I turn the call back over to you.

Thank you, operator. On behalf of our management call, thank you all again for joining us today and for your interest in Penumbra. We look forward to updating you on our fourth quarter call.

This concludes today's conference call. You may now disconnect.