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

Good morning, and welcome to day 1 of the Jefferies 2022 London Healthcare Conference. My name is Michael Sarcone. I'm an analyst on the U.S. Medical Supplies and Devices team. And with us today, we're happy to have Penumbra, and we have Adam Elsesser, Co-Founder, Chairman and CEO. So Adam, thanks for joining us today.

My pleasure.

Great. So just to kick it off. It's a really exciting time for Penumbra. You've talked about 2023 as being one of the most exciting years in the company's history. I was hoping you could just take some time and kick off why that is and just give us an overview.

Yes. No, thank you. Again, thank you for having us. 2023 is really poised to be one of those extraordinary years. We on our last earnings call laid out the 3 cornerstone products that we anticipate coming in 2023. Lightning Flash in the early part of the first quarter, Lightning Bolt in the second quarter, and then Thunderbolt in this back half of the year after the clinical trial is done. All of those technologies are involved in clot removal, but all really at a different place and time than ever before. They're using what we call computer-orchestrated aspiration, all slightly different, because the vascular beds are different, but all sort of taking what we've learned for almost 20 years now around clot removal in the body and getting -- I'll never say we're done, but we're getting way far along on being able to very easily and simply, quickly and safely remove clot regardless of where it is, whether it's in the brain or the arteries in your leg or the lungs or DVT and so on. And so it's pretty exciting. And that's not all. We have other things coming too, but I think that will be the driver for not just 2023, but for a number of years after that.

Great. Okay. Thanks for that intro. And I definitely want to delve into those topics. But just before we do that, Penumbra recently reported their 3Q results. Do you think you can just give us a quick recap of what the key takeaways and trends were?

Yes. We felt like we had a good quarter in the third quarter. We continued the sort of highlights. If you look at our U.S. stroke business, we're continuing to gain share back with our RED series catheters, which continue to be, as more and more people try them, becoming the catheter choice, which is great. They track well, they work well. They're also going to be used with Thunderbolt. So that's a good sign since it's the cornerstone of how we see the stroke business continuing. We haven't yet seen the stroke business grow, again, other than share. Our business has grown, others have seen it come down a little. The market hasn't grown, in large part driven by sort of post -- I won't say post COVID, but the staffing issues and the energy that it takes to grow that business is different than in the peripheral, because the patients aren't yet in the hospital that they need to be. So it takes a lot of local work to work with ambulance services and fire departments to move patients. And that's just hard to do in your short stack. But we have a lot of optimism that, that will turn around. I think even having excitement regain around a product like Thunderbolt in the trial could help that. On the peripheral side, our business internationally was flat, but in the U.S., we saw double-digit sequential growth and that was in part driven by some share gain on DVT, which we've talked about in the past. And that's heartening to see, but it's also a really good starting point for what I think will be an acceleration of that share gain once the Lightning Flash launches.

Great. Great. And with the 3Q results, I believe you also updated your 2022 guidance. And with that, you revealed some expectations, some pretty impressive expectations about what you're thinking in terms of Lightning Flash sales contribution. I think it was somewhere in maybe the $140 million, $150 million annualized range. Do you think you can talk about -- there was a slight delay for the Lightning Flash launch. Can you talk about that and the reason, and then what informs your expectations for such an impressive Lightning Flash launch?

Yes. Well, a couple of things just to sort of titrate the math and make sure everyone is on the same page. So what we talked about was we reiterated the number that we actually put out in the end of 2019, when we had a little over $500 million in sales. We said by the time we exit 2023, we hope to be at $1 billion. I think at the time we said that, there were some sweet and nice chuckles and maybe a perception of, well, isn't that cute, but they're naive. That was possible. But here we are. And through all of that, we had a pandemic, we had a recall of our flagship stroke product, we've had all kinds of slips happen, and we're still on track. So I'm pretty excited about the trajectory of the business so far. What I want to be careful about -- people took the 6-week delay, if you will, and what that would mean, we quantified it roughly as around $15 million and said, well, let's just take that and straight-lined it out and that's the Flash number. That's not how one sort of does launches and math. So I just want to be clear about that. And maybe what we've said about the 2023 number is that it's going to be at a minimum $1 billion, we hope. That quantifies about $160 million, that includes all 3 of those cornerstone products. It also -- we said we had other products -- there's sort of a whole bucket of things that we also have possibility of international growth in this and that. So it wasn't that we quantify the Flash number that way. That being said, I do want to just sort of remind everyone that I think it would be a good chance, too. If you look back at 2020, I think it was our second quarter earnings call, where we had 2 weeks of launching Lightning 12 under our belt. And on that call, I said that the Lightning 12, this is, again, 2 years ago, first time ever that the world had seen computer-orchestrated aspiration before. And I said that Lightning 12 was the best launch in the company's history. I took a lot of c*** for that, if you will. I think that's the technical term. How can you know 2 weeks into it. That's kind of crazy. You must just be puffing, or whatever. But we sold that quarter, I get my numbers accurate, roughly around $12 million to $13 million of Lightning 12. And I said that I had that perspective 2 weeks after launch. So not all launches are like that. But here we're going into an existing space, that we already had a product in that field. That was what we had the CAT 8 was being used for DVT and PE. And we had enough visibility to know that, that launch would be like that. That launch didn't then just straight line forever and ever at that same rate, and it kind of rolls a little here and there, but we knew we would get out of the box with a good start. So we've already done what now we're going to say we're going to do. This isn't new for us. We already have experience doing it. We know how to launch a product that has the impact that Lightning Flash has. And we have a perception because obviously, we've worked with some physicians under NDAs and so on to see the product, to work with the product, and we know their reaction to the product, and we know what it is. So I think it's not an unfair expectation around what will come out of the box. And then we have Lightning Bolt coming, and of course, then Thunderbolt and some other stuff. So when you add it all up, if you look also at 2020 to 2021, we added, in raw dollars, $190 million in sales. And that was -- one can look at 2020 and say, yes, but it was 2020, but we actually grew our business in 2020 and 2019. We didn't go down and then have to regrow. So when you think about it that way, we've already done this type of thing, and we know the rhythm of these type of launches. So I just wanted to put that up.

No, I appreciate that. And since we're on the Lightning Flash, can you just give us a quick reminder of the upgrades you're making there with that product versus Lightning 12, the areas of performance improvement?

So the most important thing in doing the venous side, whether it's a DVT case or PE is -- and they're very different, but I think you got to remember, you want to get as much or all of the clot out as possible. And I mean acute and subacute. Chronic is a different story because it's not -- it's already embedded in the vessel wall, and we can talk about that separately. You want to get all of that cloud out as fast as possible with minimizing blood loss and no additional trauma to the vessel wall or to the patient. That seems obvious. I don't think that's a controversial statement. And this is, Lightning Flash particularly is a huge step towards that. There is a new catheter. It's an extraordinary catheter. We're very proud of it. But the real innovation comes from the algorithm. And the way we measure the pressure differential at the tip of the catheter and the way and how fast the valve can open and close, so that you can really maximize the moment, the second -- it's not seconds, it's nanoseconds, if you will, where the ability to take out clot, which means the valves open and having the valve close to minimize blood loss. And the slight change came in, delay, the timing came from us making some changes to that algorithm even after the product was, we thought, done and amazing, to make it even better by sort of just finding that sweet spot on the algorithm. And again, easy to say, hard to sort of put into perspective until you see it. And when you see it, as I've said, I think, answered on the earnings call, when physicians have seen it in this case, under NDAs, they know in 40 seconds. It's that compelling. And PE cases, unlike Thunderbolt, some of the investors might have seen Thunderbolt video or demonstration, it's a small piece of focal clot in a much smaller space. Here in a PE case, you might be taking out like a whole fistful of clot. The scale of that and the ability to do that quickly and have almost a very, very small amount of blood loss, that's the magic. And we're getting pretty close.

Great. And I just have to ask because we talked about expectations for the ramp. Do you see any reasons just given what you're seeing in the performance for Lightning Flash? Any other reasons in the environment that make the environment you're launching into materially different than that 2020 year when you ramped Lightning 12?

Yes. There's a lot of more positive things in that. In the summer of 2020, we were still in COVID and lockdown, and obviously, no one was going to hospitals. Everything was done virtually. And we still did that. Like it was the first 100% virtual launch that we've ever really done in the company's history. We're not in that spot now. The nice thing is we've learned some things that because we had to do it all virtually, we can still use, because they were really effective. At the same time, you can add the fact that we can actually be in front of our customers and come in to do cases and support the early work. So I think we're really better than we were on a couple of those fronts. The only thing I would say on the counterbalancing, which is a small issue, there was this heightened awareness of clot because of COVID. We've come off of that touch, but that is sort of made up very easily, and I want to stress this by how big the market has developed since 2020. In 2020, in PE and DVT, it was still early in the idea that you could mechanically treat these patients. And we still did that well. Here, you're launching into a much more robustly developed market, where the number of patients that are being treated with mechanical products is much greater. And so all of that being said, this should be pretty successful because the pool is way bigger to start with.

Great. Then just last one on that topic. How do you think about, in terms of the expected sales contribution, your ability to take price versus contribution coming from share?

Yes. Well, let's start with price, and then we'll talk about shares. So price -- I want to reiterate our philosophy as a company around price. We are today not the highest-priced tool out there. And that's not by chance. We have a philosophy that we want hospitals to do well as well as us in this process, and that we're building a business for a long, long time. There's a lot of feelings around price in the hospital settings and hospital administrations and national contracting. And we've always tried to price our product in a manner that is fair and, therefore, perceived as fair. There is some room to have some price here. But one of the things I want to remind everyone, when we went public in 2015, and there were competitors coming on to the market, there was a perception that we would potentially have to lower price, and that was sort of out there. Here we are all these years later, I don't know how many companies are now in stroke. There's like 20 or something, and we've never lowered price. And that's just worth pointing out there. So we price our products so that we are in a good spot. There will be a small component of price, but it's not going to be the authority. The majority will be share, share coming from 2 different sources. One, other medical mechanical products where the patients are already being treated with something mechanical. And then the other part will be the conversion of physicians from non-mechanical thrombectomy tools, whether it's lytic, surgery, what have you, anticoagulants, medical management. That's, of course, the biggest part of the long term. I think the first phase will be more share between other mechanical products. And then that 2024 and beyond will be the conversion of physicians from those other modalities.

Got it. And is that 2024 conversion, that's just where it takes a few quarters for some of the physicians to really see these results.

Well, so it depends. If you look at -- in arterial versus DVT versus PE, patient flow is all very different. And so it's different for each of those vascular beds on how the patient comes to the hospital, who's in charge of them, who's making that decision. And so it's a little different for all of that. So it takes a little more time. Once Lightning Bolt launches, if it's as good as we anticipate, that might be the fastest one in terms of market conversion, if you will, because the patients are primarily already with our treating physicians. So it's sort of their decision. In DVT and PE, you have to involve more people. But unlike in stroke, and this is really worth commenting on, we don't have to move the patient, right. Now if we get the patient to that hospital and that patients are in effect like there, we don't have to move them. And that's been the biggest battle with stroke is that in many of the cases we have to move a patient, and it's unfortunate because you're talking about one of the most time-sensitive medical issues there is, and we have to move the patient and there's pushback on moving the patient. So that hurdle in stroke has been challenging. We've still done it, and we'll reignite that effort, I think, once we have enough staff. But here, I think it's going to be a little easier.

Okay. Great. That's really helpful. And I guess we can transition to stroke, and I wanted to ask a few questions on Thunderbolt. So this is pretty exciting. You've talked about it being paradigm changing. Can you just elaborate on some of the key facets of thrombectomy procedure that you think this could change.

Well, yes, so thrombectomy procedures have sort of -- the way those cases are done now, have been that way for a while. The technology is -- there's 3 different modalities, if you will, really 2 -- you either use just aspiration where you put the catheter there and try to suck it out, or you use a catheter and a stent retriever in combination. There that procedure has evolved to the point where you put the aspiration catheter right at the clot, use this entry for it to sort of hold on to it and pull it into the thing. The days of dragging a stent retriever through your vasculature from up here all the way down to the neck. I'm sure someone does it. I've not been aware of that. And that's in part because of the -- there's risk to doing that, but there's also potential injury to the vessel wall when you're dragging a metal cage, obviously, through that. And we're seeing that in the DVT space now come up, too. So those are the procedures. And people are pretty honed in on. There's a few who might experiment and change their mind, but we've been at that for a while with that modality. So Thunderbolt comes along and the goal there is to put a catheter there. Literally, there's a button on the Thunderbolt unit, which is not in the body, obviously. And it orchestrates opening and closing of 2 valves in a way that really harnesses aspiration to its truest potential. So in the videos that you might have seen or the demonstrations, we would always start with a traditional continuous aspiration where we take a really hard piece of clot that isn't amenable to being sucked out by continuous aspiration, and then we would use the same catheter, just adding Thunderbolt, push the button and the clot typically is inside the catheter in a matter of seconds. And it's pretty stunning. And it really highlights the value of what we call modulated aspiration. That's the same technology we're using in Thunderbolt, which is on the arterial side in the peripheral. And we think we'll have that same kind of effect. But as everyone, I think, now knows, we're running a clinical trial in the U.S. under an IDE to prove out the value of Thunderbolt. Obviously, it's early, but so far what I've announced is that the cases have gone just as we had hoped. And obviously, we hope for success.

You had talked about one of the limitations, just call it, I don't know if headwind is the right word, but getting the patients to where they need to be, the stroke patients. Do you see Thunderbolt, and you've talked about the ability to democratize procedures, can Thunderbolt help in those efforts in terms of...

Yes. I think it's possible. I think, look, if stroke becomes easier and easier to do, you have to imagine that we'll do it more. Stroke right now can be hard. Even with Thunderbolt, you're going to have challenges, in some cases, getting to the clot. Access in neuro is always top of mind. If you can use a smaller catheter, that is going to, by definition, be easier to get to the clot. So hopefully, on many fronts, the easier it is to do a case, the more cases will be done. And I think that's sort of the point of what we're talking about. And so far, we're hopeful that what we're seeing will continue and that will be possible.

Great. And can you remind us, have you said anything about the timing or kind of where you would be looking for any clinical trial readout on Thunder?

Yes. So I think we got a question on this in our earnings call, if I'm not mistaken, but it depends on when the trial is done. There's a couple of neuro meetings, U.S. Neuro meetings. There's a European one as well. So it depends on exactly when the trial is over and we have our 3-month follow-up, which is our required follow-up. Whatever the first meeting is that fits that is when, obviously, we would want the data presented. And it might be, of course, even before FDA clearance. It might not be, depending on the timing.

Great. I just wanted to change gears and maybe we can talk about margins and profitability. So just on the margin front, you guys have done a great job working through some macro pressures. If first, can you just discuss how the macro environment has impacted Penumbra? And then second, you're talking about gross margin expansion in '23. Can you talk about the moving pieces there in your context?

Yes. I mean -- so our gross margins used to be higher. There's a couple of things that changed that over the last couple of years. The first and most significant was the pandemic. We make all of our products in Northern California. We were in the series of Bay Area counties that were the first to shut down. We obviously weren't subject to that rule, but there was an appropriate attention given and we did to keeping all of our product builders safe, which meant we had to fundamentally change how we distanced everyone out. We had to slow some lines down. We had to add a third graveyard shift, which is more expensive, in order to keep up with demand. So there were a lot of things we purposely did in order to stay viable and stay safe with our employees that cost us money on margin. I'm incredibly proud that we did that. I'm not ashamed that we saw margins go down. Something we should be proud of that we did keep everyone safe and we step kept open. We weren't shut down, we weren't excited, all in a time of pretty extraordinary chaos and stress on the folks running that side of the business. So now that that's different, we can and are regrowing our focus. Some of those things we did are no longer necessary. So we're getting some savings there. In addition, we've seen pretty significant growth over the last few years. And so when that comes, and you're doing it in that environment, you just sort of do stuff to keep up. You're not sitting there saying, "Oh, I'm going to not keep up, but I'm going to maximize gross margin." You just make the product as fast as you can make it to keep up. Now that we're able to sort of catch our breath, there are things on top of the COVID issues where we can be more efficient. We did bring in a fellow named Joe Sendra, a very senior guy who has been incredibly valuable to help teach us some of the things we didn't know. Our whole manufacturing is homegrown. And that's been a wonderful experience, and he's been well received by the team, which is sometimes tricky. You have somebody come in to tell you that what you've done isn't good enough. That could have a negative impact on some people. And he's so good and so thoughtful and nice, just human touch that, that hasn't happened, and we've learned an awful lot from him. So there's a lot of efficiencies just built in. There was one product line, pretty significant, where he walked in and said, "Well, what if you reorientate the flow in this way." Relatively easy to do it and it gained us a significant efficiency just -- and sort of embarrassing, but he can see what we couldn't see sometimes. So I'm pretty proud of that. And then we have been moving and now getting efficiencies by expanding up in Roseville, which is about 2 hours from our current headquarters, where more and more of the products are being made up there as we are expanding. And that initially in the first year plus was less efficient because it was new and hadn't yet gotten up to speed and now we're starting to see that efficiencies come from that facility, which are actually more efficient than the long run at it. So when you add it all up, there's a lot of positive momentum there. And there is a final thing of product mix, it is as the business grows faster in thrombectomy than in our peripheral coil business, our peripheral coil business has a lower gross margin than our peripheral thrombectomy. And so as we see that growth favor thrombectomy in the next 3, 4 years, that alone will drive margin growth.

Okay. Great. I think we're out of time. So thank you, everybody, for joining us. And Adam, thanks for participating.

Yes. Yes, thanks for having me.