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

Okay. Great. We're going to start the next session here. I'm Bob Hopkins from Bank of America on the medical device side. And I want to welcome everybody to the next fireside chat. We're very happy and appreciative to have Penumbra's CEO, Adam Elsesser, here on behalf of the company. We always appreciate Penumbra's willingness to participate in virtual Vegas and look forward, hopefully, next year to have it, to drop the virtual part. But for now, we'll hopefully conduct this fireside chat without any technology glitches. So far so good with the conference, we're sort of halfway through day 1. So Adam, thanks very much for being here, and appreciate your willingness to have a discussion with us.

Of course. Thanks for having us, Bob.

Yes. No, absolutely. So we've got a limited amount of time. So I wanted to kind of touch on a few things. But maybe just to start, Adam, I'd ask kind of a big -- kind of a bigger picture overview, company exiting the first quarter results. Just kind of want to take your temperature on the kind of the state of the company right now and how you view the world sort of exiting Q1? And then we'll get a little more specific than that going forward.

Yes, that's -- thanks. It's a great question. We feel and I think we try to express this on the earnings call last week, really particularly good about the strength of our business right now and the ability to continue to help more and more people. We went through the business in a little bit different detail on this earnings call where we went through not just sort of 1 or 2 sort of big franchises, but really the entire business, both in neuro and the various product segments and peripheral, where we've highlighted the for drivers there as well as REAL and touched on international, particularly China. So all of those sort of make up what we think are the growth ahead of us over the next number of years. And it really puts us in a pretty good spot, where we have a lot of confidence that each one will contribute differently probably over the course of each quarter, but when you take it all together, will add up, I think, to a pretty successful run over the next number of years.

And then, a couple of things I wanted to talk about. One of the things I want to spend some time on is, is China, because it's -- over the last 4 or 5 years, it's not something we spend a ton of time on. And so maybe we'll start there and then move to peripheral and kind of end with stroke. So on the China side, we got that nice disclosure from you in the fourth quarter about the contribution to China. And I know you guys have talked to us about how things are kind of in place now. So you're at a point in your corporate life cycle where there's a number of things we can talk about in terms of growth drivers going forward. So help us put China in perspective, relative to some of the other things that you have going on, on a product-specific level. Because I remember at the 2019 Analyst Day, and I said this a couple of times now, it was highlighted as one of the biggest opportunities of the company over an extended period of time. So help put China in perspective for us right now.

Yes. It's a great question. And I'm happy to try to give some context to it. I'm not going to go into specific sort of detailed quantitative discussion, but really more how we think about China. We've always wanted to have our products available in China. I personally have spent a great deal of time in China looking for the right way to do that given the way that business is conducted there in the medical device industry, which has changed over the last 10 years. The rest of our team has put a great deal of effort as well. With this deal -- and so we've been -- we've also been picky. We haven't rushed in. We wanted to wait and see how do we do this, that will have really longer-term success, sort of more sustainable capacity. And this deal we've done with Genesis, I am really optimistic about. Just to remind you, what we disclosed, it has 3 components: licensing, royalties, as well as distribution. And it's initially only for 5 of our products in the neuro side, stroke and access. But not even all of our neuro products. It doesn't have the rest of neuro. It doesn't have, for example, JET 7 standard tip. It doesn't have our newest RED series, obviously, that we just discussed on the earnings call last week, and it certainly doesn't have the product that I alluded to as paradigm shifting. Then if you think about the peripheral, doesn't have any of those products yet. So we're starting sort of in a way to do this work on part of the product portfolio. But I'm very optimistic that so far, it's gone really well. This is a phenomenal group of folks at Genesis and I've been really, really pleased working with them so far. And I think there's room for this to become a pretty substantial contributor to us. But right now, it's certainly not nothing. It's a pretty -- it's nice, good start. It's off to a really, really healthy way. And I'm excited about it.

Will you be adding those peripheral products? I mean, why wouldn't you add the rest of the portfolio to the agreement?

Yes. Well, again, the key is to start small, to get to know each other, to continue those conversations, make sure we -- both sides are getting what they want out of this agreement. From my vantage point, so far, that's gone really well. And so one hopes and assumes that we can continue to add products to it, yes.

So when you think about the next 2 to 3 years, of all the different things going on at Penumbra, where does China stack up in terms of an opportunity for you and a growth driver for the company?

Yes. I always -- and not -- I don't want to pick on the question, it's a totally fair question. But I think I'm having -- I'm a proud father of 4 children and I would feel like I'm being asked to pick my favorite child with that question like that. So it's hard to quantify that from a qualitative standpoint. It's certainly important. We -- China's a significant country with lots and lots of people and we know from the work we've done there and the time we spent that there are a lot of people that can be helped with our products. So that fits our mission exactly, and we want to do that. It's significant. Does that -- will that alone drive our growth? No, of course, not. We have -- we've demonstrated, I think, by now, I hope in our vascular thrombectomy business, both on the arterial and the venous and PE, coronary plus stroke, plus the -- we're going to have a lot of growth drivers. So it's not the biggest or the sole one, but it's not insignificant. As I said, there are an awful lot of people that we think and Genesis thinks can benefit from our technology.

You've been laying the groundwork there for a number of years. And you told us in the beginning that you've got to find the right partner, you've got to get to know the right partner, but it just kind of all seems teed up. And the reason for all these questions is like, all of a sudden, there was this disclosure in the fourth quarter call, it was almost $13 million in revenues in a quarter. It just kind of took us by surprise. And that's why I'm trying to push here a little bit on, like why couldn't this be the most important growth driver for the company over the next 2 to 3 years? I mean are there limitations to the pacing of how you go forward? Or are there things I'm not thinking about?

Yes. The question -- yes, I didn't understand the question. The reason it can't -- I'm not going to say it's the most significant is it denigrates, if you will, the growth drivers -- the other growth drivers that we have. We're sitting here looking at opportunities just in the U.S. with our portfolio that can have huge opportunities to help countless number of patients, and we control that in our sales force and so on. So the goal here is not to imply that it's not that good. It's to make sure that when you look at the old side of our business, we have a lot of opportunities right now. This is a significant one. But we don't need -- we're not going to rely on this alone. This is not the only thing that will provide our growth over the next bunch of years. So that's the only nuance that I'm trying. I don't mean to imply that we're not really happy about it and it couldn't provide a significant amount of growth. It will. We have a lot of confidence in that.

Yes. No, I'm just trying to put it in perspective for folks. And on the -- trying to think if there's anything else there. I think, just one last question. I know you're not being too granular in terms of specific contribution from China in any given quarter or year, but you did give us that fourth quarter number. And I think you guys have said that, that disclosure in the fourth quarter was basically a decent way to think about the pace from which you will grow. And I just wanted to confirm that that's a fair way to think about it.

Well, yes, so the comment relates there to the fact that we only have 5 products that are subject to the agreement right now. Obviously, as we add more products, we get more approvals and we get going, there's likely additional growth on top of that. That's absolutely what we meant by that.

Right. Okay, okay.

For now, the 5 products that are in this agreement are the ones that we outlined on that call.

Yes. Okay. All right. So I apologize for saying so much to China. I sure half of people listening to this call are waiting for me to get to peripheral. So I'll get to vascular. We've talked -- I've asked this question before, but I would just like to get your updated thoughts. Obviously, when Penumbra went public, there's a lot of people that chose not to look at the company because they felt like you didn't have a big moat around the business or that there'd be so much competition so quickly that you just couldn't grow at a sustainable level. It feels -- that kind of discussion is happening now in peripheral. A little less so just because the growth in peripheral vascular has been so explosive in the last year that I find that people aren't that concerned yet. They know lots of competition is coming. And so I'm just curious, how you view your ability to stay ahead of the curve in vascular, relative to what you were able to do in stroke? I mean that's the -- maybe that's the wrong frame to ask the question, but I just want to kind of get at it that way, if you don't mind.

Yes. No, it's a totally appropriate frame, and one that is relatively easy for us to address and comment on. So if you think back to when we went public, we had 2 sort of strikes against us, if you will. One, stroke was relatively new, the trials had just happened. But all the conversation was around stentriever versus aspiration. And at the same time, there was a lot of concern, as you've pointed out, that it's just a catheter. All we have is a catheter. There's no IP, there's no -- and we made the comment, and I think it's proven to be more than accurate that, there's a lot of know-how that goes into making these catheters and their performance. And they're not all the same. And we pushed that pretty hard over the next sort of 5.5, 6 years since we've gone public. The field has caught up a little. There is a little bit more -- there's a lot more companies. It used to be 2 or 3 we were talking about the most, now it's 11 or 12, I've lost count, that all have a catheter, that are all sort of trying to get into a relatively contained market. It has potential still, but some of the growth has already happened. So that was sort of there. And I think we did pretty well, considering those limitations. If you look at the peripherals field, one, it's a little bit less singular. There's arterial, there's DVT, there's PE. They're all slightly different. That one product won't work in all of those vascular beds as we've shown in other companies have shown. So to compete, you need a lot more than just sort of one thing. Second, we're already starting the attention is coming to this field at a different point in time. We're starting with our technology already more advanced than the -- we're -- and still are frankly, in strokes. We're -- we talk about our paradigm shift coming in stroke, we're already at the first big paradigm shift with Lightning. We're able to, with smaller catheters, remove a significant amount of clot in these cases, without any real worry about taking too much blood or, ease of use nose issues. So we spend -- Lightning took 4 years and lots of effort to develop and there's some protection around that. It's not just a catheter. You can't just copy Lightning. That's not going to be something people can do, even if they wanted to. And so we're in a slightly different time frame, on -- it's you just made a catheter and put it in a box with a syringe, you're not going to get very far. That's not a market that -- and we track there 3 or 4 companies that have tried various things at that scale and they're not really particularly gaining any attention or traction because the technology keeps moving. And, the final point, we're not done innovating, even in vascular thrombectomy. I'm not, it's sort of funny to say with something so good as Lighting, but we're already working to improve upon. That's sort of our way of thinking, that's our style, we've done that for years and years, and we think, Lightning's great, we can even make it better. And so that's target's going to continue to move. But I think it's going to be a little bit different. But again, we're not even -- less than 10% penetrated of the patients that are in the hospitals, being treated by our customers, and so there's a huge amount of moving to go and it's obviously going to attract people because there's people we can help, and so people are going to try to do that, and we know that which is why we keep innovating. Every day they make things better and better.

Last question on this competition question. When you think about the difference between what's going on in perfo and what went on with stroke, you picked up some really good points, but there's one other point that one of the reasons it took the competition probably a couple of extra years to offer something interesting was because they made the wrong call at the start, and they focused exclusively or primarily on stentrievers. I feel like the competition in peripheral and vascular isn't going to make that mistake, and so that there may be more competitors sooner in this space than there were in stroke. You think that's fair?

The number of competitors isn't the question. It's what is the technology. I mean, look. there's 3 or 4 competitors that "have" products that I don't think any of us are ever seeing out there being used. So it's a big giant field with lots of opportunity. But the product has to be at least as good as what the current standard is. And it's pretty developed right now. That wasn't the case way back in the earlier days of stroke. And even so, we stayed ahead because of our ability to out-innovate. I think it's -- again, I never, ever take competition lightly, and I don't want anyone to misunderstand what I'm saying on this call. I -- we take it very seriously. That's what drives us to keep making our products better and better. But we're starting at a slightly different point. Before somebody could at least try to make a catheter that did as well, here, you can't copy Lighting. You can't just do that. That's not -- there's protection, there's everything else. It's -- and so that's not in the cards. And so you really have to think about a different way of doing something. And now that you have Lightning, the idea of like, for example, taking blood out, putting it back in, all those -- those things aren't -- no one's going to do that once you have Lighting. So we're just starting at a higher level than we started before. You -- to ask a doctor to, oh, yes, take all the blood out. Put it back in. Like, who would do that? And you don't take it out in the first place. So that not an ask that makes any sense to people. So I think we're just starting at a different spot.

Okay. That's helpful. I wanted to also ask a question about the durability of market growth in vascular. And I guess the first question I'd ask is, do you think that COVID helped the acceleration of the market, because of all the talk about costs and related to COVID. Did COVID help you? Did COVID help this market in the last 12 months?

Bob, that's a really good question. I find it awkward answering it, because the last thing I want to do is -- I mean, I will answer it. But the last thing I want to do is say somehow our products group benefited from COVID. But the reality is this, there was a lot of attention on the idea of blood clot in your body. That was -- that has not been true in the past. When we went public and talked about our vascular business, particularly the thrombectomy side, there are a lot of folks who didn't know that, that was an issue, and that it -- there were way more people that were having treatable blood clots than, in the body than treatable blood clots in the brain. That's not something that is sort of well known. So it did bring attention to it. I think the thing that was the most significant and was an important driver was this -- the downside of having so many patients in ICUs during the various waves, because that drove the need to get people out of the ICUs fast and therefore, focus on single-session treatment. And before, that wasn't a priority. You treat them real quick, i.e., put a catheter in the body and then they go to the ICU for a couple of days or a monitored bed. And that -- that dynamic was highlighted in a way that wasn't ever really able to be highlighted because the need for ICU beds. So I think that, more than anything, brought out the idea of single session, used the importance of it. And I think that will be here to stay. It's sort of more logical, right? Most patients would rather get the clot out, if they could, in a single session and go home, than hang around in an ICU for 2 or 3 days.

Yes, yes, yes. That's interesting. It makes a lot of intuitive sense. And I think a lot of us, I mean, you guys have -- did a great job at your Analyst Day laying this out and we've taken a shot at it. And I know a lot of others have in terms of identifying what ultimately the size of the market could be when you think about it. And so there's a lot of big numbers out there. What I'm curious about is your view on the pace of adaptation. You guys have kind of been growing at a very rapid pace as a company, it's over 20%. Do you think that this market, vascular mechanical thrombectomy, can be a 20% growth market for several more years? Or like how much volatility do you think we'll see? I mean I think we kind of all have an appreciation of where it could go. I think the question I'm trying to ask is, how bumpy is it going to be along the way?

Yes. Well, that's a really good question. And I've not actually been asked that -- the question in that framework, so let me give it a shot at trying to articulate what I see. So unlike in stroke, where the bumpiness -- everyone got tired of me talking about it because it was, we'd have some quarters of growth and then some quarters of not, and it was somewhat unpredictable, because there were things outside of our control. Here, I do believe we're going to have a little bit smoother growth because the patients that we're targeting anyway at this stage are the ones who are already in the hospitals with our customers, they're just not getting this type of treatment. And I don't mean even with competitive interventional products, I mean lysis or surgery, primarily. And so that likely is a smoother path. The only thing that creates slight bumps in that is just, because of the size and scale of that going through value analysis committees and getting new products in, that's not always just a linear process because there's effort in things that are slightly beyond our control then. But -- and we're seeing some of that, just the work ahead of us, obviously, with the new product launches in Lightning 7. But again, not in a substance -- that's not anything other than sort of pointing out the work ahead. So I do think it's going to be smoother. I think it is going to be a -- and I think it becomes a situation, as you get into the bulk of those patients now, that beyond the, what are typically referred to as early adopters, you're doing the hard work. And that will ultimately, unlike in stroke where the last bunch of patients might be the hardest, here, the last bunch might be the easiest, to get over a certain level. So yes, I have a different level of optimism about this. I think it's different than stroke pretty dramatically.

Okay. That's interesting. And then if I were to kind of talk about that same thing, but put it in within the context of 2021. Again, we've seen such explosive growth in that market. Just broadly speaking, as you guys thought about the guidance that you were giving for 2021 and the fact that, that market has been so explosive with all these products. Just what's your confidence at the, kind of the market growth rate that's been so solid continues? And just how did you go about thinking through that as you thought through guidance?

Yes. So as you know, from hearing about the way we think about guidance for a bunch of years now, we literally just do the math about what we think we can -- we don't get too optimistic, we don't get too pessimistic. We try to be pretty realistic and say, how do we go do this? And if you look at our vascular sales force, they're a little different than some companies that might have one product and one thing to do every day. Our vascular team has 4 big products to focus on, every single day. We have our embolization business, which continues to do well. All these years later, it keeps growing. We have our coronary business, which again, is the same size as our stroke -- the market's the same size as our stroke market, and they need to focus on that. And then we have arterial as well as venous and PE. And when you think about it, we have 3 different doctor sets and inside those 3 different doctor sets, they're -- sometimes practices of 5 each at a hospital, each with their own ideas and thoughts around treatment. So there's a lot our reps have to do every day to continue to drive the adoption of these products. So I think that plays in our favor, because it allows us to continue to have the ability to go after more and more customers, even sometimes in the same hospital system. So once you get the thing on the shelf, there's still work to be done to convert. And sometimes it's converting partners within the practice from -- to different features. So I think that plays well for us. I think the way the product works is so strong and so sticky in many cases that I think it bodes well for us.

Great. And then on that same topic of kind of thinking about guidance, because if you just looked at the -- like the press release for the first quarter and the numbers, it was massive growth in the vascular part of the business and very limited growth in neuro. And that has a lot to do with comps and what was going on in the year-ago period and such. Over the course of the rest of this year, we've got your annual guidance, just curious how much does that gap narrow between vascular and neuro over the course of the rest of this year in your mind?

Well, yes, I don't compare them. So I'm not going to compare the growth rates. I will say given where we are in neuro now with sort of a little bit of a reset around our stroke franchise, growing from where we are now, I'm pretty optimistic. I think we have a real opportunity to do some real good work both because JET 7 and standard tip is now back out, not on back order, and we're confident we have some new products coming. And so -- and I know the market, we're doing pretty well, notwithstanding all of those issues. There isn't yet a product that's just like doing better. So we feel pretty confident that over the next bit of time. And once we get -- it's too late and we're running out of time, but once we get our product that we've alluded to as a paradigm shift, then the fun begins.

Well, we look forward to seeing what that is. And so we'll stay tuned. Adam, this has been a great discussion. We always appreciate, again, your willingness to participate in our conference. So thank you very much.

Great. Thank you. Take care, Bob.

Okay. Enjoy the rest of the show. Thank you.