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

Hey, good afternoon, everyone. My name is Margaret Kaczor. I'm the research analyst here at William Blair & Company who covers Penumbra. I am required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. As you all know, it's a virtual conference this year. So again, we're in the fireside chat format. There is a way for you guys to ask questions. Strongly encouraged that you do, please submit them. I will, of course, ask them to Adam. So with that, we're pleased to have Adam Elsesser, CEO of Penumbra here with us. Adam, how are you doing?

I'm great. Thanks again for having us.

Yes, happy to do it. So maybe let's just kind of start-up high level. I'm asking all companies is kind of the one COVID question here. We've got pretty clear line of sight at this point, vaccination rates we're finally moving past COVID. So again, it's not about COVID impact, but really focusing on the long-term market dynamics that have changed for you guys, either for better or worse? And then if you can give us some thoughts kind of on the post-COVID environment in stroke and vascular, that would be great.

Yes. I think it's a great question. I think as we feel that we're getting past it first as it relates to our end markets, we got through this I think better than that. A lot of our business is in nonelective cases sort of emerging. So we felt over the last couple of quarters that we're relatively strong in spite of the issues related to COVID. As it relates to sort of our own internal business, our manufacturing and operations, that's been just a big challenge, but we've really risen to the occasion. And so I think as we get a little into the -- in California here on sort of the loosening up of some of the rules and the ability to sort of interact on campus, I think everyone is looking forward to that. We'll do it cautiously, sort of aware that things can change. But we feel pretty good. And then certainly, I think, like a lot of the mood in this country is pretty optimistic. We certainly, obviously, are aware that there are certain markets and countries where they don't feel this right now, India, Brazil and others. We have team members there that we're thinking about. But I think as a general rule of thumb, we're feeling pretty good as we look into the future.

Yes. What a change a year makes. And I couldn't help us see the RED catheter in the back in the real system. So I'm excited to ask questions about that. I'm going to say that they were appropriately placed back there, the product placement.

I didn't even notice them there, yet.

All right. Let's focus on the neuro side a little bit briefly. We actually heard someone that surprised us to the upside on the last call. So maybe give us a quick refresh in terms of pockets of strength with BMX and some of the other products or geographies?

On Neuro first, is that ...

Yes.

So on neuro, this year has obviously been challenging with the extra flex recall and all. But I think we've really shown our resiliency. One, probably demonstrated that how varied the market is, and it's not just the catheter, but that all the sort of tools that go into doing a stroke case. And really, the benefit of our other catheters, sort of our second and third best products have really held up to a lot of the competitive attempts to entree. That being said, there are a lot of companies now. We've gone from talking exclusively about some of the bigger companies now to talking about a bunch of smaller companies and there's a lot of them, all with a variety of different tools. So I think the field, as it always has been, is quite competitive. But I think regarding stroke, we're in a pretty good spot. You've commented on the box behind me, that's RED 62, which was just cleared last week, and we're in the middle of doing our early evaluation cases. It's going well. And we think there's a lot of room not just for that product, but the additional RED series catheters that are coming. BMX, you call that BMX96. That's an access tool, a very novel technology to have a much larger lumen. That has really done incredibly well in the quarter we just announced. As have the other parts of our franchise, our coil business and our hemorrhagic items for treating bleeds. And so we're feeling pretty optimistic. As we move into the next back half of the year, beyond the additional catheters, getting additional technology, we've alluded to the products -- the product that we think will help change the current paradigm, I'm more and more excited and optimistic about what I think that can really do. And I think the field needs it. I think the field rather than have a dozen companies all doing the same thing, we're going to try to change that for the better and make a product that we think can get out all the clot in a much higher rate all the time. So we're pretty excited. And I'm very optimistic about stroke in the future.

So the way you chose your words, I'm going to ask a follow-up to that. So a dozen different folks that are focused on neuro and so on. And trying to change that. Is that a comment may be that you're going to either add more products? Is it a feature set thing? Is it a sheer thing? Why that chose your words?

Well, it wasn't meant as trying to be -- send any kind of message other than just a factual statement. There's -- I think on 11 or 12 companies now in neuro, many of them smaller companies who are joining the fray, which is great. But the key is rather than sort of just do the thing that others are doing. As you know, Penumbra always likes to continue to push technology and try to really get -- have paradigmships. And I'm pretty excited about what is coming. I think we can -- the key in stroke cases is to get all the clot out as fast as possible, as much of the time as possible. And as the field has grown, that's become pretty important. No matter where that cloud is and what vessel bed that is. Some of them are smaller, some of them are bigger, and we want to be able to address that across the board. And I think we have a real shot at doing that in the future. Let's not get ahead of ourselves. We still have a lot to prove, but I'm feeling optimistic.

Okay. And so if we think about the RED series of catheters, not necessarily just 62, which is one piece of it. But what are the technical limits to the -- of today's technologies that RED is specifically going to address, going at those 2 goals?

Yes. So RED is a part of it and that the goal with catheters is to always been, the current paradigm is to track as big a catheter as you can, fit in that artery easily and safely to that spot. And so the RED series definitely addresses those issues and trying to make catheters that can track faster and better than our existing catheters. That's the current paradigm. What I'm talking about is the future paradigm, and that's a product that's not part of the RED series that I've alluded to in the past that sort of flips that paradigm in a way that I think really quite elegantly addresses the needs of the field. So there are 2 different things there, but we'll wait and see. We probably shouldn't get ahead of ourselves.

Yes. Just one last one on that elusive product. I'm just trying to think from kind of -- we've talked about it for a couple of years now. Are you still tinkering on the design a little bit? Or is it just kind of a series of investments that you're making and launching, where it's more about that? Or is it FDA?

I think you know me well enough to know that I tend not to get ahead of myself. So you can take my comments as you want them, the fact that I'm talking about it should probably answer that question.

Okay. I'm going to ask the question on China. We obviously get it a ton. You called out some international reasons, why China? So we've got limited visibility to international markets. How do you explain or understand? How do we think about cell in versus sell-through?

Yes. So I'm really excited about our partnership with Genesis. Genesis is a great company lead by really an extraordinary seasons, leader, and team that he's built. And I think the nature of the structure, the deal allows us. Here, the first phase of this deal if you will, the part that we've sort of gotten organized and going on is really only for 5 products, really all around ACE68, which is a generation or so behind now. But a really good product. And I think in the Chinese market, it's going to do really, really well. It doesn't involve any of our newer products in neuro or stroke and certainly none of our peripheral products yet. But the room is there for that to happen. And as we spend more time with this partner and develop the kind of trust that is essential to do well together. I'm gaining more and more confidence that this partnership is going to be a critical part of what we do going forward. And I'm pretty excited about it. That being said, it doesn't -- we're not relying on China to have the kind of growth that we have promised to have. It's nice to have, and it's an important market. There are a lot of people that I think will benefit from our products. But we're not relying on China as the sole driver of our future growth. And I think that gives us a lot more confidence and flexibility and the overall business going forward.

Fair enough. All right. So let's maybe switch to vascular as well. Another just massive quarter on last quarter's call with vascular thrombectomy, I think it was 80% growth or so. So to us, it feels like the business has reached an inflection point, if you will. I guess, do you agree with that? And what are you seeing in the field in terms of what's driving this demand?

Yes. Well, so to just sort of level set, our vascular business has really 4 subcomponents of it. The first is the -- our coil business, our embolization business, which continues to grow sort of quarter-over-quarter. And that is really the very unique nature of the technology we have so far in that space. The other part that we don't talk about a lot is, of course, our coronary product, which has a pretty significant market and a lot of runway ahead. It takes a while to sort of get physicians in the coronary space to try it. But it tends to be really, really sticky when they do. It's a little bit different than clot in the other parts of the body, and that it's not always the main part of the procedure. It's a sort of a thing that they want to deal with and address, but it's not the main disease that they're treating most of the time. And then, of course, the thrombectomy part, both arterial and the venous side, which really are sort of slightly different, even though it's removing clot, they're sort of viewed slightly differently and the pathway is a little different. And there, really, the inflection point has been our development of Lightning. Lightning -- both Lightning 12, which is the venous side and Lightning 7 on the arterial have just had just really extraordinary success rates. And people who use it, it's pretty sticky business. And there's just a lot of runway ahead of us. We estimate they are about 10% penetrated in the market, as we define it, which is patients who are intervened on already today by our customers or surgically treated by our customers. And that's -- that means that 90% to go. And I think we'll have some pretty significant success for quite a while.

And one of the things you've talked about in the past is your ability to get into some of these VAC committees. And it seems like maybe you're also that getting a bit of momentum there. Are you leading with Lightning? Or what are you leading with as you get into these VAC committees? Or do you have to make it indication by indication by indication?

Yes. So VAC committees are really new products. There's a whole separate process around contracting with hospitals and systems, which is really a different team. But the VAC committee process for new products and Lightning is the new product, we feel like it's starting to make some progress. There's the pandemic, if anything, made that for the most part, more challenging. Many hospital systems really put the slowdown on improving new products. There were cost-saving measures put in place, and it really has just been more recent that's starting to open up. So I think if anything, that had been a challenge. We did see with Lightning last summer and into the fall, a little bit of sort of success because there were a lot of people worried about clot as a byproduct of COVID itself, and we happen to have the new product that treated that. So I think we got some waivers and some fast-tracking then. But I do think it feels like there's a little bit of momentum. But a lot of that is just the hard work of going through the process, making sure we're on the agenda, they're willing -- they understand what it is they're looking at and deciding around. A lot of it is just nuts and bolts work to get through and to do. But again, so far, so good.

Yes. Yes, the Medtech industry is now heavily focused on vascular. You've got several companies offering different solutions now. How do you differentiate between market growth versus competitive growth? And does that change at all going forward?