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

Good afternoon. My name is Angela, and I will be the conference operator today. At this time, I would like to welcome everyone to Penumbra's Second Quarter 2022 Conference Call. [Operator Instructions]. I would like to introduce Ms. Jee Hamlyn Harris, Investor Relations for Penumbra. Ms. Hamlyn-Harris, you may begin your conference.

Thank you, operator, and thank you all for joining us on today's call to discuss Penumbra's earnings release for the second quarter of 2022. A copy of the press release and financial tables, which includes the GAAP to non-GAAP reconciliation can be viewed under the Investors tab on our company website at www.penumbrainc.com. During the course of this conference call, the company will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, quality, compliance and business trends. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those referenced in our 10-K for the year ended December 31, 2021, filed with the SEC. As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our periodic filings with the SEC, including the 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock, including, but not limited to, the impact of the COVID-19 pandemic on our business, results of operations and financial conditions. Penumbra disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. On this call, certain financial measures are presented on a non-GAAP basis. The corresponding GAAP measures and the reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. Adam Elsesser, Penumbra's Chairman and CEO; and Sandra Lesenfants, President of Interventional will provide a business update. Maggie Yuen, our Chief Financial Officer, will then discuss our financial results for the second quarter. And Jason Mills, our Executive Vice President of Strategy, will discuss our 2022 guidance. With that, I would like to turn over the call to Adam Elsesser.

Thank you, Jee. Good afternoon. Thank you for joining Penumbra's Second Quarter 2022 Conference Call. Our total revenues for the second quarter were $208.3 million, a year-over-year increase of 13.1% as reported and 15.3% in constant currency. Global vascular revenue grew 22.7% and global neuro revenue increased 1.5% compared to the same quarter a year ago. We expanded gross margins 180 basis points sequentially to 64.3%. We recorded non-GAAP operating income of $1.6 million or 0.8% of revenue in the second quarter. Looking forward, we expect to increase our revenue in the second half of the year and accelerate growth in 2023 with 4 significant catalysts, three major product launches and the presentation of significant clinical data. Sandra will also speak about these catalysts in a few minutes. Equally important in this economic climate, we expect to continue to expand gross margins with 70% plus as the goal within a few years, and we plan to increase operating profitability through discipline and operational improvements, notwithstanding the prevailing downturn in the macro economy. These catalysts, which include both Neuro and Vascular as well as our work on gross margins and operating profitability will, I believe, make the next 12 to 18 months, one of the most robust eras ever for Penumbra. Turning back to the second quarter. I am proud of how our team executed, notwithstanding a very difficult operating environment, primarily in the United States. U.S. growth of 10.2% year-over-year was lower than we had anticipated and lower than we expect in future periods. The specific challenge is most evident in our sector over the past few months included persistent staffing shortages, which challenged our hospital partners' workflow; contrast supply issues, which we think have receded, but are still watching in certain geographies around the world; and supply chain challenges, which our team continues to address with success and resolve, but not without significant effort. These challenges were and still are evident, but we are getting better at addressing them, and we expect to further mitigate their impact in the second half of the year, during which we think growth in our U.S. business will accelerate. Our International business grew 20% year-over-year and is starting to reach scale. However, foreign currency fluctuations impacted our second quarter results, and we expect FX to weigh on reported revenue in the second half of 2022 as well. Jason will address this later in the call. All of that said, the combination of our U.S. and international businesses and the 2 large areas, Neuro and Vascular, in which we participate, gives us a broad-based product portfolio and geographic platform to succeed in virtually any macro environment -- macroeconomic environment. Turning to our Vascular business, we reported growth of 22.7% year-over-year to $123.5 million in the second quarter. We grew our vascular thrombectomy revenue 30.3% year-over-year and our vascular embolization revenue 11.8% year-over-year. Our U.S. vascular growth was driven primarily by increased utilization within existing accounts who already believe in thrombectomy, but were early in the phases of trying our technology. This is in contrast with sales stocking in new accounts that primarily use lytics. In fact, based on our analysis, we believe we won competitively in both venous and arterial thrombectomy during Q2. While some of the macro factors that I discussed earlier clearly had an impact on our Q2 vascular growth in the U.S., we have seen a strong resurgence in the trends in our vascular thrombectomy business over the past month. Our current technology in venous and arterial disease, Lightning 12 and Lightning 7, represents a new treatment paradigm in both of these vascular anatomies, in which we have started to eliminate the typical trade-offs in performing mechanical thrombectomy. Looking forward, we believe our 2 new vascular products, Lightning Flash and Lightning Bolt, will take us to another level of technology leadership in both markets. Lighting Flash introduces a new advanced catheter and incorporates a next-generation Lightning algorithm that utilizes an extremely novel way to selectively control aspiration, which we think will increase the amount of clot we aspirate, further reduce the time it takes to do the procedure and further optimize blood loss mitigation, while also reducing the risk of vessel lumen damage. Just as potentially important as Lightning Flash to be in the venous market, we are equally excited about the potential for Lightning Bolt in the arterial anatomy. Lightning Bolt is designed with an extremely sophisticated algorithm. The technology incorporates both dual pressure sensors in the parent and our current Lightning algorithm that helps mitigate blood loss, as well as the clock extraction technology inherent in Thunderbolt for ischemic stroke, which I will discuss in a few minutes. Moreover, our team, along with key opinion leaders, are advancing significant clinical work and building proof that our proprietary innovations improve outcomes, reduce complications and are advancing the field overall. We expect much more discussion of important clinical work at medical meetings going forward as many physicians collect and present their experiences using our technology versus the competition. For example, at the recent VTE Summit in San Diego, independent data was presented on 85 DVT patients treated with current thrombectomy systems, including Lightning 12 which comparatively produced superior results. We look forward to these data and other independent data sets being presented, published and discussed going forward. Further, we expect presentation of the first 60 patients enrolled in our STRIDE PE trial at the PERT symposium in October, which we think will highlight our position in the PE market. On the arterial side, we expect to finish enrollment in our STRIDE study by year-end with acute results expected to be presented next spring, which we believe will increase awareness and adoption of Lightning 7 in acute limb ischemia. In addition, Sandra will discuss 2 new randomized clinical trials that we plan to conduct in vascular thrombectomy in the near term as well. In coronary, CAT RX continued a strong growth trajectory in the U.S. as did our vascular embolization business even though we did see an impact to the latter from the macro dynamics during the quarter. We also initiated a successful launch of both Lightning 12 and Lightning 7 in the European market. Moreover, the introduction of our original Indigo thrombectomy products into China was successful, and we expect strong growth going forward. We also are working towards an introduction of our vascular thrombectomy products into the Japanese market. Turning to our Neurovascular business. Our revenue grew to $84.8 million in the second quarter, up 1.5% on a year-over-year basis and 4.6% sequentially. Our U.S. stroke business grew strong double digits again year-over-year, while our neuro embolization and international stroke business offset this growth. We are excited to announce FDA approval of our IDE for the THUNDER trial, effectively starting the Thunderbolt era in stroke therapy. The excitement among the neurovascular community about this technology and this trial is palpable. We expect enrollment to be brisk and believe Thunderbolt could be launched in the United States in the second half of 2023. We have said it before and physicians who have now seen them both agreed, this technology could completely change the paradigm on ischemic stroke treatment by both improving patient outcomes as well as potentially allowing neuro physicians to treat more ischemic stroke patients safely, efficaciously and expediently. Since the Thunderbolt trial is underway, this is an appropriate time to spend a few minutes explaining what Thunderbolt is and how it works. Thunderbolt is a microprocessor controlled, advanced software algorithm, integrated into the tubing that sits between the engine pump and the red catheter. It does not go into the patient's body directly. Thunderbolt orchestrates modulating aspiration, which is proprietary to this technology. Two valves are integrated into Thunderbolt, one valve directly connects the red catheter of choice, 62, 68 or 72 to our engine pump. The second valve connects the red catheter to a non-pressurized [ sailing ] bag. The Thunderbolt algorithms orchestrate the opening and closing of each valve up to 12 times per second once clot engagement is detected. This modulated aspiration disrupts the friction between the clot and the tip of the catheter. Eliminating this friction, we believe, will allow the red catheters to ingest the clot the vast majority of the time. This compares to the current practice with aspiration, which ingestion incurs a small percentage of the time, even with larger board catheters that are much more challenging to track to the clot. Because of this, we expect Thunderbolt to change another existing paradigm in interventional stroke. We believe it will allow doctors to use smaller catheters while getting the unique benefits of modulating aspiration faster, more complete, cloud removal. This could have the added benefit of increasing the number of treatable patients by allowing for the routine treatment of more distal occlusions. In our U.S. stroke business, Thunderbolt is the clear priority. That said, we are also -- we also expect to launch an additional Red catheter in the second half of the year, which we believe will be a very important addition to our market-leading portfolio. We also expect to launch the Red catheter family into the European market during Q3, which will help us revitalize our European neuro business. I'll now turn the call over to Sandra Lesenfants, President of our Interventional business, to give her perspective on our new product pipeline and clinical trial strategy.

Good afternoon. It is a pleasure to join my first Penumbra earnings call. I have spent most of my career in the interventional space and was drawing to join Penumbra because of its unique cultural innovation and because of its commitment to put patients first. Penumbra's strong culture of innovation and built-in comprehensive product portfolios has stood the test of time and proven successful in multiple markets over the past 18 years, and I do believe the new product launches and supporting clinical data will start another transformative period in Penumbra's history. I am excited about both developments because the number of patients we can help across our core interventional markets represent one of the largest most underpenetrated opportunities I have seen in my career. I have spent many years leading some of the largest and fastest-growing businesses in the interventional medical device field. And I can say without equivocation that the culture of innovation at Penumbra is truly at a completely different level. The innovation culture here is unique, it's continuous and, most importantly, it is impactful. Adam already outlined the 3 specific technologies that we believe can be truly paradigm changing to their respective fields: Thunderbolt for ischemic stroke; Lightning Flash for the venous thromboembolism; and Lightning Bolt for peripheral arterial disease. Thunderbolt, Lightning Flash and Lightning Bolt, in addition to Lighting 12 and Lightning 7, are all proprietary systems. The development of this transformational technology has been years in the making, and they are protected by strong intellectual property portfolio. The common denominator across all these products is the microprocessor controlled advanced software algorithms that integrate into the system, orchestrating the action of our pump and our catheters. The algorithms inherent in Lightning Flash, Lightning Bolt and Thunderbolt are customized to each catheter family, which we developed based on the most optimal solution for each specific anatomy, arterial, venous or neuro. We have a clear strategic plan to accelerate the paradigm change in mechanical thrombectomy to intelligent exploration from traditional lytics or surgery. The proprietary, simplicity and the effectivity of our technology makes the difference. And we expect these products will help physicians treat significantly more patients effectively and less invasively in the months and years ahead. Further, generating new scientific evidence will be critical to achieve our objectives. On that front, I'm happy to say that we are also embarking on the most robust era of clinical evidence generation in our company's history. In addition to the [indiscernible] trial for Thunderbolt in ischemic stroke, which Adam mentioned, we have 5 additional trials currently enrolling or recently completed in stroke, arterial, PE, DVT and ambulation. In addition, we are nearing completion of STRIDE designs for 2 randomized controlled trials, one in PE and the other in coronary, which we expect to commence within the next few quarters. We will give you more details on these 2 important, randomized studies in the near future. Combined, our pipeline of breakthrough technologies and unmatched clinical portfolio sets us up exceptionally well to treat many more patients within our target markets, expand our leadership positions in each of these markets and to deliver strong growth for years in the future. I will now turn the call back to Adam.

Thank you, Sandra. Before I turn the call over to Maggie, I'd like to give an update on our immersive health care business. The idea of using immersive computing or virtual reality for health care is continuing to gain momentum with health care professionals and validates our decision to invest in this business. We have seen an uptick in interest and use of our recently launched Real y-series for rehabilitation, using our updated hardware and myriad new experiences that we unveiled at our Investor Day last year. In addition, a significant event took place this quarter to further the interest and momentum regarding the use of virtual reality for health care. The Veterans Administration hosted a multi-day summit on the use of virtual reality to help our veterans. I had the honor of joining a keynote panel with senior members of the VA to discuss this important work. I was extremely impressed with their overall knowledge and understanding as well as their willingness to validate and bring this technology to help not only veterans, but the huge number of other patients that can benefit as well. Even with that confidence in the long-term benefit and likely success of our immersive health care platform, obviously the macroeconomic environment has changed recently. Because of that, we are focusing our efforts on the most immediate use cases, which has allowed us to recalibrate our quarterly spend rate in immersive health care to realign with our discipline, to increase the profitability of the company. Over the next 12 months, we expect to trim over $10 million in operating expense from our business, while we maintain investments that we think will drive progress towards scaling this business over the long term. I'll now turn the call over to Maggie to go over our financial results for the quarter.

Thank you, Adam. Good afternoon, everyone. Today, I will discuss the financial results for the second quarter of 2022. Consistent with previous quarter's financial results on this call for revenue and gross margin are on a GAAP basis, while operating expenses and operating income are on a non-GAAP basis. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. For the second quarter ended June 30, 2022, our total revenues were $208.3 million, an increase of 13.1% reported and 15.3% in constant currency compared to the second quarter of 2021. Our geographic mix of sales in the quarter were 67.9% U.S. and 32.1% international. The United States, we reported growth of 10.2%, and in our international regions, we increased revenue 19.8% as reported and 27.2% in constant currency. Moving to revenue by franchise. Revenue from our vascular business grew to $123.5 million in the second quarter of 2022, an increase of 22.7% reported and 24.5% in constant currency compared to the same period last year. We saw double-digit growth across U.S., EMEA, Asia and Latin America regions. Revenue from our neuro business was $84.8 million in the second quarter of 2022, an increase of 1.5% reported and 4.3% in constant currency compared to the same period a year ago. Sequentially, revenue from our Neuro business grew by 4.6% reported and 5.8% in constant currency driven by stronger growth in neuro thrombectomy across international regions. Moving to gross margin and operating expenses. Gross margin in the second quarter was relatively flat at 64.3% compared to 64.4% in the same quarter last year and continues to improve sequentially from 62.5% last quarter. Our investment in capacity, labor force and productivity efforts in the last 18 months have begun to pay off in terms of driving margin expansion as well as enabling us to navigate through some macro labor shortage, inflation and supply chain headwinds. Looking forward to the balance of this year, we expect to see continued productivity improvements to offset heightened inflation and supply chain pressures. And we have several programs in place to continue to drive gross margin improvements in the future. Now on to our non-GAAP operating expenses, excluding the quarter's amortization of acquired intangible assets of $1.8 million. Total operating expense for the quarter was $132.4 million, or 64% of revenue compared to $108.4 million or 59% of revenue for the same quarter last year. Our research and development expenses for Q2 2022 were $19.6 million compared to $17.7 million for Q2 2021. SG&A expenses for Q2 2022 were $112.8 million or 54.2% of revenue compared to $90.6 million for Q2 2021 and $109.1 million compared to last quarter. We made additional investment in commercial channels and temporary resources to support our ERP system migration in the second quarter. We recorded operating income of $1.6 million or 0.8% of revenue in second quarter 2022, excluding the amortization of acquired intangible assets, compared to an operating income of $10.3 million for the same period last year. For the back half of 2022, we will be more disciplined in our discretionary spending and together with over $10 million reduction in immersive health care operating expenses in the next 12 months, we expect continued operating margin expansion in sequential quarters. We ended the second quarter with cash, cash equivalents and marketable security balance of $204.4 million. Although we experienced some receivable collection delay related to the migration of our new ERP system during the quarter, our team has made great progress to recent back to normal collection cycle. And now I'd like to turn the call over to Jason to discuss our guidance.

Thank you, Maggie, and good afternoon, everyone. Foreign currency translations impacted our reported revenue in the second quarter and first half of 2022 by $4 million and $6 million, respectively. For the full year 2022, we anticipate the FX impact to be approximately $10 million to $15 million. We are maintaining our guidance of $860 million to $875 million. But due to these FX headwinds, we are more comfortable with expectations at the lower end of this range. That said, on a constant currency basis, we continue to expect our revenue growth to be 15% to 17% compared to 2021. Looking into 2023, Lighting Flash, Lightning Bolt and Thunderbolt represent 3 paradigm-changing technologies in arterial, venous and neuro thrombectomy respectively. These products, coupled with multiple international growth opportunities and strong clinical evidence pipeline underline our confidence in future growth. Consequently, we reiterate our belief that we can accelerate our revenue growth in 2023, both on a reported and constant currency basis. I will now turn the call back to Adam for closing remarks.

Thank you, Jason, Maggie, Sandra, and Jee. I'd like to conclude this quarter's earnings call by acknowledging the world-class work that the Penumbra team did this quarter in very challenging circumstances. I am so proud to work with this team. They have shown time and time again their talent and perseverance by pulling together to tackle whatever comes our way. I also want to quickly summarize how our team of Penumbra runs the business. We are developing products that can help a significant number of patients, many of whom are not getting the most advanced treatment today. Our technology has always been unique and transformational. But at this moment, we have 4 significant catalysts coming, 3 products plus supporting clinical data that will allow us to help more and more patients for many years to come. This, coupled with our disciplined planning and execution gives us confidence that we will deliver strong double-digit growth, increase gross margins materially and significantly expand operating profitability, all while investing proportionate to the large opportunities in front of us. Thank you. We'll now take questions.

[Operator Instructions] Your first question comes from the line of Robbie Marcus with JP Morgan.

This is actually Lily on for Robbie today. Is there any way that you can quantify the magnitude of the contrast shortage in the quarter? And how are you thinking about this and other challenges like staffing, China, impacting your growth over the rest of the year?

Yes. It's a great question. I wish there was an easy way to quantify, contrast and the impact. There really isn't. I would say that there was a lot more discussion about it earlier in the quarter. I really haven't, as I said in my prepared remarks, we haven't really seen it as much as an issue right now. Sort of persistent staffing issues really have been the bigger impact, we think, if we were to pick what was driving the challenges and some of the headwinds. That being said, and I said it in my prepared remarks, the last month, the first month of this quarter, the last 30 days has -- we've seen a pretty strong resurgence. And so whether hospitals are dealing with their staffing issues are finding a way to operate within this environment in a more long-term basis. I think it's a combination of those. We have a lot of optimism for what we've seen in the first month so far.

Yes, Lily, just to add a little bit of that. As Adam said, quantitative specificity is very difficult. We tried to ascertain that. It was certainly a number of million dollars, we think. But it's hard to quantify much further than that, just to try to put a finer point on it.

Got it. That's really helpful. And just as a follow-up, did the U.S. peripheral business grow sequentially? And how are you thinking about that segment in the back half of the year?

Sorry, just so I heard your question correctly, did you ask U.S. or international?

U.S. peripheral.

Yes. So our U.S. business in the first half of the year grew about 15%. And certainly we saw, as Adam mentioned, staffing shortage, the macro economic challenges impact our U.S. business in the second quarter, more than it did in the first. We expect acceleration in that business in the back half of the year. We think it will step up in the third and even step up more in the fourth quarter. And then if you look at the second half growth on a year-over-year basis in the U.S., we think it will be similar actually to the first half, which, as I mentioned, was in the mid-teens.

Your next question comes from the line of Larry Biegelsen with Wells Fargo.

This is Lei calling in for Larry. Adam, you talked about -- you mentioned a rebound in the vascular thrombectomy business in the past month. Can you just give a little more color on how that trended through Q2, did worsen from April to June, and there was a big rebound in July? And also any commentary along the trend line in neuro? And I have a follow-up.

Yes. Starting with peripheral on the thrombectomy business, what I was alluding to is really in the last month to this -- the month of July, we saw the strong resurgence probably started a little bit into the end of June as well. Some of that, I think, is the hospitals are getting more organized around the staffing issues. And I think -- they've been working really hard to do that. And some of it might be a competitive share. As I alluded to, we're seeing a lot more conversation doctors are bringing up about some of that issue, particularly on the DVT side. And I think that's a bigger topic that we're going to be talking about and addressing going forward. But I think the combination of those things are seeing the acceleration. On the neuro side, I we'll tell you the excitement around Thunderbolt as more and more folks see it, there's a large presentation at SNIS with a demonstration from a physician who's part of the trial. We had a lot of conversation about that, folks throughout the week coming up and talking about it. And so I think there's a real excitement around that. And of course, the red catheters are part of that success right now.

Yes. Just to add to that, Lei, the underlying fundamentals of our peripheral thrombectomy business, and we look at them very carefully are actually quite healthy and has been through the second quarter. We just saw continued improvement of an already strong fundamental base in July. Generally speaking, we expect to see that continue here in the second half of the year.

Great. And then as far as gross margin, can you talk about what we should expect a sequential improvement in second half? And any comments around key drivers to get to the 70% plus gross margin in the next few years?

Yes. Thanks for the question. Yes, we're very excited to see all the momentum in productivity improvement, especially in our [ Grosville ] site and the manufacturing transfer effort. So a lot of the productivities we see in this quarter is driven by those productivity initiatives. And sequentially, there's still some low-hanging fruits and a lot of other initiatives that we're working on. We will continue to see improvement and continue to navigate through the foreign exchange inflation and supply chain pressures. In the longer term, definitely continue driving improvement, new product launches to drive favorable mix and a lot of the other bigger programs we have in place will get us in the right path towards the 70% plus gross margin target.

Your next question comes from the line of Bill Plovanic with Canaccord.

It's John on for Bill Tonight. So I just -- you had a really good OUS quarter, and I just wanted to dive a little bit more into that. Is this really from the launch of the Lightning 7 and 12 in Europe? And how should we think about OUS contribution in the second half of the year towards the overall revenue targets?

Yes. Thanks for the question, Josh. Great question. The growth in contribution was broad based in the quarter from our international business. Certainly, the Lightning launches in Europe and EMEA broadly contribute to that. We're looking forward to the Red launches this quarter in that same region. We also saw broad-based growth across Asia Pacific, including China, and look forward to continued growth there as well as Japan. Obviously, we mentioned where we could have our vascular thrombectomy products there maybe earlier than we thought. So things internationally look like they're on a solid trajectory.

Great. And just on the call itself, obviously, you've highlighted all the macro environment challenges and FX. What's your comfort level around hitting that $1 billion in sales target for 2023 still? Do you think you could still hit it with what anything that's going on now?

Yes.

Your next question comes from the line of Pito Chickering with Deutsche Bank.

A few follow-ups for you on the revenues. Did you see a difference in demand between urban hospitals versus sort of smaller hospitals as it relates to staffing? Can you also provide color on how Vascular and Neuro grew in the U.S. versus international?

Yes. So let's start with the first one. Pito, [indiscernible]. We didn't see a discernible difference. I think what we've heard from customers, be it small institutions or larger academic institutions, they're both dealing with the same macroeconomic headwinds, be they nursing or tech, staffing issues or otherwise. And the same was true when contrast was more of an issue earlier in the quarter, generally speaking. With respect to your second question on U.S. versus international, we're obviously not giving granularity to the breakout between -- in our business as U.S. international. But I think the important salient point is the underlying fundamentals in our -- I think you asked about thrombectomy businesses, in both Neuro frankly and Peripheral Vascular are very strong. Neurothrombectomy growth is obviously slower right now. The momentum with Thunderbolt, we're really excited about.