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

Good morning, and thank you for joining us for the fourth day of the 2021 Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, medical device analyst and a member of the health care research team here at Morgan Stanley. It's my pleasure to have Penumbra with us today, Adam Elsesser, President and CEO. And before we begin, I'll run through our disclaimer for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley sales representative. With that, Adam, thank you for joining us today.

Yes. Thanks for having us, Cecilia.

I wanted to start off with 2021, 2021 guidance and how you're thinking about the back half of the year? COVID's obviously kind of overhang in the U.S., especially with Delta right now. But as you think out to 4Q, your outlook for either your RED family ramping and increasing adoption, how do you see that playing out as a growth driver versus really what we've seen out of your peripheral business, multiple growth drivers you have contributing today?

Yes, it's a great question, Cecilia. We put out our guidance after the Q2, sort of toward the end of the reporting period. So we already sort of had a pretty good sense of where COVID was going and the resurgence of Delta. So we took that all into account. We talked a little bit about a small, a pretty small onetime uptick in Q2 from deferral of peripheral embolization cases. But generally, we feel really pretty strong about where our business is right now and where it's going to go for the back half of the year. You called out the new RED series, we're really pretty excited about that. It's very early on, and most of that we'll see in the fourth quarter and the first quarter of next year. But so far, the uptick and the reaction to that product line has been really kind of remarkable. And the most recent device in that product is the RED 72, which really is the larger size that will have a lot of utility, and the trackability of that catheter is pretty amazing. So we're feeling pretty confident about the stroke side of the business. And as you pointed out, the peripheral side just has a huge runway ahead, not just this quarter, not just the next quarter, but for a number of years. We're really in the earliest innings of going after the conversation with physicians about moving to what we call single-session treatment, where they rather than drip tPA over the course of 2 or 3 days, they have the opportunity to take all the clot out and send the patient home. And what we're finding with Lightning now, both in the arterial and the venous side, is the ease of use of that product. Not only does it get the clot out, but it has so many built in sort of ease-of-use things. There's auditory and visual signals when you're in clot and when you're not in clot. So all of a sudden, you take a procedure that has been typically done blind, with other technology where you don't really know where you are, you're sort of having to find out. Now you do know, you know right away and it's telling you in real time. And I think the combination of that with the success of getting clot out is going to help over the next few years of time. So we're feeling pretty confident about our business. Obviously, we all wish COVID didn't impact all of us in the way we conduct business and do things. But from a business and revenue standpoint, I think we've taken that into account and feel pretty comfortable.

From a higher level, too, just thinking about your peripheral opportunities, VT versus arterial versus coronary contributions. Can you talk through relative opportunities in each market that you see today for disruption and penetration? And really how you've targeted your sales force strategy in those different markets as you kind of approach market development, market creation and market penetration?

Yes. Really, I think, important distinction because each of those 3 arterial, DVT and PE are kind of different. You have to look at, what we've done is -- let's look at the patients who are today being treated interventionally or surgically for clot in one of those areas. And let's -- those are patients that are already with our customer or potential customer being treated. And so the question first is what are they being treated -- how are they being treated? And can we convince the physician to treat them with single-session mechanical thrombectomy. The majority of those patients are being treated with -- across all 3 with tPA dripping over several days. And that obviously takes time. You have to typically be in an ICU, ICUs are full now. So there's an open dialogue and a willingness to have those conversations. Some of those, particularly on the arterial side, are surgically treated, but it's a similar type of thing where we're trying to make it a much faster and easier stay. So those conversations just take one by one, physician by physician because remember, they're doing these procedures, both interventionally and surgically, on hundreds and hundreds of thousands of people and have been for years with no real clinical data to support it. And so the conversation is simply around can we get the clot out completely as easily and in a more efficient manner. And as people start to experience that, it's a pretty sticky business. But you're going against sort of 20 years of practice many times, depending on the position. And so it just takes time. But again, we have a lot of optimism and a lot of sense that the momentum is starting to build in that conversation. The next phase after we get those patients, again, there's 250,000 in arterial, about 180 or so in DVT and a much smaller number about 20 in PE that are being treated today interventionally or surgically. The next phase is to go after the patients that we think or identify that may benefit from this type of treatment, but that are now not yet getting intervention at all. And that's going to take a lot longer, but we don't have to do that right away. So that will likely require more clinical data, but we're doing the work now in our current thing with studies to gain enough information, enough data to start to think about powering those larger studies.

I wanted to ask further on the clinical side. Just with Lightning, how you're thinking about your clinical approach? And you look at stroke, you really needed that clinical data set to really drive market creation, adoption. Here, as you talked about, it's a bit of a mix, but you're able to see some penetration ahead of data. But as you think about what's needed from the data standpoint, to really get this field accelerating further? How are you thinking about the unmet need here that physicians really want to see from a clinical side to adopt this?

Well, I think it's a really important question. And I'd like to make sure I make the right distinction here with stroke. With stroke, we were asking -- we were basically proposing that patients got treated for the first time. They weren't yet treated. They weren't intervened on. And we really -- in order to convince everyone who had responsibility for those patients along the sort of chain of care that they should do this, that they should suggest or push these patients to be treated. So obviously, we needed the kind of data that drove that field that came out in 2014, 2015. It's different here, in that we're already that -- in our country, we're already treating about 450,000 people interventionally or surgically with no data. And we're doing that because if we don't, those patients will lose a limb, they'll lose their life in certain cases or they'll have serious, serious medical issues for a long time. So there's already this -- that movement has already happened and has happened for many, many years. So it's not about data that proves you should do nothing. It's does the new idea of mechanical -- single-session mechanical thrombectomy is at better than what they're currently doing. So that's sort of a different argument because we're already treating those patients. So all the barriers to growth in stroke aren't here. We don't have to get the patient to the right place. We don't have to transfer them. They're already where they need to be. We just have to convince doctors to do single-session therapy. And with COVID, it gave us an opportunity because with ICUs full, it was hard to put patients in certain hospitals, into ICUs to drip tPA over a course of 2 or 3 days. So that gave, I think, the field a little bit of a jump start. And we just have to keep that conversation to go. Again, to go beyond that 450,000 to patients that aren't being treated, we definitely will want data to support that. But we don't need that in the next couple of years because we got our hands full, trying to go after the first 450,000 patients.

I wanted to ask too, within this portfolio, your peripheral embolization business. Q2, strong results. You talked a little bit about maybe you saw some procedures deferred benefiting, but this franchise has delivered strong results for a few quarters, notwithstanding COVID. Can you just walk through kind of what you've seen in the marketplace? What about this technology specifically is resonating? And really, if there are use cases where you've seen your technology really drive expansion into different applications.

Yes. We tried to not spend a lot of time talking about this part of our business for a while because we didn't want to draw too much attention, but we have no choice because it continues to do really well. We really -- we made a very differentiated product. We initially were sort of limited to the world of what -- where people use detachable coils in the peripheral space, which is a relatively contained field. The field of embolization in general is much, much larger. When you start to use other materials beyond detachable coils, you have pushable coils, you have liquids and glues and plugs and a whole host of other materials. It's a much, much broader field. There is a lot of cases where people are using things to embolize parts of the peripheral space. So it's that world that we now have opened to us in large part because -- not in every case, but in large -- many of those use cases because of the nature of our product. It is -- the best way to describe it is a very big and very soft coil of material. So you have a lot of control. You have an ease of use. It's faster because it's so large. People describe it as our liquid metal. And that's just -- it's been a great product, and we keep adding tools to it. We started with just a coil and then we developed what we call POD and then POD packing and then Ruby LP, and we're going to continue to add tools in the future to keep growing that franchise. Again, all under the same fundamental view of a material that is doing what other materials can do, but maybe not as well. So we're pretty excited. I think there's room for that to continue to grow. Is it -- naturally, it's probably not ultimately as large as the peripheral thrombectomy space, but we still think there's room on that to grow. And certainly, internationally, a lot of this work has been done in the U.S. But as we look at around the world, there's opportunities to continue to grow, and we've seen that in certain markets where we've had some real success.

On the thrombectomy side that you just brought up, L7 on the arterial side, but prior to the launch, how would you characterize growth dynamics in that business relative to what you're seeing play out concurrently on the venous side of your portfolio? And really also how would you characterize the impact of L12 on the venous side versus what you're seeing with L7 on the arterial side?

Well, they're sort of different at the same time. So the arterial space -- on the venous space, I should say, the goal there was to have the catheter that we felt was large enough to get the clot out, still safe, make sure we weren't doing anything to damage the valves or anything else, be very sort of careful. And so Lightning 12 is the real sort of sweet spot to start and see what we could do. The key fundamental there is twofold. One, big enough to get the clot out, but still small enough to navigate and do easily and well in a safe manner. The benefit of Lightning on top of that because we don't have blood loss as Lightning protects against blood loss. So you're not taking out the blood, putting it back in, you're just not taking out in the first place. So that that's the core point of it. But on top of that, we've had the benefit of sort of both the auditory and visual cues. When you use Lightning, when you know you're in clot, you know you're not in clot, because it's telling you with a different sound and a different color of LED lights on the material, what you're -- when you're in clot and when you're not. So the ease of use of the product has been amazing. And that is the same on the arterial and venous side. The fundamental difference on the arterial side was we had to make a catheter set that addressed the needs on the arterial side. So big enough to do the work, but still small enough that people felt comfortable with the French size of the catheter. So they weren't having to upsize too much. And for that, we really use some of our new technology that we've talked about to, in effect, have the maximum inner diameter on the catheter so that we're able to get a lot of clot out with minimizing the outer diameter to a 7 French size. And I think that's really resonate with people where it does the work that you need to do. The size is right, but they're a [ whole French ] size smaller, which I think has been really, really an important piece of the technology. And again, then the Lightning technology, so you don't have to worry about blood loss and taking out too much blood and you have the ease of use that I already described. So that's sort of the similarities, but also a little bit of the differences.

I wanted to ask too on CAT RX. Just as you think about that market, your overlap with physicians performing PE, current TAM, current penetration, how do you drive market development adoption here?

Yes. So CAT RX has been a really good product. There is a clear need and the TOTAL trial said this for innovation in high-risk patients, patients that have really high clot burden. And as -- we've been running a study called the CHEETAH study, that has finished enrolling and we're looking forward to having that data presented. And I think that will continue the effort to sort of show for these specific patients that there is something that can be done effectively. That's the hope that we continue. So far, when people are using it, it's a pretty sticky business. People take a while to decide to use it. When they do, they've really liked it. But you're right, there is an absolute overlap. Many of the interventional cardiologists, who are using CAT RX, also do some of the vascular work, PE, for sure, but some of the other areas as well. And once they're -- sometimes they first start with CAT RX and they realize that the rest of our system can be used in other parts of the body. And actually, sometimes, it starts the other way around, where they use our system first in the vascular, the peripheral space, and then they move in and try it on the coronary. So there is definitely an overlap with that set of the interventional cardiologist customers.

I wanted to ask, too, RapidAI partnership that you announced. It's been a little a few quarters ago, I guess, at this point. But one, kind of, if you could provide an overview of progress there. But then broadly, can you talk about the intersection of health care and technology? Where is health care still behind? And really just the greatest impediments to broader utilization of technology across the field of health care. And I'm guessing next week, we'll get to hear more, but just kind of curious. Your thoughts?

Well, so the partnership with Rapid is a little bit different than what we're thinking about and doing with Immersive Healthcare, and I'll share the difference in a second. With rapid -- Rapid has built really the top platform in the world for measuring and sort of doing the analytics around imaging for stroke and determining whether or not those patients can be treated as well as connecting the workflow within a stroke center so that everyone has notified everyone in a seamless sort of mobile app format, can communicate and help make decisions faster. And when you have an urgent decision-making need, that has been a big part of it. What we're trying to do is bring that with their amazing technology to bear in PE as well. Because right now, it's a similar dynamic. You have a lot of different physicians and stakeholders in the decision tree about, do you treat a patient, don't you treat a patient, what's available to them, how fast can those decisions get made. And the technology around determining by through looking at their images and using artificial intelligence to sort of get better and better answers, should we treat this patient. That's in the early stages. That will come and become more important over time. But right now, the biggest phase is just connecting everyone. The field is dying for this because they started to do it on their own. They're building these PERT centers, consortiums of people within the center, who are connected and talk to each other. And now the technology is allowing them to do that in real time on their phone, mobilely, as opposed to sort of a different way. So it's really the earliest phase, but so far, everyone involved in these PERT Centers are really reacting positively. They love the technology, and I think it will help over the next few years.

Okay. And I did want to turn to the stroke business. As you think about kind of the biggest driver of market acceleration in the stroke field going forward, how do you think about the impact of technology enhancement versus kind of what still is left on the legislative, the field work? I know COVID kind of interrupted that. But just curious kind of as we move out of the COVID period, hopefully, sooner rather than later, but just how you think about those 2 balancing?

Yes. I think is really -- we have a lot to still do in stroke. We are not yet obviously treating everyone that could be treated. And there's no question that last year, particularly in the second quarter of 2020, when we saw such a decrease in the number of patients that even went to the stroke centers, which was well documented, that we're now sort of regaining that momentum. And it took a while, but I think we're back to that point. I was really heartened at the SNIS meeting, this is the neuro society meeting, which was in person this year in the summer. Before the next Delta wave, there was a lot of conversation about this, just sort of in the hallway amongst doctors. They're sort of energized, ready to sort of get back out and do a lot of the local work that was driving this growth. They really couldn't do that for a big chunk of last year. Obviously, you can't show up to the fire department and ambulance services and say, I know you're dealing with COVID, and you don't want to see people in person. But can we talk about your stroke patients. That wasn't going to happen for a bit. But I think there's an energy to do that. We're also seeing some beginning of movement on the legislative front, again, which I think is great. I think, again, last year, most legislatures were just dealing with the crisis at hand and their own state economies. But as we move past this, hopefully, that will come back as a driver. I guess you have to be optimistic if you do what we do. And so I remain pretty optimistic that the results are still too good. People do better generally if they're treated, and I think that will continue to drive it. For us, we -- because of the recall and then now the launch of the RED series for the next 6 months or so, we got our hands full just in sort of getting our product out there and regaining some share and sort of having some fun doing that because the product is working so well. So that will be our focus over the next sort of 6 months. And then, of course, we have Thunderbolt coming, which if it works as we hope that will be a lot of fun.

On Thunderbolt and guessing you won't give us much information, but I'm curious kind of how you approached with Lightning and VT? How you were thinking about changing the paradigm treatment there, expanding kind of physician comfort in intervening on patients? What [indiscernible] experience have you kind of incorporated in your development, your aspirations with Thunderbolt?

So thank you for framing the question that way because it allows me to answer it without just avoiding it. So I appreciate it. The goal has always been pretty straightforward. We want to get as much or all the clot out in every patient in 5 minutes or less. We've said that a lot. Will we ever get there? Hopefully, maybe we'll fall just slightly short of that. But we're nowhere near there. There's still a wide variety of skill sets. There's a wide variety of results. A wide variety of products used. And so if you look at the paradigm, particularly on the aspiration side, we've been getting bigger and bigger catheters. And I think everyone sort of gets that we may have come close to sort of the end of the -- the catheters are almost the size of the artery that they're in. So there's not obviously a lot of room to go. And the goal is not to push that to the point where it's not safe. The key is how do we get where we want to go in a different way. And that's what we think Thunderbolt to address in a very straightforward, very simplistic way and we're pretty excited about it. But look, we got to get it out there, we got to try it. And before that's available, RED is 100% of our focus right now in stroke. And frankly, it's really satisfying because the comments and the reaction has been really, really heartening. And people during the time when after the recall, no other products sort of captured the minds -- hearts and minds of physicians. So there's a real opportunity for RED to do pretty well here.

I wanted to ask to -- so as you think about the stroke market, you have innovative products, either online now with RED, in the pipeline. As you think about the -- coming out of COVID, the impact of COVID, VT in some cases, you could say, benefited from COVID just in the form of enhanced awareness around single-session therapy. But in stroke, are there any dynamics out of COVID that acted as a net positive for the field as you think going forward?

That's -- it's a good question. I haven't thought about it. I don't -- unlike your comments around sort of ICUs being full, so people thinking about single session. I don't think stroke benefited from COVID directly. I do think it slowed down the growth. I do think there wasn't sort of a net positive that I can come up with easily. There was some challenging times a year ago, over a year ago where people wouldn't even go to the hospital. I think we're past that. I think people are remembering the signs. But we do have to get back at that. And I sense, as I said, at SNIS and all, the whole community is chomping at the bit, ready to go. They want to be back out there, talking about the signs of stroke and educating ambulance drivers to be able to do a quick test and sort of figuring that out. So I'm pretty optimistic, but no, I don't see sort of a -- there wasn't an obvious silver lining there. But for us, as a company, what's ahead is, with the launch of the RED Series, an opportunity to really go after some share and getting our share of that business. And that's what's exciting in the short term for us.

Okay. And last minute here, Adam, I did want to ask about REAL, realizing we'll get a lot more next week. But just from a high level, what do you pull from your experience in stroke and peripheral? And how you think about rolling out REAL? And from a high level to just the challenges and hurdles versus traditional medical devices as you think about the commercialization process.

Well, so the way we look at this, and I think it's really important to say this, we don't look at ourselves as a stroke company or an interventional company or now a vascular company. We look at ourselves as a health care company that looks for challenges that can be done. And during our IPO 6 years ago, I shared that, if we execute well and do a good job, we very well might have our vascular business be bigger than our neuro business, 6 years or so from now. And it turned out to be true. Our vascular business now is bigger. So the goal here is to lay out a similar case with Immersive Healthcare. What is the -- what does that field look like? What -- how do you go after it in a whole hearted sort of concerted way? How do you take the great work that everyone else has done and work cohesively with everyone to try to bring therapy that is pretty well accepted as helpful into that world, across all potential sort of sites of care, if you will, and be successful. And we're going to lay out that path. It's not going to happen overnight. We're going to talk about how to get there. And we'll let people assess. Does Penumbra have the skills, have they brought in the right people? Can they do this, just like we did it first with stroke and then with vascular. And now can we do it in Immersive healthcare? And if so, if we can, it's going to be pretty important and impactful part of our business for a long time.

I know we're out of time. But Adam, I wanted to thank you for the time this morning and very much looking forward to getting here more next week.

Yes. Thank you, Cecilia. It's great questions, and I appreciate being here. Thank you.

Thank you.