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

Welcome, everyone. Happy to continue the day here at the JPMorgan Healthcare Conference. I have the pleasure of introducing Adam Elsesser, the CEO of Penumbra. Before we get to it, Adam, though, I just want to let everyone know, you can go ahead and grab the slides at the website for the conference. [Operator Instructions] So with that, Adam, take it away.

Well Thank you, Robbie, for the introduction. And of course, I want to thank JPMorgan for including us in this year's meeting. Our -- Slide 2 has our safe harbor disclosure. And I'm going to just sort of call out the slides because I'm not able to control them here. On Slide 3, we want to talk a little, maybe, about our mission as a company. Since our founding 16 years ago, Penumbra's mission has been simple. We focus on critical medical conditions and work tirelessly to innovate in these areas for years and years to perfect treatments. At the heart of this mission are, of course, the patients we're trying to help. This slide shows just a few of the patients that we've helped with our products and highlight on our website. We do not view ourselves through the lens of a specific sector like neuro or vascular, but rather any area where there's an opportunity to help a great number of patients in need. Our team brings the skill and focus to bear on these specific challenges. And at the same time, we try to do so while reducing overall cost to relieve the financial burden on health care and our society. In order to achieve this mission, we have built a purposeful structure and culture at Penumbra. It has allowed us to do this work over and over and in a way that has scaled as we've grown. This structure and culture have been critical to build a broad portfolio of products that really matter to our physician customers and patients. We've also moved into new areas that are larger than our previous areas so that we have the opportunity for durable growth. On the next slide, Slide 4, our success, past, present and in the future is driven by our innovation engine, which is really the soul of Penumbra. Our capacity to innovate has gotten stronger and stronger over the past years. We proudly call our engineers Pengineers, and they operate in a culture where the focus is first on the why, not the how, to understand the problem to be solved. They are then empowered to succeed by embracing and understanding both past failures as well as the uncertainties of true innovation. And they thrive off collaboration, which leads to our capacity to innovate year in and year out. It's worth noting that since our IPO in 2015, we have received FDA clearance for roughly 22 new products. We have nearly 200 people in R&D with over half focused on development. On the next slide, as you can see, Penumbra has strong durable growth for many years. When you think about how to build durable revenue growth, I think it's important to remind investors that we have been doing this with a true portfolio of products in many different areas for quite a while. In fact, our first big innovation was not in stroke, but in neuro access. We were the first company to design neuro guide catheter from the ground up, the original Neuron. This guide catheter was a critical innovation for the neuro field in its early days, allowing for higher and more stable access for all neuro procedures. We have continued to focus and work on this innovation for years, launching many access products, including this past quarter's launch of our new BMX guide catheter. The launch of this product has actually allowed us to add this past quarter the most new hospitals in our neuro access business since the first quarter of 2018. Notwithstanding all of these other important areas of innovation, back in 2015 during our IPO, investors talked about us as a stroke company, in large part driven by the then very new and important opportunity to treat more stroke patients. We predicted back then that the mechanism of aspiration for treating stroke patients would become the frontline mechanism. And today, it seems clear that, that has come true. We also said that competition would increase in aspiration for stroke treatment, which, of course, has happened over the past 5 years. And in accordance with our mission, we are continuing to innovate within this field both with updates to our current aspiration catheter options as well as very innovative technology that changes the current paradigm from needing bigger and bigger catheters to allowing for less focus on the catheter and more on the speed and completeness of clot removal. We will share more details on the technology as the timing becomes clearer to us this year. At the time of our IPO, we also projected that our Vascular business, which was very small at the time, would become more and more important to our growth, particularly as competition increased in stroke. In fact, in the past quarter, Vascular became the larger part of our business, and there is significant room for this business to grow for many years. In other words, we have built a true portfolio of innovative products that have provided us the base to produce durable growth. The next slide. Yesterday, we announced that Penumbra expects preliminary Q4 2020 revenue to be in the range of $162.5 million to $167.9 million, setting another quarterly revenue record for the company, which represents growth of approximately 12% to 16% compared to the fourth quarter in 2019. Excluding the impact of the JET 7 XTRA FLEX voluntary recall, we expect fourth quarter 2020 revenue on a non-GAAP basis in the range of $172.5 million to $172.9 million, which represents growth of approximately 19% compared to the fourth quarter of 2019. Next slide. We expect full year 2020 revenue in the range of $556 million to $561.4 million, which represents growth of approximately 2% to 3% compared to full year 2019. I am proud that our Penumbra team around the world was able to help our customers address the needs of many more patients during the quarter despite the challenges of the global pandemic. On the next slide, I want to focus on our team. There are a number of important aspects about Penumbra as a company that we are proud of, and we believe important for the short and long term. First, we want to remind our investors that substantially all of our products are made in-house in the United States at our headquarters in Alameda and at our expansion manufacturing facility in Roseville, California. Throughout our growth, we have continually increased our manufacturing capacity in order to meet the needs of our customers, and treat more patients with our breakthrough products. This year, that effort was tested more than ever due to the pandemic, but thoughtful planning by our incredible team ensured that we could continue to meet customer demand while focusing on maintaining a safe work environment for our employees despite the impact this has had on our manufacturing efficiency. In addition, despite the challenges posed by the pandemic in 2020, we did not have any furloughs and kept our workforce intact. In fact, we hired more employees in 2020 than we did during 2019 in order to keep up with our growth. We are very optimistic about our capacity to keep up with customer demand in the long run. But as we have all read in the current headlines, over the next few months, COVID-19 will continue to challenge all manufacturing operations, including ours. I also want to address a very important topic about our company and our team for our long-term growth and success. It is one thing to run a company when everything is going well. Over the last 16 years, we have had our share of successes. But we've also faced lots of challenges. It is those challenges that define the company's ability to succeed in the long run. Those challenges build a character and resilience that gives Penumbra the capacity to continue to innovate and make our products better and better. Over the near and midterm, we will keep adding to our otherwise extraordinary team so we can continue to serve our mission. Now I want to focus on the specific areas of our business. First, our Neuro business has 3 significant areas that we will continue to focus on. We've already mentioned our access business, which is obviously the start of every neuro procedure. The launch of BMX96, a remarkable innovation in which we increased the inner diameter of the catheter from our Neuron MAX without increasing the outer diameter. This has enabled us the opportunity to be used in many cases, not just stroke but the entire range of neuro procedures. This has also allowed physicians to remember that Penumbra not only has some of the best stroke products on the market, but we also have very good embolization products, including the WAVE coil, considered by many to be the best finishing coils on the market. Regarding our Stroke business, we continue to have success with our current aspiration catheters, 3MAX, 4MAX, JET D, ACE68 and JET 7 standard tip. These products are backed by clinical evidence and will continue to be an important part of many stroke interventions until we update some of these catheters. 2020 was a challenging year for the growth of stroke procedures in general. It was well documented that the field saw a significant decrease in stroke cases in the second quarter and modest improvements through the balance of the year. We need to get back to treating many more patients who suffered a stroke. We have to remind ourselves that the cost of the resultant disability of stroke is such a huge burden on our health care system, billions and billions of dollars. This critical fact, together with the eventual easing of the pandemic, should allow the field to continue to grow in the long run. It will take some time, but we will get back to growth in our stroke business in the U.S. and throughout the world. In sum, we are excited about our entire portfolio of stroke embolization and access tools in the neuro part of our business. Going to the next slide. Our Vascular business is a bit different than our Neuro business. First, there are dramatically more patients that we can help and those patients are already in the hospitals with our current and future customers. There is no need to transfer these patients like stroke patients. Our broad product portfolio in peripheral thrombectomy can treat patients with PE, DVT, arterial clots or coronary thrombus cases. It is worth mentioning that we believe that with CAT RX, our coronary product, we think we can help up to 200,000 patients in the U.S., which is the same number as the U.S. stroke market. But again, these patients are already in the hospital being treated. In fact, we added almost 300 new centers using CAT RX in 2020. Not all the physicians in each center at first use it, but this product allows us to introduce our technology to cardiologists who also perform a significant number of the peripheral procedures. This work will continue for quite some time. In addition, we rarely get asked or talk about the Peripheral Embolization business, even though it's something that I'm particularly proud of. From the beginning, we didn't just develop products similar to everyone else's, to compete for share. We made products that have unique quality specific to size and performance that make our products uniquely important to many of the procedures. Our products fill the space and the [ baskets ] which are better due to their design than others. In fact, our packing coil has been routinely referred to as liquid metal. And they are able to help a huge number of patients in very distinct ways from other offerings. This part of the business hasn't received a lot of attention, but have produced record growth again this year as we continue to innovate, launch new products and make our entire Peripheral Embolization portfolio available to many more physicians. In fact, we launched an additional product in this part of our business in 2020, our LP coil, which has the benefit of being deliverable by a smaller, lower profile catheter yet has the benefits of being both larger and softer than other smaller coils on the market. Taking stock of our Vascular business overall and specifically our portfolio of products and the many patients we can still help, we are poised for significant growth for many years to come. On the next slide, I'd like to talk about our virtual reality product. Our REAL Immersive VR System is a purpose-built system built from the ground up and dedicated to the health care field. We started our journey with REAL as an extension of our neuro offering for stroke patients. With the pandemic and the reduction of in-person rehab sessions, we took most of 2020 to expand the hardware and build a new platform as well as taking out a significant number of new applications that will treat a much larger number of medical conditions. This work has expanded our vision for REAL dramatically. As I have previously stated during the first half of 2021 on a date that we will announce later, we will present to you more details about this platform technology, about all of the applications for REAL and about our vision for the business model, and how we can bring REAL to as many patients as possible. We continue to see a clear opportunity to serve many patients who need some form of rehabilitation with an occupational physical therapist. This could be as a result of a stroke or it could also be cardiac rehab, orthopedic rehab, Parkinson's and other reasons. Our portfolio will include a wide range of specific applications that are tailor-made for patient interaction with their physical or occupational therapists. Our platform will also be able to be used remotely. In other words, when a patient and therapists are not together but with almost the same functionality as being together. And finally, we will have an at-home solo mode where patients can work independently and at the prior direction of their therapists. In addition, with this platform, we are expanding the applications to cover many other conditions that have large numbers of patients in need of help. For example, the management of memory loss and mental health. The clinical evidence around the use of virtual reality for these applications is pretty significant. And we are harnessing these data, working with some of the world's foremost virtual reality experts in health care to develop additional data, technologies and applications specific to the REAL System. As you might have seen recently from one of Qualcomm's newest videos on The Verge, we have been working very closely with Qualcomm to bring our newest XR technology to our hardware. Indeed, our partnership with Qualcomm has allowed for many of the new advances that have been happening for us in 2020. Later this year, we will present our latest portfolio of products in REAL ecosystem, hardware, software and content. We will have a lot to execute on to make this a viable part of our business. But what we are doing matters. I don't want to get ahead of ourselves. But if we can execute, REAL has the potential to positively impact more patients than any of our other businesses. We accomplished a lot in 2020, and I can't wait to share more with you soon. Before I summarize our outlook for 2021 and beyond. I want to mention the COVID-19 pandemic. Obviously, the pandemic will have a lingering impact on the global health care system. Like all our peer companies, we are aware of the short-term uncertainty the pandemic causes. But overall, we are very optimistic about the year ahead. As we come out of the winter, the impact of COVID will likely lessen. Effective vaccines will become widely available by mid-2021. And we believe hospitals are continuing to improve their ability to treat patients even in hard hit areas. Now I'd like to end my talk today where I started by reminding our investors, our employees and indeed ourselves that Penumbra has developed a broad diversified portfolio of products in neuro, vascular and virtual reality. Our innovation will drive us deeper into each of these markets and will also help us pioneer treatments in new markets where there are unmet needs for many more patients. We have come a long way already, but we have a long, long way to go. We still have 80% of the patients suffering from ischemic stroke to help, over 90% of the vascular thrombectomy patients to help and almost 100% of the patients that can be helped with our virtual reality technology. Second, we are battle-tested as a company and know how to take on challenges. And finally, we continue to have good confidence to say, subject to short-term disruptions from COVID that might affect all of our peer companies, that we believe Penumbra can reach over $1 billion of revenue by 2023. Thank you for your attention. I appreciate it.

Okay. Well, great presentation, Adam. And maybe we could jump into some Q&A here. Again, feel free to send questions if you want. We also have Maggie Yuen, the CFO of Penumbra joining us for Q&A. So Adam, I want to give you congratulations. I think you win the award for biggest preannounced beat in the fourth quarter so far of all the companies that have reported. So I want to start there and spend a bit of time on it. Let's start with the Peripheral business. And clearly, Lightning 12 has just had a huge launch. Maybe you could give us the initial thoughts on how that contributed to the quarter? And how much it really added to growth?

Yes. First of all, thanks, Robbie, for the comment. And that's a great question. So Lightning 12, as I said, almost half a year ago, is definitely the best launch we've ever had as a company. The product is really kind of extraordinary. We did 2 things with Lightning 12, just to remind everyone. We created a larger catheter called CAT 12. It's not that much larger, but large enough that it has the ability to sort of take out a significant amount of clot on both the venous side as well as in PE patients. But we paired it with Lightning. Now Lightning is a product that connects to our pump and the catheter. It does not go in the body of the patient. It's a tool that regulates the blood -- the aspiration power and the blood loss. So what you can do with Lightning is very -- with a lot more confidence, go after with full aspiration power, taking out much larger clot burden without really having the same risk around blood loss that you had when you didn't have that sort of regulator on it. And you also have a number of other things about it that are really quite remarkable. You have auditory signals to tell you when you're in clot and not in clot. And so that allows for a more efficient pace where you're not sort of having to search sometimes for where the next large pieces of clot are depending on the type of case. So it's been really, really successful. What we started to see in Q4, we're starting to get the product through value analysis committees. We don't have a huge amount of inventory. So there's very small sort of stocking orders as part of this, really 2, 3 units in many cases, just to get it on the shelf in places. But we're starting to see that sort of regular use in more and more accounts. And we think that we will continue that effort for a number of quarters as we go. And so it's really, as it relates to our -- the venous side and PE part of our business, I think, a huge improvement, and I think an opportunity for us to legitimately look at going after the majority of those cases. Now just to remind everyone, we also have Lightning 7 coming, and Lightning 7 is an update to our arterial side, and we'll provide more detail maybe on our earnings call as we start to do the early evaluation basis. But so far, I'm quite optimistic that we can have a huge impact with Lightning 7 as well. And so I think you add that to our CAT RX product on the coronary side and the larger part of our thrombectomy business is pretty well situated to help a lot of people.

And Adam, Lightning 12 essentially took your venous business from minimal to substantial. I just want to help set expectations as we move into 2021. CAT 7, you already have a really healthy arterial business to begin with. So should we think of this as adding anywhere close to the same dollars to Penumbra as Lightning 12 or think of this as more of a nice incremental addition?

Yes. It's a good question. Rather than address it in the context of dollars, the way we look at it is why did we create Lightning 7. You're not wrong. The product that we had before is pretty darn successful on the arterial side. But there really were several issues or, I guess, objections that we heard for a while from customers. The first was people were hesitant to use an 8-French sheath, which is what you really needed to use our CAT 8 product in many arterial cases. And so by creating a slightly smaller catheter, which is Lightning -- CAT 7. But CAT 7 uses the same technology as CAT 12 in BMX, which allows for a maximum sort of ratio between the inner and outer diameter, you're able to get almost the same size inner diameter by going down the whole sheath size. And so for many physicians who have been hesitant to switch from catheter-directed lysis and use of TPA in those cases, this should address many of their concerns. In addition, blood loss, which is less relevant on the arterial side, but still not insignificant as a potential risk for some of those cases, by adding Lightning, you're able to have all of the benefits of the lack of blood loss as well as the auditory signals to really guide your work. So we think the combination of this -- those objections with this product could expand the use of our technology really against catheter-directed lysis pretty substantially in 2021.

Adam, a couple of questions coming in here. I'll group them together. The gist is on Lightning 12. In the venous space, there's -- you and Inari are 2 of the newer products. We also have Boston Scientific. But given that you're more focused in this space, it gets a lot more attention. Inari has a good product at a higher price point. You have a good product at a lower price point. So I'm getting questions from both angles, but basically, the gist is, what's the strategy at the lower price point? Is there any room to a bit higher over time?

Rather than make comparisons to other companies, I'll start by saying, this is a field in which we can -- the field can use all the help and companies going after sort of getting people to go to sort of a more mechanical approach. So we have nothing but a lot of respect for the competitors that are in this space. As it relates to the question around pricing, pricing strategies vary depending on the companies and the moment in time. If you look back at our history around pricing, we've always thought about pricing in a more long term and sort of holistic way. And just to maybe remind everyone about the way we think about pricing and using stroke in the stroke market, there -- we've always priced our products in a way where they're fairly priced and they're not at the high point of the market. So back in the day when we were going public and aspiration was still trying to find its foothold in stroke, there were a lot of questions that we had priced our system less than what stentriever were then charging. And our rationale at the time was as competition comes, the last thing you want is to be at the highest point of market and then have to not only deal with competition, but then deal with lowering your price. And so we've always looked to price fairly. We want hospitals to also have success financially in treating their patients. And that's just been, I think, core to who Penumbra is. I even mentioned it in my prepared remarks that the goal here is to make sure that the health care system stays safe financially as well so that everyone can be treated that needs to be treated. So we priced Lightning in a way where we think it's fair. The benefit, there is a charge to Lightning that didn't exist before, at the same time need for using separators in the peripheral space has come way down. So that sort of has translated to not quite a wash. And it still provides real value. And I think it gives us a position that we're not likely going to be competing on price and having to lower our price anytime soon. And I think that's really important.

Great. Maybe if we could shift gears a little bit from peripheral to the Neuro business. And there's been a lot of moving pieces throughout 2020 and just recently with the recall of XTRA FLEX. Maybe before that and we get to some of the impact going forward, I want to spend a minute on fourth quarter. And it looks like on my math that international neuro had a really good quarter and bounced back from what we've seen. How much of that was inventory rebuild? And how much of that -- was it just better underlying fundamentals, if you could give us a sense of the quarter?

Yes. We'll go through on our earnings call, a lot of the specifics. It's still early as we sort of get down to those levels. There's nothing about the quarter that was from an international standpoint, significantly different. Our business continues to grow. We're excited about some of the international opportunities. But the stroke business, as I mentioned in my prepared remarks, there's a lot beyond the competition. There's a lot of work ahead for us to continue to take that on and take Brazil as a perfect example. The Brazil ran their own trial that read out very positive. Our product was used successfully in that trial as well as other companies. And there's a huge opportunity. And then, of course, the pandemic hit. And the focus hasn't been on driving the stroke treatment right now. But again, those opportunities are still there for so many patients. So it's just going to take a little longer, but I do think those opportunities are there. What's important, because we have spent so much time over the years talking about the need, the growth of the stroke market, is really to have everyone understand we are incredibly passionate about innovating and being part of the growth of the stroke market. We have some great other companies that are in this space that we have a lot of respect for. And together, I think we can all make sure that more and more patients are treated. But as it relates to our company's need to have that happen immediately for our continued growth, I hope this quarter and this year really show people that our broad portfolio of products are enough to continue to grow the business in a whole bunch of different ways. And it doesn't mean we still care about stroke. It just means it's not essential in this moment in time for us to still have growth.

Adam, a question that came in here, it's been something people have been asking you since the IPO road show. And it's really -- what is Penumbra's competitive advantage? And how durable is it? This is an area where you compete against a lot of different large, well-established companies, yet you continue to innovate faster and outmaneuver them time and time again. So what is it that really keeps Penumbra ahead of the competition?

Yes. It's a really great question. I tried to address it a little bit in my prepared remarks. We built this company from scratch to do this. We think about innovation and what that means, I think, very purposefully. And I think that's proven to be successful. If you look at all of our growth, some of the products have come as ideas from others, as some of the concepts or specific thoughts. But the work that has gone into making them a real product have really all been organic. And we keep doing that over and over again. And so it's one thing if I was sitting here 5, 6, 7 years ago, telling you that this is what I wanted to do. You could have a lot of skepticism. But we now have 16-plus years of doing this in area after area. That was one of the reasons I highlighted the neuro access area. Folks who are just sort of getting new to the story, neuro access before Penumbra wasn't very evolved. It was a limitation on doing most neuro cases. And we came around and purposely designed the first neuro access catheter. And now there's a very big field in neuro access. Lots of companies have been working on it. There's some great technology that's developed that's pushed us to continue to innovate stronger and faster. And it's enabled huge number of cases that probably wouldn't have been able to be done. That's how it's supposed to be. And I couldn't be proud of our team's role in it. I'm happy that other companies are part of it, too, because it pushes everyone. So our secret really is the way we think about it, the way we're organized, the way we're structured, the way we think about the uncertainty that goes with innovation, that's what's driven us.

Maybe Maggie, I'll bring you in here. And I know you haven't given guidance for 2021, but maybe I can ask a question this way. You put up a run rate that in the fourth quarter here, that's about $690 million, if you annualize it. The Street is sitting at $645 million for 2021. That didn't really include much of a quarter's impact from XTRA FLEX. So maybe just I'll ask you, do you feel like you're very comfortable with where the Street is for next year? And do you think there's probably more upside given the fourth quarter number you just put up?

I mean obviously, it's still a little bit early for us to take a look at next year. But fundamentally, we feel pretty strong about where we stand. But at the same time, there's still a lot of uncertainty around the COVID impact.

Got it. Do you think we'll get a full year's worth of guidance on the fourth quarter earnings call coming up?

It's a little early to say. The goal will certainly to be to provide that guidance if we have -- all have that visibility.

Got it. And maybe one more on XTRA FLEX here. It looks -- when I look at my numbers, when I look at Street numbers, I took about 75% of the lost sales out, assume 25% migrate over to another product, took out some access sales along with it, it looks like the Street was a little more severe in its cuts and basically took all XTRA FLEX sales out with no transition out to a number of products. It's only been a few short weeks since the announcement. But Adam, any way to help investors think about how to play around with our models and how much of those sales you can capture into other products?

Yes. It's a great question, Robbie. And it is early in the process. So to give any kind of definitive answer, I think is not very wise. We do have a fair amount of confidence that our current products, ACE68 and JET 7 standard tip are really good products and will continue to be used. We were very fortunate to have inventory available. I will tell you that constraints on inventory could become an issue in the short term just because of what we're seeing. But that being said, we have a lot of confidence that our business in the stroke world is going to stay strong. And again, reminding everyone that it's not just that one catheter. But even when you look at that one, the big catheter that everyone talks about, our current offerings, ACE68 and JET 7 standard tip, they have a lot of clinical data behind them. They've been used a lot. And as they stack up against many other competitors' products, they're pretty darn good. And so yes, I think we feel pretty comfortable that we'll hold our own in the stroke business at this time.

Well, great. I didn't get to talk about REAL VR. Maggie, we could talk about a lot more in financials. But unfortunately, we're out of time here. So Adam and Maggie, thank you so much for your time. Wish you a good conference, and I hope everybody enjoys the rest of their day.

All right. Thanks, Robbie.

Thanks, Robbie.