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

Good afternoon. Welcome to the second day of the Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, medical device analyst here at Morgan Stanley. It's my pleasure to have Adam Elsesser, CEO of Penumbra here with us today. Really quickly, disclosure, www.morganstanley.com/disclosures. Adam, with that, thank you very much for being here with us.

Yes. Thanks for having us again. Appreciate it.

Wanted to start with the macro, as that seems to be the key topical point these days. But as you think about 2Q, you talked about staffing, a little bit of contrast. I get the sense contrast is largely behind us. That was more of a U.S. dynamic. But as you think about your business, your guidance in U.S. versus OUS mix, setting aside kind of some of the macro components and then recently announced launching RED catheters in Europe. So as you think about just the puts and takes, Europe, or your OUS business, U.S. business, everything going on that, how do you think about the setup for 2Q?

Yes. Well, I think as we said on our earnings call and have repeated, we're really set up for the next, what I think will be the strongest time in our company's history. I really mean that. We have 4 large catalysts we laid out on our earnings call, 3 products and then clinical work. And I -- we have a lot of optimism. We're -- as it relates to the questions of the macro question, staffing being really the primary one, I don't think it's solved. They didn't magically solve it in the hospital settings in 1 quarter. People, I think, are probably learning to deal with it and adjust. But I don't think that's going to be magically solved in the short term. But I do think the hospitals are learning to deal with it. I think we, as a company, have so much momentum, both on the stroke side, the RED series of catheters, as you all know, in the last couple of quarters have done well and taken share in the U.S. as a good bellwether for the launch in Europe that you alluded to and Japan. And then on the peripheral side, we're seeing that continued success really even before the launch of Lightning Flash and then Lightning Bolt. So we're in pretty good shape right now, notwithstanding the world we live in.

Yes. You talked about just where you are in the transition of the business. And you step back early days, it was a stroke business. And a lot of the focus was trackability of the catheters. It was, in some cases, expanding the diameter, profile of the devices. How do you think about just the focus areas there to disrupt the field versus how you're thinking about both on the stroke side, now on the peripheral side, too. How does that mindset shift there?

Yes. Well, I think maybe the best way to describe it to the investment community is we, I think, used to be viewed as a catheter company. We made pretty extraordinary catheters, catheters that were bigger, still soft, supple, trackable. They would hold their shape under aspiration power. So really, that innovation drove the first phase of our company's existence and growth. We don't see ourselves as a catheter company more now. I'm not taking for any of our catheter -- amazing catheter engineers listening, our catheters still matter a lot. But I think physicians have started to talk about us more as a software company. Computers are driving or orchestrating aspiration. They have been doing that with Lightning now for a bit. With Thunderbolt trial underway, that's what's happening, with Lightning Bolt and then Lighting Flash. The innovation there is in the computer orchestrated aspiration. So back in the day, if you think about way back in the early days of stroke, there were really 2 modalities to get clot out. You could sort of grab it at the entry and drag it out or you could suck it out, aspirate it out. That's still true. But the trade-offs between those technologies is becoming clearer and clearer. And with the advent of computer orchestrated aspiration, I think we're narrowing that to the point where the trade-offs are clearer and clearer. And that's pretty exciting for us. It wasn't that long ago that I was asked in a public setting that was thrombectomy in the peripheral side, a market. And my answer was, well, it might not be a defined market today, but there are about million people in the U.S. who have clot in their body in some form, and none of them think it's a good idea to have that clot. So we should try to find a way to easily get it out. We're getting closer and closer to being able to get clot out, whether it's in the arterial side, the veins, lungs, what have you -- without those trade-offs. And that's exciting, and I think that gives us a lot of optimism.

Wanted to talk about your pipeline, some of your clinical trials, starting on the stroke side. Thunderbolt, Thunder Trial and correct me on time lines, but it sounds like maybe we should think about second half of '23 is reasonable to see that product on the market. But as you think about just what you've done in stroke, so far, where we are from a penetration standpoint, COVID had some fits and starts in terms of impacting some of the care development, maybe 25% penetrated in your target market, I think, is reasonable. How do we think about Thunderbolt enabling either expanding the TAM that you're actually able to target? Or from an operator standpoint, enabling more operators?

Yes. So I think if Thunderbolt continues, the trial just got underway and the time line that you laid out is what we anticipate happening, we hope to finish enrolling the patients sometime in spring, late spring. We have a 3-month follow-up and then be able to take that data and submit it to FDA. So second half of the year seems logical. If that holds and these cases continue the way they've gone, I think, the procedure just becomes that much easier. It is -- and I think any time a procedure becomes easier, by definition, you'll likely see a broadening of the use of that procedure. Whether doctors being able to dispatch to more hospitals and so on, I think there'll be a pressure pill put on making sure more and more of these patients get treated. What we saw in the last couple of years, and I think this is an important point, there was a fair amount of momentum in the growth of the stroke market. We started with very few of these patients being treated, and then all of the stroke trials showed that we had to do this. So it has a lot of clinical evidence behind it. But we had this just physical hurdle of making sure the patients were in the right place. And a lot of that work to do that with moving patients from one place to another. And that took work in local communities. Physicians, stroke coordinators, so on, going to the emergency services or the fire department and so on and encouraging them to -- teaching them how to see the signs of stroke, encouraging them to bring those particular stroke patients to them to be treated. A lot of that work stopped during COVID. You can't really -- people weren't moving around, people didn't -- weren't welcoming guests in this firehouse and things like that in the same level. And so now we have to deal with the fact that a lot of these places don't have the same staff that they did to do that extra work. So we're going to see it come back. There's too much invested and there's too much emotion -- positive emotion around it. We just totally can't predict it. I do think by definition, making the procedure easier, faster, if that is what holds, then it's likely going to have a positive impact. There'll be a level of excitement around making sure that everyone can get treated again.

As you think about what you're looking to do right now in stroke with Thunderbolt, you have Lighting Flash, Lightning Bolt coming out as well. What's the different approach on the automation side, specifically in those 2 disease states that you're looking at?

So at this stage, it all comes down to sort of the -- what are the algorithms, what are the -- what is the software, in effect doing, with the bulk technology. Whether it's Thunderbolt and Lightning Bolt, it has 2 valves and they're alternating in a way to reduce the friction at the tip of the catheter where the clot in the catheter gets stuck. We've seen that -- the benefit of that. People might forget, way back in 2008, when we first launched our stroke system, we had a much smaller catheter, .041 catheter, and the clot would never just ingest through that. It was too small. So we had what's called a separator, which is a wire with a very, very specialized shape on the tip that you could use with your hand back and forth, back and forth. How you were sucking to break the friction manually of the clot at the tip of the catheter. And it worked. It was extraordinary. It had a really high level of success. The downside or the trade-off of that technology was that it took a long time because you're just doing it with your hand back and forth. So what we've done with Lightning Bolt and Thunderbolt is automated that we don't have anything physically there anymore. It's all just in the tubing and the way the valves work to do that in a matter of like 12 times a second. So that's the kind of innovation that is coming on the arterial side, whether it's in the brain or the rest of the body. On the venous side, there the technology is focused more on being able to suck out clot, more clot factor with even less blood loss than we currently have. I mean -- and that's the Flash part of Lightning Flash, where we've dramatically changed the way we measure, the pressure differentials and how to upgrade the algorithm pretty dramatically. And that's going to be so much fun to get out there, and I think people will -- who haven't already come on board. And again, as I've said, we're seeing that happen more and more now where people are embracing the Lightning technology. But I think Lightning Flash will be another inflection point where it will become sort of obvious that this is the way to go.

How do you think about this catheter profile, especially in stroke, bigger was better for a while. What is the optimal size as you think about -- and in DVT, with the automation, what's the bigger focus as you think about just looking beyond your current portfolio in terms of where can you further optimize? Is it more on the automation, less on the catheter? Just the balance that you're looking at.

There's always a need to have great catheters that track really well, that are soft, atraumatic, at the same time hold their shape. So we're going to continue to do that and innovate, albeit our current set of catheters, together with the new ones coming, I think, are really is really, really good. But we'll always try to improve that. The real innovation where we're going to start to see more and more improvement is on the software side with the algorithms. And so you can't just -- the software is the hard part, and fine-tuning that will be harder -- is harder right now. Again, I don't know -- I think we know in neuro that we're getting pretty close that too big is no longer that good. And I think we're seeing that with -- there are companies who have much bigger catheters. The bloom is a bit off on some of those with some of the issues. And so really, what's the right size? I think intuitively, doctors know that if you can take out all the clot really quickly with a smaller catheter as possible, that's -- I think that's intuitive. The key has been, can you do that. And there's been a phase where that was harder to do under with just basic aspirations. But now with Lightning and then Lighting Flash, that's getting easier and easier to take out significant clot much faster. And again, if you don't take the blood out and you don't have to spend the time to put it back in that actually makes the procedure shorter for the patient, not longer.

Looking at your peripheral business broadly, kind of 4 buckets, if you will, arterial, coronary, DVT, PE. As you think about just where those different fields are in their evolution, in their penetration, you've talked about commencing 2 clinical, 2 RCTs, 1 in PE, 1 in coronary. Why those? And where, on a relative basis, do you think -- in both of those markets is penetration?

So the RTC -- the coronary one is sort of a specific animal. We presented the CETA data in November of last year, which was really extraordinary data. That -- in the coronary field, there was a lot of desire and appropriately so to have randomized clinical data around that. There was prior data around handheld syringe-based devices. And so there's, I think, just a need to not just see the single arms. So that's sort of a specific thing related to that particular market. On the PE side, there was no consensus when we started around what the endpoints for a trial like this should be. The most important thing when you run a trial that is trying to compare against anticoagulants, in fact, open up the field so you can potentially offer this treatment if it proves to be better to more people is to have a trial that the whole field sort of accepts as the right trial design. And so we've been working for the better part of a year with people in the interventional world, but also pulmonologists and the whole group of people who are in charge of these patients, if you will, to make sure that whatever study we design is a study that will -- if it's positive, will be accepted as valid endpoints to do that. It's not something you can rush. We saw this in stroke. We saw people long before the successful studies, studies that were done that weren't -- didn't have time spent and didn't always turn out to be successful. So I think it's really important that we do that work. And we've done that now with PE. We'll be announcing the details of that, as we've said, later this year and the same with coronary. And whether that's necessary, probably will be on the other vascular beds, we'll make sure we don't rush that and have the kind of buy in as necessary in the field to grow those fields dramatically.

That kind of leads into what's your interest longer term on the DVT side and you talk about RCTs that tracked within that space. And I think it highlighted where there is benefit of intervening, but -- or at least the anatomy. But how do you think about just kind of the benefit of having RCT data there versus what you're doing in...

In order to really open that up, I think you're right, you will need an RTC study. I think the question is what is that study, what is the design, making sure that all the group of doctors who would be referring to patients also buy into that, not just on the interventional community. I think there's a lot of work to be done still.

As you think, too, about PE and randomizing and willingness to randomize versus anticoagulation, is that going to be a challenge?

On PE?

Yes.

Again, I think if you do the work that, I think, we've done, I don't think so, because the buy-in across all -- not just interventional subspecialties, but pulmonologists and so on have been pretty deep. So I think people will want to prove this, again, if it's provable, this is open to those patients. I don't think anyone doesn't want to see patients get the right treatment, they just want to make sure that it's being done in the right way so that it's an accurate assessment of what's good for patients.

If you look across your 4 buckets right now, where would you say momentum across those markets is strongest in terms of kind of driving an interventional -- lytic free interventional approach?

It's a great question. We don't break that up. And some of it is because it's harder to do with the Lightning 12 being used in both PE and DVT. I would tell you, and it's not me saying I love all my kids equally, albeit I do. It really -- we have momentum across all of the businesses right now. It's kind of a really fun phase. Obviously, there's been a lot of conversation on the DVT side. We've definitely seen that momentum coming out of the SIR meeting, but that isn't meaning to take away from the other areas right now. And I think over the next couple of years, as we continue to do this work and launch the Lighting Flash and Lighting Bolt, I think, it's going to be pretty equal.

What does the market look like before RCTs? You'll have technology innovation of augmenting market growth. But where -- as you look at it, just the bottlenecks, maybe PE, where we've had less intervention historically, being able to kind of educate the field in many respects.

Yes. It varies a little bit if you think about what is happening to those patients. Right now, arterial, so many of those patients are already in the hospital. They're either getting surgery or catheter-directed lysis. So you would hope that with Lightning Bolt that would be a relatively easier transition because those same physicians, for the most part, have those patients already. Opening up the market in DVT and PE, again, you want to make sure that the patients that you're currently treating are getting great results, that's obviously critical. And then do the work necessary to expand that. And I think we're really set up, I think. As I said, it's going to be I think a pretty fun couple of years.

On the clinical side, too, I think you have STRIKE-PE coming up at PERT and then also STRIDE. I just wanted to, on both of those, touch base. And what is on the PE side, having kind of the real-world data, what's the longer-term outlook in terms of leveraging that to drive penetration for the...

Yes. The data with single-arm studies like that is really more confirmatory for what people are expecting and what we're doing. So -- and I'm certainly not going to mess up our PIs by sharing the results and not have them be able to get the first word on that. So let's wait until those happen. But obviously, I mentioned them on our earnings call and so on because I'm proud of the work we've done so far. And I think it will confirm that we're on the right track.

I wanted to ask too-- we're running out of time, Immersive Healthcare, though. You talked a little bit about at least shifting how you're thinking about investing in the areas you're investing in, on your recent earnings call, and also a focus on optimizing the business structure margins. Can you just talk about what shifted in terms of your near-term priorities with REAL? And then also tied in with that, kind of the margin focus and longer-term margin expansion focus that you're looking at.

Let me briefly touch on margins first. And it's somewhat, but not directly related to the Immersive Healthcare, and I want to then end with that. So on gross margins, I think we've said this a bunch. We've used to have higher margins. We manufacture everything in Northern California when at the time of COVID and the shutdowns, we were in one of the first counties that did shut down. We didn't have to because we're exempt, but we really worked hard to keep people safe. We also saw a lot of growth after that first quarter. And so we couldn't not manufacture products. So we instituted all kinds of COVID protocols to keep people safe. We spread people out. We created a graveyard shift, which is more expensive. We also then expanded and accelerated the Roseville facility, which is about 2 hours away, also in Northern California. All of that weighed on the margins for a while. We're now coming out of that, so some of those are loosening and we were able to see the benefit of that. In the last couple of quarters, we've seen the margin tick up a couple of points roughly each quarter. So we're on the right track. The other big area that we are focusing on is just sort of the normal optimization of the business. We've brought in some folks. We've had the ability to sort of step back a touch now that we're not quite in the everyday moment of crisis and keeping up, and being able to look at some things that we can do over the next year or 2 that we'll see some notable improvement just in basic optimization as the company has matured and brought in new odds, if you will. And then the third, ultimately, will be product mix. Our coil, which again is a great product and does really extraordinary things in the peripheral side, does tend to have a lower margin. Pricing is a little more set. They've been around a lot longer. And so as the thrombectomy side of our business grows, that will have another favorable aspect. So on the gross margin side, we feel we are confident that, that will grow. Like we said, it will grow up into the 70s in the next couple of years. On Immersive Healthcare, it's sort of a natural evolution of taking on. And I know there's a lot of interest around it and a lot of discussions, so we called it out. But this is more the natural order of when you tackle something that's never been done before and that is Immersive Healthcare, just like it was with stroke, and just like it was with peripheral thrombectomy for us -- you're going to tweak things. And a year ago, this time, we had an Analyst Day. We talked about $0.06, talked about building a platform technology for the whole field. And we tried to do everything at once. And that was the right decision a year ago. There was a lot of interest in the users of VR in the health care system, and there still is, but some of that has slowed down a little because of the general slowdown and also staffing. People don't have people to implement, the use of technology like that. So adjusting to that reality, we don't -- we realize we don't have to do it all at once. We can do things a bit more in serial. And so we can adjust our spend appropriately. And I think that's what we're doing. I -- there are signs and things I've mentioned, the VA and some other opportunities where I have more confidence than ever that we can help a lot of people here. The key is to do it in a way that can prove that out as soon as possible. And I think we're on that right path. And I think we're doing it responsibly. So again, I remain pretty optimistic that the stories are there, and it's never easy doing something that's never been done before and trying to figure it out. But I'm pretty confident it will be worth it in the end.

And as you sit here today and recognizing the idea, the concept has gone through a lot of change as the markets evolved you, but how do you think about kind of coming back to the business model, but the structure of that model longer term, how it fits in from a gross margin standpoint, OpEx?

Yes, there's a lot of questions about the gross margin. I don't think the gross margins are going to be bad for us in that part of the business at all. So that wouldn't be my worry or anxiety. The biggest issue, and this is what I'm so excited about the VA doing right now is really figuring out how to implement the use of VR and sort of put it into the therapeutic workflow for large health care systems. That's never been done. It's not -- you can't just say, hey, patients, go buy it. You have to really figure out how do you fold it into the daily workflow of various therapies. And if you can prove that out, if you can do that work, then you've locked in how to implement this across large spectrums of patients who really have a need for it. And that's what we've been waiting for and to watch the VA take that on. That's where it's so exciting, and that's what it has given me more confidence. It's not about the -- there's plenty of resources, and this is not an expensive process -- product, if you will, per se. It's multiple use. It's -- there's lots of things about it. That's not the issue.

Last quick question that I didn't ask earlier. Just Lightning Flash and Lightning Bolt, what are the key differences? Is it mainly catheter size? Or is that largely...

It's the fundamental mechanism of action. So the Lightning Bolt is more like Thunderbolt, which, as I described, probably have 2 valves that alternate. Lightning Flash is a new way of doing what we do in Lightning, so you can take out a lot more clot, a lot faster with even limited blood loss. So they're just slightly different. It goes to the algorithm for the most part.

Okay. Got it. And with that, I think we're out of time. But Adam, thank you very much for joining us today.

Appreciate it. Thank you.

Thank you.