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

Good afternoon, everyone. Thanks for joining us at the 21st Annual Needham Healthcare Conference. I'm Mike Matson, and I lead the Medtech [ and Lead ] Research team here at Needham & Company. With me is Penumbra's CEO, Adam Elsesser; and Executive Vice President of Strategy, Jason Mills. Instead a standard presentation, we are going to do a Q&A session. [Operator Instructions] So we're going to go straight into the Q&A here.

I just want to start off with some questions on the Vascular business. Obviously, that's been a tremendous success story for Penumbra, very, very strong growth over the last few years, despite the pandemic. So just in terms of this growth, I was wondering if you could maybe just talk about what's been driving it? And is it really just simply an under-penetrated market and procedures being converted from tPA therapy to the more interventional device-based approaches?

Yes. So it's a great question, Mike. And it's a little broader than that, depending on what area you're talking about. And to remind you, as you know, in the Vascular side, we're really in 4 different areas. We have the coronary, which is a different, sort of, trajectory in group of patients. And then we have DVT, PE and then the arterial side. And they're all a little bit different. So on the arterial side, for example, you're pulling from not only [ tPA ] patients, but also, potentially, surgically treated patients. But patients, nonetheless, a bulk of them that are already with our doctors. And so that's sort of an important thing to note that they are already being seen by our end customers. On the venous side, it's a mixture of patients who are being treated there, primarily, with tPA, as you said, but also as the procedures get easier and physicians are seeing the success, opening that pool up. And eventually, there'll be additional clinical work needed to really open it all the way up. But we got a ways to go before we get there. So the vast majority of -- to answer your question, of the new patients are coming from one of those areas, depending on which Vascular [ seg ] we're talking about.

Okay. Got it. And I want to talk a little bit about just the competitive landscape in the Vascular business. So on the venous side, I think Ra Medical is probably one of your main competitors. The products seem, to me, to be a little bit different, in terms of how they work, both the sizing and the, I guess, the method of creating the negative pressure. So can you maybe just talk about how your products compare to others in Ra? And to what degree are they, sort of, overlapping in terms of the types of clots that are getting treated with the two companies' products?

Yes. Listen, I -- before I do that, I'm happy to explain the difference in the products. But we don't we don't really see -- whether it's them or anyone else, at this stage, as competitors. And I've said that before, and I don't want people to discount it. We are happy to compete with anyone who wants to compete with us. But at this stage; one, the products are very different. But also, there is a necessary sort of benefit that comes from the attention that multiple companies have on this space. And just to remind everyone, when we went public in 2015, and I said that our Vascular business would be bigger than our Neuro business in 5 to 6 years, I can assure you that every single person laughed and thought that I was naive. And obviously, that turned out to be true because it's the simple fact that nobody, not a patient or a physician, has ever said that clot in your arteries or veins is a positive thing. It's just not been something -- and so there are a lot of patients that have clot in their arteries and veins. So we've had to find a way to get it out. And having the -- sort of, the attention put on this space now, is a very, very positive thing. For us, as a company, when we get to the point of needing to compete, and there will be a point where the market's developed enough and we do have to compete, we're starting at a totally different point than when we did, say, in stroke and other, where we were all sort of doing this simultaneously together. We're years ahead of where we were when we developed the stroke market. The technology is already way ahead. We have Lightning, which really revolutionized the way, when thought about taking out blood clot, both in the arteries and veins. And the fundamental difference, the way our product works is, we can be smaller, the catheters can be smaller. They're attached to power Aspiration, so we have the continuous flow of power Aspiration which is an incredibly efficient way to remove clot. And we have Lightning, which then prohibits too much blood from ever being taken out, so you don't have to do the silly thing of putting it back in or running the risk of paying attention. And on top of that, you have the benefit of what Lightning does, which tells you, both visually and with an auditory signal when you're in clot and when you're not in clot. So you can't tell that from the screen that you're looking at, you can't otherwise -- so you're, sort of, hunting and pecking with your catheter looking for clot when you use products without Lightning. And this gives you that benefit, and it actually makes the cases go much faster. So even though you're smaller, because of continuous Aspiration and that sort of ability to tell where you are, you're actually speeding up the chases. And we're finding people really, really respond to that. And if you just obviously look at history in the vascular space, the arc of innovation always starts out, and then it starts to get smaller. Smaller is always going to be better. It's obviously safer, less traumatic, provides less other complications. So I think we're on the right track. We've talked about new products coming, both on the arterial and venous side this year. Where we are now is really strong. You add those on top of it. And I think we're in really good shape for many years to develop this market and I think sets the standard. And I think, that's what's happening out there.

Okay. That's very helpful. But just as far as like the amount of clot and the size of the clots that some of the competing products are able to capture, I mean you don't think that -- you believe yours is still able to compete despite...?

It's not a belief, it's a fact. We've done tens of thousands of cases. And the amount of clot we take out, I mean that -- to say that's a belief is silly. Just look on Twitter and other places are good -- call any of the customers using it. So it can take out -- there's no situation where we can't take out significant amounts of clot with our system. And again, sometimes much faster, when you look at the total procedure time. So we're in pretty good shape. As I said, again, I don't want to spend time co-competing because there's work both -- all these companies need to do together to continue to develop the market. But at the end of the day, when we do go head-to-head, I think we're going to be in really good shape.

Yes. Okay. All right. So I mean, you brought up Lightning. So I did want to ask about that. You kind of provided an overview of what it does and its purpose. But maybe, you could talk a little bit about just the kind of business model there, in terms of are you -- how you're selling it. I mean, I imagine it's bundled with the catheter. And do you get a price premium? Are there more or less catheters getting used? Is it just purely price-cost neutral from the customer perspective, but they get a better solution, so you win from that?

Yes. Well, so it depends, when you say price premium or price neutral. What's your baseline? So there -- from what we charged when we first launched Lightning 12, which was now in the middle of 2020, there was definitely an increase in the price for the box, say, Lightning 12, which includes the Lightning component as well as the catheter. But that, from a -- an annualized basis, that's obviously been taken out. Where do we stack up against other companies and their pricing? We are -- definitely have always, as a company, looked at price really as a ratio, sort of what the DRG is, what hospitals can do, so that we are always allowing them to be successful and make money. And we do that independently of anybody else's pricing. And that is really, really an important thing to point out. More now than ever, pricing matters. You need to be viewed as a company that is fair in their pricing, and we have done that. Now the product itself has good margins. So we're not leaving anything on the table, if you will. We're just not going too far. And I think, in the long run, when you look ahead a couple of years, that's going to be pretty successful. Just as a reminder for everyone, when we were going public, there was a lot of conversation about competition coming in stroke and would we see a price impact. We're 7 years into it. We have, God knows how many, companies competing with us in stroke now. And we haven't lowered our price because we never needed to, because we price fairly. And I think that's an important thing to remember, as we go forward, is, this is not a race, if you will, to the bottom. This is about innovation and continually making things better and better. So yes, I guess, there's a small premium compared to what we used to sell it at, but it is not the most expensive product on the market.

Yes. Okay. That's helpful. And just to be clear, what you're saying about the price premium with -- that you've got with Lightning, I mean, it sounds like that's kind of run its course in terms of impact...

On an annualized basis, that's totally run its course, yes.

Yes. Okay. And does that then imply that the majority of -- the vast majority the customers have or -- is there anyone still not using Lightning, or is there some holdouts out there?

Yes. There's a few people on the arterial side, who have not yet switched, but I mean very small number. And they're all in the process of switching. What comes next will cause them to want to get on that bandwagon pretty quickly. So I'm not -- I think -- look, the days of just putting a catheter in the artery -- like we used to put a 8-French catheter, CAT 8 was an 8-French catheter, an inner diameter of [ 0.288 ], and we put that in there, hook it up to continuous Aspiration. And it works-ish. And the -ish part is, you don't know where you are. You don't have any of the feedback that I just described, which is important. And you really run the risk of having too much blood loss, and that was a concern. So we had to remind everyone to pay a huge amount of attention, so that they wouldn't hurt the patients. And we succeeded for a few years doing that because nothing else existed. But those days are long over. No one would do that anymore because they don't have to. They have Lightning. And so now they have no blood loss. And because they have Lightning 7, they have almost the same-size catheter, but they have a whole French size smaller. And that's been a huge success because most people want to have a smaller hole. They don't want to go all the way to an 8-French hole. And so I think the combination of those things have pushed the field to a totally different spot than we were when we first launched the product in, what, 2015.

Okay. And then, I think I've heard you in some prior presentations, mention that you haven't filed as many patents because you kind of relied more on trade secrets with your catheter designs and things like that. But I believe we have some patents on Lightning. So [ do you then ] believe that, that's [ protected enough ] that it will block competitors from being able to offer something similar or...?

Yes.

Okay. All right. That's easy. And then, do you -- have you -- I asked about your existing customers upgrading to Lightning. It sounds like that's mostly happened, but have you been seeing evidence that this has helped to capture share? In other words, doctors that were using something else that they've been able to -- that this has given -- they have given Penumbra a second look because of Lightning or...?

Yes. Well, if you're asking about how they're doing surgery, vascular surgeons are going to cut down doing that or using tPA, the answer is obviously, that -- that's the bulk of the growth we've had. Do we occasionally take share from one of the other mechanical systems? Absolutely. But again, not a focus of ours. Somebody hears somebody, a friend tells them to try it. It's pretty sticky once you try it, so it's hard to go backwards. But we're not unaware that our -- again, friendly competitors sometimes do that. And so we have to play that game of touch. But the vast majority of the work we do is focused on going after the share that isn't using mechanical thrombectomy right now.

Yes, Mike, it's also worth pointing out that our team is -- our vascular team in the field is covering all 3 specialties doing this work across those 4 thrombectomy areas, right? Cardiologists, radiologists and vascular surgeons. So the opportunity exists in, really, two ways. You have, perhaps, hospitals that are not doing any mechanical thrombectomy, in which case, there's opportunity across all 3 specialties. There's also opportunities where within a hospital, perhaps cardiologists, for example, are using cataracts for coronary, and there's an opportunity to continue to expand within that hospital. They may themselves be doing arterial as well as coronary, or they may have colleagues in radiology that would be a call point for our vascular team to espouse the benefits of Lightning in venous or arterial, if they're doing those procedures.

Yes. And it seems a little bit like a no-brainer to use Aspiration as opposed to surgery or lytics or something like that. So like what -- but I understand, I've been covering Medtech for a while, there's always an adoption curve. But why -- I guess to the [ doctors ] that aren't -- haven't adopted it, I mean, why haven't they? They just haven't been exposed to it? Or...

Do me a favor, do a giant survey and call them all and tell them they should switch. I would be very grateful.

We'll work on that. All right. And then moving on to the Neuro business. So the Neuro business has slowed down some -- I mean, still kind of teens, double-digit growth. So relative to other companies and other markets, still a healthy growth. But what do you think has caused the slower growth? I mean, it seems like; one, the market, maybe, has matured; two, there's this kind of capacity constrained around stroke's limit of -- the conversion with stroke centers and things like that, that's kind of system-wide issues; and then, three, there has been some more competition. So I mean, is that a fair assessment? Or am I missing something?

I think it's a fair assessment. I think the details are what matter the most there. And if you don't mind, maybe I'll just walk through some of the important details.

Yes, sure.

So going back to the beginning of 2020, when the lockdown happened, we saw a pretty notable decrease in the number of strokes for the first, sort of, 3, maybe 4 months. And that was widely reported in the lay press. It was all over the place. Happened with heart attacks, too, but stroke was particularly hit. So we saw a decrease. That sort of stabilized. And then in 2021, we saw it come back up and really come back to where it was before it decreased. The work -- there's a lot of energy and desire to continue to grow that number of patients that are being treated. But a lot of that work is done locally by people going out into the community, working with the EMS providers, the fire departments, educate people about triage. And obviously, during the pandemic, that was harder to do that work. People weren't out and about as much. In addition, now we have such staffing issues in hospitals, even though the acute phase of the month of January is over. So from a procedural standpoint, we don't -- people are stretched. They're just understaffed, whether it's in physicians or in their nursing staff or otherwise. And so it's going to be a bit before we see the level of growth come back, but there's no lack of interest. There's a few things that then counterbalance that and sort of make up for it. And that is more and more hospitals, there's the process of -- I don't know if you're familiar with the term locums, where physicians are, sort of, go on these trips and go, stay for a week to a hospital, are paid by the day to support them. In Neuro, that's become more active than it used to be. And so they are sometimes going to hospitals that otherwise don't do a lot of stroke, and then they're showing up and spending a week. And then, all of a sudden, they do a lot of stroke that week because they're there, but they're not there permanently. And so you -- to me, that's a good sign. I wish they would become more permanent. But you can make, apparently, a lot more money doing locums than you can in a full-time job. And so that tells me, though, that there's probably a good business model when staffing issues start to write themselves, where more and more centers will come online. And then certainly, as the products get easier and easier, I think there will be an opportunity to -- and Thunderbolt is, I think, a good part of that, to democratize this [ spend ] and be able to do this, where we're not necessarily moving the patient but appropriately trained physicians can do this in a broader range of hospitals. So I have a lot of optimism. We didn't come this far to see it stall out before we were able to seat everyone. And I have a lot of optimism about that. On the market share question, which isn't really market growth as much as market share, we've had competition since we went public, long before we went public. It's particularly competitive with a few players now, different ones, some come, some go. I wouldn't put too much stock on that, on a long-term basis. Our RED series of catheters have performed really, really well. And then, we're, as you know, getting ready to start our trial, which we'll publicly talk about a little more for Thunderbolt in a bit. And I'm -- of all the things I've ever done, maybe it's because we've been working on stroke so long. But I can't wait. And I think the strategy of working with the FDA, doing a trial, getting that sort of out there at the beginning, so that we're not having to convince people post factor, I think, is going to be big for us and big for patients. I think it's going to be a pretty significant change. So a lot of excitement in my mind, and I think there's an opportunity. It may not be as obvious right now as the Vascular business, but we're not giving up in stroke.

Yes. Okay. And then, I wanted to ask about some different, I guess, approaches to treating stroke. I mean, you've got Aspiration, you've got stent retrievers, and then kind of using both. And I guess, it seems like the market, at least in the U.S., has shifted in favor of more of Aspiration. But can you maybe just talk about, kind of, the landscape there and how the doctors really choose one versus the other?

Yes. I'm going to say something, and I'm sure there's examples of where I'm wrong. But I'm not aware of anyone who's actively using just a stentriever. I'm sure, there is somebody, but it's no longer wildly in favor. So you're either using an aspiration catheter and a stentriever or you're using Aspiration first as a primary mechanism. But what's really interesting is, within that very broad -- there's all kinds of sub techniques. And we don't have enough time to go through them all. And that, to me, tells you the most important thing. If you have all kinds of very nuanced techniques between using either an Aspiration and stentriever versus Aspiration and this and that, it tells me that none of it is yet perfect. It's not as simple as just take a small catheter, put it at the clot, push the button and you're done. And that's where we have to go in order to have the kind of success that we want. And that's why I am so excited about Thunderbolt because all of these techniques in these different nuances, which are -- to be honest with you, I give the physicians that are trying all that a lot of credit. They're trying to take the tools they have, and they're going to try to make them work for their patients. So I have a lot of respect for that. But our obligation is to try to make that even easier and easier, so that they don't have to cobble together various techniques and devices that aren't necessarily even designed to work together. And that's where Thunderbolt comes in. And so that -- the very fact that you're asking that question about all these different products and the way they're used, is the reason and the justification of why Thunderbolt is necessary.

Yes. Okay. I'm getting to Thunderbolt. I still a few other questions. So RED, I know that those are going to be the catheters that will work with Thunderbolt. The RED family, sorry. You have launched that, though. So can you maybe just -- putting aside Thunderbolt for a minute, just talk about the catheters themselves and like why -- what's better about them as opposed to your prior versions? Is it just trackability, or is there something else?

Yes. So yes, trackability is the main thing. As you know, you have to -- two things have to happen. You have to be able to track it. And you can't do damage when you're tracking it. Obviously, you can't dissect the vessel or perforate a vessel, what have you. And it has to hold its shape when you put Aspiration power on it, so that it doesn't, sort of, collapse on itself under Aspiration power. And the RED series does that. The big surprise, I think -- even us a little bit, is the success of RED 62, which is a slightly smaller catheter, but it tracks so well. And people are, I think, are using it in situations that they could potentially use a bigger catheter, but this tracks so easily and it holds its shape and is able to get clot out. So the whole RED series has been very successful around trackability. That's the starting point. Again, today, that's what it is. It's a more traditional catheter that is treated that way. That, combined with Thunderbolt, hopefully, will enable and, if you will -- the best way to sort of take Aspiration to its highest potential, so that you can literally just push a button and hopefully, the clot will go out, be ingested in a matter of a minute or so. If we can get there, then we've done a lot, and we should be pretty pleased that this field has moved that far in getting clot out.

Okay. All right. I want to -- I've got a couple of questions that have come in that I want to address them now before we move on, and it is a little bit of a sidetrack from what we're talking about. But your stock is down about 7% or 8% today, and some people are just asking if you have any, kind of, explanation for things that have come up in the meetings you've had today or anything like that? Yes. I mean, again, this isn't my question, but several people have asked this. So I figured I would just throw this out there and see if you...

No, I appreciate the question. It's a fair question. I don't -- I've long since not understood the stock market. I -- if you hear what we said in our last call, and the success that we think we have ahead, I don't know. I don't know how to judge our stock versus everyone else's. That's not my business. But there is absolutely nothing that has happened that would cause our stock to be down, particularly today, on a comparative basis. We are in a great position. Our existing products are doing really well, and we're seeing growth. We have more to come, plus Immersive Healthcare and other things that are making good progress. I think we're, as I said, as strong as we've ever been. So I don't know how to answer that.

Yes. Okay. So it's just kind of -- it's a tough day, generally. I mean, a lot of the stocks we follow, are down, especially the higher-growth names. So I think interest rates are up yet again. So it may just have something to do with that. But okay. All right. So back to the neuro questions here. So as far as Thunderbolt, so a few questions on this. I know you've talked about it some, but -- so you're going to run a trial. You haven't really yet really talked about the trial design or how long it's going to take, correct?

Yes. As soon as we have an issue, the IDE with the FDA, we'll obviously share all those details and so on. I don't want to get ahead of myself as we're still working those details out. We're in the final stages, and I think we'll be able to talk about that pretty soon. I'm -- again, typically, stroke trials are pretty quick. Hopefully, we will be able to get this done very efficiently. I think -- we'll see, but if the product works like I think it will -- but again, we don't even have to finish the trial before there's going to be a lot of excitement around this, and I think it will build. So I think we're in pretty good shape. I look at our position in Neuro as strong as it's been in a long, long time.

Yes. Okay. And just on the trial, I mean, the reason -- there's not a lot of follow-up, right? Because you're not looking at long-term outcomes. It's more about just how the product [ functions ] during the actual procedure itself. The effectiveness of getting the clot out essentially, right?

Yes. That's true.

All right. And then, I assume the pricing model would be similar to what you've talked about with Lightning, where there is a price uplift, at least initially, but then that will, kind of, like once everyone, kind of, shifts over to Thunderbolt, and that will be like 1 year or whatever, sort of a one-time benefit in terms of your growth rate?

Yes. I mean, yes, that's the way the math works, obviously. But yes, there's no question that there, if you're looking at the kind of solution that I've alluded to, we hope to see, obviously, you don't need a stent, you don't need a balloon guide. You don't need all these other ancillary tools. The pricing can, even though we're going to be fair, can take that into account. So yes, that's true.

And the other consideration, Mike, is the extent to which we democratize the procedure and more of these stroke patients can be intervened on or are intervened on over time. As far as that's occurring because of the innovation of Thunderbolt, then obviously, that would be at the Thunderbolt price point.

Yes, yes. Okay. All right. And I want to ask a few on the REAL System. So I guess, this is a new category and new market. So can you just provide us -- I think most people know what it is, but just a quick overview of the product and your plans to commercialize it?

Yes. So what we've said now for a bit, and I'll repeat it but try to maybe be as clear as possible. So there are really 3 big work efforts that we need to go through right now. And we laid this out at the Investor Day we had in September, a little bit at other public forums and we'll continue to do that. The work -- the first is sort of the technical work to build both on hardware and software, to build what we call a platform type of technology that can have our applications on them, and those applications have grown, obviously, dramatically since we first launched with the work that our studio has done and some second-party studios. And host, if you will, and be able to publish anybody else's applications on them. So there's just some work to be done. We've also expanded the hardware configuration to have one that's just a headset and nothing else, which is easier for many, many settings and appropriate for those settings. And the one that has all of the trackers that capture your body movement and is more appropriate for applications that require you to be seen and see yourself and have your therapists see the movement that you're doing. And so that work is continuing to build that platform. The other work is, we're in conversations with many, many different end users in all of those channels that we laid out in our Investor Day to get them experienced on the system, to get them to see the value of it. And those conversations have been really, really quite strong. The good news is, 2 years ago, nobody would have understood what VR was and the point of it. And now I don't remember, maybe there was a conversation, but almost every single one, the people that we're talking to know what VR is and actually already believe that it will be helpful to their patients. They just are trying to sort out how to operate within this. And once they hear that we're going to be a platform and that they can get other people's content as well potentially through our system. It's a real positive because no one wants to use a headset manufactured or owned by a social media company, right now, in the healthcare world. So as the year progresses toward the back half of the year, we're going to be sharing you the -- sort of the qualitative results of those conversations, who's signing up, who's doing what, and get a sense of that work, so that you guys can have that. I think that's important. I mean, I want to not forget, we've worked with thousands and thousands of patients already with our system. And we already know through that work, how beneficial it is. So we're not making this up at this point. And that, to me, is really important. And then the final piece is third parties wanting to be on our platform, taking their work that they've done and publishing it on our platform, or, in certain cases, developing with other users, very particular applications for certain things. And those conversations are going really well. Again, most people want the benefit of that. We provide a service, if you will, in an ease of commercializing their stuff by having it on our platform. So again, there are no numbers associated that with yet, but that's the work we're doing, and we're doing it, I think, really well, and we will start to put out some of that information in the back half of this year. And I think it will give people a lot more clarity and be able to, sort of, give them comfort that what we're doing is making a lot of sense.

Okay. And then, just moving on because we're running low on time here. But -- the -- I wanted to ask one about China. I know it's a decent sized business for Penumbra. I have heard some rumblings of potential tenders, the [ value-based ] purchasing program there, covering neurovascular. I don't know what the mix of your businesses there, Neuro versus Vascular, but can you just maybe comment on that? Is there any risk there of tenders affecting your China business?

Yes. We haven't seen it. As you know, we have worked with a local partner, and I think that's a really an important distinction. That's a different business model. We've talked about that in the past. So we have not seen that at all. And so far, as you remember, what we've announced is that the only products there are our neuro products. And so it is, right now, just neuro. Obviously, that can change as we add additional products, going forward. But so far, we have not seen an impact. And I think it's because of the partner we have and the structure of our deal.

Okay. Got it. And then, I just have to ask one on the supply chain and inflation. I guess, your products, you do have some electronics with your pumps and your -- now with the Lightning and Thunderbolt. I mean, are you confident that you can get adequate components for those products?

Yes. So far -- we've said this before. And -- we invested in the manufacturing side of our business during the pandemic. Obviously, we saw a little hit on the gross margin side to do that. And all I can say is, thank God, we also were pretty clear that, that wasn't a permanent long-term situation. And it's not. And we have been very, very blessed. We've had a few weird things that surprised us. None of it slowed us down or anything. Our team is amazing. I think we'll all compare notes in supply chain. Some of the strangest things can happen in that situation. But we're very, very lucky and blessed. We have not seen that slow us down right now at all.

Okay. All right. Well, we're almost out of time. I'm just trying to work with these questions here to see if there's anything else I can -- I get asked about from the audience.

And Mike, on that question, I'll propose to that question. We're very positive about our gross margins and where they will end up going.

Okay. So I guess someone was asking about neuro. I don't recall you saying this, but they're claiming that you said that it could accelerate, the growth could accelerate for the next few quarters, even without Thunderbolt. I mean, is that true that you said that? If it's true, then is it still true now?

Yes. What I probably said is that we, over the next few quarters, really the rest of this year, we have a lot of work to do to continue to take share in the U.S. with RED. That's a very particular market and a particular tactic. So we're definitely going to continue to try to do that, and we think we can. Obviously, the rest of the global business is what it is, and we'll continue to fight that fight. And RED is coming in other parts of the world as well. So long run, I think we're in pretty good shape there.

Okay. All right. I think we're out of time, so we'll stop there. But thank you, Adam. Thank you, Jason, appreciate you coming to our conference.

Of course, thanks for having us. Appreciate it. Take care. Bye-bye.