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

So thank you, everybody, for coming back. We are now moving to the presentation for Penumbra. I'm thrilled that Jason Mills is here today. We also have Jee and the audience for other questions. So...

Thanks for having us.

I'm going to kick it off just with a big picture question. I mean, we've been following oh, man I've been following Penumbra for many years, but there's a lot going on this year. What is it that you want to make sure that investors hear in terms of how the year lays out and set expectations, both financially, but also from a product launch standpoint.

Well, I think what investors should hear is that we have a lot of patients that we need to help in our core markets. As you know, in the thrombectomy business, we are targeting patients that need help in 5 vascular beds. And we have a new, we think, paradigm-changing technology to improve patient outcomes in all of those areas. This year, we've talked a lot about and we'll be talking a lot about the 2 products that are launching right now, Lightning Flash, which will be -- we'll talk about it, I'm sure, for the venous anatomy and Lightning Bolt, which will be for the arterial anatomy, covering 3 out of those 5 vascular beds. So the innovation at Penumbra has been a hallmark of the company since its founding in 2004. And the productivity and innovation year after year has been, to some extent, I think, unprecedented or very, very good in MedTech, generally speaking. And that continues, and we're excited about these products ability to improve patient outcomes in a profound way.

Was there anything about the timing. Well, we'll start with Lighting Flash right now. Was there anything about the timing of that approval that surprised you? I mean, I think the Street was surprised back in November when you announced a delay for it. But then you got it out pretty quickly in early January.

Yes. I mean -- so the delay we talked about in the fourth quarter was of our own doing. We -- this is a computer orchestrated technology. And so there are a couple of aspects to the system. One is a catheter, which is a significant advancement in catheter technology, but the computer part of that, there are algorithms that our team is constantly working on. And what we discovered was that there was a set of algorithms that was significant advancement that we wanted to integrate into this technology at first launch, Lightning Flash. And so we took the time to do that. We are pretty excited about that investment in time.

So Flash, we'll start with that. What makes it different than Lightning 12, Lightning 7 and I'll even add the competition.

Lightning Flash is the most powerful thrombectomy technology ever invented. And power allows for you to act on a relatively large amount of clot in the venous anatomy be it DVT in a very, very fast way. So the fundamentals of getting clot out of the body, and this is true anywhere is to get all of the clot out as fast as possible without taking much blood out and without damaging the vasculature within which you are working. And the appropriately sized catheter and during to us, the appropriately the appropriate system from a computer orchestration standpoint is perhaps a little different depending on the anatomy. And Lightning Flash, what we've been able to dial into that technology is that unprecedented power and the ability through the algorithms inherent in flash to discern clot from blood faster than anybody has ever been able to do. Of course, we're the only ones able to do computer orchestration, so faster than we've been able to do and that helps us really optimize the act of getting clot out of that anatomy and optimize the definition of optimization is are those fundamental principles of getting clot out of the body that I just mentioned.

I'm going to translate that to it's the algorithm. Is that the right way to just sort of say that's what makes it special?

It's really important. Of course, that's proprietary to us, and we're gratified to have patents around that stuff finally around our technologies. But the catheters, so we hear a lot about the trackability of our catheters and the trackability of the catheter that is inherent in Lightning Flash, we're hearing a lot of great feedback about. And that's important for DVT, but it's also important in PE, where you're crossing through the heart and the interaction with that catheter with the heart is important, and that's been discussed by societies and organizations with respect to size. And so it's important to be able to track through the heart and get to the lungs and be able to suck out clot even faster than anyone has ever been able to do and then not take the blood out because you shouldn't take it out, putting it back in is not a good item.

A good idea. So when I was in your offices in January, one of the things that struck me about Lightning Flash was just even the size of the box, the flexibility of the catheter, and I'm not a physician and then the decrease in the amount of time that it takes to get the blood out. What is...

Clot out.

Clot out. See you suggested caught out. So what is it that the physician is resonating to?

So you're right, the system comes together. The computer is embedded in the tubing of the system. And of course, within that box within that system is the catheter. And the pump is relatively ubiquitous. We developed it internally, the engine pump. It's been -- it's relatively ubiquitous in the country. So for new accounts, we make sure that they have a pump. But the system or the technology itself is inherent in Lightning Flash system that comes in every box. And what's resonating with them is what I just said. I mean they understand the principles of getting clot out of the body and getting all of it out as fast as possible without doing damage without causing other problems without trade-offs is another way to say it is what's resonating with them. And that will be true for Lightning Bolt as well. It will be true for Thunderbolt as we're going through that study. I'm sure we'll talk about all of this. But the fundamentals of clot removal and ultimately, what we're trying to do here is to -- for physicians to allow for removal of clot from anywhere in the body to be relatively routine as quick and powerful and safe as possible. And with these innovations, I think what the team has done at Penumbra is move that needle along that arc of innovation further than anyone ever has, including ourselves, which have been doing this longer than everyone.

So do you see it as a cannibalization of your current portfolio or do you see it as market expansion? Or how -- now that you have a little over 2 months' experience with Flash in the field are you positioning it?

So within the venous anatomy, it's all of the above is the short answer. So within the venous anatomy DVT and PE, I would more than 9 out of every 10 patients that have clinically significant clot that are -- the incidents per se, in the United States are not getting -- not getting a mechanical thrombectomy procedure. And over time, it's reaching those patients, that's the primary goal. There will be -- with respect to how we grow our business, a big component of that as well as given that it's the most optimal thrombectomy system ever created, we think it's the best solution for either of those procedures regardless of what you're deciding to do mechanical thrombectomy [ lytics ] or surgery, depending on the anatomy.

Okay. Can you talk a little bit about pricing and how you thought about pricing Lightning Flash?

Yes. I mean so pricing philosophy has been something that's been important for Penumbra going all the way back to the early days when it sort of created the art of aspiration in stroke. And if you remember back then, and moving into the time period of Mr. Clean, et cetera, stent retrievers set price is very, very high. And Adam has always had a philosophy that we need to share the value with the customers, notwithstanding that we're developing the most innovative technologies out there. So all of that to say that we will share in the value with Lightning Flash and Lighting Bolt. Is it more valuable from an innovation standpoint to patient outcomes, then anything else out there? Yes. Is it more valuable than what our previous generation technologies are? Yes, we believe they are. So there will be some price increase, but that will be a very small portion of the growth that we expect to get will come from price. It will be from generating patient -- better patient outcomes and therefore, utilization of this product in the venous anatomy.

Why do you think 9 out of 10 patients are not using mechanical thrombectomy? What's the hurdle in the hospital?

Well, I think it varies. I think the -- if you just take them separately, in PE, it has been just the way that the doctors have practiced and were trained in using anti-coagulation medication analytics and thrombectomy to me generally is relatively new. So I think the development of those markets on the venous side, the other hurdle generally is that those patients aren't managed initially by the physician who is ultimately doing the procedure that they could come in through the emergency rooms, general practitioners. So there is a triaging necessity to venous procedures that is a little different in arterial when those procedures are acute and you have, let's say, a cold leg, you're going to come in and be referred immediately to either an interventional cardiologist, vascular surgeon, sometimes interventional radiologists who are ultimately going to do your procedure. And so that's part of it in developing this market is to raise the awareness, not just among the interventionalists themselves who may have been doing something else previously. But the referral networks of physicians, internists, general practitioners, ER physicians that will be referring on those patients for an intervention.

Okay. So is it just a matter of education while they're a medical school or is it a matter of working or smoothing the referral pathway or both.

I think... It's -- like anything else, Mike, it's raising awareness. And as awareness grows about clot and the deleteriousness, if you will, of clot in the body among this physician group. And COVID did some of that. I mean, unfortunately, I don't know that COVID generally has raised the number of people that have clot, but it certainly raised the awareness of -- to look for it, right? And so all of that helps as patient outcomes are -- get better and better via the utilization of Lightning Flash in venous and Adam. You're going to see the awareness grow because of that naturally -- and that will float down to the referral network in varying degrees of time, but I think fairly quickly, generally.

Okay. Anything else we should be asking about Flash?

Ask all you want. We're pretty excited about it.

Okay. The excitement comes through, I got that. Cool. But I do want to spend some time on the more recent FDA approval of Bolt. And is the same -- is the story the same as Flash? I mean, other than it being at a different part of the anatomy or is it maybe a different story, a different marketing or a competitive approach?

Yes. So I mean the only thing sort of monolithic about these vascular beds is the fact that you want to get the clot out fast and holistically. The other thing that's the same is exerting power will drive the speed with which you can get the clot out. And when in the arterial system, the vessels are small. So obviously, the appropriately sized catheter is smaller. And with less real state, you've got to try to exert the power necessary to ingest the clot the vast majority of the time, which is the point, get the clot out so that it comes back through the canister and you can see it. And doing that, we've figured out that Lightning Bolt, which uses a slightly different algorithm, modulated aspiration, which is proprietary to Penumbra to do that work. And -- but the end result is the same, we think, the speed with which we're getting clot out vis-a-vis that power, while different algorithms is similar. And doing so without taking too much blood out without damaging the vessel. Again, I'm going back to the fundamentals of taking clot of the body, it's the same. You're just doing it differently. The appropriately sized catheter, the algorithms are different and we can innovate really fast, even faster now because part of that innovation is software-driven and you can just innovate faster, the time lines of approval. You get a new catheter approved, it takes 9 to 18 months, 12 months, whatever, right, just to go through the compatibility testing, et cetera. It's different with software.

Okay. So I'm trying to think about modeling all of this. So you've got Lightning Flash, which is ramping. You've got Lightning Bolt, which has just begun ramping same sales force, same doctor, different? How do you think about doing 2 large product rollouts at the same time?

Yes. So let me talk about how we launch products at Penumbra. I'm happy to say -- so we launched products through first starting with once you get clearance and evaluation period of a couple of dozen cases. And you're doing that for design control, making sure things it's the first time you're in the human body to make sure things are progressing as you expected. And we've already gone through that period that with Flash, obviously rolled right into a full launch, and we're pretty excited about that. I'm happy to say that after clearance, we've now done our first patient in Lightning Bolt in that evaluation period, and it will follow the same process. And if all things go well, which we're pretty excited about what we've seen so far in the early days, literally days that, that will fully launch subsequent to that. We talked about it being before the end of the quarter.

Okay. It doesn't fully answer my questions so I'm going to push you a little bit.

Please ask it again, I probably missed it. I apologize.

A lot is going on today. Sales force.

So yes, sorry, that's right. So it's the same -- the vascular sales team has, since its inception, done a very astute job of helping patients in thrombectomy in all vascular beds. Remember, we launched CAT RX for coronary, which we haven't yet talked about in 2018. That's been a really strong grower in perpetuity since then. And then embolization, our embolization portfolio is second to none. In fact, we're the market leader, and we've continued to grow that in large part because physicians are finding new areas and applications for our unique coil set. That's the same sales force. So they're able to sell all of this. It's -- the culture is important among our sales force. The professionalism is important. We're very, very I don't know Picky is a technical term, but I think...

Selective.

I think the team has done a fantastic job finding the right people that carry the right character, the right professionalism and of course, the maximum ability to compete at a high level. That's what you see in Penumbra sales force.

So the same sales team is selling both products at the same time into the physician base.

Yes. And so the interventional community in our realm is interventional cardiologists, interventional radiologists and vascular surgeons. They all do, to some extent, all of those procedures, but it's sort of different by vascular bed either, it's predominant. We're going to SIR in a couple of days by interventional radiologists, interventional cardiologists do a lot of those procedures to occasionally vascular surgeons, but rarely. DVT is all 3 of them. Vascular surgeons do more in interventional cardiologists and some inventory radiologists and in arterial, it's vascular surgeons and interventional cardiologists predominant.

Could Lighting Bolt outpace Lightning Flash?

I think both will outperform for patients. How is that?

That's good. I'll start there. Is there a different financial profile for the 2 different ones, 2 different products?

Not significantly, so you're asking about ASPs. I mean...

COGS, ASPs...

No, there's no difference in the margin -- standard margin profiles for those. They are both thrombectomy in general for us is our highest margin business, and that's part of the expansion to 70% plus over the next few years is positive mix shift in our business as thrombectomy, we think will grow the fastest vis-a-vis our other businesses. But from a price standpoint, like I said, I think we share value with hospitals, but it's a slight premium for both -- in both cases relative to the previous generation products.

Is there a benefit to launching 2 at the same time, either from a sales cycle or a manufacturing perspective?

So sorry, could you ask that again? I was distracted...

Of course. As I drop things. Yes, the question was, is there a benefit to selling a [ either ] from manufacturing, sales or COGS.

So there -- it won't be -- there's not a deterrence to having both. There could be some benefits, but I don't know that they're necessarily worth focusing on. I mean, for example, if you're -- with some hospitals, you might be going through if it matches up, the value analysis committee review processes for Lightning Flash and Lightning Bolt at the same time. And there might be a bit of leverage of time there that could be beneficial to how quickly you get both products through that respective -- those respective value analysis committees. I think for -- if you talk to the sales team, having sort of paradigm changing technologies that address all of those vascular beds is better than not. So I don't think that they're definitely not saying hold off on one so that we can get our arms around both. These technologies are both important for patients. And so our sales force are going to want to have them in the hands of our physicians as soon as possible. They'll be able to do that.

At some stage, do you start to rationalize some of the older products with these newer ones here?

It's a good question. I mean, generally speaking, Penumbra has carried a portfolio approach because there are opportunities or reasons patients to use other technologies that maybe are used less. For example, in DVT, you might have smaller vessels within which you would want to use Lightning 12. And I think that will be a relatively small number, but there -- we need to help those patients, too. In arterial, some doctors, albeit it's a huge, I think, unmet need that we're addressing thrombus below the knee and down into the ankle, Lightning 7 could be too big for some of those vessels, and they will sometimes use it, and it's a very small percentage to use CAT RX, but they'll take CAT RX down there with some good success. So the portfolio approach has been proposed to Penumbra for quite some time. As you know, in stroke, it's a portfolio approach. It's not just the sort of the catheter that gets all the headline, be it RED 72, RED 68, there are other catheters that are really important to those procedures. Now when Thunderbolt comes, Thunderbolt is going to change that paradigm. But nonetheless, the portfolio approach is important.

Before I get to Thunderbolt, do you have the manufacturing capacity? And is everything still being made in California?

Yes and yes. We have a new facility sort of not new anymore, but a couple of years ago, we started to build out Roseville, which is outside of Sacramento, which is a significant footprint for us that we will slowly take advantage of and will be part of our ability to expand our margins as our volumes increase.

Okay. Thunderbolt. End of the year in guidance or not in guidance?

Not in guidance.

Not in guidance.

So it's not included it because we don't have control over the biggest aspect of it, which is the FDA time line. The enrollment is tracking. It's like every stope trial. It fits and starts. You might have a couple of patients in 1 week or 1 over a weekend and you're like, Ash, we should be faster, and then 6 and 2 days. That's how stroke goes with the parameters of the study, like any stroke study, the patients have to come in within an 8-hour window. It's the same. It's not -- I'm not telling you anything you don't already know because we've seen lots of stroke studies. And so it's tracking the way that we expected it to track. But no, to include it in the lower limit, which is all we've given at this point, the $1 billion lower limit for our guidance, we did not include it because we didn't have control over that. So... yes, and you don't need it too.

So what makes Thunderbolt special versus the rest of the portfolio in neuro?

So what makes it special is what I've been talking about, the power with which you can get the clot out. So the speed with which you can get the clot out and the ability to do that work potentially with a smaller catheter, by using a smaller catheter to do more powerful work, counterintuitive, but true when you're using modulating aspiration proprietary to Penumbra is that you're able to track smaller catheters to the place the clot is faster than larger catheter, it's just obvious, right, because the tortuosity is significant in almost every case and some more than others. But using smaller catheters to do even more powerful speedy work is sort of the holy grail and more physicians, I think, would be adept at doing that and feeling comfortable. So it could be incremental technology in stroke care. I think doctors are looking for more than that these days. The paradigm has been, can we get a 72 versus the 70. It used to be 68 versus 64. That's incremental improvements. The RED technologies are the best on the market, but they're incremental catheter improvements. What stroke physicians want, what patients need is sort of a revolutionary improvement and Thunderbolt we think is that.

How much time does Thunderbolt save?

Perhaps a lot. I mean, it could be -- I mean, you've seen the models, right? So it could be -- it could cut the time when you get to the clot, which part of it is how fast can I track the catheter. If you're able to use a smaller catheter, you should be able to get there faster once you're there, you should be able to ingest all the clot out more of the time faster. And a lot of this, the time component is getting the clot ingested and working on adapting it through the tortuosity if you're not able to fully ingest it. So it could be profound. I don't want to put a number on it, but could we -- the goal would be, over time, it has always been, and we're getting -- we could get pretty close to it, if not achieve it, is to do a stroke procedure in 5 minutes or less in terms of the device time.

Okay. And time is brand.

Yes. So time is important.

If you're able to make the procedure as straightforward as you're describing and as fast as you're describing, why would this not be done in all hospitals versus stroke centers?

Yes. It's a tricky question. Right now, the Modus Operandi is taking these -- moving these patients to comprehensive stroke centers. Would -- moving the patient comes with certain trade-offs. It sometimes takes longer to get to that hospital. And time is brain. So that -- those are all considerations that right now, folks that make these decisions, which isn't me and certainly not me and not us, have decided that's worth the trade-off of time. It some point in time may that change sure, but that won't be driven by Penumbra. We're certainly -- you're going to hear us talk about neuro trained physicians or those physicians that are doing these procedures, and we're not going to advocate for anything other. But if the industry decides that what is important is to maybe treat faster, and they believe that this technology allows for that to happen, then that -- the societies and the doctors will make those changes themselves. And that will be a natural, very ethical way to do it.

Where are these products in terms of an international launch?

So they will be in the United States first. We haven't given time lines for international. But what we did say in the prepared remarks on the last call, purposefully is that we will bring all of these technologies to patients in Europe, China, Japan, Latin America, Asia Pacific. We're in all of those areas today. And depending -- the regulatory submission process is different in every one of them. But as soon as possible the other thing we're working on, too, especially as it relates to peripheral thrombectomy is the reimbursement infrastructure in some of these company -- countries. They're not -- it's not the same as in the United States. And these are next-generation technologies we spend a lot of money on. So we're working on that as well. So we're cognizant of that. I don't think that if you think about -- well, 3, 4, or 5 years from now, do you expect that, of course. I mean I hope it's sooner than that, but we haven't put a time line on.

Okay. Just some basic questions, patient volumes, staffing, general state of the union, anything that we should be aware of or business...

Yes. We haven't called out staffing issues for quite a while. It certainly -- and so a lot of -- most of our procedures are those -- it's pretty obvious to those physicians. They need to act on that patient as quickly as possible. That having been said, I got to tell you, speaking on behalf of Penumbra and Adam, we have enormous admiration for the physicians and their teams and what they've had to go through. You know that everyone in this room knows what they've had to go through in terms of not just COVID but the staffing challenges that they face every day, it seems like that the productivity in solving that puzzle is progressing. They're getting better and better and -- but it's still a hard job and still something they're working towards. I think the technologies we're bringing to bear help that in decent ways, meaning if we're able to keep a patient out of the ICU because they don't need a lytic drip, we can just take the clot out, that's going to have a profound impact on utilization of hospital resources.

So when you think about the expense side of the equation, none of these launches come for free, how do you think about operating the -- how do you think about operating leverage as you go forward?

We think it's important, is the short answer. I think what you're going to see us continue to do is invest in our growth. But we will also invest in our growth with a disciplined approach to it. That doesn't mean we invest less. That -- we're going to invest more on dollar volume, but we will invest in a way that our operating expense infrastructure grows at a slower pace than our top line, we think. And we also have, we think, levers that we've talked about on the gross margin line that are important. So we talked about approaching double-digit operating margins exiting this year, and we look forward to that continuing.

Okay. The real reality platform has quieted, and do we take that for it's done or do we take that for something that management is moving along?

Absolutely the latter, not the former. And the quieted comment, I think, is fair. But we're doing -- internally, the progress we've made is probably worthy of being even louder than we've been. But there are 2 things we're watching that are less sort of -- that are things that may not be as easy for Wall Street. They're not quantitative. The first thing is we're evaluating on an increasing basis. If this technology is doing for patients what we needed to do for them to improve in a number of areas and that's happened. The second thing we're working on and our work with both public and private institutions, including the Department of Veterans Affairs is helping us with this, but is longer term in studying and evaluating is where does and how it does, virtual reality work into the workflow of any given modality of health care, be it rehab, be it anxiety or mental health issues, be it aging and anxiety for older adults. All of those, there's profound literature that suggests virtual reality positively impacts all of those areas. But where in the workflow as those patients engage with the health care system, is it most appropriate and which health care professional is most appropriate to introduce that to the patient? All -- none of that's been done. It's -- I don't want to talk about it being similar to stroke. When the company started with an idea of getting clot out of the brain, there was no reimbursement, doctors didn't really want to treat or be on call to do it. It was like the perfect setup for starting a company that focused on getting clot out of the brain, right? And so it took -- it wasn't until 2014 or 2015 that the preponderance evidence validated that decision. I'm not saying it's going to take 10, 11 years. Hopefully, we can move a lot faster than that. But there is a precedent for really great things being worth the wait.

CAT RX., you've mentioned it a couple of times. Where is that in this development? And there was some clinical data presented 2 years ago now, if my memory serves such...

It was a 2 years study...

That should support that.

Yes. CAT RX is a really, really great catheter. And it's the first and only catheter thrombectomy catheter, that's shown positive results in the coronary vessels. And we are doubling down on those results with the CHEETAH-ACS randomized study, which will be use of CAT RX that take the clot out of the coronary vessels in STEMI patients, coupled with normal PCI, what you would do normally versus just PCI. And what we expect to show is that taking the clot out prior to PCI as profound impact on patient outcomes, which is exactly what we saw in the CHEETAH-ACS study, albeit it was a big study, 4 in patients, but slightly smaller and non-randomized. The cardiologists want to see randomized data in this field and in this field, it's appropriate, we do that so we're doing that. But the patient outcomes, and it's growing really well in every year since 2018 because in their own practices, doctors that are using and are seeing the benefit, and that will continue.

Okay. The $1 billion dollar question, and I've chosen that number. On the fourth quarter call, you sort of set out as a goal for 2023 revenue and you reiterated what you said on the third quarter call and you reiterated it on the fourth quarter call. What takes you below $1 billion and what takes you above it? And how -- I'm going to add more crinkle to the question, how does it ramp throughout the year?

Yes. All great questions. So $1 billion is the lower limit of what we expect from ourselves this year. We have not set the upper limit. And we haven't set the upper limit yet because we've talked a lot about 2 products that are currently launching that just give us a little bit more time, give us a quarter. And you can obviously hear excitement about both products. But look, how it ramps throughout the year is, I think it will increase throughout there. We talked, I think, in our prepared remarks about the growth on a year-over-year basis like it accelerates throughout the year. So that's probably a good way to think about it.

Okay. When we're here next year, and we're talking again, what do you think we'll be talking about as it relates to Penumbra.

That we've helped a lot more patients and they have clot in their lungs, clot in their deep veins, clot in their arterial system. And by the way, clot in their coronaries as well as stroke as well. And we're going to be talking about continued innovation.

Continued innovation, meaning?

Well, I mean we're going to be talking about Thunderbolt too. And we're going to be talking about CAT RX. We're going to talking about clinical studies that haven't yet started, but we've announced a study storm RCT and pulmonary embolism, which could expand that market and certainly shine a really, really positive light on Lightning Flash as well as the CHEETAH-ACS study in coronary. So I think we're talking about having treated a lot more patients, but still a lot to go.

Any readouts clinically we should be aware of this year?

We have several trials that we'll have results throughout the year. We have the Stride PE study still going on with the ID registry study in PE. We have the Stride study, which finished, but you're going to see readouts. We've seen interim results -- sorry, early results on Stride, which is for peripheral arterial the thrombectomy in arterial. We have the Bolt study still enrolling. Those are registry studies, so I'm not sure exactly what the clinical trial presentation time lines look like throughout the year, but there will be clinical data that support our research and technology in all of [ that as part of ] this year.

Excellent. And the last for many minutes, anything else you'd like to add?

That we're really excited about the opportunity we have in front of us. And it's a humbling opportunity to be able to bring this technology for so many patients in these markets, taking clot out of the body is not a new idea, but the penetration of our ability to do that it's been good, but we're still not reaching very many of the patients, if you look at the penetration rates. These technologies, given what they do to act on those fundamental principles of thrombectomy is pretty exciting.

Excellent. Jason, thank you so much for joining us today.

Thank you. Thank you very much, Joanne. Thank you to Citibank as well.